Interest paid was USD 655 million and USD 631 million (thereof USD 49 million and USD 43 million for letter of credit fees) for 2017 and 2018, respectively. Tax paid was USD 720 million and USD 740 million for 2017 and 2018, respectively.
204 Swiss Re 2018 Financial Report and other related charges or credits are included in net investment income. Investment in real estate held for sale is carried at the lower of cost or fair value, less estimated selling costs, and is not depreciated. Reductions in the carrying value of real estate held for sale are included in realised investment losses.
Other invested assets include affiliated companies, equity accounted companies, derivative financial instruments, collateral receivables, securities purchased under agreement to resell, deposits and time deposits, 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 in earnings.
The Group also designates non-derivative and derivative monetary financial instruments as hedges 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 non-derivative and derivative monetary financial instruments and translation gains and losses on the hedged net investment are reported as translation gains and losses in shareholders’ equity.
Deferred acquisition costs for short-duration contracts are amortised in proportion to premiums earned. Future investment income is considered in determining the recoverability of deferred acquisition costs for short-duration contracts. Deferred acquisition costs
for long-duration contracts are amortised over the life of underlying contracts. Deferred acquisition costs for universal-life and similar products are amortised based on the present value of estimated gross profits. Estimated gross profits are updated quarterly.
Income taxes Deferred income tax assets and liabilities are recognised based on the difference between financial statement carrying amounts and the corresponding income tax bases of assets and liabilities using enacted income tax rates and laws. A valuation allowance is
The Group releases stranded tax effects for unrealised gains/losses on AFS securities to earnings on a straight-line basis over the average duration of the relevant AFS portfolio as an approximation of when the individual securities within the portfolio are sold or mature. For adjustment for pension and other post-retirement benefits, stranded tax effects are released to earnings when the relevant pension plan is terminated. For foreign currency translation, stranded tax effects are released to earnings in line with the recycling of the underlying foreign currency translation amounts.
The Group does not discount liabilities arising from prospective property and casualty insurance and reinsurance contracts, including liabilities which are discounted for US statutory reporting purposes. Liabilities arising from property and casualty insurance and reinsurance contracts acquired in a business combination are initially recognised at fair value in accordance with the acquisition method of accounting.
Amounts assessed against policyholders for mortality, administration and surrender are shown as fee income. Amounts credited to policyholders are shown as interest credited to policyholders. Investment income and realised investment gains and losses
Unit-linked and with-profit business are presented together as they are similar in nature. For unit-linked contracts, the investment risk is borne by the policyholder. For with-profit contracts, the majority of the investment risk is also borne by the policyholder, although there are certain guarantees that limit the downside risk for the policyholder, and a certain proportion of the returns may be retained by Swiss Re Group (typically 10%). Additional disclosures are provided in Note 7.
Reinstatement premiums are due where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. The recognition of reinstatement premiums as written depends on individual contract features. Reinstatement premiums are either recognised as written at the time a loss event occurs or in line with the recognition pattern of premiums
208 Swiss Re 2018 Financial Report written of the underlying contract. The accrual of reinstatement premiums is based on actuarial estimates of ultimate losses. Reinstatement premiums are generally earned in proportion to the amount of reinsurance provided.
Insurance and reinsurance ceded The Group uses retrocession arrangements to increase its aggregate underwriting capacity, to diversify its risk and to reduce the risk of catastrophic loss on reinsurance assumed. The ceding of risks to retrocessionaires does not relieve the Group of its obligations to its ceding companies. The Group regularly evaluates the financial condition of its retrocessionaires and monitors the concentration of credit risk to minimise its exposure to financial loss from retrocessionaires’ insolvency. Premiums and losses ceded under retrocession contracts are reported as reductions of premiums earned and claims and claim adjustment expenses. Amounts recoverable for ceded short- and long-duration contracts, including universal-life-type and investment contracts, are reported as assets in the accompanying consolidated balance sheet.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, an update to subtopic 825-10, “Financial Instruments – Overall”. The ASU requires the Group to carry investments in equity securities, including partnerships, unincorporated joint ventures and limited liability companies at fair value through earnings, with the exception of equity method investments, investments that result in consolidation or investments for which the measurement alternative has been elected. The Group did not elect the measurement alternative for any of its investments. For financial liabilities to which the fair value option has been applied, the ASU requires an entity to separately present the change in fair value attributable to instrument-specific credit risk in other comprehensive income (OCI) rather than in net income. In addition, the ASU requires an entity to assess whether a valuation allowance is needed on a deferred tax asset (DTA) related to fixed income securities available-for-sale in combination with the entity’s other DTAs rather than separately from other DTAs. The Group adopted ASU 2016-01 on 1 January 2018 together with ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10)”. The opening balance sheet impact from the adoption was a reclassification within shareholders’ equity from net unrealised investment gains, net of tax, to retained earnings of USD 347 million. In addition, USD 5 million were reclassified from retained earnings to credit risk of financial liabilities at fair value option, net of tax. These reclassifications can be found in the statement of shareholders’ equity. The impact on pre-tax earnings in 2018 due to the adoption of ASU 2016-01 was an estimated net realised investment loss of USD 599 million.
In November 2016, the FASB issued ASU 2016-18, ‘‘Restricted Cash’’, a consensus of the FASB EITF to topic 230, ‘‘Statement of Cash Flows’’. The update requires that the statement of cash flows explains the change during the period in the total of cash, cash equivalents and restricted cash and restricted cash equivalents. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Group adopted ASU 2016-18 retrospectively on 1 January 2018. The adoption did not have a material impact on the Group’s financial statements.
In February 2017, the FASB issued ASU 2017-05, ‘‘Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets’’, an update to subtopic 610-20, ‘‘Other Income --- Gains and Losses from the Derecognition of Nonfinancial Assets’’. This update clarifies and provides guidance on the scope of subtopic 610-20 including financial assets meeting the definition of an in-substance non-financial asset. The Group adopted ASU 2017-05 retrospectively on 1 January 2018. The adoption did not have an impact on the Group’s financial statements.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost’’, an update to topic 715, “Compensation – Retirement Benefits”. The amendments in this update require that an employer separates other components of net benefit cost from the service cost component and presents these components outside a subtotal of income from operations, if one is presented. Further, the ASU only allows the service cost component of net benefit cost to be capitalised. The Group adopted ASU 2017-07 retrospectively on 1 January 2018. The adoption did not have a material impact on the Group’s financial statements.
In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting’’, an update to topic 718, “Compensation – Stock Compensation”. The amendments in this update provide guidance about which changes to the terms or conditions of a sharebased payment award require to apply modification accounting under topic 718. The Group adopted ASU 2017-09 on 1 January 2018. The adoption did not have an impact on the Group’s financial statements.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, an update to topic 220, “Income Statement – Reporting Comprehensive Income”. The ASU allows a reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the Tax Cuts and Jobs Act. The Group early adopted ASU 2018-02 on 1 January 2018. The adoption resulted in a reclassification within shareholders’ equity
210 Swiss Re 2018 Financial Report of USD 159 million of stranded tax charges from accumulated other comprehensive income to retained earnings. The reclassification can be found in the statement of shareholders’ equity.
Future adoption of new accounting standards In February 2016, the FASB issued ASU 2016-02 “Leases”, which creates topic 842, “Leases”. The core principle of topic 842 is that a lessee should recognise the assets and liabilities that arise from leases. A lessee should recognise in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing the right to use the underlying asset for the lease term. This accounting treatment applies to finance leases and operating leases. The accounting applied by a lessor is largely unchanged from that applied under the current guidance. The Group will adopt this ASU on 1 January 2019. The expected impact from the adoption is a net balance sheet gross-up of approximately USD 0.5 billion. Further, deferred gains carried on the balance sheet and amortised over time under the existing sale-leaseback guidance (estimated to be approximately USD 97 million as of 1 January 2019) will be released as a cumulative-effect adjustment to opening retained earnings as of 1 January 2019.
In August 2018, the FASB issued ASU 2018-12, “Targeted Improvements to the Accounting for Long-Duration Contracts”, an update to topic 944, “Financial Services—Insurance“. This ASU requires that the cash flows and net premium ratio will be updated for changes in insurance assumptions (eg mortality, morbidity, terminations) when measuring the liability for future policy benefits for non-participating traditional and limited-payment insurance and reinsurance contracts. The effect of updating cash flow assumptions will be measured on a retrospective catch-up basis and presented separately from the ongoing policyholder benefit expense in the statement of operations in the period the update is made. There will no longer be a provision for adverse deviation. In addition, the discount rate used to reflect the time value of money in the calculation of the liability for future policy benefits will be standardised. An upper-medium-grade fixed-income instrument yield will be required, which differs from the current requirement to use a discount rate reflecting expected investment yields. Further, a locked-in rate will be used in the periodic calculation of the net premium ratio and accretion of interest on the liability for income statement purposes. For balance sheet remeasurement purposes, the discount rate will be updated at each reporting date, with the effect of discount rate changes on the liability recorded immediately in OCI. The ASU requires deferred acquisition costs (DAC) relating to most long-duration contracts to be amortised on a constant basis over the expected term of the contract, and the resulting amortisation amount should not be a function of revenue or profit. The new standard also introduces a new category called market risk benefits, which are features that protect the contract holder from capital market risk and expose the insurer to that risk. These features have to be measured at fair value, with changes in own credit risk recognised in OCI, and presented separately in the primary financial statements. The ASU also requires significant additional disclosures, including disaggregated roll forwards of the liability for future policy benefits, policyholder account balances, market risk benefits and DAC. The ASU is effective for annual and interim periods beginning after 15 December 2020. Early adoption of the amendments is permitted. The new guidance relating to measurement of the traditional and limited-payment contract liabilities and DAC amortisation has to be adopted under a modified retrospective transition approach, with an option to elect a full retrospective transition if certain criteria are met. Under the modified retrospective approach, for contracts in force at the transition date, an entity would continue to use the existing locked-in investment yield interest rate assumptions to calculate the net premium ratio. However, for balance sheet measurement purposes, policyholder liabilities are discounted at the upper-medium-grade fixed-income instrument yield at the transition date, with the impact of the change recognised against accumulated OCI. The Group is currently assessing the impact of the new requirements.
Group items Items not allocated to the business segments are included in the “Group items” column, which encompasses Swiss Re Ltd, the Group’s ultimate parent company, the former Legacy business in run-off, Principal Investments and certain Treasury units. Swiss Re Ltd charges trademark licence fees to the business segments which are reported as other revenues. Certain administrative expenses of the corporate centre functions that are not recharged to the operating segments are reported as Group items.
Consolidation Segment information is presented net of external and internal retrocession and other intra-group arrangements. The Group total is obtained after elimination of intra-group transactions in the “Consolidation” column. This includes significant intra-group reinsurance arrangements, recharge of trademark licence fees and intersegmental funding.
212 Swiss Re 2018 Financial Report a) Business segments – income statement For the year ended 31 December 2017 Property & Casualty Reinsurance
Premiums earned 16 667 11 851 3 651 950 33 119 Fee income from policyholders 129 457 586 Net investment income – non-participating business 1 017 1 308 161 1 193 184 –155 3 708 Net realised investment gains/losses – non-participating business 613 591 128 133 262 1 727 Net investment result – unit-linked and with-profit business 81 3 234 3 315 Other revenues 48 3 5 2 359 –385 32
Net premiums written 16 098 12 647 4 122 1 175 34 042 Change in unearned premiums –3 36 –197 –3 –167
Claims ratio in % 72.2 82.6 74.2 Expense ratio in % 31.8 34.9 32.4 Combined ratio in % 104.0 117.5 106.6 Management expense ratio in % 5.4 Net operating margin in % 4.3 9.4 –11.1 3.9 2.9
Assets Fixed income securities 35 968 29 158 8 157 22 637 32 95 952 Equity securities 1 776 670 180 69 341 3 036 Other investments 13 298 3 200 132 2 550 6 447 –12 276 13 351 Short-term investments 2 547 1 174 451 1 207 38 5 417 Investments for unit-linked and with-profit business 424 29 122 29 546 Cash and cash equivalents 1 651 1 705 796 1 605 228 5 985 Deferred acquisition costs 2 156 4 784 488 789 8 217 Acquired present value of future profits 804 1 014 1 818 Reinsurance recoverable 2 345 4 359 5 486 4 914 –10 046 7 058 Other reinsurance assets 9 715 9 304 2 461 6 859 –5 541 22 798 Goodwill 1 908 1 823 206 134 4 071 Other 8 798 4 169 2 108 1 823 1 752 –8 329 10 321
Liabilities Unpaid claims and claim adjustment expenses 45 659 12 192 11 929 2 601 1 –4 936 67 446 Liabilities for life and health policy benefits 17 888 501 26 314 –5 110 39 593 Policyholder account balances 1 356 30 582 31 938 Other reinsurance liabilities 10 331 4 162 3 816 3 365 3 –5 812 15 865 Short-term debt 2 735 5 075 238 –6 415 1 633 Long-term debt 2 402 7 749 798 1 515 552 –4 514 8 502 Other 9 551 6 878 1 483 2 342 3 017 –9 405 13 866
216 Swiss Re 2018 Financial Report b) Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2017 USD millions Property Casualty Specialty Unallocated Total
Net premiums written 6 115 7 665 2 251 16 031 Change in unearned premiums 140 435 61 636
Premiums earned 6 255 8 100 2 312 16 667 Net investment income 1 017 1 017 Net realised investment gains/losses 613 613 Other revenues 48 48
Income/loss before interest and income tax expense –1 244 –711 38 1 678 –239 Interest expenses –280 –280
Income before interest and income tax expense 935 345 535 1 815 Interest expenses –315 –315
Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2018 Life Health Unallocated Total USD millions
Net premiums written 8 606 4 041 12 647 Change in unearned premiums 29 7 36
Expenses Life and health benefits –7 128 –3 152 –10 280 Return credited to policyholders –5 –5 Acquisition costs –1 449 –596 –2 045 Operating expenses –513 –245 –758
220 Swiss Re 2018 Financial Report d) Net premiums earned and fee income from policyholders by geography Net premiums earned and fee income from policyholders by region for the years ended 31 December
Fee income from policyholders, thereof: Gross fee income before retrocession to external parties 130 457 587
Fee income from policyholders, thereof: Gross fee income before retrocession to external parties 153 434 587
Claims before receivables from retrocession to external parties –10 043 –9 731 –2 394 –2 944 –25 112
Unpaid claims and claim adjustment expenses; life and health benefits before impact of retrocession to external parties –3 426 –586 –1 381 780 –4 613
Net unpaid claims and claim adjustment expenses; life and health benefits –3 408 –642 –1 356 715 –4 691
Net acquisition costs –4 253 –2 064 –554 –106 –6 977
Claims and claim adjustment expenses For the year ended 31 December 2018 Property & Casualty Reinsurance
Claims paid, thereof: Gross claims paid to external parties –10 802 –10 346 –3 150 –3 454 –27 752 Intra-group transactions (assumed and ceded) –209 –408 209 408 0
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 in 2017 and 2018 was 10% and 9%, respectively. The amount of policyholder dividend expense in 2017 and 2018 was USD 194 million and USD 245 million, respectively. The Group revised the presentation of policyholder dividend expense. Comparative information for 2017 has been adjusted accordingly.
226 Swiss Re 2018 Financial Report 4 Premiums written For the years ended 31 December 2017 Property & Casualty Reinsurance
Gross premiums written, thereof: Direct 55 3 279 1 489 4 823 Reinsurance 16 290 12 732 802 128 29 952 Intra-group transactions (assumed) 254 526 112 144 –1 036 0
Retrocession to external parties –401 –1 343 –339 –376 –2 459 2018 Property & Casualty Reinsurance
Paid related to: Foreign exchange 2 653 −1 748 Effect of acquisitions, disposals, new retroactive reinsurance and other items 1 178 709
Reinsurance recoverable 4 458 3 606 Deferred expense on retroactive reinsurance 240 169
Balance as of period end 66 795 67 446 1 The Group revised its methodology for determining the prior-year net claims and claim adjustment expenses development on a certain health business. Comparative information for 2017 has been amended accordingly.
Prior-year development Non-life claims development during 2018 on prior years includes favourable development on property and specialty, partially offset by adverse development on casualty. The favourable development on property and specialty is mainly related to the natural catastrophe events in North America and wildfires in California that occurred in 2017. Casualty includes adverse development for motor and liability lines of business.
Line of business: Property –555 –340 Casualty –67 428 Specialty –178 –295 Life and health1 266 249
At the end of 2018, the Group carried net reserves for US asbestos and environmental liabilities equal to USD 1 860 million. During 2018, the Group incurred net losses of USD 141 million and paid net against these liabilities of USD 111 million. Incurred claims include a settlement with one cedent on reported asbestos and environmental claims.
Non-life re/insurance contracts For reinsurance business, cedents report their case reserves and their estimated IBNR to the Group. The Group develops and recognises its own estimate of IBNR claims, which includes circumstances in which the cedent has not reported any claims to the Group or where the Group‘s estimate of reserves needed to cover reported claims differs from the amounts reported by cedents. For reinsurance business, case reserves and estimated IBNR reported by cedents to the Group have been accounted for as case reserves in previous years. For the year-end 2018, IBNR reported by cedents are presented together with the Group's own estimate of IBNR as IBNR in the claims development tables. Reserving for insurance business is performed similarly, except that the Group estimates case reserves as well. Reserving is done on portfolio or contract level depending on the features of the contract: For business reviewed on a portfolio level, the expected ultimate losses are set for most lines and types of business based on analysis performed using standard actuarial techniques. In general, contracts are aggregated into portfolios by combining contracts with similar features.
In most cases, these standard actuarial techniques encompass a number of loss development factor techniques applied to claim tables of paid and reported losses. Other actuarial techniques may be applicable to specific categories. For instance, the analysis of frequency and severity could be applied in all disaggregation categories. Life contingency techniques for projecting regular payments related to bodily injury claims are applied to motor proportional, motor non-proportional, liability proportional, liability non-proportional, accident and health and similar Corporate Solutions lines, where the information is available. In some cases, techniques specific to the projection of future payments for specific risks such as asbestos or pollution claims are applied to both proportional and non-proportional liability claims, also in Corporate Solutions (see also separate section “US asbestos and environmental claims exposure” on page 229).
Life and health re/insurance contracts For the Life & Health Reinsurance long tail business, the liability for IBNR claims includes provision for “not yet reported claims” expected to have been incurred in respect of both already processed and not yet processed reinsurance accounts and generally includes provisions for the cost of claims on disability contracts that currently are within their deferred period. The IBNR reserving calculations have been made using appropriate techniques, such as chain ladder and/or Bornhuetter-Ferguson approaches, depending upon the level of detail available and the assumed level of development of the claim. For certain lines of business, IBNR claims reserves include reported but not admitted claims, allowing for expected rates of decline for these claims.
Claims frequency information Claims frequency information is not available for the disaggregation categories of Property & Casualty Reinsurance, as cedents do not report claims frequency information to the Group for most of the assumed reinsurance contract types. These contracts are to be found in all disaggregation categories presented.
Property & Casualty Reinsurance – Property Incurred claims and allocated claim adjustment expenses, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance 7 533
Property & Casualty Reinsurance – Liability, proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance 7 914
The increase in the incurred losses for accident years 2013 to 2018 is driven by volume increases of business being written. The increases in the incurred losses in reporting year 2018 for accident years 2015 to 2017 are driven by US business.
Liabilities for claims and claim adjustment expenses, net of reinsurance 8 851
The increase in incurred losses from accident year 2015 onwards is due to an increase in the volume of workers‘ compensation written on a proportional basis. The 2009 and prior accident years include the run-off of business written by entities acquired as part of the acquisition of General Electric Insurance Solutions during 2006. This business which generally had a longer payment pattern was not renewed.
Liabilities for claims and claim adjustment expenses, net of reinsurance 3 458
Liabilities for claims and claim adjustment expenses, net of reinsurance 5 718
For accident year 2011, negative claims paid in the first year are due to the commutation of an external retrocession on acquired retroactive business.
Property & Casualty Reinsurance – Specialty Incurred claims and allocated claim adjustment expenses, net of reinsurance
This category contains several individual large losses on marine, aviation and space lines, including the Costa Concordia event in accident year 2012. The 2017 accident year claims incurred is higher due to natural catastrophes mainly stemming from hurricanes Harvey, Irma and Maria in the Americas which have reduced in reporting year 2018. The 2018 accident year claims incurred include natural catastrophes and man-made losses.
Liabilities for claims and claim adjustment expenses, net of reinsurance 6 474
The claims incurred increased due to general volume growth for all accident years. Incurred claims on accident years 2016 and 2017 increased due to large man-made losses as well as adverse prior year development, in particularly in casualty North America. Accident years 2017 and 2018 were significantly impacted by multiple severe large man-made losses, hurricanes in North America and the California wildfires.
Change in claim counts in 2013 and 2014 relate mostly to agriculture business written in 2013, leading to high claim counts in those years. For accident year 2017, a portion of the Accident & Health business from the IHC acquisition moved from assumed reinsurance to direct business which is driving the increase in direct claim counts in that year relative to accident year 2016.
Life & Health Reinsurance, long tail (RSI) 5.5% 16.7% 15.2% 10.9% 7.7% 6.1% 4.6% 4.6% 3.4% 3.7%
In the reporting year 2013, the Group significantly strengthened IBNR claims liabilities in Australia for some lines of business. In addition, for 2013 and 2014 the effect of business volume increases is discernible as well. In 2018 the first year incurred claims are below 2017 due to lower volume in Australia.
Corporate Solutions 6 474 Life & Health Reinsurance, long tail 1 965
Total net undiscounted outstanding liabilities excluding other short duration contract lines and before unallocated reinsurance recoverable 51 447 Discounting impact on (Life & Health Reinsurance) short duration contracts –291 Impact of acquisition accounting –554
Property 571 Liability, proportional 324 Liability, non-proportional 266 Accident & Health 215 Motor, proportional 76 Motor, non-proportional 237 Specialty 594
Exclusions: Unallocated claim adjustment expenses 994 Long duration contracts 10 180
244 Swiss Re 2018 Financial Report 6 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
Opening balance as of 1 January 966 1 558 –521 1 037 2 003 Amortisation –135 –143 45 –98 –233 Interest accrued on unamortised PVFP 52 102 –17 85 137 Effect of change in unrealised gains/losses –1 –1 –1 Effect of foreign currency translation 38 96 –51 45 83
Gross investment income 4 097 4 509 Investment expenses –380 –419 Interest charged for funds held –9 –15
Share in earnings of equity-accounted investees included impairments of the carrying amount of equity-accounted investees of USD 46 million for 2017.
Equity securities available-for-sale: Gross realised gains1 959 Gross realised losses1 –28
Net realised/unrealised gains/losses on insurance-related activities included impairments of USD 11 million and USD 7 million for 2017 and 2018, respectively.
Realised gains/losses – fixed income securities –12 12 –61 –140 Realised gains/losses – equity securities 2 094 191 –2 124 –257 Realised gains/losses – other 28 8 –14 1
A reconciliation of other-than-temporary impairments related to credit losses recognised in earnings was as follows: Balance as of 1 January 97 91 Credit losses for which an other-than-temporary impairment was not previously recognised 14 5 Reductions for securities sold during the period –24 –12 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 4 2 Impact of increase in cash flows expected to be collected –4 –4 Impact of foreign exchange movements 4 –2
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 14 397 273 –152 14 518 US Agency securitised products 5 884 18 –66 5 836 States of the United States and political subdivisions of the states 1 620 108 –7 1 721 United Kingdom 8 699 1 378 –31 10 046 Germany 3 193 239 –22 3 410 Canada 3 969 543 –30 4 482 France 2 015 252 –10 2 257 Australia 2 065 16 –4 2 077 Other 7 655 318 –76 7 897
Other-than-temporary impairments recognised in other Estimated USD millions or cost gains losses comprehensive income fair value
Total 45 832 2 289 –559 47 562 Corporate debt securities 39 630 1 617 –542 40 705 Mortgage- and asset-backed securities 4 211 117 –56 –1 4 271
Fixed income securities available-for-sale 89 673 4 023 –1 157 –1 92 538
Unrealised losses on securities available-for-sale The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position as of 31 December 2017 and 2018.
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 9 742 113 1 825 39 11 567 152 US Agency securitised products 3 773 37 1 029 29 4 802 66 States of the United States and political subdivisions of the states 304 4 120 3 424 7 United Kingdom 1 161 18 301 13 1 462 31 Germany 722 19 44 3 766 22 Canada 1 766 29 276 1 2 042 30 France 214 8 7 2 221 10 Australia 1 118 3 74 1 1 192 4 Other 2 813 54 451 22 3 264 76
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 1 157 33 6 170 123 7 327 156 US Agency securitised products 1 013 11 3 710 119 4 723 130 States of the United States and political subdivisions of the states 108 2 518 17 626 19 United Kingdom 1 372 47 442 27 1 814 74 Germany 109 4 156 3 265 7 Canada 549 8 855 21 1 404 29 France 381 5 15 1 396 6 Australia 509 2 21 1 530 3 Other 2 280 68 1 149 67 3 429 135
As of 31 December 2017, USD 40 million of the gross unrealised loss on equity securities available-for-sale relates to declines in value for less than 12 months and USD 7 million to declines in value for more than 12 months.
Total investments for unit-linked and with-profit business 29 516 5 650 24 818 4 728 1 Change due to ASU 2016-01. Please refer to Note 1 for more details.
Other financial assets and liabilities by measurement category As of 31 December 2017 and 2018, ‘‘Other invested assets’’ and ‘‘Accrued expenses and other liabilities’’ by measurement category were as follows: Investments measured at net asset value as Amortised USD millions Fair value practical expedient cost or cost Equity-accounted Not in scope1 Total
Derivative financial instruments 582 582 Repurchase agreements 160 160 Securities lending 778 51 829 Securities sold short 1 947 1 947 Other 835 2 837 3 672
Investments measured at net asset value as Amortised USD millions Fair value practical expedient cost or cost Equity-accounted Not in scope1 Total
Derivative financial instruments – assets 1 710 –1 176 534 534 Reverse repurchase agreements 6 053 –2 995 3 058 –3 058 0 Securities borrowing 1 589 –524 1 065 –1 065 0
Derivative financial instruments – liabilities –1 924 1 342 –582 49 –533 Repurchase agreements –2 631 2 471 –160 160 0 Securities lending –1 878 1 049 –829 765 –64
Assets pledged As of 31 December 2017 and 2018, investments with a carrying value of USD 7 384 million and USD 5 776 million, respectively, were on deposit with regulatory agencies in accordance with local requirements, of which USD 147 million and USD 277 million, respectively, were cash and cash equivalents. As of 31 December 2017 and 2018, investments with a carrying value of USD 12 209 million and USD 12 959 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries, of which USD 247 million and USD 404 million, respectively, were cash and cash equivalents. Cash and cash equivalents pledged include some instances where cash is legally restricted from usage or withdrawal.
As of 31 December 2017 and 2018, securities of USD 15 740 million and USD 15 850 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. Corresponding liabilities of USD 989 million and USD 941 million, respectively, were recognised in accrued expenses and other liabilities for the obligation to return collateral that the Group has the right to sell or repledge.
Collateral accepted which the Group has the right to sell or repledge As of 31 December 2017 and 2018, the fair value of the equity securities, government and corporate debt securities received as collateral was USD 7 476 million and USD 4 239 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2017 and 2018 was USD 1 981 million and USD 1 721 million, respectively. The sources of the collateral are securities borrowing, reverse repurchase agreements and derivative transactions.
Repurchase agreements Debt securities issued by governments and government agencies 31 2 091 354 139 2 615 Corporate debt securities 16 16
Securities lending Debt securities issued by governments and government agencies 110 146 242 431 929 Corporate debt securities 7 4 11 Equity securities 0
Level 2 inputs are market-based inputs that are directly or indirectly observable, but not considered level 1 quoted prices. Level 2 inputs consist of (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical assets or liabilities in non-active markets (eg markets which have few transactions and where prices are not current or price quotations vary substantially ); (iii) inputs other than quoted prices that are observable (eg interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates); and (iv) inputs derived from, or corroborated by, observable market data.
The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency, include most government agency securities, investment-grade corporate bonds, certain mortgage- and asset-backed products, less liquid listed equities and state, municipal and provincial obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.
Certain financial instruments are classified within level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity, less liquid corporate debt securities and certain assetbacked securities (ABS). Certain over-the-counter (OTC) derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy. Pursuant to the election of the fair value option, the Group classifies certain liabilities for life and health policy benefits in level 3 of the fair value hierarchy. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.
Values of mortgage- and asset-backed securities are obtained both from third-party pricing vendors and through quoted prices, some of which may be based on the prices of comparable securities with similar structural and collateral features. Values of certain ABS for which there are no significant observable inputs are developed using benchmarks to similar transactions or indices. For both residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), cash flows are derived based on the transaction-specific information, which incorporates priority in the capital structure, and are generally adjusted to reflect benchmark yields, market prepayment data, collateral performance (default rates and loss severity) for specific vintage and geography, credit enhancements and ratings. For certain RMBS and CMBS with low levels of market liquidity, judgements may be required to determine comparable securities based on the loan type and deal-specific performance. CMBS terms may also incorporate lock-out periods that restrict borrowers from prepaying the loans or provide disincentives to prepay and therefore reduce prepayment risk of these securities, compared to RMBS. The factors specifically considered in valuation of CMBS include borrower-specific statistics in a specific region, such as debt service coverage and loan-to-value ratios, as well as the type of commercial property. Mortgage- and asset-backed securities also includes debt securitised by credit card, student loan and auto loan receivables. Pricing inputs for these securities also focus on capturing, where relevant, collateral quality and performance, payment patterns and delinquencies.
The Group’s OTC interest rate derivatives primarily include interest rate swaps, futures, options, caps and floors and are valued based on the cash flow discounting models which generally utilise as inputs observable market yield curves and volatility assumptions.
Assets and liabilities measured at fair value on a recurring basis As of 31 December, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: Quoted prices in active markets for identical assets and liabilities
Assets Fixed income securities held for proprietary investment purposes 14 013 86 420 1 353 101 786
Total assets at fair value 48 475 97 023 2 450 –1 176 828 147 600
Liabilities Derivative financial instruments –22 –1 423 –479 1 342 –582
Investments measured at net asset value as 2018 and liabilities inputs inputs Impact of practical USD millions (level 1) (level 2) (level 3) netting1 expedient Total
Debt securities issued by US government and government agencies 11 668 2 186 13 854 US Agency securitised products 6 551 6 551 Debt securities issued by non-US governments and government agencies 30 468 3 30 471 Corporate debt securities 39 372 1 370 40 742 Mortgage- and asset-backed securities 4 329 5 4 334
Liabilities for life and health policy benefits –119 –119 Accrued expenses and other liabilities –302 –1 538 –1 840
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December, the reconciliations of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs were as follows: Liabilities for life Fixed Other and health 2017 income Equity Derivative Investment invested Total Derivative policy Total USD millions securities securities assets real estate assets assets liabilities benefits liabilities
Assets and liabilities Balance as of 1 January 1 353 4 386 198 509 2 450 –479 –126 –605
Variable annuity and fair valued –325 –327 Discounted cash flow model Risk margin 4% (n/a) GMDB contracts Volatility 4–42%
–150 –127 Discounted cash flow model Discount rate 5% per annum
The significant unobservable inputs used in the fair value measurement of the Group’s variable annuity and fair valued guaranteed minimum death benefit (GMDB) contracts are: risk margin, volatility, lapse, mortality adjustment rate and withdrawal rate. A significant increase (decrease) in isolation in each of the following inputs: risk margin, volatility and withdrawal rate would result in a significantly higher (lower) fair value of the Group’s obligation. A significant increase (decrease) in isolation in a lapse rate for inthe -money contracts would result in a significantly lower (higher) fair value of the Group’s obligation, whereas for out-of-themoney contracts, an isolated increase (decrease) in a lapse assumption would increase (decrease) fair value of the Group’s obligation. Changes in the mortality adjustment rate impact the fair value of the Group’s obligation differently for living-benefit products, compared to death-benefit products. For the former, a significant increase (decrease) in the mortality adjustment rate (ie increase (decrease) in mortality, respectively) in isolation would result in a decrease (increase) in fair value of the Group’s liability. For the latter, a significant increase (decrease) in the mortality adjustment rate in isolation would result in an increase (decrease) in fair value of the Group’s liability.
Other invested assets measured at net asset value Other invested assets measured at net asset value as of 31 December were as follows: 2017 2018 Unfunded Redemption frequency Redemption USD millions Fair value Fair value commitments (if currently eligible) notice period
Private equity funds 511 504 362 non-redeemable n/a Hedge funds 128 196 redeemable1 45–95 days2 Private equity direct 92 69 non-redeemable n/a Real estate funds 97 43 30 non-redeemable n/a 1 The redemption frequency varies by position. 2 Cash distribution can be delayed for an extended period depending on the sale of the underlyings.
Liabilities for life and health policy benefits The Group elected the fair value option for existing GMDB reserves related to certain variable annuity contracts which are classified as universal-life-type contracts. The Group has applied the fair value option, as the equity risk associated with those contracts is managed on a fair value basis and it is economically hedged with derivative options in the market. The liability is carried at fair value and changes in fair value attributable to instrument-specific credit risk are reported on other comprehensive income and all other changes in fair value are reported as a component of earnings.
Assets and liabilities measured at fair value pursuant to election of the fair value option Pursuant to the election of the fair value option for the items described, the balances as of 31 December were as follows: of which at fair value pursuant to the fair value option 446 312 Funds held by ceding companies 9 155 9 009 of which at fair value pursuant to the fair value option 206 206 Liabilities Liabilities for life and health policy benefits –42 561 –39 593 of which at fair value pursuant to the fair value option –126 –119 Accrued expenses and other liabilities –7 190 –6 798 of which at fair value pursuant to the fair value option –150 –127
Significant Significant other unobservable 2018 observable inputs inputs USD millions (level 2) (level 3) Total
266 Swiss Re 2018 Financial Report 9 Derivative financial instruments 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.
Amount offset Where a right of set-off exists –801 801 Due to cash collateral –375 541
Total net amount of derivative financial instruments 534 –582 –48 2018 Notional amount assets/liabilities
Derivatives not designated as hedging instruments Interest rate contracts1 52 719 441 –326 115 Foreign exchange contracts1 19 415 186 –148 38 Equity contracts1 12 493 719 –538 181 Credit contracts 379 –1 –1 Other contracts 11 385 61 –471 –410
Total net amount of derivative financial instruments 568 –582 –14 1 During 2018, the Group revised its methodology on the calculation of notional amounts for interest rate derivatives. The revision has no impact on the income statement or balance sheet of the Group. Comparative information for 2017 has been adjusted accordingly.
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 “Investments for unit-linked and with-profit business”, 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 2017 and 2018.
Non-hedging activities The Group primarily uses derivative financial instruments for risk management and trading strategies. Gains and losses of derivative financial instruments not designated as hedging instruments are recorded in “Net realised investment gains/losses — non-participating business” and “Net investment result — unit-linked and with-profit business” in the income statement. For the years ended 31 December, the gains and losses of derivative financial instruments not designated as hedging instruments were as follows: Derivatives not designated as hedging instruments Interest rate contracts 43 –178 Foreign exchange contracts 301 –60 Equity contracts –254 30 Credit contracts –25 –7 Other contracts 287 73
Fair value hedging relationships Foreign exchange contracts –577 577 430 –430
For the years ended 31 December 2017 and 2018, the Group recorded an accumulated net unrealised foreign currency remeasurement gain of USD 1 552 million and USD 2 102 million, respectively, in shareholders’ equity. These offset translation gains and losses on the hedged net investment.
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 2017 and 2018 was approximately USD 909 million and USD 997 million, respectively. The maximum potential loss is based on the positive market replacement cost assuming non-performance of all counterparties, excluding cash collateral.
The total fair value of derivative financial instruments containing credit risk-related contingent features amounted to USD 102 million and USD 108 million as of 31 December 2017 and 2018, respectively. For derivative financial instruments containing credit risk-related contingent features, the Group posted collateral of nil as of 31 December 2017 and 2018, respectively. In the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD 108 million additional collateral would have had to be posted as of 31 December 2018. The total equals the amount needed to settle the instruments immediately as of 31 December 2018.
The Groupʼs debt as of 31 December was as follows: Senior financial debt 433 235 Subordinated financial debt1 637 Contingent capital instruments classified as financial debt1 761
Senior financial debt 3 781 3 428 Senior operational debt 390 388 Subordinated financial debt1 2 632 1 892 Subordinated operational debt 2 370 2 112 Contingent capital instruments classified as financial debt1 975 682 1 Certain items previously described within the disclosure table as subordinated financial debt or convertible debt are now included as contingent capital instruments classified as financial debt. Comparative information for 2017 has been amended accordingly.
Maturity of long-term debt As of 31 December, long-term debt as reported above had the following maturities: Due in 2019 2 341 0 Due in 2020 197 188 Due in 2021 213 816 Due in 2022 845 817 Due in 2023 897 855 Due after 2023 5 655 5 826
Total senior long-term debt as of 31 December 2018 3 816
Maturity Instrument Issued in Currency Nominal in millions Interest rate First call in Book value in USD millions 2042 Subordinated fixed-to-floating rate loan note 2012 EUR 500 6.63% 2022 568 2044 Subordinated fixed rate resettable callable loan note 2014 USD 500 4.50% 2024 498 2057 Subordinated private placement (amortising, limited recourse) 2007 GBP 1 658 5.28% 2 112 Perpetual subordinated fixed-to-floating rate callable loan note 2015 EUR 750 2.60% 2025 826
Total subordinated long-term debt as of 31 December 2018 4 004
Maturity Instrument Issued in Currency Nominal in millions Interest rate First call in Book value in USD millions 2024 Senior unsecured exchangeable instrument with issuer stock settlement 2018 USD 500 3.25% 494 2045 Subordinated contingent write-off securities 2013 CHF 175 7.50% 2020 188
Total contingent capital instruments classified as long-term debt as of 31 December 20171 975 1 Certain items previously described within the disclosure table as subordinated long-term debt are now included as contingent capital instruments classified as long-term debt. Comparative information for 2017 has been amended accordingly.
In addition to the above, interest expense on contingent capital instruments classified as equity was USD 67 million and USD 41 million for the years ended 31 December 2017 and 2018, respectively.
Long-term debt issued in 2018 In June 2018, Swiss Re Ltd issued a six-year senior unsecured exchangeable instrument with issuer stock settlement. The instrument has a face value of USD 500 million, with a fixed coupon of 3.25% per annum payable semi-annually in arrear until the maturity date (13 June 2024). The interest expense was USD 10 million for the year ended 31 December 2018. In limited circumstances, the instrument may be redeemed early, in cash. Noteholders have a put option requiring the issuer to redeem the instrument at par if a delisting, nationalisation or change of control occurs. The higher of the par value and the fair market value of the instrument may be stock-settled, at any time at the option of the issuer, by delivering Swiss Re Ltd shares at a prevailing share price which uses a forward-looking 15 trading day volume-weighted average share price with a 1% discount. If the issuer stock settlement option is exercised at a time when the Groupʼs, or the issuerʼs, regulatory solvency ratio calculated under the Swiss Solvency Test is less than 160%, the prevailing share price is subject to a share price floor of USD 44.3305. After year five, holders of the instrument have the unrestricted option (and prior to year five, a restricted option) to exchange the instrument for Swiss Re Ltd shares at the prevailing exchange price, which is initially set at USD 115.2593, representing a premium of 30% to the reference share price, which used a forward-looking ten trading day volume-weighted average share price commencing on 7 June 2018. The number of Swiss Re Ltd shares to be delivered upon a noteholder-initiated exchange will be determined by dividing the principal amount of the instrument held by such noteholder by the prevailing exchange price at the time. The issuer may elect to settle a noteholder exchange in cash or Swiss Re Ltd shares. The share price floor and the exchange price are subject to customary anti-dilution adjustments. To economically hedge the settlement of a noteholder-initiated exchange (in cash or in Swiss Re Ltd shares), Swiss Re Ltd purchased matching call options in an aggregate amount of USD 500 million with an expiry date of 13 June 2024 on Swiss Re Ltd shares with a portion of the proceeds of the offering through an internal call option entered through Swiss Reinsurance Company Ltd with external banks. Consequently, no new Swiss Re Ltd shares will be issued upon a noteholder-initiated exchange. Both the noteholder-initiated exchange option and the matching call options are accounted as equity within Swiss Re Ltd.
274 Swiss Re 2018 Financial Report 12 Earnings per share Most jurisdictions require reinsurers to maintain a minimum amount of capital in excess of the statutory definition of net assets or maintain certain minimum capital and surplus levels. In addition, some jurisdictions place certain restrictions on amounts that may be loaned or transferred to the parent company. The Group’s ability to pay dividends may be restricted by these requirements.
Dividends are declared in Swiss francs. During the years ended 31 December 2017 and 2018, the Group paid dividends per share of CHF 4.85 and CHF 5.00, respectively.
Earnings per share for the years ended 31 December were as follows: USD millions (except share data) 2017 2018
Basic earnings per share Net income 393 481 Non-controlling interests 5 –19 Interest on contingent capital instruments1 –67 –41
Net income per share in CHF2 1.01 1.34 1 Please refer to Note 11 “Debt and contingent capital instruments”. 2 The translation from USD to CHF is shown for informational purposes only and has been calculated using the Group’s average exchange rates.
13 Income taxes The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which it operates. The components of the income tax expense were: Current taxes 727 636 Deferred taxes –595 –567
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: Income tax at the Swiss statutory tax rate of 21.0% 110 115 Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates 11 122 Impact of foreign exchange movements 71 –64 Tax exempt income/dividends received deduction –51 –61 Change in valuation allowance –77 –92 Non-deductible expenses 57 55 Change in statutory rate –60 25 Change in liability for unrecognised tax benefits including interest and penalties 13 72 Intra-entity transfers 16 –68 Other, net1 42 –35 1 Other, net includes tax return to tax provision adjustments from various jurisdictions.
Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows: Deferred tax assets Income accrued/deferred 259 212 Technical provisions 488 560 Pension provisions 313 293 Benefit on loss carryforwards 2 296 2 675 Currency translation adjustments 490 423 Unrealised gains in income 487 424 Other 981 1 212
Gross deferred tax asset 5 314 5 799 Valuation allowance –475 –366 Unrecognised tax benefits offsetting benefits on loss carryforwards –22 –22
Deferred tax liabilities Present value of future profits –322 –294 Income accrued/deferred –473 –199 Investment valuation in income –535 –382 Deferred acquisition costs –918 –1 071 Technical provisions –2 191 –2 264 Unrealised gains on investments –984 –584 Foreign exchange provisions –507 –602 Other –807 –780
Total deferred and other non-current tax liabilities –6 975 –6 471
As of 31 December 2018, the Group had USD 11 649 million net operating tax loss carryforwards, expiring as follows: USD 5 million in 2019, USD 17 million in 2020, USD 9 million in 2021, USD 7 million in 2022, USD 7 128 million in 2023 and beyond, and USD 4 483 million never expire.
Income taxes paid in 2017 and 2018 were USD 720 million and USD 740 million, respectively.
As of 31 December 2017 and 2018, the amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 206 million and USD 257 million, respectively.
Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. For the years ended 31 December 2017 and 2018, such expenses were USD 2 million and USD 7 million, respectively. For the years ended 31 December 2017 and 2018, USD 54 million and USD 60 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2018 is included within the deferred and other noncurrent taxes section reflected above and in the balance sheet.
The balance of gross unrecognised tax benefits as of 31 December 2018 presented in the table above excludes accrued interest and penalties (USD 60 million).
During the year, certain tax positions and audits in Switzerland, Australia and France were effectively settled.
The following table summarises jurisdictions and tax years that remain subject to examination: Australia 2013–2018 Korea 2013–2018 Brazil 2013–2018 Luxembourg 2014–2018 Canada 2011–2018 Malaysia 2009–2018 China 2009–2018 Mexico 2013–2018 Colombia 2012–2018 Netherlands 2014–2018 Denmark 2013–2018 New Zealand 2013–2018 France 2016–2018 Nigeria 2016–2018 Germany 2014–2018 Singapore 2013–2018 Hong Kong 2013–2018 Slovakia 2014–2018 India 2006–2018 South Africa 2014–2018 Ireland 2014–2018 Spain 2014–2018 Israel 2014–2018 Switzerland 2015–2018 Italy 2013–2018 United Kingdom 2008, 2011–2018 Japan 2013–2018 United States 2011–2018
278 Swiss Re 2018 Financial Report 14 Benefit plans 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.
Fair value of plan assets as of 31 December 3 887 2 565 0 6 452
Funded status –61 101 –413 –373 2018 Swiss plan Foreign plans Other benefits Total USD millions
Non-current assets 238 238 Current liabilities –3 –17 –20 Non-current liabilities –72 –169 –302 –543
Components of net periodic benefit cost The components of pension and post-retirement cost for the years ended 31 December were as follows: 2017 USD millions Swiss plan Foreign plans Other benefits Total
Other changes in plan assets and benefit obligations recognised in other comprehensive income for the years ended 31 December were as follows: 2017 USD millions Swiss plan Foreign plans Other benefits Total
Net gain/loss 123 50 –25 148 Prior service cost/credit 1 –61 –60 Amortisation of: Net gain/loss –64 –19 –83 Prior service cost 15 15
The estimated net loss and prior service credit for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2019 are USD 56 million and USD 15 million, respectively. The estimated net gain and prior service credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2019 are USD 2 million and USD 15 million, respectively.
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 6 335 million and USD 6 043 million as of 31 December 2017 and 2018, respectively.
Pension plans with an accumulated benefit obligation in excess of plan assets as of 31 December were as follows: Projected benefit obligation 5 071 4 898 Accumulated benefit obligation 5 025 4 856 Fair value of plan assets 4 834 4 654
Assumptions used to determine obligations at the end of the year Discount rate 0.6% 0.8% 2.8% 3.0% 2.1% 2.2% Rate of compensation increase 1.8% 1.8% 3.0% 3.0% 2.1% 2.1%
Effect on total of service and interest cost components 0 0 Effect on post-retirement benefit obligation 18 –15
Plan asset allocation by asset category The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2017 and 2018 was as follows: Swiss plan allocation Foreign plans allocation
Asset category Equity securities 29% 23% 23% 21% 13% 20% Debt securities 41% 46% 45% 71% 73% 74% Real estate 23% 24% 24% 0% 2% 0% Other 7% 7% 8% 8% 12% 6%
Short-term investments 38 38 Derivative financial instruments –13 –13 Real estate 692 692 Other assets 89 563 652
Assets Fixed income securities: Debt securities issued by the US government and government agencies 32 209 241 Debt securities issued by non-US governments and government agencies 1 227 1 227 Corporate debt securities 1 769 10 1 779 Residential mortgage-backed securities 16 16 Commercial mortgage-backed securities 1 1 Agency securitised products 7 7 Other asset-backed securities 3 3
Equity securities: Equity securities held for proprietary investment purposes 901 308 1 209
Total assets at fair value 933 3 689 731 659 6 012
Balance as of 1 January 612 106 718 Realised/unrealised gains/losses: Relating to assets still held at the reporting date 34 –26 8 Relating to assets sold during the period 19 19
Closing balance as of 31 December 692 113 805 2018 USD millions Real estate Other assets Total
As of 31 December 2018, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: USD millions Swiss plan Foreign plans Other benefits Total
The total compensation cost for share-based compensation plans recognised in net income was USD 55 million and USD 47 million in 2017 and 2018, respectively. The related tax benefit was USD 12 million and USD 10 million, respectively.
A summary of the movements in shares relating to outstanding awards granted under the restricted share plans for the year ended 31 December 2018 is as follows: Weighted average grant date fair value in CHF1 Number of shares
Non-vested at 1 January 88 483 844 Granted 96 219 163 Forfeited 87 –462 Vested 88 –322 238 1 Equal to the market price of the shares at grant.
The fair value assumptions in the grant valuations include market estimates for dividends (and an additional special dividend of CHF 3.00 for the LPP 2015) and the risk-free rate based on the average of the 5-year US Treasury bond rate (for LPP 2015) and the average of the 10-year US Treasury bond rate (for LPP 2016, LPP 2017 and LPP 2018) taken monthly over each year in the performance period. This resulted in risk-free rates between 1.8% and 3.1% for all LPP awards.
PSUs Non-vested at 1 January 341 955 472 628 696 804 Granted 286 193 Forfeited –8 150 –34 180 –32 426 –6 413 Vested –333 805
The disclosure requirements under Swiss Law in respect of compensation and loans to the members of the Board of Directors and of the Group Executive Committee, as well as closely related persons, are detailed in the Compensation Report on pages 165–170 of the Financial Report of the Swiss Re Group.
The disclosure requirements under Swiss Law in respect of participations of members of the Board of Directors and the Group Executive Committee, as well as closely related persons, are detailed on pages 318–319 of the Annual Report of Swiss Re Ltd.
288 Swiss Re 2018 Financial Report 17 Related parties The Group defines the following as related parties to the Group: subsidiaries of Swiss Re Ltd, entities in which the Group has significant influence, pension plans, members of the Board of Directors (BoD) and the Group Executive Committee (EC) and their close family members, and entities which are directly and indirectly controlled by members of governing bodies of the Group and their close family members.
As of 31 December 2017 and 2018, the Group’s investment in mortgages and other loans included USD 301 million and USD 373 million, respectively, of loans due from employees, and USD 181 million and USD 212 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
The total number of shares, options and related instruments held by members of the BoD and the Group EC and persons closely related to, amounts to less than 1% of the shares issued by Swiss Re Ltd. None of the members of BoD and the Group EC has any significant business connection with Swiss Re Ltd or any of its Group companies. The Group BoD member Susan L. Wagner is also a board member of BlackRock, Inc. BlackRock, Inc. is acting as external asset manager for the Group.
Share in earnings and dividends received from equity-accounted investees for the years ended 31 December, were as follows: Share in earnings of equity-accounted investees 100 166 Dividends received from equity-accounted investees 170 170
18 Commitments and contingent liabilities Leasing commitments As part of its normal business operations, the Group enters into a number of lease agreements. As of 31 December 2018, such agreements, which are operating leases, total the following obligations for the next five years and thereafter: USD millions 2018
Minimum rentals for all operating leases (except those with terms of one month or less that were not renewed) for the years ended 31 December 2017 and 2018 were USD 94 million and USD 86 million, respectively. Sublease rental income for the years ended 31 December 2017 and 2018 was USD 2 million and USD 2 million, respectively.
Other commitments As a participant in limited and other investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnerships for periods of up to ten years. The total commitments remaining uncalled as of 31 December 2018 were USD 1 954 million.
Share capital (millions) Affiliation in % as of 31.12.2018 Method of consolidation
South Africa Swiss Re Africa Limited, Cape Town ZAR 2 100 f
Singapore Swiss Re Asia Holding Pte. Ltd., Singapore USD 0 100 f Swiss Re Asia Pte. Ltd., Singapore USD 320 100 f
20 Variable interest entities The Group enters into arrangements with variable interest entities (VIEs) in the normal course of business. The involvement ranges from being a passive investor to designing, structuring and managing the VIEs. The variable interests held by the Group arise primarily as a result of the Group’s involvement in certain insurance-linked securitisations, life and health funding transactions, swaps in trusts, debt financing, investment, senior commercial mortgage and infrastructure loans as well as other entities, which meet the definition of a VIE.
Life and health funding vehicles The Group participates in certain structured transactions that retrocede longevity and mortality risks to captive reinsurers with an aim to provide regulatory capital credit to a transaction sponsor through creation of funding notes by a separate funding vehicle which is generally considered a VIE. The Group’s participation in these transactions is generally limited to providing contingent funding support via a financial contract with a funding vehicle, which represents a potentially significant variable interest in the funding vehicle. The Group does not have power to direct activities of the funding vehicles and therefore is not a primary beneficiary of the funding vehicles in these transactions. The Group’s maximum exposure in these transactions equals either the total contract notional or outstanding balance of the funding notes issued by the vehicle, depending on the specific contractual arrangements.
Swaps in trusts The Group provides interest rate and foreign exchange risk hedges to certain asset securitisation trusts which qualify as VIEs. As the Group’s involvement is limited to interest rate and foreign exchange derivatives, it does not have power to direct any activities of the trusts and therefore does not qualify as primary beneficiary of any of these trusts. These activities are in run-off.
The Group consolidates an investment vehicle, because the Group holds the entire interest in the entity and makes investment decisions related to the entity. The investment vehicle is a VIE because it is structured as an umbrella company comprised of multiple sub-funds. The majority of the investments held in this vehicle are accounted for as available-for-sale and are disclosed in the investment note and not included in the tables below.
Investment vehicles for unit-linked business Additionally, the Group invests on behalf of the policyholders as a passive investor in a variety of investment funds across various jurisdictions. By design, many of these funds meet a VIE definition. While the Group may have a potentially significant variable interest in some of these entities due to its share of the fund’s total net assets, it never has power over the fund’s investment decisions or unilateral kick-out rights relative to the decision maker.
Senior commercial mortgage and infrastructure loans The Group also invests in structured commercial mortgage and infrastructure loans, which are held for investment.
The infrastructure loans are made to non-recourse special purpose entities collateralised with infrastructure project assets. Some borrower entities may have insufficient equity investment at risk, which results in the VIE designation.
Non-consolidated VIEs The following table shows the total assets and liabilities on the Group’s balance sheet related to VIEs in which the Group held a variable interest but was not the primary beneficiary as of 31 December: Fixed income securities available-for-sale 587 935 Equity securities available-for-sale 700 Equity securities at fair value through earnings 272 Policy loans, mortgages and other loans 1 035 1 313 Other invested assets 1 831 1 953 Investments for unit-linked and with-profit business 9 223 5 999
Opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company at 31 December 2018, the results of operations and the cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America and comply with Swiss law.
Unobservable or interpolated inputs used for the valuation of certain level 2 and 3 investments
Key audit matter Valuation of actuarially determined P&C loss reserves involves a high degree of subjectivity and complexity. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses at a given date.
In particular, loss reserves for ‘long tail’ lines of business (for example, the Liability, US Asbestos and Environmental, Motor Liability and Workers’ Compensation portfolios) are generally more difficult to project. This is due to the protracted period over which claims may be reported as well as the fact that claim settlements are often less frequent but of higher magnitude. Long-tailed lines of business generally rely on many assumptions based on experts’ judgement.
Evaluating the appropriateness of the recognition, accounting, and disclosures for large and/or structured transactions
Based on the work performed, we consider the methodologies and assumptions used by management in the valuation of actuarially determined P&C loss reserves to be appropriate.
In relation to the matters set out opposite, our substantive testing procedures included the following, which are applicable for both the standard reserving and large and/or structured transactions: Testing the completeness and accuracy of the underlying data by vouching against the source documentation.
Evaluating the appropriateness of the recognition, accounting, and disclosures for large and/or structured transactions.
Based on the work performed, we consider that the methodologies and assumptions used by management in the valuation of actuarially determined L&H reserves to be appropriate.
Furthermore, on a regular basis, the Company enters into large and/or structured transactions which often have material or complex financial reporting and reserving consequences. The reserving for such transactions is subject to increased risk of error due to the non-routine nature of transactions and the judgemental nature of reserving.
Key audit matter The Company is carrying a provision for uncertain tax items on its books. The valuations of these items are based on management’s estimates and management’s assessment whether deferred tax assets are more likely than not to be realised. Changes in the estimates of uncertain tax items have an impact (through income tax expense) on the results.
Expenses Claims and claim adjustment expenses –8 336 –7 254 –8 810 Life and health benefits –8 639 –8 236 –8 414 Return credited to policyholders –4 597 –3 371 –61 Acquisition costs –4 495 –3 679 –4 021 Other operating costs and expenses –3 976 –3 620 –3 902
Income before income tax expense 920 2 675 2 875 Income tax expense –221 –541 –77
Net income after attribution of non-controlling interests 699 1 980 2 626
Swiss Re Ltd Financial statements 306 Swiss Re 2018 Financial Report
Annual Report Swiss Re Ltd Swiss Re Ltd (the Company), domiciled in Zurich, Switzerland, is the ultimate holding company of the Swiss Re Group. Its principal activity is the holding of investments in Swiss Re Group companies.
The Company earned trademark license fees of CHF 340 million and reported net realised foreign exchange gains of CHF 70 million, offset by valuation adjustments on investments in subsidiaries and affiliated companies of CHF 776 million and administrative expenses of CHF 133 million.
Non-current assets increased by CHF 191 million to CHF 21 204 million as of 31 December 2018, mainly driven by an increase in loans to subsidiaries and affiliated companies, partially offset by a decrease in investments in subsidiaries and affiliated companies.
Liabilities Total liabilities increased from CHF 726 million as of 31 December 2017 to CHF 890 million as of 31 December 2018.
Short-term liabilities decreased by CHF 434 million to CHF 263 million as of 31 December 2018, mainly driven by a decrease in loans from subsidiaries and affiliated companies.
Own shares (directly held by the Company) increased by CHF 310 million to CHF 1 946 million as of 31 December 2018 due to net purchases of own shares of CHF 6 million and share buy-back programmes of CHF 1 304 million, partially offset by the cancellation of own shares of CHF 1 000 million.
Current assets Cash and cash equivalents 6 1 Short-term investments 4 3 39 Receivables from subsidiaries and affiliated companies 765 442 Other receivables and accrued income 5 18 Loans to subsidiaries and affiliated companies 3 179 3 656
Non-current assets Loans to subsidiaries and affiliated companies 98 719 Investments in subsidiaries and affiliated companies 5 20 915 20 485 Total non-current assets 21 013 21 204
Liabilities Short-term liabilities Payables to subsidiaries and affiliated companies 43 120 Other liabilities and accrued expenses 225 143 Loans from subsidiaries and affiliated companies 429 – Total short-term liabilities 697 263
Legal reserves from capital contributions 192 192 Other legal capital reserves 1 0 Legal capital reserves 193 192
Retained earnings brought forward 4 4 Net income for the financial year 4 043 3 077 Own shares (directly held by the Company) 9 –1 636 –1 946
Receivables from subsidiaries and affiliated companies/Other receivables These assets are generally carried at nominal value. Value adjustments are recorded where the expected recovery value is lower than the nominal value.
The provision for taxation represents an estimate of taxes payable in respect of the reporting year.
As of 31 December 2018, securities of CHF 10.7 million were lent to Group companies under securities lending agreements, whereas in 2017 securities of CHF 0.1 million were lent to Group companies. As of 31 December 2018 and 2017, there were no securities lent to third parties.
As of 31 December 2018 and 2017, Swiss Re Ltd held directly the following investments in subsidiaries and affiliated companies: Further disclosures in respect of investments in significant indirect subsidiaries and affiliated companies are detailed in Note 19 “Significant subsidiaries and equity investees” on pages 290 to 292 in the notes to the Group financial statements, where the voting interests are equal to the affiliations disclosed, except of Sul América S.A. where the voting rights are equal to 10%.
The Company has established subordinated debt facilities which allow the Company to issue subordinated callable notes at any time. The Company pays a fee on the available commitment under the facility and an interest rate on issued notes. Notes, when issued, will be classified as subordinated debt. As of 31 December 2018, no notes have been issued under the facilities.
An overview of the subordinated debt facilities is provided in the following table: As of 31 December 2018 Domicile Currency Share capital
The Company has entered into subordinated funding facilities with its subsidiary Swiss Reinsurance Company Ltd under which Swiss Reinsurance Company Ltd has the right, among others, to issue subordinated notes to the Company at any time. For its various rights, Swiss Reinsurance Company Ltd owes the Company an unconditional fixed commitment fee on the total facility amount, payable in annual instalments. Annually, Swiss Reinsurance Company Ltd receives a partial reimbursement of the commitment fee on the undrawn facility amount. As of 31 December 2018, the facilities were undrawn.
2 At the 154th Annual General Meeting held on 20 April 2018, the Group’s shareholders authorised the Group Board of Directors to repurchase up to a maximum CHF 1 billion purchase value of the Group’s own shares prior to the 2019 Annual General Meeting through a public share buy-back programme for cancellation purposes.
Purchase of own shares1 995 183 482 229 Sale of own shares 2 –1 027 501 –476 363 Share buy-back programme (152nd AGM 2016)3 5 077 780 – Share buy-back programme (153rd AGM 2017)4 6 347 500 4 485 316 Cancellation of shares bought back –10 620 280 –10 832 816 Share buy-back programme (154th AGM 2018)5 – 10 050 442 Own shares as of 31 December 34 866 516 38 575 324 1 Purchased at average price CHF 93.17 (2017: CHF 89.91). 2 Sold at average price CHF 94.49 (2017: CHF 87.31). 3 Purchased at average price CHF 94.33.
As of 31 December 2018, there was one shareholder with a participation exceeding the 3% threshold of Swiss Re Ltd’s share capital: Further information in respect of major shareholders are detailed in “Group structure and shareholders” on page 104 in the 2018 Financial Report.
This section is in line with Articles 663c para. 3 and 959c para. 2 cif. 11 of the Swiss Code of Obligations, which requires disclosure of shareholdings, options and related instruments held by members of the Board of Directors and Group Executive Committee (Group EC) at the end of the reporting year and of share-based compensation for the Board of Directors during the reporting year. Further disclosures in respect of compensation for the members of the Board of Directors and the Group EC, and persons closely related, are detailed in the Compensation Report on pages 165 to 170 of the Financial Report of the Swiss Re Group.
Share ownership The number of shares held as of 31 December were: Members of the Group EC 2017 2018
Christian Mumenthaler, Group CEO 68 775 71 733 David Cole, former Group Chief Financial Officer1 82 982 n/a John R. Dacey, Group Chief Financial Officer 23 671 27 124 Guido Fürer, Group Chief Investment Officer 61 077 66 007 Agostino Galvagni, CEO Corporate Solutions 94 591 99 521 Jean-Jacques Henchoz, former CEO Reinsurance EMEA2 49 020 n/a Russell Higginbotham, CEO Reinsurance EMEA n/a 3 918 Thierry Léger, CEO Life Capital 49 841 53 785 Moses Ojeisekhoba, CEO Reinsurance 36 194 38 998 Jayne Plunkett, CEO Reinsurance Asia 34 288 36 264 Patrick Raaflaub, Group Chief Risk Officer – 3 944 Edouard Schmid, Group Chief Underwriting Officer 29 161 30 936 J. Eric Smith, CEO Reinsurance Americas 21 400 24 004 Thomas Wellauer, Group Chief Operating Officer 105 390 110 520 1 The number of shares held on 31 March 2018 when David Cole stepped down from the Group EC was 82 982. 2 The number of shared held on 22 August 2018 when Jean-Jacques Henchoz stepped down from the Group EC was 53 168.
Eileen Rominger, Member2 n/a 813 Philip K. Ryan, Chair Finance and Risk Committee 8 892 11 611 Sir Paul Tucker, Member 2 530 4 004 Jacques de Vaucleroy, Chair Compensation Committee 868 2 706 Susan L. Wagner, Chair Investment Committee 8 754 11 360 Larry Zimpleman, Member2 n/a 813 1 Term of office expired after the completion of the AGM of 20 April 2018 and did not stand for re-election. 2 Elected to Swiss Re’s Board of Directors at the AGM of 20 April 2018. 3 Shareholdings for 2018 include 2 500 American Depository Receipts (ADRs), equivalent to 625 shares.
Share-based compensation The share-based compensation for the members of the Board of Directors for 2017 and 2018 was: Members of the Board of Directors Fees in blocked shares1
Karen Gavan, Member5 n/a n/a 80 887 Rajna Gibson Brandon, former Member4 127 1 494 43 513 C. Robert Henrikson, former Chair Compensation Committee4 185 2 183 63 749
Carlos E. Represas, former Member6 34 396 n/a n/a Eileen Rominger, Member5 n/a n/a 74 813 Philip K. Ryan, Chair Finance and Risk Committee 233 2 758 240 2 719
Jacques de Vaucleroy, Chair Compensation Committee 73 868 163 1 838 Susan L. Wagner, Chair Investment Committee 223 2 643 230 2 606 Larry Zimpleman, Member5 n/a n/a 74 813 1 Represents the portion (40%) of the total fees for the members of the Board of Directors that is delivered in Swiss Re Ltd shares, with a four-year blocking period. 2 The number of shares is calculated by dividing the portion (40%) of the total fees with the average closing price of the shares on the SIX Swiss Exchange during the ten
trading days preceding the AGM less the amount of any dividend resolved by such AGM. 3 Acting as the Lead Independent Director. 4 Term of office expired after the completion of the AGM of 20 April 2018 and did not stand for re-election. 5 Elected to Swiss Re’s Board of Directors at the AGM of 20 April 2018. 6 Term of office expired after the completion of the AGM of 21 April 2017 and did not stand for re-election.
Restricted shares For the years ended 31 December 2017 and 2018, neither the members of the Board of Directors nor the members of the Group EC held any restricted shares.
Proposal for allocation of disposable profit The Board of Directors proposes to the Annual General Meeting to be held in Zurich on 17 April 2019 to approve the following allocations and dividend payment: Dividend If the Board of Directors’ proposal for allocations and dividend payment is accepted, an ordinary dividend of CHF 5.60 per share will be paid on 25 April 2019 from voluntary profit reserves.
Voluntary profit reserves after allocation and dividend payment 16 797 18 194 1 Since the Board of Directors’ proposal for allocation of disposable profit, included in the Annual Report 2017, the number of registered shares eligible for dividend, at the dividend payment date of 26 April 2018, decreased due to the share buy-back programme of 4 485 316 shares and transfer of 46 926 shares for employee participation purposes from not eligible to eligible for dividend. This resulted in a lower dividend of CHF 22 million, compared to the Board of Directors’ proposal, and higher voluntary profit reserves by the same amount.
Share structure per 31 December 2018 Number of registered shares Nominal capital in
1 The Board of Directors’ proposal to the Annual General Meeting of 17 April 2019 is based on the number of shares eligible for dividend as of 31 December 2018. The actual dividend payment will depend on the number of shares eligible for dividend as of 18 April 2019.
In performing impairment assessments of investments in subsidiaries and affiliated companies, management uses considerable judgement in determining valuation-method inputs. Management applies a consistent market value method for each investment and applies adjustments to the model based on specific characteristics of the investment.
How our audit addressed the key audit matter In relation to the matter set out opposite, our substantive testing procedures included the following: ̤ Evaluating management’s method and assumptions to determine a market value.
̤ Assessing whether the model applied for each subsidiary is reasonable, including any adjustments applied.
̤ Understanding judgements applied by management for each investment to ensure they are in accordance with our own expectation based on our knowledge of the business and industry.
On the basis of the work performed, we consider the methods and assumptions used by management to be reasonable.
The termination of a reinsurance contract by agreement of the parties on the basis of one or more lump sum payments by the reinsurer which extinguish its liability under the contract. The payment made by the reinsurer commonly relates to incurred losses under the contract.
Insurance and reinsurance protection of one or more specific risk exposures based on a contractual agreement.
Insurance against the incapacity to exercise a profession as a result of sickness or other infirmity.
Adjustment of the book value or collateral value of a security, portfolio or account to current fair market value.
Intangible asset primarily arising from the purchase of life and health insurance companies or portfolios.
Investment related operating income as a percentage of invested assets. Invested assets include investments, securities in transit, certain financial liabilities and exclude policy loans, minority interests, cash and cash equivalents, as well as assets related to securities lending, repurchase agreements and collateral balances.
Amount of capital that is required to support the risks assumed by an entity. It is based on the entity's total risk.
An investment strategy process which analyses trends in the global economy and the associated impact on financial markets to assess the overall financial market outlook as well as their implications for various asset classes and risk exposures.
An insurance contract that has additional amounts added to the sum insured, or paid/ credited separately to the policyholder as a bonus, which result from a share of the profit generated by the with-profits insurance funds, including these funds’ interests in other blocks of business.
General impact of adverse market conditions The operations of Swiss Re Ltd (“Swiss Re”) and its subsidiaries (collectively, the “Group”) as well as its investment returns are subject to market volatility and macroeconomic factors, which are outside of the Group’s control and are often inter-related.
Financial, credit and foreign exchange markets are experiencing continued periods of volatility reflecting a range of political, economic and other uncertainties, some of the more significant of which are inter-related. These include the planned withdrawal of the United Kingdom from the European Union and significant uncertainty regarding the basis of that withdrawal and the future relationship between the United Kingdom and the European Union; the possible emergence of trade barriers and other protection policies across a range of economies, including a sustained trade war between the United States and China; geopolitical tensions more broadly; a prolonged slowdown in one or more of the principal global economies, particularly in China, and possible recession; continued challenges faced by the Eurozone; the tightening of monetary policy; sustained challenges to multilateral institutions and frameworks; the domestic political situation in the United States, various member states of the European Union and potentially other countries; and heightened scrutiny of technology companies.
The Group cannot predict which legislative and/or regulatory initiatives will be enacted or promulgated, what the scope and content of these initiatives ultimately will be, when they will be effective and what the implications will be for the industry, in general, and for the Group, in particular. The Group may be subject to changes in views of its regulators in respect of the models that the Group uses for capital and solvency purposes, and could be adversely affected if, for example, it is required to use standard models rather than internal models. Generally, legal and regulatory changes could have a material impact on the Group’s business. Uncertainty regarding the future relationship between the UK and the EU could also impact the legislative and/or regulatory regimes to which the Group is subject, both in the United Kingdom and in the European Union.
Market risk Volatility and disruption in the global financial markets could expose the Group to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices and foreign currency exchange rates, which may adversely impact the Group’s financial condition, results of operations, liquidity and capital position. The Group’s exposure to interest rate risk is primarily related to the market price and cash flow variability associated with changes in interest rates. In general, a low interest rate environment, such as the one experienced in recent years, poses significant challenges to the insurance and reinsurance industries, with earnings capacity under stress unless lower investment returns from fixed income assets can be offset by lower combined ratios or higher returns from other asset classes. 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-thantemporary impairments.
Risks relating to credit rating downgrades Ratings are an important factor in establishing the competitive position of reinsurance companies. Third-party rating agencies assess and rate the financial strength of reinsurers and insurers. These ratings are intended to measure a company’s ability to repay its obligations and are based upon criteria established by the rating agencies. Ratings may be revised downward or revoked at the sole discretion of the rating agencies.