Gross premiums earned by segment, 2016 (Total USD 4 042 million)
Gross premiums earned by regions, 2016 (Total USD 4 042 million)
Swiss Re Corporate Solutions Group Net income attributable to common shareholder 409 172 –58
Combined ratio in % 90.9 99.3 Return on equity1 in % 17.3 7.3 1 Return on equity is calculated by dividing net income attributable to common shareholder by average common shareholder’s equity.
Notes to the Group financial statements 8 Note 1 Organisation and summary of significant accounting policies 8 Note 2 Information on business segments 16 Note 3 Insurance information 19 Note 4 Unpaid claims and claim adjustment expenses 20 Note 5 Deferred acquisition costs (DAC) 29 Note 6 Investments 30 Note 7 Fair value disclosures 36 Note 8 Derivative financial instruments 42 Note 9 Acquisitions 44 Note 10 Debt 45 Note 11 Income taxes 46 Note 12 Benefit plans 49 Note 13 Related parties 50 Note 14 Variable interest entities 52 Report of the statutory auditor 54
Swiss Re Corporate Solutions Ltd 58 Annual Report 58 Income statement 62 Balance sheet 63 Notes 65 Proposal for allocation of disposable profit 75 Report of the statutory auditor 76
General Information 80 Cautionary note on forward-looking statements 80 Note on risk factors 82
Net investment income 6 127 124 Net realised investment gains/losses1 6 141 49 Other revenues 9 5
Income/loss attributable to non-controlling interests –2 2 Net income attributable to common shareholder 409 172 1 Total impairments for the years ended 31 December of USD 3 million in 2015 and USD 10 million in 2016 were fully recognised in earnings. 2 The twelve months ended 31 December 2016 include a tax credit on US foreign income.
Investments 6,7,8 Fixed income securities, available-for-sale (including 1 056 in 2015 and 979 in 2016 subject to securities lending and repurchase agreements) (amortised cost: 2015: 5 945; 2016: 4 946) 5 888 4 927 Equity securities, available-for-sale (including 166 in 2015 and 4 in 2016 subject to securities lending and repurchase agreements) (cost: 2015: 906; 2016: 335) 935 384 Short-term investments (including 488 in 2015 and 366 in 2016 subject to securities lending and repurchase agreements) 1 256 1 246 Other invested assets1 182 1 773
Cash and cash equivalents (including 13 in 2015 and 109 in 2016 subject to securities lending) 504 449 Accrued investment income 49 39 Premiums and other receivables 2 276 2 541 Reinsurance recoverable on unpaid claims 6 182 5 429 Funds held by ceding companies 20 76 Deferred acquisition costs 5 387 444
Income taxes recoverable 11 6 84 Deferred tax assets 242 248 Other assets 693 784 1 The adoption of ASU 2015-02 as of 1 January 2016 led to a change in consolidation of an investment vehicle. The majority of the investments held in this vehicle were accounted for as fixed income and equity securities available-for-sale and are now reported as investment in equity-accounted investees which is part of Other invested assets. Please refer to Note 1 for more details.
Funds held under reinsurance treaties 876 790 Reinsurance balances payable 343 402 Income taxes payable 33 13 Deferred and other non-current tax liabilities 11 375 375 Accrued expenses and other liabilities 599 732 Long-term debt 10 496 497
Additional paid-in capital 677 687 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax –28 12 Foreign currency translation, net of tax –13 –6
Additional paid-in capital Balance as of 1 January 677 677 Share-based compensation 10 Balance as of period end 677 687
Net income attributable to common shareholder 409 172 Dividends on common shares –200 –250 Balance as of period end 1 605 1 527
Interest paid was USD 23 million and USD 23 million for the years ended 31 December 2015 and 2016, respectively. Tax paid was USD 155 million and USD 122 million for the years ended 31 December 2015 and 2016, respectively.
Securities purchased/sold under agreement to resell/repurchase, net –43 26 Cash paid/received for acquisitions/disposal of reinsurance transactions, net –108 –127 Net purchases/sales/maturities of other investments –23 –697 Net cash provided/used by investing activities –327 –52
Total net cash provided/used –53 –38 Effect of foreign currency translation –11 –17 Change in cash and cash equivalents –64 –55 Cash and cash equivalents as of 1 January 568 504 Cash and cash equivalents as of 31 December 504 449 1 The adoption of ASU 2015-02 as of 1 January 2016 led to a change in consolidation of an investment vehicle. The majority of the investments held in this vehicle were accounted for as fixed income and equity securities available-for-sale and are now reported as investment in equity-accounted investees. Please refer to Note 1 for more details.
SRCS is a wholly owned subsidiary of Swiss Re Ltd. Swiss Re Ltd is the ultimate parent company of the Swiss Re Group, which consists of four business segments: Property & Casualty Reinsurance, Life & Health Reinsurance, Corporate Solutions and Life Capital. The presentation of each segment’s balance sheet is closely aligned with the segment legal entity structure.
Short-term investments are measured at fair value with changes in fair value recognised in net income. The Group considers highly liquid investments with a remaining maturity at the date of acquisition of one year or less, but greater than three months, to be short-term investments.
Deferred acquisition costs for short-duration contracts are amortised in proportion to premiums earned. Future investment income is considered in determining the recoverability of deferred acquisition costs for short-duration contracts.
Income taxes Deferred income tax assets and liabilities are recognised based on the difference between financial statement carrying amounts and the corresponding income tax bases of assets and liabilities using enacted income tax rates and laws. A valuation allowance is recorded against deferred tax assets when it is deemed more likely than not that some or all of the deferred tax asset may not be realised.
Funds held assets and liabilities On the asset side, funds held by ceding companies consist mainly of amounts retained by the ceding company for business written on a funds withheld basis. On the liability side, funds held under reinsurance treaties consist of amounts retained from ceded business written on a funds withheld basis.
In November 2014, the FASB issued ASU 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity – a consensus of the FASB Emerging Issues Task Force”, an update to topic 815, “Derivatives and Hedging”. The ASU provides guidance on how to assess whether or not a derivative embedded in an instrument in the legal form of a share must be bifurcated and accounted for separately from its host contract. Entities are required to use “the whole instrument approach” to determine whether the nature of the host contract in a hybrid instrument issued in the form of a share is more akin to debt or to equity. Under this approach, an issuer or investor considers all stated and implied substantive terms and features of a hybrid instrument when determining the nature of the host contract. No single term or feature will necessarily determine the nature of the host contract. The Group adopted ASU 2014-16 on 1 January 2016. The adoption did not have a material effect on the Group’s financial statements.
In February 2015, the FASB issued ASU 2015-02, “Consolidation: Amendments to the Consolidation Analysis”, an amendment to topic 810, “Consolidation”. ASU 2015-02 (i) eliminates the indefinite deferral of the consolidation requirements for certain investment companies and similar entities, (ii) modifies how to evaluate partnerships and other entities under the VIE framework, (iii) eliminates the presumption that a general partner should consolidate a limited partnership, (iv) modifies consolidation analysis, particularly for decision-maker fee arrangements and related party relationships, (v) excludes from the scope of consolidation assessment the entities that are, or operate similar to, money market funds registered under the US Investment Company Act of 1940. The Group adopted ASU 2015-02 on 1 January 2016 following the modified retrospective method. The modified retrospective method does not require the restatement of prior periods. The adoption did not have a material effect on the Group’s financial statements; however, it led to a change in consolidation of an investment vehicle. Please refer to the balance sheet, Note 6 Investments and Note 14 Variable interest entities for further details.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, an update to subtopic 835-30, “Interest—Imputation of Interest”. The ASU changes the presentation of debt issuance costs in financial statements by requiring that an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortisation of the costs is reported as interest expense. The Group adopted ASU 2015-03 on 1 January 2016 on a prospective basis. The adoption did not have an impact on the Group’s financial statements.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory”, an update to topic 740, “Income Taxes”. This ASU amends the current guidance which prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This new standard requires that an entity should recognise the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new requirements are effective for the Group for annual and interim periods beginning after 15 December 2017. The Group is currently assessing the impact of the new requirements.
a) Business segments – income statement For the years ended 31 December 2015 USD millions Property Casualty Specialty Credit Total
Expenses Claims and claim adjustment expenses –500 –783 –519 –153 –1 955 Acquisition costs –152 –104 –103 –100 –459 Operating expenses1 –257 –182 –116 –103 –658 Total expenses before interest expenses –909 –1 069 –738 –356 –3 072
Net investment income 127 Net realised investment gains/losses 141 Other revenues 9 Interest expenses –24 Income before income tax expense 560 1 The Group revised the allocation of operating expenses by Business segment with no impact to the Group’s result. Comparative information for 2015 has been adjusted accordingly.
Financial Statements I Notes to the Group financial statements b) Gross premiums earned by geography Gross premiums earned by regions for the years ended 31 December
Latin America 406 398 Europe (including Middle East and Africa) 933 904 Asia-Pacific 291 304
Reinsurance recoverable on unpaid claims and policy benefits As of 31 December 2015 and 2016, the Group had a reinsurance recoverable of USD 6 182 million and USD 5 429 million, respectively. The concentration of credit risk is regularly monitored and evaluated.
The Group cedes certain re/insurance contracts to affiliated companies within the Swiss Re Group, but outside of Swiss Re Corporate Solutions Ltd and its subsidiaries (please refer to Note 13).
Paid related to: Current year –523 –493 Prior year –1 186 –1 345
The Business Unit maintains an active commutation strategy to reduce exposure. When commutation payments are made, the traditional “survival ratio” is artificially reduced by premature payments which should not imply a reduction in reserve adequacy.
Short duration contract unpaid claims and claim adjustment expenses Basis of presentation of claims development tables This section provides claims development information on an accident year basis.
Claims development information and information on reserves for claims relating to insured events that have occurred but have not yet been reported or not enough reported (“IBNR”) is presented by the four core operating business segments (“disaggregation categories”). Amounts shown are net of external retrocession and ceded re/insurance contracts to affiliated companies within the Swiss Re Group, but outside the Swiss Re Corporate Solutions Group. Claims development information and information on IBNR reserves are shown on a nominal basis, also for cases where the Group discounts claim liabilities from acquisition accounting.
Some of the information provided in the following tables is treated as Required Supplementary Information (RSI) under US GAAP. Therefore, it does not form part of these consolidated audited financial statements. Claims development information for all periods except the current reporting period and any information derived from it – including average annual percentage payout of claims incurred – is considered RSI and is identified as RSI in the tables presented.
For business reviewed on a portfolio level, the expected ultimate losses are set for most lines and types of business based on analysis performed using standard actuarial techniques. In general, contracts are aggregated into portfolios by combining contracts with similar features.
In addition, the following applies for all business: ̤ For the most recent underwriting years, reliance may be made on the Group’s costing and underwriting functions for the initial estimates of claims, although the initial reserving estimates may differ from these pricing estimates if there is good reason to believe losses are likely to emerge higher or lower, and in light of the limited claims experience to date. Reviews of those initial estimates are performed regularly, forming a basis for adjustments on both the current and prior underwriting years.
Specialty had favourable experience in accident years 2012 – 2014. In accident year 2015, experience is driven by several medium-sized aviation claims.
Net outstanding liabilities Corporate Solutions: Property 811 Casualty 3021 Specialty 721 Credit 45
Total net undiscounted outstanding liabilities excluding other short duration contract lines 4598 Impacts of acquisition accounting –133 Total net discounted outstanding liabilities excluding other short duration contract lines 4465 Other short duration contract lines 151 Total net discounted outstanding short duration liabilities 4616
Reinsurance recoverables on unpaid claims Corporate Solutions: Property 88 Casualty 4914 Specialty 143 Credit 11
Impacts of acquisition accounting –18 Other short duration contract lines 246 Total short duration reinsurance recoverables on outstanding liabilities 5384
Amortisation –459 –513 Effect of foreign currency translation –1 Closing balance 387 444
Investment income Net investment income by source was as follows: Realised gains and losses Realised gains and losses for fixed income, equity securities and other investments were as follows: USD millions 2015 2016
Fixed income securities 133 117 Equity securities 22 16 Short-term investments 5 6 Other current investments 12 11 Share in earnings of equity-accounted investees1 19 Cash and cash equivalents 1 2 Net result from deposit-accounted contracts 3 5 Deposits with ceding companies 20 Gross investment income 196 176 Investment expenses –31 –39 Interest charged for funds held –38 –13 Net investment income 127 124 1 Due to the adoption of ASU 2015-02 as of 1 January 2016, the Group presents the result of an investment in “Share in earnings of equity-accounted investees” instead of consolidating the investment. Please refer to Note 1 for more details.
Equity securities available-for-sale: Gross realised gains 110 79 Gross realised losses –17 –27
For securitised products, a cash flow projection analysis is conducted by integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities, and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecasted economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and the present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.
Investments available-for-sale Amortised cost or cost and estimated fair values of fixed income securities classified as available-for-sale as of 31 December were as follows: 2015 USD millions
Mortgage-and asset-backed securities 397 1 –3 395 Fixed income securities available-for-sale 5 945 43 –100 5 888 Equity securities available-for-sale 906 83 –54 935 2016 USD millions
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 1 743 9 –11 1 741 US Agency securitised products 117 –1 116 States of the United States and political subdivisions of the states 425 4 –7 422
Mortgage- and asset-backed securities 325 1 –2 324 Fixed income securities available-for-sale 4 946 34 –53 4 927 Equity securities available-for-sale 335 55 –6 384
Maturity of fixed income securities available-for-sale The amortised cost or cost and estimated fair values of investments in fixed income securities available-for-sale by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2015 and 2016, USD 1 670 million and USD 1 495 million, respectively, of fixed income securities available-for-sale were callable.
Due in one year or less 546 530 1 011 1 002 Due after one year through five years 2 729 2 698 1 804 1 801 Due after five years through ten years 1 380 1 356 1 281 1 280 Due after ten years 893 909 525 519 Mortgage- and asset-backed securities with no fixed maturity 397 395 325 325 Total fixed income securities available-for-sale 5 945 5 888 4 946 4 927
Related financial instruments not set off in the balance sheet Net amount
Derivative financial instruments - assets 8 8 8 Reverse repurchase agreements 43 43 –43 0 2015 USD millions
Derivative financial instruments - assets 22 22 22 Reverse repurchase agreements 17 17 –17 0 2016 USD millions
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 1 715 13 5 0 1 720 13 US Agency securitised products 96 0 96 0 States of the United States and political subdivisions of the states 22 0 22 0
The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, include most government agency securities, investment-grade corporate bonds, certain mortgage- and asset-backed products, less liquid listed equities, and state, municipal and provincial obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.
The fair values of assets are adjusted to incorporate the counterparty risk of non-performance. Similarly, the fair values of liabilities reflect the risk of non-performance of the Group, captured by the Group’s credit spread. These valuation adjustments from assets and liabilities measured at fair value using significant unobservable inputs are recognised in net realised gains and losses. For 2016, these adjustments were not material.
Values of mortgage and asset-backed securities are obtained both from third-party pricing vendors and through quoted prices, some of which may be based on the prices of comparable securities with similar structural and collateral features. Values of certain asset-backed securities (ABS) for which there are no significant observable inputs are developed using benchmarks to similar transactions or indices. For both residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), cash flows are derived based on the transaction-specific information, which incorporates priority in the capital structure, and are generally adjusted to reflect benchmark yields, market prepayment data, collateral performance (default rates and loss severity) for specific vintage and geography, credit enhancements, and ratings. For certain RMBS and CMBS with low levels of market liquidity, judgements may be required to determine comparable securities based on the loan type and deal-specific performance. CMBS terms may also incorporate lock-out periods that restrict borrowers from prepaying the loans or provide disincentives to prepay and therefore reduce prepayment risk of these securities, compared to RMBS. The factors specifically considered in valuation of CMBS include borrower-specific statistics in a specific region, such as debt service coverage and loan-to-value ratios, as well as the type of commercial property. Mortgage and asset-backed securities also includes debt securitised by credit card, student loan and auto loan receivables. Pricing inputs for these securities also focus on capturing, where relevant, collateral quality and performance, payment patterns, and delinquencies.
The category “Other invested assets” includes the Group’s private equity funds investments which are made via ownership of funds. Substantially all of these investments are classified as level 3 due to the lack of observable prices and significant judgement required in valuation. The Group’s holdings in private equity funds are generally valued utilising net asset values (NAV), subject to adjustments, as deemed necessary, for restrictions on redemption (lock-up periods and amount limitations on redemptions). These investments are included under investments measured at net asset value as a practical expedient.
Assets and liabilities measured at fair value on a recurring basis As of 31 December, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: 2015 USD millions
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December, the reconciliation of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs was as follows: Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) for the years ended 31 December were as follows: 2015 USD millions
Transfers into level 31 0 0 Transfers out of level 31 0 0 Impact of foreign exchange movements 0 0
Closing balance as of 31 December 0 13 0 13 –74 –74 1 Impact of ASU 2015–07. Please refer to Note 1 for more details. 2 Transfers are recognised at the date of the event or change in circumstances that caused the transfer.
Gains/losses included in net income for the period 33 20 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date –28 16
Other invested assets measured at net asset value As of 31 December 2015 and 2016, other assets measured at net asset value were USD 12 million and USD 8 million, respectively. Additionally there were USD 1 million of unfunded commitments as of 31 December 2016.
Weather contracts –82 –41 Proprietary Option Model Risk Margin 8%–11% (9.7%) Correlation –59%–48% (–19.7%)
Power outage contracts –11 –20 Proprietary Option Model Risk Margin 7%–15% (9%) Average power forward price USD 40–USD 88
(USD 51.4) Industry loss warrants –13 –13 Credit Default Model Market implied probability of Nat Cat event 1%–13% (6.5%)
Gains and losses of derivative financial instruments The Group primarily uses derivative financial instruments for risk management and trading strategies. Gains and losses of derivative financial instruments are recorded in “Net realised investment gains/losses˝ in the income statement. For the years ended 31 December, the gains and losses of derivative financial instruments were as follows: Maximum potential loss The maximum potential loss as of 31 December 2015 and 2016 was approximately USD 8 million and USD 22 million, respectively. The maximum potential loss is based on the positive market replacement cost assuming non-performance of all counterparties.
Derivative financial instruments Foreign exchange contracts –2 –4 ECM/Weather contracts/ILW 35 16 Total gains/losses recognised in income 33 12 2015 USD millions
IHC Risk Solutions, LLC On 31 March 2016, the Group acquired IHC Risk Solutions, LLC (IHC), a leading US employer stop loss company and the direct employer stop loss business of Independence Holding Company. The cost of the acquisition was USD 153 million. The transaction includes IHC’s operations, its team of experts and business portfolio, including in-force, new and renewal business. This acquisition broadens the Group’s current employer stop loss capabilities in the small- and middle-market self-funded healthcare benefits segment.
The following table presents details of acquired intangible assets subject to amortisation as of the date of acquisition: The goodwill of USD 65 million relates to the casualty business segment. The goodwill is expected to be deductible for tax purposes.
Financial Statements I Notes to the Group financial statements 11 Income taxes
Income tax at the Swiss statutory tax rate of 20.6% (2015: 20.5%) 115 37 Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates 47 14 Tax exempt income/dividends received deduction –14 –9 Change in valuation allowance 1 5 Statutory rate change 1 –3 Other income based taxes 9 –1 Tax credits –41 Other, net –10 8
Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows: As of 31 December 2016, the aggregate amount of temporary differences associated with investment in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognised amount to approximately USD 295 million. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
As of 31 December 2016, the Group had USD 110 million net operating tax loss carryforwards, expiring as follows: USD 4 million in 2019, USD 4 million in 2020, USD 13 million in 2021 and beyond, and USD 89 million never expire.
Income taxes paid in 2015 and 2016 were USD 155 million and USD 122 million, respectively.
Deferred tax assets Deferred acquisition costs 40 36 Income accrued/deferred 30 19 Unearned premium reserve 57 66 Technical provisions 20 23 Benefit on loss carryforwards 12 28 Currency translation adjustments 39 37
Liability for unrecognised tax benefits including interest and penalties –9 –5 Total deferred and other non-current tax liabilities –375 –375
Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: The amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 7 million and USD 5 million at 31 December 2015 and 31 December 2016, respectively.
The following table summarises jurisdictions and tax years that remain subject to examination: USD millions 2015 2016
Balance as of 1 January 9 8 Reductions for tax positions of prior years –1 –1 Statute expiration –1 Settlements –1 Balance as of 31 December 8 5
SRCS is a wholly owned subsidiary of Swiss Re Ltd. Swiss Re Ltd is the ultimate parent company of the Swiss Re Group. SRCS and its subsidiaries participate in various pension plans sponsored by affiliated companies of the Swiss Re Group. These pension plans include the “Pension Fund Swiss Reinsurance Company (Swiss Re)” among others.
Group contributions for 2016 For the year ended 31 December 2016, the Group contributed USD 12 million to the aforementioned pension plans. In addition, the Group contributes into a number of defined contribution plans. The amount expensed in 2016 was USD 7 million.
Financial Statements I Notes to the Group financial statements 13 Related parties
Gross premiums written 214 163 Net premiums written –99 –149 Change in unearned premiums 38 35 Premiums earned –61 –114 Net investment income – non-participating business –46 –18 Net realised investment income – non-participating business 16 22 Total revenues –91 –110
Unpaid claims and claim adjustment expenses 391 294 Unearned premiums 161 131 Funds held under reinsurance treaties 816 713 Reinsurance balances payable 94 146 Accrued expenses and other liabilities 102 125
The Group enters into arrangements with VIEs in the normal course of business. The involvement ranges from being a passive investor to designing, structuring and managing the VIEs. The variable interests held by the Group arise primarily as a result of the Group‘s involvement in certain investment vehicles, which meet the definition of a VIE.
For all its variable interests in VIEs, the Group assesses whether it has a controlling financial interest in these entities and, thus, is the primary beneficiary. The Group identifies the activities that most significantly impact the entity‘s performance and determines whether the Group has the power to direct those activities. In conducting the analysis, the Group considers the purpose, the design and the risks that the entity was designed to create and pass through to its variable interest holders. Additionally, the Group assesses if it has the obligation to absorb losses or if it has the right to receive benefits of the VIE that could potentially be significant to the entity. If both criteria are met, the Group has a controlling financial interest in the VIE and consolidates the entity.
The Group invests in an investment vehicle that is consolidated by Swiss Reinsurance Company. The investment vehicle is a VIE (under ASU 2015-02) because it is structured as an umbrella company comprised of multiple sub-funds.
Equity securities available-for-sale 26 Other invested assets 1 630 Premiums and other receivables 3
Maximum exposure to loss1 1 Maximum exposure to loss is the loss the Group would absorb from a variable interest in a VIE in the event that all of the assets of the VIE are deemed worthless.
How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls of the valuation models for level 2 and 3 investments, including the Company’s independent price verification process.
Moreover, not all natural catastrophe events and/or significant man-made losses can be modelled using traditional actuarial methodologies, which increases the degree of judgement needed in establishing reserves for these events.
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved.
In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Critically reviewing the ‘more-likely-than-not’ tax assessments to evaluate the Company’s judgements and estimates of the probabilities and the amounts.
Annual Report Swiss Re Corporate Solutions Ltd The management report follows the regulations as outlined in article 961c of the Swiss Code of Obligations.
Reinsurance and sub-holding company Swiss Re Corporate Solutions Ltd (the Company), domiciled in Zurich, Switzerland, performs a dual role within the Swiss Re Group as both a reinsurance company and a sub-holding company for the Corporate Solutions Business Unit. The Company is a wholly-owned subsidiary of Swiss Re Ltd, the ultimate parent company domiciled in Zurich, Switzerland. In 2016, the Company directly employed worldwide staff at an average of 325 full-time equivalents. Effective 1 January 2016, the Company directly employed its staff in Switzerland. In prior years, the staff were employed by Swiss Reinsurance Company Ltd, and their costs recharged.
The Company paid an ordinary dividend in cash of CHF 240 million.
Reinsurance result Reinsurance result amounted to CHF 126 million in 2016, compared to CHF 219 million in 2015.
Premiums earned increased 8% to CHF 2 684 million in 2016 (2015: CHF 2 481 million), mainly due to the acquisition of IHC Risk Solutions business and general growth mainly in liability, partly offset by lower premium in space and aviation. Excluding the effects of foreign exchange movements, premiums earned increased by 6%.
Claims and claim adjustment expenses increased by 14% to CHF 1 622 million in 2016 (2015: CHF 1 422 million). The increase was mainly due to the acquisition of IHC Risk Solutions business and several liability and natural catastrophe losses. Excluding the effects of foreign exchange movements, claims and claims adjustment expenses increased by 12%.
Operating costs increased by CHF 8 million to CHF 199 million in current year (2015: CHF 191 million).
Investment result Net investment result amounted to CHF 119 million, compared to CHF 20 million in the prior year.
Result from other income and expenses The result from other income and expenses was due to lower foreign exchange gains compared to prior year, mainly due to the strengthening of the US dollar against the Swiss franc.
Total investments increased from CHF 5 060 million at 31 December 2015 to CHF 5 555 million at 31 December 2016, driven by higher reinsurance business volume, partly offset by the ordinary cash dividend to Swiss Re Ltd.
Other provisions increased by CHF 56 million mainly due to the shift of employee pension benefits from Swiss Reinsurance Company Ltd effective 1 January 2016.
Shareholder’s equity Shareholder’s equity decreased from CHF 1 768 million at 31 December 2015 to CHF 1 704 million at 31 December 2016.
The decrease resulted from the ordinary cash dividend of CHF 240 million, partly offset by net income for 2016 of CHF 176 million.
Structural changes Addition of new entities Corporate Solutions has announced that its subsidiary, Corporate Solutions Brasil Seguros S.A. (SRCSB) will acquire the commercial large-risk portfolio from Bradesco Seguros S.A. (Brasil) and receive exclusive access to Bradesco Seguros’ distribution network. Upon closing the transaction, Bradesco Seguros will take a 40% equity stake in SRCSB, while Swiss Re Corporate Solutions Ltd will retain a 60% stake. This transaction is subject to regulatory approval.
Macroeconomic environment The global economy is projected to grow at a slightly higher pace in 2017 than in 2016, and growth in advanced markets is projected to stay moderate. However, the early 2017 data from the Euro area and the UK have been strong. In 2018, both economies are expected to slow down as the actual exit of the UK from the EU approaches. In the US, given the many uncertainties regarding the new administration’s policy proposals, it is difficult to estimate the extent of impact on the economy and its timing. Nevertheless, there is room for optimism in the global growth outlook, with a smaller threat of a strong dollar in the US, and the likely return to growth of large emerging countries. In spite of expected rate hikes by the US Federal Reserve Bank, monetary policy across regions will remain accommodative. However, its marginal benefits on the economy are declining, in absence of structural reforms in the major economies. Main risk scenarios include the sustainability of China’s growth, the effect of a tightening US Federal Reserve Bank’s policy and ongoing political issues in Europe.
In 2016 the industry experienced a continued, albeit slower expansion of inflation-adjusted insurance premium volumes, bolstered by strong growth in emerging markets. Pricing continues to deteriorate in all major lines of business, but at a slower pace, driven mostly by abundant capacity and an absence of large natural catastrophe losses.
Reinsurance business Strategy and priorities The Company conducts the commercial insurance business of the Swiss Re Group and is committed to deliver long-term profitability and economic growth. Through our network of subsidiaries, future growth aspirations are focused on selected areas, with dedicated strategic initiatives to expanding into Primary Lead and further broadening of the footprint. Corporate Solutions offers customised, innovative and multi-line, multi-year risk transfer solutions, taking into account the unique needs of local markets and specialty industries.
Outlook In terms of economic outlook, the Company’s baseline assumption is for moderate and uneven continuing global recovery, with an expectation for the US economy to outperform and the Eurozone growth to remain modest. Emerging markets are exposed to downside risks and face differentiation amongst countries, as potential fallout from the US trade policy affects countries unevenly.
Outlook In terms of the investment outlook for 2017, government bond yields are expected to rise from current levels, in particular in the US with smaller rises in the UK and Germany. The outlook is neutral for corporate bonds, with modest spread widening expected in the US while Eurozone corporate bonds remain tight, supported by the European Central Bank asset purchase program. The outlook is similarly neutral for equities with a preference for the US given better near-term earnings outlook.
The Group Executive Committee (Group EC) is responsible for developing and implementing Swiss Re’s Group-wide risk management framework. It also sets and monitors risk capacity limits, oversees the Economic Value Management framework, determines product policy and underwriting standards, and manages regulatory interactions and legal obligations. The Group EC has delegated various risk management responsibilities to the Group Chief Risk Officer (Group CRO) as well as to the Business Units.
The Group CRO is appointed as the principal independent risk controller of Swiss Re. The Group CRO 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 Group CRO leads the independent Risk Management function, which is responsible for risk oversight and control across Swiss Re. It thus forms an integral part of Swiss Re’s business model and risk management framework. The Risk Management function is comprised of central teams providing specialised risk expertise and oversight, as well as dedicated risk teams for the Reinsurance, Corporate Solutions, and Life Capital (formerly Admin Re®) Business Units.
Business Unit Corporate Solutions and Group Risk Management activities are complemented by Swiss Re’s Group Internal Audit and Compliance units: ̤ Group Internal Audit performs independent assessments of adequacy and effectiveness of internal control systems. It evaluates the execution of processes within Swiss Re, including those within Risk Management. ̤ The Compliance function oversees Swiss Re’s compliance with applicable laws, regulations, rules, and the Group Code of
Conduct. It also assists the Business Unit and the Group Board of Directors, Executive Committees and other management bodies in identifying, mitigating and managing compliance risks.
Other reinsurance revenues 3 5 Allocated investment return 36 44 Total revenues from reinsurance business 2 520 2 733
Shares in investment funds 1 106 1 702 Short-term investments 944 714
Financial and reinsurance assets Funds held by ceding companies 449 604 Cash and cash equivalents 44 16 Reinsurance recoverable from unpaid claims 3 20 39 Reinsurance recoverable from unearned premiums 3 9 9 Reinsurance recoverable on technical provisions retroceded 29 48 Tangible assets 0 0 Deferred acquisition costs 3 367 412 Intangible assets 10 20 Premiums and other receivables from reinsurance 3 1 217 1 164 Other receivables 14 81 Other assets 4 3 Accrued income 6 3 Total financial and reinsurance assets 2 140 2 351
Legal profit reserves – – Voluntary profit reserves 16 26 Retained earnings brought forward 80 8 Net income for the financial year 178 176
Basis of presentation In general, the financial statements are prepared in accordance with Swiss Company Law. As a reinsurance company and based on Art. 111b of the Ordinance on the supervision of private insurance companies (ISO), the Company is also required to follow the Insurance Supervisory Ordinance-FINMA (ISO-FINMA). The ISO-FINMA contains specific guidance for presentation of the balance sheet, the income statement and the notes of insurance companies and overrides the general guidance of the Swiss Code of Obligations (SCO).
Investments ̤ The following assets are carried at cost, less necessary and legally permissible depreciation: Investments in subsidiaries and affiliated companies ̤ Fixed income securities (other than zero-coupon bonds) ̤ Shares in investment funds
The group valuation method is applied for the investments in subsidiaries and affiliated companies, which are economically linked to each other.
Tangible assets Tangible assets are carried at cost, less individually scheduled straight-line depreciation over their useful lives. Items of minor value are not capitalised.
Technical provisions gross Unpaid claims are recognised based on information provided by clients and own estimates of expected claims experience, which are drawn from empirical statistics. These include provisions for claims incurred but not reported. Unpaid insurance obligations are set aside at the full expected amount of future payment.
Shares in investment funds 5 8 10 23 Short-term investments 3 – 0 3
Investment expenses Subsidiaries and affiliated companies – – – – Fixed income securities – –3 –1 –4 Equity securities – – –1 –1 Loans – – – – Shares in investment funds – – – – Short-term investments – – 0 0
As of 31 December 2016, the Company has issued limited guarantees of notional CHF 746 million (2015: CHF 673 million) to a subsidiary in support of individual transactions.
As of 31 December 2016, securities of CHF 704 million (2015: CHF 866 million) were lent to Swiss Reinsurance Company Ltd under securities lending agreements. As of 31 December 2016 and 2015, there were no securities lent to third parties.
Reinsurance balances payable –18 –16 -34 –23 –39 –62 1 Reported under "Reinsurance recoverable on technical provisions retroceded" on page 63.
Allocation to voluntary profit reserves – – – 250 – –250 – Allocation to retained earnings – – – – –72 72 – Dividend for the financial year 2015 – – – –240 – – –240 Net income for the year – – – – – 176 176
Fair value of securities transferred to third parties – – Fair value of securities transferred to affiliated companies 866 704
Financial Statements I Swiss Re Corporate Solutions Ltd 8 Security deposits
Funds held by ceding companies 449 603 Premiums and other receivables from reinsurance 1 019 950 Other receivables 12 72 Reinsurance balances payable 13 10 Other liabilities 5 33
There were no outstanding claims on and obligations towards the parent company, Swiss Re Ltd, at the end of the period 2016 and 2015
Swiss Re Corporate Solutions Brasil Seguros S.A. Brazil São Paulo 100% 100% Compania Aseguradora de Fianzas S.A. Confianza Colombia Bogotá 51% 51% Swiss Re Corporate Solutions Advisors South Africa (Pty) Ltd South Africa Johannesburg 100% 100% Swiss Re Corporate Solutions Services Ltd United Kingdom London 100% 100% Swiss Re Serviços de Consultoria em Seguros e Resseguros Ltda Brazil São Paulo 100% 100%
As of 31 December 2016, the Company employed a worldwide staff at an average of 325 (2015: 8) full time equivalents.
Total administrative expenses for 2016, including charges by affiliates, amounted to CHF 306 million (2015: CHF 228 million).
Legal reserves from capital contributions brought forward 1 342 1 342 Proposed allocation to voluntary profit reserves in connection with the cash dividend –301 – Legal reserves from capital contributions after proposed allocation to voluntary profit reserves 1 312 1 342 1 The translation into CHF at spot rate on the settlement date may result in a lower reclassification of legal reserves from capital contributions to voluntary profit reserves by a respective amount on the settlement date.
Voluntary profit reserves after proposed allocation of legal reserves from capital contributions and cash dividend 26 26 1 The translation into CHF at spot rate on the settlement date may result in a lower cash dividend by a respective amount on the settlement date. 2 The 2015 figure was recalculated based on the final cash dividend, converted into CHF at spot rate on the settlement date.
Report of the statutory auditor Report of the statutory auditor to the General Meeting of Swiss Re Corporate Solutions Ltd Zurich, Switzerland
Report of the statutory auditor on the financial statements As statutory auditor, we have audited the financial statements of Swiss Re Corporate Solutions Ltd (the ‘Company’), which comprise the income statement, balance sheet and notes (pages 62 to 74) for the year ended 31 December 2016.
Key audit matter Investments are generally valued at lower of cost or market value (prudence principle). In addition to the lower of cost or market value, amortised cost must also be considered for fixed income securities, which is in accordance with the Insurance Supervision Ordinance.
In particular, ‘long tail’ lines of business (for example, Liability, Motor Liability and Workers’ Compensation) are generally more difficult to project. This is due to the protracted period over which claims can be reported as well as the fact that claims settlements are often less frequent but of higher impact. They are also subject to greater uncertainties than claims relating to ‘short-tail’ business. Long-tailed lines of business generally rely on many assumptions based on experts’ judgement.
How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls relating to the application of the actuarial methodology, data collection and analysis, as well as the processes for determining the assumptions used by management in the valuation of actuarially determined P&C loss reserves.
On the basis of the work performed, we consider that the methodology, assumptions and underlying data used in the valuation of actuarially determined P&C loss reserves to be reasonable and in line with financial reporting requirements and accepted industry practice.
In performing impairment assessments of investments in subsidiaries and affiliated companies, management uses considerable judgement in determining different valuationmethod inputs.
Certain statements contained herein are forward-looking. These statements (including as to plans, objectives, targets and trends) provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact.
General impact of adverse market conditions The operations of Swiss Re Corporate Solutions Ltd (“Swiss Re”) and its subsidiaries (collectively, the “Group”) as well as its investment returns are subject to market volatility and macro-economic factors, which are outside of the Group’s control and are often inter-related.
The Group cannot predict which legislative and/or regulatory initiatives will be enacted or promulgated, what the scope and content of these initiatives ultimately will be, when they will be effective and what the implications will be for the industry, in general, and for the Group, in particular. The Group may be subject to changes in views of its regulators in respect of the models that the Group uses for capital and solvency purposes, and could be adversely affected if for example it is required to use standard models rather than internal models. Generally, legal and regulatory changes could have a material impact on the Group’s business. Uncertainty triggered by the outcome of the UK referendum on EU membership could also impact the legislative and/or regulatory regimes to which the Group or the broader Swiss Re Group is subject, both in the United Kingdom and in the European Union.
In addition, regulatory changes could occur in areas of broader application, such as competition policy and tax laws. Changes in tax laws, for example, could increase the taxes the Group pays, the attractiveness of products offered by the Group, the Group’s investment activities and the value of deferred tax assets. Any number of these changes could apply to the Group and its operations. These changes, or inconsistencies between the various regimes that apply to the Group, could increase the costs of doing business, reduce access to liquidity, limit the scope of current or future business or affect the competitive balance, or could make insurance less attractive to the Group’s clients.
Market risk Volatility and disruption in the global financial markets could expose the Group to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices and foreign currency exchange rates, which may adversely impact the Group’s financial condition, results of operations, liquidity and capital position. The Group’s exposure to interest rate risk is primarily related to the market price and cash flow variability associated with changes in interest rates. In general, a low interest rate environment, such as the one experienced in recent years, poses significant challenges to the insurance industry, with earnings capacity under stress unless lower investment returns from fixed income assets can be offset by lower combined ratios or higher returns from other asset classes. Economic weakness, fiscal tightening and monetary policies are keeping government yields low, which impacts investment yields and affects the profitability of life savings products with interest rate guarantees. Exposure to credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads. When credit spreads widen, the net unrealised loss position of the Group’s investment portfolio can increase, as could other-than-temporary impairments.
The Group is exposed to changes in the level and volatility of equity prices, as they affect the value of equity securities themselves as well as the value of securities or instruments that derive their value from a particular equity security, a basket of equity securities or a stock index. The Group is also subject to equity price risk to the extent that the values of life-related benefits under certain products and life contracts, most notably variable annuity business, are tied to financial market values; to the extent market values fall, the financial exposure on guarantees related to these contracts would increase to the extent this exposure is not hedged. Exposure to foreign exchange risk arises from exposures to changes in spot prices and forward prices as well as to volatile movements in exchange rates.
Risks relating to credit rating downgrades Ratings are an important factor in establishing the competitive position of insurance companies. Third-party rating agencies assess and rate the financial strength insurers such as Swiss Re. These ratings are intended to measure a company’s ability to repay its obligations and are based upon criteria established by the rating agencies. Ratings may be revised downward or revoked at the sole discretion of the rating agencies.
Legal and regulatory risks In the ordinary course of business, the Group is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which determine rights and obligations under insurance, reinsurance and other contractual agreements. From time to time, the Group may institute, or be named as a defendant in, legal proceedings, and the Group may be a claimant or respondent in arbitration proceedings. These proceedings could involve coverage or other disputes with clients, disputes with parties to which the Group transfers risk under reinsurance arrangements, disputes with other counterparties or other matters. The Group cannot predict the outcome of any of the foregoing, which could be material for the Group.
Insurance, operational and other risks As part of the Group’s ordinary course operations, the Group is subject to a variety of risks, including risks that reserves may not adequately cover future claims and benefits, risks that catastrophic events (including hurricanes, windstorms, floods, earthquakes, acts of terrorism, man-made disasters such as industrial accidents, explosions, and fires, and pandemics) may expose the Group to unexpected large losses (and related uncertainties in estimating future claims in respect of such events); competitive conditions (including as a result of consolidation and the availability of significant levels of alternative capacity); cyclicality of the industry; risks related to emerging claims and coverage issues (including, for example, trends to establish stricter building standards, which can lead to higher industry losses for earthquake cover based on higher replacement values); macro developments giving rise to emerging risks, such as climate change and technological developments (including greater exposure to cyber risks, which could have a range of consequences from operational disruption, to a loss of proprietary or customer data, to greater regulatory burdens and potential liability); risks arising from the Group’s dependence on policies, procedures and expertise of the Group’s clients; risks related to investments in emerging markets; and risks related to the failure of, or attacks directed at, the Group’s operational systems and infrastructure. Any of the foregoing, as well as the occurrence of future risks that the Group’s risk management procedures fail to identify or anticipate, could have a material adverse effect on the Group, and could also give rise to reputational risk.
Use of models; accounting matters The Group is subject to risks relating to the preparation of estimates and assumptions that management uses, for example, as part of its risk models as well as those that affect the reported amounts of assets, liabilities, revenues and expenses in the Group’s financial statements. In addition, particularly with respect to large natural catastrophes, it may be difficult to estimate losses, and preliminary estimates may be subject to a high degree of uncertainty and change as new information becomes available. Deterioration in market conditions could have an adverse impact on assumptions used for financial reporting purposes, which could affect possible impairment of present value of future profits, fair value of assets and liabilities, deferred acquisition costs or goodwill. Moreover, regulators could require the use of standard models instead of permitting the use of internal models. To the extent that management’s estimates or assumptions prove to be incorrect, it could have a material impact on underwriting results (in the case of risk models) or on reported financial condition or results of operations, and such impact could be material.