Combined ratio in % 91.9 89.9 Return on equity1 in % 10.3 15.6 1 Return on equity is calculated by dividing net income attributable to common shareholder by average common shareholder’s equity.
Gross premiums earned by regions, 2014 (Total USD 3 931 million)
Net investment income 7 90 89 Net realised investment gains 7 63 158
Expenses Claims and claim adjustment expenses 3 –1 729 –2 054 Acquisition costs 3 –412 –463 Other expenses –513 –579 Interest expenses –8 Total expenses –2 654 –3 104
Income before income tax expense 387 587 Income tax expense 11 –97 –195 Net income before attribution of non-controlling interests 290 392
Net income before attribution of non-controlling interests 290 392 Other comprehensive income, net of tax: Change in unrealised gains/losses –15 18 Change in foreign currency translation –26 –48
Comprehensive income attributable to non-controlling interests 1 Total comprehensive income attributable to common shareholder 249 363 2013 USD millions
Balance as of 1 January 98 103 201 Change during the period 137 –40 97 Amounts reclassified out of accumulated other comprehensive income –105 –105 Tax –14 –8 –22 Balance as of period end 116 55 171 1 Reclassification adjustment included in net income is presented in the ’’Net realised investment gains/losses’’ line. 2 Reclassification adjustment is limited to translation gains and losses realised upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity.
Cash and cash equivalents (including 0 in 2013 and 20 in 2014 subject to securities lending) 404 568 Accrued investment income 30 44 Premiums and other receivables 1 984 2 274 Reinsurance recoverable on unpaid claims 4 7 836 7 434 Funds held by ceding companies 364 388 Deferred acquisition costs 5 332 360
Income taxes recoverable 12 31 Deferred tax assets 11 233 258 Other assets 643 720
Liabilities Unpaid claims and claim adjustment expenses 4 11 364 11 721
Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax 98 116 Cumulative translation adjustments, net of tax 103 55
Dividends on common shares1 –437 –599 Balance as of period end 1 276 677
Retained earnings Balance as of 1 January 853 1 091 Net income attributable to common shareholder 290 393 Effect of change in Group structure2 13 Dividends on common shares –52 –101 Balance as of period end 1 091 1 396
Tax paid was USD 75 million and USD 63 million for the years ended 31 December 2013 and 2014, respectively.
Cash flows from investing activities Fixed income securities: Net purchase/sale/maturities of short-term investments –40 –774
Cash paid/received for acquisitions/disposal of reinsurance transactions, net 2 –131 Net purchases/sales/maturities of other investments 2 –13 Net cash provided/used by investing activities –432 –997
Cash flows from financing activities Issuance/repayment of long-term debt 496 Dividends paid to parent –489 –700 Net cash provided/used by financing activities –489 –204
Use of estimates in the preparation of financial statements The preparation of financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the related disclosure including contingent assets and liabilities. The Group’s liabilities for unpaid claims and claim adjustment expenses include estimates for premium, claim and benefit data not received from ceding companies at the date of the financial statements. In addition, the Group uses certain financial instruments and invests in securities of certain entities for which exchange trading does not exist. The Group determines these estimates based on historical information, actuarial analyses, financial modelling and other analytical techniques. Actual results could differ significantly from the estimates described above.
For assets or derivative structures at fair value, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Although management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and judgment over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. As of 31 December 2014, the Group had not provided any collateral on financial instruments in excess of its own market value estimates.
The cost of equity securities AFS is reduced to fair value, with a corresponding charge to realised investment losses if the decline in value, expressed in functional currency terms, is other-than-temporary. Subsequent recoveries of previously recognised impairments are not recognised in earnings.
Interest on fixed income securities is recorded in net investment income when earned and is adjusted for the amortisation of any purchase premium or discount. Dividends on equity securities are recognised as investment income on the ex-dividend date. Realised gains and losses on sales are included in earnings and are calculated using the specific identification method.
Financial Statements I Notes to the Group Financial Statements interest equals or exceeds 3% are accounted for using the equity method. Investments in limited partnerships where the Group’s interest is below 3% and equity investments in corporate entities which are not publicly traded are accounted for at estimated fair value with changes in fair value recognised as unrealised gains/losses in shareholder’s equity.
Derivative financial instruments The Group enters into various financial contracts covering risks such as weather, weather-contingent price risks and outage contingent power price risks that are accounted for as derivative financial instruments. The Group also uses derivatives to manage exposure to foreign currency risks. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models, with changes in fair value recorded in income. The Group currently does not apply hedge accounting.
Other assets Other assets include deferred expenses on retroactive reinsurance, prepaid reinsurance premiums, receivables related to investing activities, real estate for own use, equipment, accrued income, certain intangible assets and prepaid assets.
Real estate for own use and equipment are carried at depreciated cost. Depreciation on buildings is recognised over the estimated useful life of the asset. Land is recognised at cost and not depreciated.
Funds held assets and liabilities On the asset side, funds held by ceding companies consist 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.
a) Business segments For the years ended 31 December 2013 USD millions Property Casualty Specialty Credit Total
Net investment income 90 Net realised investment gains/losses 63 Interest expenses 0 Income before income tax expenses 387 2014 USD millions Property Casualty Specialty Credit Total
Gross premiums earned by country for the years ended 31 December
Latin America 234 429 Europe (including Middle East and Africa) 840 1 008 Asia-Pacific 254 266
Premium receivables invoiced 392 412 Receivables invoiced from ceded re/insurance business 305 178 Recognised allowance –31 –24
US asbestos and environmental claims exposure The Group’s obligation for claims payments and claims settlement charges also includes obligations for long-latent injury claims arising out of policies written prior to 1986 as well business acquired subsequently through reinsurance arrangements to other Swiss Re Group Companies, in particular in the area of US asbestos and environmental liability.
At the end of 2014, the Group carried net reserves for US asbestos and environmental liabilities equal to USD 178 million. During 2014, the Group incurred net losses of USD 27 million and paid net against these liabilities USD 16 million.
Effect of acquisitions/disposals and retrocessions –13 Amortisation –412 –461 Effect of foreign currency translation –2 Closing balance as of 31 December 332 360
The following table presents detail of acquired intangible assets subject to amortisation as of the date of acquisition: The goodwill of USD 92 million relates to the Credit business segment. The goodwill is not expected to be deductible for tax purposes.
Fixed income securities 98 106 Equity securities 17 15 Short-term investments 4 5 Other current investments 9 7 Cash and cash equivalents 3 2 Net result from deposit-accounted contracts 4 3 Deposits with ceding companies 56 24 Gross investment income 191 162 Investment expenses –26 –29 Interest charged for funds held –75 –44 Net investment income 90 89
Other-than-temporary impairments –5 –4 Net realised investment gains/losses on trading securities 1 Other investments: Net realised/unrealised gains/losses 1 –5 Net realised/unrealised gains/losses on insurance-related activities 3 46 Foreign exchange gains/losses –31 18 Net realised investment gains/losses 63 158
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 1 300 2 –18 1 284 US Agency securitised products 418 1 –2 417 States of the United States and political subdivisions of the states 230 –15 215
Mortgage- and asset-backed securities 467 7 –1 473 Fixed income securities available-for-sale 5 116 75 –43 5 148 Equity securities available-for-sale 586 161 –15 732
As of 31 December 2013 and 2014, securities of USD 1 417 million and USD 1 581 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. There were no associated liabilities.
States of the United States and political subdivisions of the states 63 18 81 0
Governance around level 3 fair valuation The Senior Risk Committee, chaired by the Group Chief Risk Officer, has a primary responsibility for governing and overseeing all of the Groupʼs asset and derivative valuation policies and operating parameters (including level 3 measurements). The Senior Risk Committee delegates the responsibility for implementation and oversight of consistent application of the Groupʼs pricing and valuation policies to the Pricing and Valuation Committee.
A formal IPV process is undertaken monthly by members of the IPV team within a Financial Risk Management function. The process includes monitoring and in-depth analyses of approved pricing methodologies and valuations of the Group’s financial instruments aimed at identifying and resolving pricing discrepancies.
The Risk Management function is responsible for independent validation and ongoing review of the Group’s valuation models. The Product Control group within Finance is tasked with reporting of fair values through the vendor-and model- based valuations, the results of which are also subject to the IPV process.
Assets and liabilities measured at fair value on a recurring basis As of 31 December, the fair value of assets and liabilities measured on a recurring basis by level of input was as follows: 2013 USD millions
Debt securities issued by US government and government agencies 1 273 226 1 499 US Agency securitised products 417 417 Debt securities issued by non-US governments and government agencies 413 413
Assets Fixed income securities held for proprietary investment purposes 1 556 3 579 13 5 148
Debt securities issued by US government and government agencies 1 556 241 1 797 US Agency securitised products 224 224 Debt securities issued by non-US governments and government agencies 553 553
Equity securities held for proprietary investment purposes 732 732 Short-term investments held for proprietary investment purposes1 1 723 625 2 348 Derivative financial instruments 11 11 Other invested assets 21 21 Total assets at fair value 4 011 4 204 45 8 260
Liabilities Derivative financial instruments –72 –72 Total liabilities at fair value 0 0 –72 –72 1 In the first quarter 2014, the Group changed the valuation of short-term investments from amortized cost to fair value. There is no material impact to net income, total assets or shareholder’s equity.
Realised/unrealised gains/losses: Included in net income –4 –4 0 Included in other comprehensive income –2 –1 –3 0
Gains/losses included in net income for the period –4 36 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date –5 33
Other invested assets measured at net asset value As of 31 December 2013 and 2014, other assets measured at net asset value were USD 21 million.
Assets and liabilities not measured at fair value but for which the fair value is disclosed As of 31 December 2014, the subordinated financial debt issued by the Group was valued at USD 493 million. The debt position is fair valued based on executable broker quotes and is classified as a level 2 measurement.
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. Gains and losses of derivative financial instruments were as follows: Maximum potential loss In consideration of the rights of set-off and the qualifying master netting arrangements with various counterparties, the maximum potential loss as of 31 December 2014 was approximately USD 11 million. The maximum potential loss is based on the positive market replacement cost assuming non-performance of all counterparties.
The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: Tax rate reconciliation The following table reconciles the expected tax expense at the Swiss statutory tax rate to the actual tax expense in the accompanying income statement: The Group reported a tax charge of USD 195 million on a pre-tax income of USD 587 million for 2014, compared to a charge of USD 97 million on a pre-tax income of USD 387 million for 2013. This translates into an effective tax rate in the current and prioryear reporting periods of 33.2% and 25.1%, respectively. The higher tax rate in the current year compared to the prior year is largely driven by tax charges from foreign exchange movements.
Net operating tax losses of USD 45 million were utilised during the period ended 31 December 2014.
Income taxes paid in 2013 and 2014 were USD 75 million and USD 63 million, respectively.
Liability for unrecognised tax benefits including interest and penalties –13 –10 Total deferred and other non-current tax liabilities –267 –425
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 10 million and USD 9 million at 31 December 2013 and 2014, respectively.
Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. The balance of gross unrecognised tax benefits as of 31 December 2014 presented in the table above excludes accrued interest and penalties (USD 1 million).
Balance as of 1 January 14 12 Additions based on tax positions related to the current year 1 Additions for tax positions related to the prior years 5 19 Reductions for tax positions of prior years –17 Settlements –7 –6 Balance as of 31 December 12 9
Denmark 2010–2014 France 2012–2014 Germany 2010–2014 Italy 2009–2014 Japan 2009–2014 Luxembourg 2010–2014 Netherlands 2010–2014 Singapore 2013–2014 Switzerland 2013–2014 United Kingdom 2012–2014 United States 2009–2014
Financial Statements I Notes to the Group Financial Statements 12 Related parties
Premiums earned 256 157 Net investment income –74 –43 Total revenues 182 114
Unpaid claims and claim adjustment expenses 472 488 Unearned premiums 356 203 Funds held under reinsurance treaties 1 414 1 337 Reinsurance balances payable 34 115
Other assets 143 46 Accrued expenses and other liabilities 194 88
United Kingdom Swiss Re Specialty Insurance (UK) Limited, London GBP 18 100 f The Palatine Insurance Company Limited, London GBP 8 100 f
Colombia Compañía Aseguradora de Fianzas S.A. Confianza, Bogota COP 223 551 51 f
The central risk management units 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, ̤ Developing the central risk governance framework
Report of the statutory auditor to the General Meeting of Swiss Re Corporate Solutions Ltd Zurich
Financial year 2014 Net income for the financial year 2014 amounted to CHF 288 million, compared to CHF 90 million in the prior year.
Premiums earned increased by 30% to CHF 2 464 million in 2014. At constant foreign exchange rates the growth was 33%. The increase was mainly driven by business growth in the Corporate Solutions Group companies combined with increased cession shares and of the reinsurance written with external clients.
In 2014, the Company increased the equalisation provision by CHF 79 million.
Assets Total assets increased by 35% to CHF 6 674 million as of 31 December 2014, compared to 31 December 2013. At constant foreign exchange rates the growth was 26%.
Total investments increased from CHF 3 406 million as of 31 December 2013 to CHF 4 567 million as of 31 December 2014, driven by the investment of the proceeds from the issuance of a subordinated debt and higher reinsurance business volume, partly offset by the funding of the dividends to Swiss Re Ltd.
Technical provisions increased from CHF 2 710 million as of 31 December 2013 to CHF 4 255 million as of 31 December 2014, mainly reflecting increased business volume and the increase of the equalisation provision by CHF 79 million.
In addition, the Company issued a subordinated debt of CHF 497 million in 2014.
The nominal share capital of the Company remained unchanged at CHF 100 million as of 31 December 2014.
Claims and claim adjustment expenses –1 096 –1 420 Change in equalisation provision –60 –79 Acquisition costs –464 –615 Other reinsurance result 3 3 Operating costs –167 –194 Allocated investment return 28 33 Reinsurance result 135 192
Income before income tax expense 85 332 Income tax expense 5 –44 Net income 90 288
Other legal reserves 52 52 Legal reserves from capital contributions 1 910 1 342 Other reserves – – Retained earnings brought forward 2 2 Net income for the financial year 90 288
Basis of presentation On 1 January 2013, new Swiss accounting and financial reporting legislation entered into force based on partial revisions of the Swiss Code of Obligations. Based on the transitional provisions, the new provisions have to be implemented for annual accounts from the 2015 financial year onwards, at the latest. The Swiss Re Corporate Solutions Ltd’s financial statements 2014 have still been prepared based on the accounting provisions of the Swiss Code of Obligations in effect until 31 December 2012.
The following table shows the main foreign currencies in which the Company operated: Cash and cash equivalents Cash and cash equivalents include cash at bank, short-term deposits and certain investments in money-market funds with an original maturity of three months or less. Such current assets are held at nominal value.
Liabilities assumed and consideration provided in connection with portfolio transactions are established through the respective lines in the income statement. The initial recognition of the assumed outstanding claims is recorded as change in unpaid claims, with the consideration being recognised as negative claims paid. The assumption of the provision for unearned premiums is established through the change in unearned premiums, with the respective consideration accounted for as premiums written.
Non-technical provisions The provision for taxation represents an estimate of taxes payable in respect of the reporting year.
Deposit arrangements Contracts which do not meet risk transfer requirements, defined as transferring a reasonable probability of a significant loss to the reinsurer, are accounted for as deposit arrangements. Deposit amounts are adjusted for payments received and made, as well as for amortisation or accretion of interest.
Management expenses The overall management expenses are allocated to the reinsurance business and the investment business on an imputed basis.
Claims paid and claim adjustment expenses –450 – –450 –676 45 –631 Change in unpaid claims –651 5 –646 –786 –3 –789 Claims and claim adjustment expenses –1 101 5 –1 096 –1 462 42 –1 420
Fixed commissions –462 0 –462 –606 0 –606 Profit commissions –2 – –2 –9 – –9 Acquisition costs –464 0 –464 –615 0 –615
Financial Statements I Swiss Re Corporate Solutions Ltd 4 Assets from reinsurance 5 Liabilities from reinsurance 6 Change in shareholder’s equity 7 Share capital
Premiums and other receivables from reinsurance 854 3 857 1 231 2 1 233 Funds held by ceding companies 327 – 327 486 – 486
Shareholder’s equity as of 1 January 2 532 2 154 Dividend paid for the previous year –468 –265 Extraordinary cash dividend – –393 Net income for the financial year 90 288 Shareholder’s equity as of 31 December 2 154 1 784
In general, Swiss Re Corporate Solutions Ltd is managed by certain employees of Swiss Reinsurance Company Ltd. As of 31 December 2014, the Company directly employed a worldwide staff of 9 (2013: 9).
Total administrative expenses for the 2014 financial year, including charges by affiliates, amounted to CHF 210 million (2013: CHF 185 million).
Financial Statements I Swiss Re Corporate Solutions Ltd 16 Risk assessment
The Board of Directors proposes to the Annual General Meeting of the Company, to be held on 27 March 2015, to approve the following allocations and payment of an ordinary cash dividend of USD 200 million, which must not exceed CHF 210 million, translated into CHF at spot rate on the settlement date. The ordinary cash dividend is paid to its sole shareholder Swiss Re Ltd out of other reserves.
Retained earnings brought forward 2 2 Net income for the financial year 90 288 Disposable profit 92 290 Allocation to other reserves –90 –210 Retained earnings after allocation 2 80
Proposed cash dividend (maximal amount in CHF of the proposed dividend in USD translated into CHF) – –2101
Other reserves after proposed allocation of legal reserves from capital contributions and ordinary cash dividend
1 The Board of Directors proposes to the Annual General Meeting of the Company, to be held on 27 March 2015, to approve the payment of an ordinary cash dividend of USD 200 million to its sole shareholder Swiss Re Ltd out of other reserves on 30 March 2015. In order to comply with the Swiss Code of Obligations the proposed ordinary cash dividend, translated into CHF at spot rate on the settlement date, must not exceed CHF 210 million.
Report of the statutory auditor on the Financial Statements As statutory auditor, we have audited the accompanying financial statements of Swiss Re Corporate Solutions Ltd (the “Company”), which comprise the income statement, balance sheet and notes (pages 43 to 52), for the year ended 31 December 2014.
We further confirm that the proposal for allocation of disposable profit complies with Swiss law and the Company‘s articles of incorporation. We recommend that the financial statements submitted to you be approved.
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, liquidity position or prospects to be materially different from any future results of operations, financial condition, solvency ratios, liquidity position or prospects expressed or implied by such statements. Such factors include, among others: • instability affecting the global financial system and developments related thereto; • deterioration in global economic conditions; • the Group’s ability to successfully implement its business strategy especially during “soft” market cycles; • the Group’s relationship with the rest of the Swiss Re Group; • the Group’s ability to maintain sufficient liquidity and access to capital; • the effect of market conditions, including the global equity and credit markets, and the level and volatility of 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; • possible inability to realize amounts on sales of securities on the Group’s balance sheet equivalent to their mark-to-market values recorded for accounting purposes; • the outcome of tax audits, the ability to realize tax loss carryforwards and the ability to realize deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings; • the possibility that the Group’s hedging arrangements may not be effective; • the lowering or loss of the financial strength or other ratings of one or more Swiss Re companies, and developments adversely affecting the Group’s ability to achieve improved ratings; • the cyclicality of the insurance industry; • uncertainties in estimating reserves; • uncertainties in estimating future claims for purposes of financial reporting, particularly with respect to large natural catastrophes, as significant uncertainties may be involved in estimating losses from such events and preliminary estimates may be subject to change as new information becomes available; • the frequency, severity and development of insured claim events; • acts of terrorism and acts of war; • policy renewal rates; • extraordinary events affecting the Group’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events; • current, pending and future legislation and regulation affecting us or the Group’s clients and other counterparties and interpretations of legislation or regulations by regulators; • legal actions or regulatory investigations or actions, including those in respect of industry requirements or business conduct rules of general applicability; • changes in accounting standards; • the timely and full recoverability of reinsurance placed by us with third parties, or other amounts due to us; • significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions; • changing levels of competition; and • operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks.
Political or geopolitical developments, and international responses thereto, also can have an adverse impact on global financial markets and economic conditions.
Further adverse developments or the continuation of adverse trends that in turn have a negative impact on financial markets and economic conditions could limit the ability of Swiss Re Corporate Solutions (“Corporate Solutions”) and its subsidiaries (the “Group”) to access the capital markets and bank funding markets, and could adversely affect the ability of counterparties to meet their obligations. Any such developments and trends could also have an adverse effect on Corporate Solutions’ investment results, which in the current low interest rate environment and soft insurance cycle could have a material adverse effect on overall results.
Regulatory changes The Group’s activities are regulated in a number of jurisdictions in which the Group conducts business. In addition, the Group could be affected by regulatory changes or developments affecting the overall Swiss Re group, of which the Group is a part (the “Swiss Re Group”). New legislation as well as changes to existing legislation have been proposed and/or recently adopted in a number of jurisdictions that are expected to alter, in a variety of ways, the manner in which the financial services industry is regulated. Although it is difficult to predict which proposals will become law and when and how new legislation ultimately will be implemented by regulators (including in respect of the extraterritorial effect of reforms), it is likely that significant aspects of existing regulatory regimes governing financial services will change. These may include changes as to which governmental bodies regulate financial institutions, changes in the way financial institutions generally are regulated, increased regulatory capital requirements, enhanced governmental authority to take control over operations of financial institutions, restrictions on the conduct of certain lines of business, changes in the way financial institutions account for transactions and securities positions, changes in disclosure obligations and changes in the way rating agencies rate the creditworthiness and financial strength of financial institutions.
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 business or affect the competitive balance.
The Group is also subject to credit and other risks in its credit business, including reliance on banks that underwrite and monitor facilities in which the Group participates and potential default by borrowers.
Counterparty risks The Group’s general exposure to counterparty risk was heightened during the credit crisis, and this risk could still be exacerbated to the extent defaults, or concerns about possible defaults, by certain market participants trigger more systemic concerns about liquidity. Losses due to defaults by counterparties, including issuers of investment securities (which include structured securities) or derivative instrument counterparties, could adversely affect the Group. In addition, trading counterparties, counterparties under swaps and other derivative contracts, and financial intermediaries may default on their obligations due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons, which could also have a material adverse impact on the Group.
The Group’s ratings reflect the current opinion of the relevant rating agencies. One or more of its ratings could be downgraded or withdrawn in the future. Rating agencies may increase the frequency and scope of ratings reviews, revise their criteria or take other actions that may negatively impact the Group’s ratings. In addition, changes to the process or methodology of issuing ratings, or the occurrence of events or developments affecting the Group, could make it more difficult for the Group to achieve improved ratings which it would otherwise have expected.
As claims paying and financial strength ratings are key factors in establishing the competitive position of insurers, a decline in ratings alone could make insurance provided by the Group less attractive to clients relative to insurance from competitors with similar or stronger ratings. A decline in ratings could also cause the loss of clients who are required by either policy or regulation to purchase insurance only from insurers with certain ratings. A decline in ratings could also impact the availability and terms of unsecured financing and obligate the Group to provide collateral or other guarantees in the course of its insurance business or trigger early termination of funding arrangements potentially resulting in a need for additional liquidity. As a ratings decline could also have a material adverse impact on the Group’s costs of borrowing or ability to access the capital markets, the adverse implications of a downgrade could be more severe.
The Group does not currently operate on a standalone basis. It is dependent on other members of the Swiss Re Group for a range of asset management services, corporate services (including general management services, human resources, logistics, IT support, finance, treasury and accounting services and auditing services) and technical services (including actuarial services support, underwriting services support and claims operations support). In addition, it derives a range of significant operational and other benefits from its status as a part of the Swiss Re Group, including its ability to market its products on a worldwide basis under the “Swiss Re Corporate Solutions” brand name. As a result, factors affecting the Swiss Re Group, whether involving developments or events unique to Swiss Re or events or developments applicable more broadly, could have a material adverse effect on the Group’s ability to conduct its business, even if such factors do not directly impact the commercial insurance business.
Capital, funding, reserve and cost allocations are made at the Swiss Re Group level across the four operating segments based principally on business plans as measured against U.S. GAAP and Economic Value Management metrics. Decisions at the Swiss Re Group level in respect of the broader group could have an adverse impact on the Group’s financial condition, including its capital and liquidity levels, as well as on its SST ratio. As part of the Swiss Re Group’s focus on efficient capital allocation, the Group expects to be paying dividends to SRL. Decisions on dividends payable by each of the operating segments, including the Group, are made at the Swiss Re Group level based on legal, capital and liquidity considerations.
While further changes to the Swiss Re Group structure may not have a financial statement impact on a Swiss Re Group consolidated basis, they would impact the Group to the extent that operations are transferred into or from the Group, or as a result of intra-group transactions (from the perspective of the Swiss Re Group) to the extent the Group is a counterparty to any such transactions. The process of optimizing the structure as between the Swiss Re Group and its operating segments will continue to evolve over time.