03 Group financial statements 03 Income statement 04 Balance sheet 06 Statement of shareholders’
Swiss Reinsurance Company Ltd Swiss Reinsurance Company Ltd is a leading and highly diversified global reinsurer and part of the Swiss Re group of companies. The company operates through offices in more than 20 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Reinsurance Company Ltd is rated AA– by Standard & Poor’s, A1 by Moody’s and A+ by A.M. Best.
The new Swiss Re corporate structure will be reflected in the Group financial statements beginning with the first quarter of 2012. During the first half of 2012, Swiss Reinsurance Company Ltd will transfer Corporate Solutions and Admin Re® entities through a dividend in-kind to Swiss Re Ltd. These transfers are subject to the approval of our principal regulator, the Swiss Financial Market Supervisory Authority, FINMA. Following these transfers, the Corporate Solutions and Admin Re® entities will no longer be subsidiaries of Swiss Reinsurance Company Ltd and will instead become subsidiaries of Swiss Re Ltd.
Cash and cash equivalents (including 4 139 in 2010 and 36 in 2011 subject to securities lending) 16 928 11 298
Liabilities Unpaid claims and claim adjustment expenses 7 64 690 64 878 Liabilities for life and health policy benefits 3, 8 39 551 39 044
Additional paid-in capital 10 530 8 958 Treasury shares, net of tax –1 483 –1 134
Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax 1 042 4 223 Other-than-temporary impairment, net of tax –169 –118 Cumulative translation adjustments, net of tax –3 742 –3 924 Accumulated adjustment for pension and post-retirement benefits, net of tax –522 –775
Convertible perpetual capital instrument (CPCI) Balance as of 1 January 2 670 0 Reclassification of convertible perpetual capital instrument1 –2 670 Balance as of period end 0 0
Treasury shares, net of tax Balance as of 1 January –1 477 –1 483 Purchase of treasury shares –49 –270 Issuance of treasury shares, including share-based compensation to employees 43 619 Balance as of period end –1 483 –1 134
Other-than-temporary impairment, net of tax Balance as of 1 January –397 –169 Other changes during the period 228 51 Balance as of period end –169 –118
Net income after non-controlling interests 1 980 2 578 Convertible perpetual capital instrument (net income)1 –1 117 Dividends on common shares4 –319 Cumulative effect of adoption of ASU No. 2009-173 60 Balance as of period end 19 651 22 229
Balance as of 1 January 0 1 564 Change during the period 1 410 –39 Income attributable to non-controlling interests 154 172 Balance as of period end 1 564 1 697
Net income before attribution of non-controlling interests 1 0171 2 750 Other comprehensive income, net of tax: Change in unrealised gains/losses 2 035 3 181 Change in other-than-temporary impairment 228 51 Change in foreign currency translation –182 –182 Change in adjustment for pension benefits –69 –253
Cash paid/received for acquisitions/disposal of reinsurance transactions, net 80 Net purchases/sales/maturities of other investments –123 –454 Net cash provided/used by investing activities –2 052 3 560
2 As of 1 January 2010, the Group adopted ASU No. 2009-17 (FAS167), an update to Topic 810 – Consolidation, which resulted in the full consolidation of certain VIEs.
Nature of operations The Swiss Reinsurance Company Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company Ltd (the parent company, referred to as “SRZ”) and its subsidiaries (collectively, the “Swiss Reinsurance Company Group” or the “Group”). The Swiss Reinsurance Company Group is a wholesale provider of reinsurance, insurance and other insurance-based forms of risk transfer. Working through brokers and a network of more than 60 offices around the globe, its client base consists of insurance companies, mid-to-large-sized corporations and public sector clients.
The Swiss Re Group (Swiss Re Ltd and its consolidated subsidiaries) is implementing a new organisational structure which will be reflected in the financial statements of the Swiss Re Group beginning with the first quarter of 2012. During the first half of 2012, Swiss Reinsurance Company Ltd will transfer Corporate Solutions and Admin Re® entities through a dividend in-kind to Swiss Re Ltd. These transfers are subject to the approval of our principal regulator, FINMA. Following these transfers, the Corporate Solutions and Admin Re® entities will cease to be subsidiaries of Swiss Reinsurance Company Ltd and, therefore, will no longer be part of the Swiss Reinsurance Company Group; these entities will instead become subsidiaries of Swiss Re Ltd.
Use of estimates in the preparation of financial statements The preparation of financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the related disclosure including contingent assets and liabilities. The Group’s liabilities for unpaid claims and claim adjustment expenses and policy benefits for life and health include estimates for premium, claim and benefit data not received from ceding companies at the date of the financial statements. In addition, the Group uses certain financial instruments and invests in securities of certain entities for which exchange trading does not exist. The Group determines these estimates based on historical information, actuarial analyses, financial modelling and other analytical techniques. Actual results could differ significantly from the estimates described above.
Valuation of financial assets The fair value of the majority of the Group’s financial instruments is based on quoted prices in active markets or observable inputs. These instruments include government and agency securities, commercial paper, most investment-grade corporate debt, most high-yield debt securities, exchange-traded derivative instruments, most mortgage-backed and asset-backed securities and listed equity securities. In markets with reduced or no liquidity, spreads between bid and offer prices are normally wider compared to spreads in highly liquid markets. Such market conditions affect the valuation of certain asset classes of the Group, such as some asset-backed securities as well as certain derivative structures referencing such asset classes.
Other invested assets include affiliated companies, equity accounted companies, derivative financial instruments, collateral receivables, securities purchased under agreement to resell, and investments without readily determinable fair value (including limited partnership investments). Investments in limited partnerships where the Group’s 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 shareholders’ equity.
If the derivative is designated as a hedge of the fair value of assets or liabilities, changes in the fair value of the derivative are recognised in earnings, together with changes in the fair value of the related hedged item. If the derivative is designated as a hedge of the variability in expected future cash flows related to a particular risk, changes in the fair value of the derivative are reported in other comprehensive income until the hedged item is recognised in earnings. The ineffective portion of the hedge is recognised in earnings. When hedge accounting is
The Group also designates non-derivative monetary financial instruments as a hedge of the foreign currency exposure of its net investment in certain foreign operations. From the inception of the hedging relationship, remeasurement gains and losses on the designated nonderivative monetary financial instruments and translation gains and losses on the hedged net investment are reported as translation gains and losses in shareholders’ equity.
Business combinations The Group applies the purchase method of accounting for business combinations. This method allocates the cost of the acquired entity to the assets and liabilities assumed based on their estimated fair values at the date of acquisition.
Acquired present value of future profits The acquired present value of future profits (PVFP) of business in force is recorded in connection with the acquisition of life and/or health business. The initial value is determined actuarially by discounting estimated future gross profits as a measure of the value of business acquired. The resulting asset is amortised on a constant yield basis over the expected revenue recognition period of the business acquired, generally over periods ranging up to 30 years, with the accrual of interest added to the unamortised balance at the earned rate. For universal-life and similar products, PVFP is amortised in line with estimated gross profits, and estimated gross profits are updated quarterly. The carrying value of PVFP is reviewed periodically for indicators of impairment in value. Adjustments to reflect impairment in value are recognised in earnings during the period in which the determination of impairment is made.
Recent accounting guidance In January 2010, the FASB issued “Improving Disclosures about Fair Value Measurements” (ASU No. 2010-06), an update to Topic 820 – Fair Value Measurements and Disclosures. This new standard implements additional disclosure requirements for the three fair value levels. As required by the update, the Group adopted some of the requirements as of 1 January 2010. The remaining requirements were adopted as of 1 January 2011 and can be found in Note 3.
In December 2010, the FASB issued “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (ASU No. 2010-28), an update to Topic 350 – Intangibles – Goodwill and Other. This update provides guidance under what circumstances a company is required to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The Group adopted this guidance as of 1 January 2011. The adoption did not have an impact on the Group’s financial statements.
Also in December 2010, the FASB issued “Disclosure of Supplementary Pro Forma Information for Business Combinations” (ASU No. 2010-29), an update to Topic 805 – Business Combinations. This update specifies that an entity should disclose revenue and earnings of the combined entity as though the business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The Group adopted this update as of 1 January 2011. The adoption did not have an impact on the Group’s financial statements.
In April 2011, the FASB issued “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (ASU No. 2011-02), an update to Topic 310 – Receivables. This update provides clarifications on the determination whether a restructuring of debt constitutes a troubled debt restructuring. The Group adopted this guidance as of 1 July 2011. The adoption did not have an impact on the Group’s financial statements.
In October 2010, the FASB issued “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (ASU No. 2010-26), an update to Topic 944 – Financial Services – Insurance. This new guidance limits the definition of deferrable acquisition costs to costs directly related to the successful acquisition or renewal of insurance contracts. The Group will adopt ASU No. 2010-26 in the first quarter of 2012. We do not expect that the adoption will have a material impact on the Group’s financial statements.
Realised gains and losses Realised gains and losses for fixed income, equity securities and other investments (including unit-linked and with-profit business) were as follows: USD millions 2010 2011
Equity securities 509 662 Policy loans, mortgages and other loans 428 770 Investment real estate 188 213 Short-term investments 88 104 Other current investments –32 –173 Share in earnings of equity-accounted investees 351 276 Cash and cash equivalents 102 101 Deposits with ceding companies 513 478
Other-than-temporary impairments –423 –258 Net realised investment gains/losses on trading securities 108 478 Change in net unrealised investment gains/losses on trading securities 2 372 –1 063 Other investments: Net realised/unrealised gains/losses 213 –935 Foreign exchange gains/losses –552 338 Net realised investment gains/losses 2 783 409
For securitised products, cash flow projection analysis is conducted 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 similar hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecast 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 net present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.
Balance as of 1 January 1 409 829 Credit losses for which an other-than-temporary impairment was not previously recognised 196 141 Reductions for securities sold during the period –775 –418 Increase of credit losses for which an other-than-temporary impairment has been recognised previously, when the Group does not intend to sell, or more likely than not will not be required to sell before recovery 96 54 Impact of increase in cash flows expected to be collected –69 –85 Impact of foreign exchange movements –28 –6
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 20 387 1 881 –1 22 267
Fixed income securities available-for-sale 86 984 7 799 –836 –177 93 770 Equity securities available-for-sale 1 907 201 –148 1 960
Investments trading Fixed income securities and equity securities classified as trading as of 31 December were as follows: Fixed income securities and equity securities classified as trading as of 31 December include securities held for unit-linked and with-profit business: 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 2010 and 2011, USD 13 107 million and USD 10 274 million, respectively, of fixed income securities available-for-sale were callable.
As of 31 December 2010 and 2011, investments (including cash and cash equivalents) with a carrying value of approximately USD 8 573 million and USD 7 954 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities.
As of 31 December 2010 and 2011, securities of USD 12 802 million and USD 7 823 million, respectively, were pledged as collateral in securities lending transactions and repurchase agreements. The associated liabilities of USD 1 750 million and USD 8 681 million, respectively, were recognised in accrued expenses and other liabilities.
Debt securities issued by governments and government agencies 8 324 4 492
Fixed income securities trading held for unit-linked business 2 302 2 354 Fixed income securities trading held for with-profit business 1 648 1 741 Fixed income securities trading 3 950 4 095 Equity securities trading held for unit-linked business 17 405 15 231 Equity securities trading held for with-profit business 1 135 951
Mortgage- and asset-backed securities with no fixed maturity 15 268 15 131 7 719 7 525 Total fixed income securities available-for-sale 79 443 80 950 86 984 93 770
USD millions Fair value Unrealised losses Fair value Unrealised losses Fair value Unrealised losses
As of 31 December 2010 and 2011, the Group’s investment in mortgages and other loans included USD 270 million and USD 270 million, respectively, of loans due from employees, and USD 356 million and USD 357 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
As of 31 December 2010 and 2011, investments in real estate included USD 6 million and USD 6 million, respectively, of real estate held for sale.
Depreciation expense related to income producing properties was USD 40 million and USD 39 million for 2010 and 2011, respectively. Accumulated depreciation on investment real estate totalled USD 528 million and USD 558 million as of 31 December 2010 and 2011, respectively.
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 the year ended 31 December 2011, these adjustments were non-material. Whenever the underlying assets or liabilities are reported in a specific business segment, the valuation adjustment is allocated accordingly. Valuation adjustments not attributable to any business segment are reported in Group items.
Values of residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and other asset-backed securities (Other ABS) 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 ABS for which there are no significant observable inputs are developed using benchmarks to similar transactions or indices. For both RMBS and 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, judgments 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, as 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.
The category Other assets mainly includes the Group’s private equity and hedge fund investments, which are made directly or via ownership of funds. Substantially all these investments are classified as level 3 due to the lack of observable prices and significant judgment required in valuation. Valuation of direct private equity investments requires significant management judgment due to the absence of quoted market prices and the lack of liquidity. Initial valuation is based on the acquisition cost, and is further refined based on the available market information for the public companies that are considered comparable to the Group’s holdings in the private companies being valued, and the private company-specific performance indicators, both historic and projected. Subsequent valuations also reflect business or asset appraisals, as well as market transaction data for private and public benchmark companies and the actual companies being valued, such as financing rounds and mergers and acquisitions activity. The Group’s holdings in the private equity and hedge 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).
The Group also holds complex structured credit contracts, such as collateralised debt securities (CDS) referencing MBS, certain types of collateralised debt obligation (CDO) transactions, and the products sensitive to correlation between two or more underlying parameters (CDO-squared), all of which are classified within level 3 of the fair value hierarchy. A CDO is a debt instrument collateralised by various debt obligations, including bonds, loans and CDS of differing credit profiles. In a CDO-squared transaction, both the primary instrument and the underlying instruments are represented by CDOs. Generally, for CDO and CDO-squared transactions, the observable inputs such as CDS spreads and recovery rates are modified to adjust for correlation between the underlying debt instruments. The correlation levels are modelled at the portfolio level and calibrated at a transaction level to liquid benchmark rates.
Debt securities issued by US government and government agencies 16 043 3 041 19 084 US Agency securitised products 5 011 5 011 Debt securities issued by non-US governments and government agencies 34 438 34 438
Total assets at fair value 41 367 89 149 5 895 –7 252 129 159
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December 2010 and 2011, the reconciliation of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs were as follows:
Financial statements | Notes to the Group financial statements 2010 USD millions
Realised/unrealised gains/losses: Included in net income 19 115 –4 –36 –27 –58 54 21 –788 –45 –35 –784 Included in other comprehensive income –5 7 29 1 55 –2 129 214
Transfers into level 31 Transfers out of level 31 Impact of foreign exchange movements –1 –1 18 16
Realised/unrealised gains/losses: Included in other comprehensive income –1 4 –15 4 20 12
Closing balance as of 31 December 2011 1 111 4 8 0 16 69 1 512 112 0 986 36 2 041 5 895
The private equity direct portfolio consists of equity and equity-like investments directly in other companies. These investments have no contractual term and are generally held based on financial or strategic intent.
Private equity and real estate funds generally have limitations imposed on the amount of redemptions from the fund during the redemption period due to illiquidity of the underlying investments. Fees may apply for redemptions or transferring of interest to other parties. Distributions are expected to be received from these funds as the underlying assets are liquidated over the life of the fund, which is generally from ten to twelve years.
Assets Fixed income securities trading 11 252 7 548 of which at fair value pursuant to the fair value option 01 0 of which at fair value pursuant to the fair value option 475 455 Liabilities Liabilities for life and health policy benefits –39 551 –39 044 of which at fair value pursuant to the fair value option –271 –341 1 These fixed income securities matured in the second quarter of 2010. Related changes in fair values are presented in the table below.
Fixed income securities trading –23 0 Equity securities trading –17 –20 Liabilities for life and health policy benefits 22 –71 Total –18 –91
The Group uses a variety of derivative financial instruments including swaps, options, forwards, credit derivatives, and exchange-traded financial futures in its trading and hedging strategies, in line with the Group’s overall risk management strategy. The objectives include managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities, as well as locking in attractive investment conditions for future available funds.
Fair values and notional amounts of derivative financial instruments As of 31 December 2010 and 2011, the fair values and notional amounts of the derivatives outstanding were as follows: The notional amounts of derivative financial instruments give an indication of the Group’s volume of derivative activity. The fair value assets are included in other invested assets and the fair value liabilities are included in accrued expenses and other liabilities. The fair value amounts that were not offset were nil as of 31 December 2010 and 2011, respectively.
Total net amount of derivative financial instruments 2 454 –4 860 –2 406
As of 31 December 2010 and 2011, the fair values and maximum potential payout of the written credit derivatives outstanding were as follows: Total fair values of credit derivatives written/sold
As of 31 December 2010 USD millions 0–5 years 5–10 years Over 10 years
The percentage of PVFP which is expected to be amortised in each of the next five years is 8%, 8%, 7%, 7% and 7%.
Opening balance as of 1 January 2010 869 3 025 3 894 6 054
Interest accrued on unamortised PVFP 247 Effect of foreign currency translation –6 18 12 –75 Effect of change in unrealised gains/losses –58 Closing balance as of 31 December 2010 792 2 779 3 571 4 565 2011 DAC PVFP USD millions Non-Life Life & Health Total
Opening balance as of 1 January 2011 792 2 779 3 571 4 565
The Group’s debt as of 31 December was as follows: Maturity of long-term debt As of 31 December, long-term debt as reported above had the following maturities: USD millions 2010 2011
Long-term debt – financial and operational debt 18 427 16 541
Reinsurance recoverable –6 307 –5 717 Deferred expense on retroactive reinsurance –455 –401
Amortisation of deferred expense on retroactive reinsurance and impact of commutations 66 73
Paid related to: Current year –1 202 –1 694 Prior year –8 501 –7 899
At the end of 2011, the Group carried net reserves for US asbestos, environmental and other long-latent health hazards equal to USD 2 214 million. During 2011, the Group incurred net losses of USD 128 million and paid net against these liabilities USD 183 million.
Financial statements | Notes to the Group financial statements 8 Reinsurance information
Reinsurance assets and liabilities The reinsurance assets and liabilities as of 31 December were as follows: Reinsurance receivables Reinsurance receivables as of 31 December were as follows: Sales inducements Sales inducements are offered to contract holders of certain universal life and annuity products. The amounts deferred equal the sum of persistency bonuses credited to the account value plus the non-interest related increase in the persistency bonus liability. These costs are amortised in constant proportion to estimated gross profits over the life of the contract, using the credited interest rates as the discount rate.
Sales inducements as of 31 December were as follows: Policyholder dividends Policyholder dividends are recognised as an element of policyholder benefits. The relative percentage of participating insurance of the life and health policy benefits was 7% in 2010 and 2011. The amount of policyholder dividend expense in 2010 and 2011 was USD 110 million and USD 134 million, respectively.
Liabilities Unpaid claims and claim adjustment expenses 53 345 11 345 64 690 53 827 11 051 64 878 Life and health policy benefits 39 551 39 551 39 044 39 044
Receivables invoiced from ceded re/insurance business 695 512 Assets arising from the application of the deposit method of accounting and meeting the definition of financing receivables 568 707 Recognised allowance –152 –132
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: For 2011, the Group reported a tax expense of USD 83 million. This represents an effective tax rate of 2.9%, compared to an effective tax rate of 20.2% in the prior year. The decrease in the tax rate was primarily due to a non-recurring benefit from the change in tax basis in a subsidiary based on a write-down in the value of a Group subsidiary required in 2011 local statutory statements, changes in local country tax rates and the release of valuation allowances.
Income tax at the Swiss statutory tax rate of 21.0% 562 596 Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates 39 138 Impact of foreign exchange movements 65 –38 Disallowed expenses 2 7 Tax exempt income /dividends received deduction –47 –45 Change in valuation allowance 68 –143 Basis differences in subsidiaries –368 Change in statutory tax rates 14 –122 Change in liability for unrecognised tax benefits including interest and penalties –50 99 Life tax adjustments 14 –9 Other, net –126 –32
Income taxes paid in 2011 and 2010 were USD 707 million and USD 476 million, respectively.
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 630 million and USD 726 million at 31 December 2010 and 2011, respectively.
Germany 2007– 2011 Slovakia 2007– 2011 Hong Kong 1994 – 2011 South Africa 2010 – 2011
Defined�benefit�pension�plans�and�post-retirement�benefits The Group sponsors various funded defined benefit pension plans. Employer contributions to the plans are charged to income on a basis which recognises the costs of pensions over the expected service lives of employees covered by the plans. The Group’s funding policy for these plans is to contribute annually at a rate that is intended to maintain a level percentage of compensation for the employees covered. A full valuation is prepared at least every three years.
Amendments –7 –7 Actuarial gains /losses 157 –18 12 151 Benefits paid –149 –61 –13 –223 Employee contribution 20 20 Acquisitions /disposals /additions 1 –3 –2 Effect of curtailment and termination benefits 3 –4 –1 Effect of foreign currency translation 317 –44 17 290 Benefit�obligation�as�of�31�December 3 202 1 902 330 5 434
Benefits paid –163 –69 –15 –247 Employee contribution 25 25 Acquisitions /disposals /additions 0 Effect of curtailment and termination benefits 1 1 Effect of foreign currency translation –20 –24 –2 –46 Benefit�obligation�as�of�31�December 3�328 1�952 363 5�643
Fair value of plan assets as of 1 January 3 104 1 778 4 882 Actual return on plan assets –71 73 2
Benefits paid –163 –69 –15 –247 Employee contribution 25 25 Acquisitions /disposals /additions 1 1 Effect of foreign currency translation –4 –26 –30 Fair�value�of�plan�assets�as�of�31�December 2�983 1�814 0 4�797 Funded�status –345 –138 –363 –846
Prior service cost /credit –1 –111 –112 2010 USD millions Swiss plan Foreign plans Other benefits Total
Expected return on assets –126 –106 –232 Amortisation of: Net gain /loss 10 16 –11 15 Prior service cost 6 –11 –5 Effect of settlement, curtailment and termination 3 –1 –1 1 Net�periodic�benefit�cost 59 22 –4 77
Prior service cost /credit –39 –39 Amortisation of: Net gain /loss –37 –17 11 –43 Prior service cost –6 11 5 Exchange rate gain /loss recognised during the year –1 –1 Total�recognised�in�other�comprehensive�income,�gross�of�tax 235 46 54 335 Total�recognised�in�net�periodic�benefit�cost� and�other�comprehensive�income,�gross�of�tax 355 69 48 472
Assumed�medical�trend�rates� at�year�end Medical trend – initial rate 6.5% 6.3% Medical trend – ultimate rate 4.7% 4.7% Year that the rate reaches the ultimate trend rate 2015 2015
Effect on total of service and interest cost components 1 –1 Effect on post-retirement benefit obligation 29 –24
Residential mortgage-backed securities 50 50 Commercial mortgage-backed securities 5 5 Other asset-backed securities 4 4
Balance as of 1 January 465 95 560 Realised /unrealised gains /losses: Relating to assets still held at the reporting date 16 8 24 Relating to assets sold during the period 0
Balance as of 1 January 539 113 652 Realised /unrealised gains /losses: Relating to assets still held at the reporting date 6 –9 –3 Relating to assets sold during the period 1 1
Group Compensation awards settled in equity are settled in Swiss Re Ltd shares.
As of 31 December 2010 and 2011, the Group had the share-based compensation plans described below.
Total compensation cost for share-based compensation plans recognised in net income was USD 129 million and USD 52 million in 2010 and 2011, respectively. The related tax benefit was USD 34 million and USD 16 million, respectively.
A summary of the activity of the Group’s stock option plans is as follows: The following table summarises the status of stock options outstanding as of 31 December 2011: All stock options outstanding are also exercisable and the status of these exercisable options is reflected in the table above.
The fair value of each option grant was estimated on the date of grant using a binomial option pricing model.
Restricted�shares The Group issued 3 727 and 14 834 restricted shares to selected employees in 2010 and 2011, respectively. Moreover, as an alternative to the Group’s cash bonus programme, 234 560 and 425 154 shares were issued during 2010 and 2011, respectively.
Performance�share�plan In 2009 and 2010, the Group granted a share plan for the Chairman and Vice Chairman of the Board of Directors. The Group did not grant a further plan in 2011. The plans have a requisite service period of three years and are settled in shares. The plans are measured based on Swiss Re’s Total Shareholder Return (TSR), representing the share price performance plus paid dividend in any performance period, against a selected peer group. The final number of shares to be released upon vesting can vary between 0% and 150% of the original grant. The fair value of the 2009 and 2010 plans were based on the share price as of the date of grant, which was CHF 36.00 and CHF 53.60, respectively. 111 111 and 83 957 units were issued under these plans in 2009 and 2010, respectively, and the same number of units remains outstanding as of 31 December 2011.
Long-term�Incentive�plan The Group annually grants a Long-term Incentive plan (LTI) to selected employees with a three-year vesting period. The requisite service period as well as the maximum contractual term for each plan is three years and the final payment, if any, occurs at the end of this performance measurement period. The plan includes a payout factor which is derived from return on equity (ROE) and earnings per share (EPS) targets over the vesting period. The payout ratio can vary between 0 and 2 and the final payment for each plan will depend on whether the performance targets have been achieved over the plan period. The fair value of the plans are based on stochastic models which consider the likelihood of achieving performance targets and the impact of dividends. Each of the plan grants that were outstanding during 2011 is described below.
The LTI plans granted in 2010 and 2011 are expected to be settled in shares. The payout factors are driven by average ROE and average EPS over the vesting period. The share price used for measurement is based on the date of grant and was CHF 48.15 and CHF 39.39 for the 2010 and 2011 plans, respectively.
Stock�appreciation�rights In 2006, the Group issued 3 million stock appreciation rights (SAR) as an extraordinary grant following the Insurance Solutions acquisition. The plan was expected to be settled in cash. The requisite service period was two years, while the maximum contractual term was five years. The plan vested in 2008; however, holders of the award were still able to exercise their rights until the maximum contractual period expired, in 2011. The fair value of the appreciation rights were estimated at date of grant using a binomial option-pricing model and was revised at every balance sheet date until exercise. The plan expired in 2011 with no value.
Unrecognised�compensation�costs As of 31 December 2011, the total unrecognised compensation cost (net of expected forfeitures) related to non-vested, share-based compensation awards was USD 31 million, and the weighted average period over which that cost is expected to be recognised was 1.7 years.
Employee�participation�plan The Group’s employee participation plan consists of a savings scheme lasting two or three years. Employees combine regular savings with the purchase of either actual or tracking options. The Group contributes to the employee savings over the period of the plan.
In 2010 and 2011, 656 569 and 1 878 895 options, respectively, were issued to employees and the Group contributed USD 67 million and USD 77 million, respectively, to the plan.
Financial statements | Notes to the Group financial statements 13 Information on business segments
The Group presents three operating business segments: Property & Casualty, Life & Health and Asset Management. Items not allocated to these three business segments are included in the “Group items” column.
The Asset Management business segment includes two separate sub-segments, Credit & Rates and Equity & Alternative Investments, resulting from the aggregation of Asset Management Risk Stripes. The Asset Management business segment includes proprietary returns on the Group’s invested fixed-income securities, equity securities and alternative investments.
The allocation of investment result to Property & Casualty and Life & Health is determined based on US GAAP re /insurance liabilities. The allocation methodology applies a risk-free return to the nominal net reserves at the end of the prior quarter. The risk-free interest rate applied to the reserves is determined by currency and duration of the underlying Property & Casualty and Life & Health reserves. The “Allocation” column eliminates the calculated investment result allocated to either the Property & Casualty or the Life & Health business segments.
Financial statements | Notes to the Group financial statements a) Business segment results For the years ended 31 December 2010 USD millions Property & Casualty Life & Health Asset Management Group items Allocation Total
Net realised investment gains /losses 110 2 331 808 –466 2 783
Expenses Claims and claim adjustment expenses –2 904 –2 692 –1 346 –6 942 –258 –7 200 Acquisition costs –571 –655 –551 –1 777 –82 –1 859 Other expenses –489 –424 –220 –1 133 –51 –1 184 2011 USD millions
Net realised investment gains /losses –52 3 –49 97 48 Other revenues 2 2
Financial statements | Notes to the Group financial statements c) Life & Health business segment – by line of business For the year ended 31 December
Financial statements | Notes to the Group financial statements d) Asset Management For the years ended 31 December 2010 USD millions Credit & Rates
Financial statements | Notes to the Group financial statements e) Net premiums earned and fee income from policyholders by geography Net premiums earned and fee income from policyholders by regions for the years ended 31 December
Liechtenstein Elips Life AG, Vaduz 13 12 100 f Elips Versicherungen AG, Vaduz 5 5 100 f
Luxembourg Swiss Re Europe Holdings S.A., Luxembourg 136 127 100 f Swiss Re Europe S.A., Luxembourg 454 425 100 f Swiss Re Finance (Luxembourg) S.A., Luxembourg 0 0 100 f Swiss Re Funds (Lux) I, Senningerberg1 10 410 9 735 100 f Swiss Re International SE, Luxembourg 236 221 100 f
Barbados European Finance Reinsurance Company Ltd., Bridgetown 3 089 2 888 100 f European International Holding Company Ltd., Bridgetown 0 0 100 f European International Reinsurance Company Ltd., Bridgetown 1 1 100 f Gasper Funding Corporation, Bridgetown 17 16 100 f Milvus I Reassurance Limited, Bridgetown 0 0 100 f
United States Facility Insurance Corporation, Austin 0 0 100 f Facility Insurance Holding Corporation, Dallas 0 0 100 f First Specialty Insurance Corporation, Jefferson City 5 5 100 f North American Capacity Insurance Company, Manchester 4 4 100 f North American Elite Insurance Company, Manchester 4 3 100 f North American Specialty Insurance Company, Manchester 13 12 100 f Reassure America Life Insurance Company, Fort Wayne 3 2 100 f Rialto Re I Inc, Burlington 0 0 100 f SR Corporate Solutions America Holding Corporation, Wilmington 0 0 100 f Sterling Re Inc., Burlington 0 0 100 f Swiss Re America Holding Corporation, Wilmington 0 0 100 f Swiss Re Atrium Corporation, Wilmington 1 0 100 f Swiss Re Capital Markets Corporation, New York 0 0 100 f Swiss Re Financial Products Corporation, Wilmington 2 116 1 979 100 f Swiss Re Financial Services Corporation, Wilmington 0 0 100 f Swiss Re Life & Health America Holding Company, Wilmington 0 0 100 f Swiss Re Life & Health America Inc., Hartford 4 4 100 f Swiss Re Partnership Holding, LLC, Dover 368 344 100 f Swiss Re Solutions Holding Corporation, Wilmington 9 8 100 f Swiss Re Treasury (US) Corporation, Wilmington 0 0 100 f Swiss Reinsurance America Corporation, Armonk 6 6 100 f Washington International Insurance Company, Manchester 4 4 100 f Westport Insurance Corporation, Jefferson City 6 6 100 f
When analysing the status of an entity, the Group mainly assesses if (1) the equity is sufficient to finance the entity’s activities without additional subordinated financial support, (2) the equity holders have the right to make significant decisions affecting the entity’s operations, and (3) the holders of the voting rights substantively participate in the gains and losses of the entity. When one of these criteria is not met, the entity is considered a VIE and needs to be assessed for consolidation under the VIE section of the Consolidation Topic.
The party that has a controlling financial interest is called the primary beneficiary and consolidates the VIE. An enterprise is deemed to have a controlling financial interest if it has both of the following: ̤ the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and ̤ the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
Generally, the activities of a securitisation vehicle are pre-determined at formation. There are substantially no ongoing activities during the life of the VIE that could significantly impact the economic performance of the vehicle. Consequently, the main focus to identify the primary beneficiary is on the activities performed and decisions made when the VIE was designed. Typically, the Group is considered the primary beneficiary of a securitisation vehicle when the Group acts as a sponsor of risk passed to the VIE and enters at the same time in a total return swap with the VIE to protect the VIE’s assets from market risk. Under the total return swap, the Group would incur losses when some or all of the securities held as collateral in the securitisation vehicle decline in value or default. Therefore, the Group’s maximum exposure to loss equals the principal amount of the collateral protected under the total return swap.
The total assets of the debt financing vehicles in which the Group is the primary beneficiary were USD 7 051 million as of 31 December 2011.
Premiums and other receivables 10 10 9 9 Reinsurance recoverable on unpaid claims and policy benefits 11 11 7 7 Funds held by ceding companies 6 6 2 2
Carrying value Whereof limited recourse: Carrying value Whereof limited recourse: Unpaid claims and claim adjustment expenses 23 23 15 15 Liabilities for life and health policy benefits 1 182 1 182 1 165 1 165
As of 31 December 2011, the total assets of other VIEs in which the Group holds variable interests but is not the primary beneficiary were USD 3 684 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 712 million.
Consolidated VIEs The following table shows the total assets and liabilities on the Group’s balance sheet relating to VIEs of which the Group is the primary beneficiary as of 31 December: As of 31 December 2011, the consolidation of the VIEs resulted in non-controlling interests in the balance sheet of USD 414 million (31 December 2010: USD 402 million). The net non-controlling interests in income were USD 6 million and USD 12 million net of tax for 2010 and 2011, respectively.
Non-consolidated VIEs The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs in which the Group holds a variable interest but is not the primary beneficiary as of 31 December: The following table shows the Group’s assets, liabilities and maximum exposure to loss which are related to VIEs in which the Group holds a variable interest but is not the primary beneficiary as of 31 December: In 2011, an insurance-linked securitisation vehicle in which the Group held a variable interest, but was not the primary beneficiary, was restructured in order to unwind the related structure. As a result, the vehicle no longer qualified as a VIE and was consolidated as a voting interest entity from the third quarter of 2011. A further unconsolidated insurance-linked securitisation vehicle was being unwound as of end of December 2011, at which time the Swiss Re Group no longer had any variable interests in the entity. Consequently, neither vehicle was part of the VIE disclosures as of 31 December 2011.
The assets and liabilities for the swaps in trusts represent the positive and negative fair values of the derivatives the Group has entered into with the trusts. Liabilities of USD 586 million recognised for the “Other” category relate mainly to collateral received.
Other invested assets 1 406 680 Premiums and other receivables 2 Reinsurance recoverable 1 631 Deferred acquisition costs 2
Funds held under reinsurance treaties 1 614 Short-term debt 406 393 Accrued expenses and other liabilities 885 509
For the years ended 31 December, restructuring provision developed as follows: 2010 USD millions Property & Casualty Life & Health Asset Management Total
Release of provision –9 –5 –2 –16 Costs incurred –73 –41 –22 –136 2011 USD millions Property & Casualty Life & Health Asset Management Total
Release of provision –3 –1 –3 –7 Costs incurred –30 –17 –15 –62
The Board of Directors of Swiss Re Ltd is ultimately responsible for the Group’s governance principles and policies, including approval of the Group’s overall risk tolerance. The Board mainly deals with risk management through two committees: ̤ The Finance and Risk Committee is responsible for reviewing the Group Risk Policy and capacity limits, as well as for monitoring risk tolerance and reviewing top risk issues and exposures. ̤ The Audit Committee is responsible for overseeing internal controls and compliance procedures.
The Group Executive Committee (Group EC) is responsible for implementing the risk management framework through four further committees: ̤ The Group Risk and Capital Committee has responsibility for allocating capital and insurance risk capacity, approving investment risk limits, and determining changes to the internal risk and capital methodology.
The global Risk Management function operates through dedicated units for property and casualty risk, life and health risk, and financial market and credit risk. Each unit is entrusted with Group-wide responsibility for identifying, assessing and controlling their allocated risks and for risk governance at the risk category level. The units also work closely with each other, where necessary, on transaction reviews and other cross-category issues. Actuarial management is an integral part of the insurance risk units, ensuring reserving adequacy.
Senior managers of business and corporate units are responsible for managing operational risks in their area of activity, based on a centrally coordinated methodology. Their self-assessments are reviewed and challenged by operational risk specialists in partnership with the dedicated risk management units. Risk management experts also review the Group’s underwriting decision processes.
Reinsurance and sub-holding company Swiss Reinsurance Company 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.
Financial year 2011 The after-tax loss for the 2011 financial year amounted to CHF 63 million, compared to a profit of CHF 380 million in the previous year.
Reinsurance result The total reinsurance result amounted to a gain of CHF 3.0 billion, compared to a gain of CHF 1.3 billion in 2010.
Investment result The net investment result declined by CHF 2.6 billion to a loss of CHF 2.3 billion in 2011.
Investment income increased by CHF 1.6 billion to CHF 4.9 billion. This increase was mostly driven by higher dividend income and higher realised gains on derivative financial instruments which hedged the life and health variable annuity business.
Other income and expenses Other net expenses decreased by CHF 0.5 billion to CHF 0.6 billion in 2011. The decrease mainly consisted of the one-time termination expense in 2010 for the convertible perpetual capital instrument (CPCI) issued to National Indemnity Company, a subsidiary of Berkshire Hathaway Inc., and reduced trademark license fee income. Since the establishment of the new ultimate holding company, Swiss Reinsurance Company Ltd did not receive any trademark license fee income, but paid license fees to Swiss Re Ltd instead.
Assets Compared to 2010, total assets decreased 12% to CHF 83.9 billion. Without the effect of foreign exchange movements, total assets amounted to CHF 84.1 billion.
Liabilities In comparison to 2010, total liabilities decreased 13% to CHF 66.2 billion. Without the effect of foreign exchange movements, total liabilities amounted to CHF 66.4 billion.
Shareholder’s equity As of 31 December 2010, shareholder’s equity amounted to CHF 18.8 billion before allocation of the disposable profit. After the dividend payment of CHF 943 million for 2010, and the inclusion of the loss for the 2011 financial year, shareholder’s equity decreased to CHF 17.8 billion at the end of 2011.
The nominal share capital of the Company increased slightly due to newly issued shares from the conditional capital for employee participation programmes. As of 31 December 2011, the nominal share capital amounted to CHF 37 million.
The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements.
Claims and claim adjustment expenses –7 774 –9 970 Life and health benefits –1 868 4 538 Change in equalisation provision – 550 Acquisition costs –1 584 –867 Other reinsurance result 412 271 Operating costs –912 –914 Allocated investment return 858 592
Income before income tax expense 569 108 Income tax expense –189 –171 Net income /loss 380 –63
Non-current assets Investments Investment real estate 1 130 1 095 Investments in subsidiaries and affiliated companies 21 389 22 552 Loans to subsidiaries and affiliated companies 4 227 4 636 Mortgages and other loans 705 714
Current assets Premiums and other receivables from reinsurance 3 5 067 5 865 Funds held by ceding companies 3 17 655 11 385 Deferred acquisition costs 3 565 592 Cash and cash equivalents 6 247 3 527
Non-technical provisions Provision for taxation 128 53 Provision for currency fluctuation 1 465 1 735 Other provisions 513 441 Total non-technical provisions 2 106 2 229
Shareholder’s equity 5 Share capital 37 37 Other legal reserves 650 650 Reserve for own shares 1 449 748 Legal reserves from capital contributions 9 762 8 995
Retained earnings brought forward 50 50 Profit /loss for the financial year 380 –63
Income and expenses are converted into Swiss francs at average exchange rates for the reporting year.
Liabilities for life and health policy benefits are determined on the basis of actuarially calculated present values taking experience into account. For external business, liabilities are the greater of cedent-reported information and estimates of own experience drawn from internal studies. With respect to the business ceded by the Company’s life and health subsidiaries, a prospective gross premium valuation is applied, taking into account expected future cash flows inherent in the reinsurance contract from the valuation date until expiry of the contract obligations. Cash flows include premiums, claims, commissions, investment income and expenses, with a margin added for prudence to reflect the uncertainties of the underlying best estimates. The gross premium valuation approach could result in a negative liability provision, which is typically set to zero.
The initial set up of assets and liabilities in respect of property and casualty retroactive treaties with external counterparties is accounted for as a balance sheet transaction.
Non-technical provisions The provision for taxation reflects the related tax expense for the financial year under report.
Liabilities from derivative financial instruments Liabilities from derivative financial instruments are generally maintained at the highest commitment amount as per a balance sheet date during the life of the underlying contracts. Premiums received in respect of derivative financial instruments are not realised until expiration or settlement of the contract.
Income tax expense The income tax expense relates to the financial year under report.
Income statement classification The Company has revised the classification between certain income statement categories. Specifically, the capital tax and indirect taxes were reclassified from tax expense to other expenses. Therefore, the previously reported 2010 figures of tax expense and other expenses have been changed accordingly.
Notes Swiss Reinsurance Company Ltd Additional information on the financial statements 1 Reinsurance result 2 Investment result
Claims paid and claim adjustment expenses –7 568 –152 –7 720 –13 930 3 528 –10 402
Claims and claim adjustment expenses –7 411 –363 –7 774 –16 150 6 180 –9 970
Income from real estate investment 100 98 Income from subsidiaries and affiliated companies 556 2 335 Income from equity securities 13 33 Income from fixed income securities, mortgages and other loans 621 638 Income from derivative financial instruments 72 23 Income from short-term investments 52 65 Income from alternative investments 46 61 Income from investment services 71 40 Valuation readjustments on investments 440 29 Realised gains on sale of investments 1 356 1 605
Financial statements | Swiss Reinsurance Company Ltd 3 Assets from reinsurance 4 Liabilities from reinsurance 5 Shareholder’s equity
Shareholder’s equity as of 1 January 18 720 18 757 Dividend paid for the previous year –343 –9431 Capital increase including premium 0 0 Profit /Loss for the financial year 380 –63 Shareholder’s equity on 31 December before dividend payments 18 757 17 751 Dividend payments –9421 –6 8382 Shareholder’s equity on 31 December after dividend payments 17 815 10 913 1 The number of registered shares eligible for dividend at the dividend payment date increased since the proposal for allocation of profit, dated 22 March 2011, due to the issuance of 2 778 new registered shares from options being exercised and the transfer of 347 512 shares for employee participation purposes from not eligible to eligible for dividend. This resulted in a higher dividend of CHF 963 298 compared to the Board of Directors’ proposal.
In addition, as a component of the Swiss Re Group’s financing structure, the Company has guaranteed CHF 5 678 million (2010: CHF 6 020 million) of debt issued by certain subsidiaries and letter of credit facilities benefiting various subsidiaries of which no amount was utilised as of 31 December 2011 and 2010, respectively.
Leasing�contracts Total off-balance-sheet commitments from operating leases for the next five years and there after are as follows: These commitments pertain to the non-cancellable contract periods and refer primarily to office and apartment space rented by the Company.
Security�deposits To secure the technical provisions at the 2011 balance sheet date, securities with a value of CHF 9 486 million (2010: CHF 9 858 million) were deposited in favour of ceding companies, of which CHF 9 200 million (2010: CHF 9 297 million) referred to affiliated companies of the Company.
Investment�funds As of 31 December 2011, fixed income securities of CHF 4 581 million (2010: CHF 5 881 million) were held in investment funds, which are owned by its affiliated companies. The securities in these funds and their revenues are reported in the corresponding asset category.
Public�placed�debentures As of 31 December 2011, the following public placed debentures were outstanding: Investments�in�subsidiaries Details on the Company’s subsidiaries are disclosed on pages 74 to 77.
Own�shares As of 31 December 2011, the Swiss Re Group held 370 706 931 Swiss Reinsurance Company Ltd shares, of which Swiss Re Ltd owned 344 052 565 shares and the Company owned directly 26 654 366 shares.
In connection with the exchange offer Swiss Reinsurance Company Ltd contributed all its own shares to Swiss Re Ltd in exchange for an equivalent number of new Swiss Re Ltd shares. The total of contributed shares was 26 654 366, including 20 000 Swiss Reinsurance Company Ltd shares that were contributed by a third party on behalf of Swiss Reinsurance Company Ltd, with a total book value of CHF 747 830 958. This book value consisted of 11 678 802 shares contributed with a par value of CHF 0.10 per share and 14 975 564 shares contributed with an average price of CHF 49.86 per share.
Fair value of securities transferred to third parties 954 5�646 Fair value of securities transferred to affiliated companies – 5�682 Total 954 11�328
With respect to a maximum of CHF 5 000 000 through the issuance of up to 50 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10 out of the total amount of authorised capital referred to above, the subscription rights of shareholders may not be excluded.
With respect to a maximum of CHF 3 500 000 through the issuance of up to 35 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10 out of the total amount of authorised capital referred to above, the Board of Directors may exclude or restrict the subscription rights of the existing shareholders for the use of shares in connection with (i) mergers, acquisitions (including take-over) of companies, parts of companies or holdings, equity stakes (participations) or new investments planned by the Company and /or Group companies of Swiss Reinsurance Company Ltd, financing or re-financing of such mergers, acquisitions or new investments, the conversion of loans, securities or equity securities, and /or (ii) improving the regulatory capital position of the Company or Group companies of Swiss Reinsurance Company Ltd in a fast and expeditious manner if the Board of Directors deems it appropriate or prudent to do so (including by way of private placements).
Premiums and other receivables from reinsurance 986 1�183 Funds held by ceding companies 15 524 9�074 Other receivables 2 435 2�836
Release�of�undisclosed�reserves In the year under report, no net undisclosed reserves on investments or on provisions were released (2010: CHF 88 million).
Risk�assessment Article 663b sub-para. 12 of the Swiss Code of Obligations requires disclosure of information on the performance of a risk assessment.
Balance carried forward 50 431 171 –13�008�239 Allocati on to other reserves 380 000 000 – Withdrawal from other reserves for dividend payments – –6�837�899�198 Reclassification of legal reserves from capital contributions to other reserves –942 206 4381 – Dividend payment out of other reserves 942 206 4381 1�028�209�497 Dividend in-kind of Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Ltd out of other reserves2 – 5�809�689�701 Disposable�profit�/loss 430 431 171 –13�008�239 1 The number of registered shares eligible for dividend at the dividend payment date increased since the proposal for allocation of profit, dated 22 March 2011, due to the issuance of 2 778 new registered shares from options being exercised and the transfer of 347 512 shares for employee participation purposes from not eligible to eligible for dividend. This resulted in a higher dividend of CHF 963 298 compared to the Board of Directors’ proposal.
Report of the statutory auditor Report of the statutory auditor to the General Meeting of Swiss Reinsurance Company Ltd Zurich
Report�on�other�legal�requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence.
We further confirm that the proposal for allocation of disposable profit/loss complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved.
̤ the cyclicality of the reinsurance 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; ̤ mortality and morbidity experience; ̤ policy renewal and lapse 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 the Group or its ceding companies; ̤ 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; ̤ significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions; ̤ changing levels of competition; ̤ operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks; and ̤ challenges in implementation, adverse responses of counterparties, regulators or rating agencies, or other issues arising from, or otherwise relating to, the changes in the Group’s corporate structure.
General impact of adverse market conditions and deterioration in global financial markets The euro area sovereign debt crisis, coupled with weak demand and mild fiscal contraction in the US, is slowing global growth. Recession cannot be ruled out for a number of developed economies, and emerging markets, while continuing to expand, are doing so at a slower pace than in 2011, or than expected. Economic developments, in the form of adverse growth trends, and the political environment, in the form of fiscal tightening, accommodative monetary policy and governance challenges, are resulting in low interest rates, threats to holders of sovereign debt and holders of debt of financial institutions with exposure to sovereign debt, and adverse trends in emerging markets.
Concerns are increasing about rising sovereign debt burdens, possible sovereign defaults and the future of the euro, which in turn could affect economic growth rates, interest rates and inflation. Failure to reach an early resolution of the euro area sovereign debt crisis, and continued uncertainty over the stability of the euro and the European Monetary Union, could increase the severity and duration of economic recession, cause more economic turmoil in the near term, cause further disruptions in the global financial markets and impact foreign currency exchange rates. These developments in turn could have an adverse impact on our investment results, our ability to access the capital markets and the bank funding market, the ability of counterparties to meet their obligations to us and the short-term outlook for the life insurance industry, particularly in North America and Europe, with a corresponding negative impact on our Life & Health business. Concerns over the stability of the euro could also have a broad effect on contractual arrangements denominated in, or otherwise tied to, the euro.
Legislative initiatives directly impacting our industry include the establishment of a panEuropean regulator for insurance companies, the European Insurance and Occupational Pension Authority, which gained its regulatory powers on 1 January 2011 and will be able to overrule national regulators in certain circumstances. In addition, Swiss Re is subject to the Swiss Solvency Test, and Solvency II is currently expected to be transposed into law in January 2013, but will not be binding on insurers until a year later in January 2014. In the US, as a possible step towards federal oversight of insurance, the US Congress created the Federal Insurance Office within the Department of Treasury.
“systemically important”, which designation is expected to result in enhanced regulatory supervision and heightened capital, liquidity and diversification requirements under evolving reforms. Although, to date, the focus of reforms in respect of systemically important financial institutions principally has been on banks, there is an emerging focus on insurance companies as well. Swiss Re could be designated as a global systemically important financial institution. In addition, there appears to be a trend towards a more coordinated, centralised and stricter approach to insurance regulation specifically, in both the EU and the US.
Regulatory changes may also occur in areas of broader application, such as competition policy and tax laws. Changes in tax laws 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 could increase the costs of doing business, reduce access to liquidity, limit the scope of business or affect the competitive balance, or could make reinsurance less attractive to primary insurers.
Market risk Volatility and disruption in the global financial markets can 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. 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. With respect to equity prices, 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 liferelated 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. While the Group has discontinued writing new variable annuity business and has an extensive hedging programme covering its existing variable annuity business, certain risks cannot be hedged, including actuarial risks, basis risk and correlation risk. 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.
These risks can have a significant effect on investment returns and market values of securities positions, which in turn may affect both the Group’s results of operations and financial condition. The Group continues to focus on asset-liability management for its investment portfolio, but pursuing even this strategy has its risks – including possible mismatch – that in turn can lead to reinvestment risk. The Group seeks to manage the risks inherent in its investment portfolio by repositioning the portfolio from time to time, as needed, and to reduce risk and fluctuations through the use of hedges and other risk management tools. The Group has reduced risk to the portfolio by repositioning the components of the portfolio and, as a result, profitability could potentially be impacted and, unless offset by underwriting returns, reduced.
The Group may not be able to secure new sources of liquidity or funding, should projected or actual liquidity fall below levels it requires. The ability to meet liquidity needs through asset sales may be constrained by market conditions and the related stress on valuations, and through third-party funding may be limited by constraints on the general availability of credit and willingness of lenders to lend. In addition, the Group’s ability to meet liquidity needs may also be constrained by regulatory requirements that require regulated entities to maintain or increase regulatory capital, or that restrict intra-Group transactions, the timing of dividend payments from subsidiaries or the fact that certain assets may be encumbered or otherwise non-tradable. Failure to meet covenants in lending arrangements could give rise to collateralposting or defaults, and further constrain access to liquidity. Finally, any adverse ratings action could trigger a need for further liquidity (for example, by triggering termination provisions or collateral delivery requirements in contracts to which the Group is a party) at a time when the Group’s ability to obtain liquidity from external sources is limited by such ratings action.
Risks relating to credit rating downgrades Ratings are an important factor in establishing the competitive position of reinsurance companies, and market conditions could increase the risk of downgrade. Third-party rating agencies assess and rate the financial strength of reinsurers and 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.
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, industrial accidents, explosions, industrial actions, fires and pandemics) may expose the Group to
General information | Note on risk factors unexpected large losses, changes in the insurance industry that affect ceding companies, competitive conditions, cyclicality of the industry, risks related to emerging claims and coverage issues, risks arising from the Group’s dependence on policies, procedures and expertise of ceding companies, risks related to investments in emerging markets, and risks related to the failure of operational systems and infrastructure. In addition, 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. Any of the foregoing, as well as other concerns in respect of the Group’s business, could also give rise to reputational risk.
Risks related to realignment of the Swiss Re corporate structure As Swiss Re Ltd moves to fully implement the realignment of its corporate structure in 2012 by separating the Corporate Solutions business unit and the Admin Re® business unit from the Reinsurance business unit, the Reinsurance business unit (comprised of Swiss Re and the legal entities remaining in the Group following the separation) could face operational risks relating to the implementation of the new structure. Following full implementation, with a changed legal entity profile, the Reinsurance business unit and its constituent subsidiaries will be impacted differently than would have been the case under Swiss Re’s historical structure, including, without limitation, in respect of legal and regulatory requirements (including as to capital and liquidity), ratings considerations, and lender and other counterparty considerations. Among other things, the realigned Group’s asset base will change, and capital, funding, reserve and cost allocations will be adjusted across the three business units, as a result of which the realigned Group’s liquidity and capital profiles will likely change and Swiss Re’s SST risk ratio may change.
Corporate calendar and contact information Corporate calendar 13 April 2012 Annual General Meeting Swiss Re Ltd 4 May 2012 First quarter 2012 results 9 August 2012 Second quarter 2012 results 8 November 2012 Third quarter 2012 results
Swiss Reinsurance Company Ltd Mythenquai 50 /60 P.O. Box 8022 Zurich Switzerland