Swiss Re Corporate Solutions Group Net income attributable to common shareholder 172 –740 –530
Group financial statements 2 Income statement 2 Statement of comprehensive income 3 Balance sheet 4 Statement of shareholder’s equity 6 Statement of cash flows 7
Notes to the Group financial statements 8 Note 1 Organisation and summary of significant accounting policies 8 Note 2 Information on business segments 14 Note 3 Insurance information 18 Note 4 Unpaid claims and claim adjustment expenses 20 Note 5 Deferred acquisition costs (DAC) 30 Note 6 Investments 31 Note 7 Fair value disclosures 36 Note 8 Derivative financial instruments 41 Note 9 Acquisitions 43 Note 10 Debt 44 Note 11 Income taxes 45 Note 12 Benefit plans 48 Note 13 Related parties 49 Note 14 Variable interest entities 50 Report of the statutory auditor 52
Net premiums written 3 3 662 3 600 Change in unearned premiums –159 51
Net income/loss attributable to common shareholder 172 –740 1 Total impairments for the years ended 31 December of USD 10 million in 2016 and USD 4 million in 2017 were fully recognised in earnings.
Net income/loss before attribution of non-controlling interests 170 –745 Other comprehensive income, net of tax: Change in unrealised investment gains/losses 40 10 Change in foreign currency translation 7 18
Balance as of period end 22 12 34 1 Reclassification adjustment included in net income is presented in “Net realised investment gains/losses”.
Cash and cash equivalents (including 109 in 2016 and 60 in 2017 subject to securities lending) 449 621 Accrued investment income 39 42 Premiums and other receivables 2 541 2 371 Reinsurance recoverable on unpaid claims 5 429 5 458 Funds held by ceding companies 76 105 Deferred acquisition costs 5 444 454 Goodwill 173 213 Income taxes recoverable 11 84 84 Deferred tax assets 248 363 Other assets 784 1 032
Liabilities Unpaid claims and claim adjustment expenses 4 10 271 11 818 Unearned premiums 3 118 3 166 Funds held under reinsurance treaties 790 747 Reinsurance balances payable 402 264 Income taxes payable 13 18 Deferred and other non-current tax liabilities 11 375 243 Accrued expenses and other liabilities 732 805 Long-term debt 10 497 497
Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items 71 50 Net realised investment gains/losses –49 –105 Income from equity-accounted investees, net of dividends received –19 –48 Change in: Technical provisions and other reinsurance assets and liabilities, net –484 1 067 Funds held by ceding companies and under reinsurance treaties –141 –73 Reinsurance recoverable on unpaid claims 753 322 Other assets and liabilities, net 123 –28 Income taxes payable/recoverable –112 –226 Trading positions, net –48 32
Cash flows from investing activities Fixed income securities: Sales 2 489 2 665 Maturities 274 584 Purchases –2 461 –4 905 Net purchases/sales/maturities of short-term investments –20 786
8 Swiss Re Corporate Solutions Ltd 2017 Annual Report 1 Organisation and summary of significant accounting policies Nature of operations The Swiss Re Corporate Solutions Group, which is headquartered in Zurich, Switzerland, comprises Swiss Re Corporate Solutions Ltd (the parent company, referred to as “SRCS”) and its subsidiaries (collectively, the “Group”). The Group provides a wide range of traditional and non-traditional commercial insurance products and risk transfer solutions through a network of offices around the globe.
For assets or derivative structures at fair value, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Although management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and judgement over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. As of 31 December 2017, the Group had not provided any collateral on financial instruments in excess of its own market value estimates.
Interest on fixed income securities is recorded in net investment income when earned and is adjusted for the amortisation of any purchase premium or discount. Dividends on equity securities are recognised as investment income on the ex-dividend date.
Realised gains and losses on sales are included in earnings and are calculated using the specific identification method.
Other invested assets include deposits and time deposits, investments in affiliated companies, investments in equity accounted companies, investment real estate, derivative financial instruments, collateral receivables, securities purchased under agreement to resell, and investments without readily determinable fair value (including limited partnership investments). Investments in limited partnerships where the Group’s interest equals or exceeds 3% are accounted for using the equity method. Investments in limited partnerships where the Group’s interest is below 3% and equity investments in corporate entities which are not publicly traded are accounted for at estimated fair value with changes in fair value recognised as unrealised gains/losses in shareholder’s equity.
Derivative financial instruments and hedge accounting The Group enters into various financial contracts covering risks such as weather, weather-contingent price risks and outage contingent power price risks that are accounted for as derivative financial instruments. The Group also uses derivatives to manage exposure to foreign currency risks. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models, with changes in fair value recorded in income. If the derivative is designated as a hedge of the fair value of assets or liabilities, the fair value change of the hedged item is recognised in earnings, together with the changes in fair value of the derivative.
Business combinations The Group applies the acquisition method of accounting for business combinations. This method allocates the cost of the acquired entity to the assets and liabilities assumed based on their estimated fair values at the date of acquisition. The underlying assets and liabilities acquired are subsequently accounted for according to the relevant GAAP guidance. This includes specific requirements applicable to subsequent accounting for assets and liabilities recognised as part of the acquisition method of accounting, including goodwill and other intangible assets.
Premiums Property and casualty insurance and reinsurance premiums are recorded when written and include an estimate for written premiums receivable at period end. Premiums earned are generally recognised in income over the contract period in proportion to the amount of insurance and reinsurance provided. Unearned premiums consist of the unexpired portion of insurance and 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 insurance and 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 retrocession contracts are reported as assets in the accompanying consolidated balance sheet.
Receivables Premium and claims receivables which have been invoiced are accounted for at face value. Together with assets arising from the application of the deposit method of accounting that meet the definition of financing receivables they are regularly assessed for impairment. Evidence of impairment is the age of the receivable and/or any financial difficulties of the counterparty. Allowances are set up on the net balance, meaning all balances related to the same counterparty are considered. The amount of the allowance is set up in relation to the time a receivable has been due and financial difficulties of the debtor, and can be as high as the outstanding net balance.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, an update to subtopic 825-10, “Financial Instruments – Overall”. The ASU requires an entity to carry investments in equity securities, including partnerships, unincorporated joint ventures and limited liability companies at fair value through net income, with the exception of equity method investments, investments that result in consolidation or investments for which the entity has elected the measurement alternative. For financial liabilities to which the fair value option has been applied, the ASU also requires an entity to separately present the change in fair value attributable to instrument-specific credit risk in other comprehensive income rather than in net income. 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 will adopt ASU 2016-01 on 1 January 2018. It is expected that the adoption will not have a material impact on the Group’s financial statements.
In March 2016, the FASB issued ASU 2016-06, “Contingent Put and Call Options in Debt Instruments”, an update to topic 815, “Derivatives and Hedging”. This ASU clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call or put options solely in accordance with
the four-step decision sequence as defined in the implementation guidance issued by the Derivatives Implementation Group (DIG). The Group adopted ASU 2016-06 on 1 January 2017. The adoption did not have an impact on the Group’s financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses”, an update to topic 326, “Financial Instruments – Credit Losses”. ASU 2016-13 replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses. For financial instruments that are measured at amortised cost and available-for-sale debt securities, the standard requires that an entity recognises its estimate of expected credit losses as an allowance. The ASU is effective for annual and interim periods beginning after 15 December 2020. Early adoption for interim and annual periods after 15 December 2018 is permitted. The Group is currently assessing the impact of the new requirements.
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business”, an update to topic 805, “Business Combinations”. The amendments in this update clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments stipulate that when substantially all of the fair value of an integrated set of assets and activities (“set”) acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Group early adopted ASU 2017-01 on 1 July 2017. The adoption did not have an impact on the Group’s financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, an update to topic 350, “Intangibles – Goodwill and Other”. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognised assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its regular goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognise an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognised should not exceed the total amount of goodwill allocated to that reporting unit. The new requirements are effective for goodwill impairment tests in annual and interim periods beginning after 15 December 2020. Early application of the ASU is permitted. The Group is currently assessing the impact of the new requirements.
14 Swiss Re Corporate Solutions Ltd 2017 Annual Report 2 Information on business segments The Group provides innovative insurance capacity to mid-sized and large multinational corporations across the globe. Offerings range from standard risk transfer covers and multi-line programmes to customized solutions tailored to the needs of clients. The business segments are determined by the organisational structure and the way in which management reviews the operating performance of the Group.
The Group presents five core operating business segments: Property, Accident & Health, Other liability, Specialty and Credit.
In the year ended 2017, the Accident & Health segment and the Other liability segment are reported separately, replacing the previous Casualty segment. Accident & Health has increased since the IHC acquisition and is expected to continue to grow. Comparative information for 2016 has been adjusted accordingly.
Claims ratio in % 45.4 85.6 87.5 63.9 51.5 64.6 Expense ratio in % 36.6 28.1 26.6 35.0 53.6 34.7 Combined ratio in % 82.0 113.7 114.1 98.9 105.1 99.3
b) Gross premiums earned by geography Gross premiums earned by region for the years ended 31 December
North America 2 436 2 487 Latin America 398 489 Europe (including Middle East and Africa) 904 937 Asia-Pacific 304 337
18 Swiss Re Corporate Solutions Ltd 2017 Annual Report 3 Insurance information Premiums written and premiums earned For the years ended 31 December
Premiums written, thereof: Direct 3 056 3 279 Reinsurance 1 123 939 Ceded –517 –618
Reinsurance recoverable on unpaid claims As of 31 December 2016 and 2017, the Group had a reinsurance recoverable of USD 5 429 million and USD 5 458 million, respectively. The concentration of credit risk is regularly monitored and evaluated.
Reinsurance receivables Reinsurance receivables as of 31 December were as follows: Premium receivables invoiced 551 856 Receivables invoiced from ceded re/insurance business 109 126 Recognised allowance –24 –41
20 Swiss Re Corporate Solutions Ltd 2017 Annual Report 4 Unpaid claims and claim adjustment expenses A reconciliation of the opening and closing reserve balances for unpaid claims and claim adjustment expenses for the years ended 31 December is presented as follows: Balance as of 1 January 10 619 10 271 Reinsurance recoverable −6 182 –5 429
Incurred related to: Paid related to: Current year −493 –521 Prior year −1 345 –1 681
At the end of 2017, the Business Unit Corporate Solutions carried net reserves for US asbestos and environmental liabilities equal to USD 210 million. During 2017, Corporate Solutions incurred net losses of USD 3 million and paid net against these liabilities of USD 11 million.
Estimating ultimate asbestos and environmental liabilities is particularly complex for a number of reasons, relating in part to the long period between exposure and manifestation of claims and in part to other factors, which include risks and lack of predictability inherent in complex litigation, changes in projected costs to resolve and in the projected number of, asbestos and environmental claims, the effect of bankruptcy protection, insolvencies and changes in the legal, legislative and regulatory environment. As a result, the Group believes that projection of exposures for asbestos and environmental claims is subject to far less predictability relative to non-environmental and non-asbestos exposures. Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts and the current state of the law.
However, reserves are subject to revision as new information becomes available and as claims develop. Additional liabilities may arise for amounts in excess of reserves, and the Group’s estimate of claims and claim adjustment expenses may change. Any such additional liabilities or increases in estimates cannot be reasonably estimated in advance but could result in charges that could be material to operating results.
Claims development information and information on reserves for claims relating to insured events that have occurred but have not yet been reported or not enough reported (“IBNR”) is presented by the five core operating business segments (“disaggregation categories”). In 2017, the Accident & Health segment and the Other liability segment are reported separately, replacing the previous Casualty segment (please refer to Note 2). Amounts shown are net of external retrocession and ceded re/insurance contracts to affiliated companies within the Swiss Re Group, but outside the Swiss Re Corporate Solutions Group. Claims development information and information on IBNR reserves are shown on a nominal basis, also for cases where the Group discounts claim liabilities from acquisition accounting.
SRCS was incorporated in 2011 and started operations in 2012. Corporate Solutions as a separately managed business unit likewise started operations in 2012 after the transfer of Swiss Reinsurance Company Ltd’s investment in SRCS in 2012 to the Swiss Re Group holding company, Swiss Re Ltd. Therefore, six accident years and reporting periods are shown for the Group. Claims arising from older accident years prior to 2012 are shown as a reconciling item in ”All liabilities before 2012” in the claims development tables. All but an immaterial portion of these claims arise from accident years older than 10 years and therefore are out of the required range of disclosure.
Some of the information provided in the following tables is treated as Required Supplementary Information (RSI) under US GAAP. Therefore, it does not form part of these consolidated audited financial statements. Claims development information for all periods except the current reporting period and any information derived from it – including average annual percentage payout of claims incurred – is considered RSI and is identified as RSI in the tables presented. This section of the note provides claims development information on an accident year basis.
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. 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 (see also separate section ’Asbestos and environmental claims exposure’ on page 21).
Liabilities for claims and claim adjustment expenses, net of reinsurance 1 770
Accident years 2012 and 2016 are impacted primarily by development on large losses from natural catastrophes in Asia and North America, as well as a large man-made loss in North America. Negative IBNRs can be a feature for claims arising from Property exposure, due to overstated case reserves.
Accident year 2017 was significantly impacted by hurricane activity in North America, wildfires in California and an earthquake in Mexico.
Accident & Health was impacted by the IHC Risk Solutions, LLC (IHC) acquisition in reporting year 2016. There was an increase in expected losses and changes in the accident year split for accident year 2016. The liabilities before 2012 relate mainly to accident years 2006 and prior.
Other liability Incurred claims and allocated claim adjustment expenses, net of reinsurance
Liabilities for claims and claim adjustment expenses, net of reinsurance 2 345
A subsidiary of the Group maintains an adverse development cover protecting all lines of business for accident years 2007 and prior for which the recoverable is recorded in Other liability. This leads to the net negative reserve amount in “All liabilities before 2012”.
Liabilities for claims and claim adjustment expenses, net of reinsurance 77
Net outstanding liabilities Corporate Solutions: Property 1 770 Accident & Health 958 Other liability 2 345 Specialty 785 Credit 77
Total net undiscounted outstanding liabilities excluding other short duration contract lines 5 935 Impact of acquisition accounting –117
30 Swiss Re Corporate Solutions Ltd 2017 Annual Report 5 Deferred acquisition costs (DAC) As of 31 December, the DAC were as follows: Opening balance as of 1 January 387 444 Deferred 571 553 Effect of acquisitions/disposals and retrocessions 2 Amortisation –513 –549 Effect of foreign currency translation –1 4
6 Investments Investment income Net investment income by source was as follows: Fixed income securities 117 130 Equity securities 16 7 Short-term investments 6 7 Other current investments 11 9 Share in earnings of equity-accounted investees 19 48 Cash and cash equivalents 2 3 Net result from deposit-accounted contracts 5 6
Realised gains and losses Realised gains and losses for fixed income securities, equity securities and other investments were as follows: Fixed income securities available-for-sale: Gross realised gains 27 17 Gross realised losses –14 –7
Equity securities available-for-sale: Gross realised gains 79 97 Gross realised losses –27 –4
Other-than-temporary impairments –10 –4 Net realised investment gains/losses on trading securities 1 –1 Net realised/unrealised gains/losses on other investments 1 –4 Net realised/unrealised gains/losses on insurance-related activities 15 12 Foreign exchange gains/losses –23 –1
For securitised products, a cash flow projection analysis is conducted by integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecasted economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and the present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 1 743 9 –11 1 741 US Agency securitised products 117 –1 116 States of the United States and political subdivisions of the states 425 4 –7 422 Canada 176 –11 165 Brazil 104 1 105 Australia 62 –1 61 Other 204 1 –9 196
Equity securities available-for-sale 335 55 –6 384 2017 Amortised cost Gross unrealised Gross unrealised Estimated USD millions or cost gains losses fair value
Maturity of fixed income securities available-for-sale The amortised cost or cost and estimated fair values of investments in fixed income securities available-for-sale by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2016 and 2017, USD 1 495 million and USD 1 694 million, respectively, of fixed income securities available-for-sale were callable.
As of 31 December 2016 and 2017, securities of USD 1 458 million and USD 1 916 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. There were no associated liabilities.
Gross amounts of Net amounts of financial Related financial 2016 recognised Collateral set-off liabilities presented instruments not set-off USD millions financial liabilities in the balance sheet in the balance sheet in the balance sheet Net amount
Derivative financial instruments – assets 22 22 22 Reverse repurchase agreements 97 97 –97 0
Total 1 963 29 64 11 2 027 40 Corporate debt securities 654 11 1 0 655 11 Mortgage- and asset-backed securities 159 2 159 2
36 Swiss Re Corporate Solutions Ltd 2017 Annual Report 7 Fair value disclosures Fair value, as defined by the Fair Value Measurements and Disclosures Topic, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
features. Where market data is not available, valuations are developed based on the modelling techniques that utilise observable inputs and option-adjusted spreads and incorporate considerations of the security’s seniority, maturity and the issuer’s corporate structure.
Values of mortgage and asset-backed securities are obtained both from third-party pricing vendors and through quoted prices, some of which may be based on the prices of comparable securities with similar structural and collateral features. Values of certain asset-backed securities (ABS) for which there are no significant observable inputs are developed using benchmarks to similar transactions or indices. For both residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), cash flows are derived based on the transaction-specific information, which incorporates priority in the capital structure, and are generally adjusted to reflect benchmark yields, market prepayment data, collateral performance (default rates and loss severity) for specific vintage and geography, credit enhancements and ratings. For certain RMBS and CMBS with low levels of market liquidity, judgements may be required to determine comparable securities based on the loan type and deal-specific performance. CMBS terms may also incorporate lock-out periods that restrict borrowers from prepaying the loans or provide disincentives to prepay and therefore reduce prepayment risk of these securities, compared to RMBS. The factors specifically considered in valuation of CMBS include borrower-specific statistics in a specific region, such as debt service coverage and loanto -value ratios, as well as the type of commercial property. Mortgage and asset-backed securities also includes debt securitised by credit card, student loan and auto loan receivables. Pricing inputs for these securities also focus on capturing, where relevant, collateral quality and performance, payment patterns and delinquencies.
The category “Other invested assets” includes the Group’s private equity funds investments which are made via ownership of funds. The Group’s holdings in private equity funds are generally valued utilising net asset values (NAV), subject to adjustments, as deemed necessary, for restrictions on redemption (lock-up periods and amount limitations on redemptions). These investments are included under investments measured at net asset value as a practical expedient.
Assets Fixed income securities held for proprietary investment purposes 1 741 3 186 4 927
Impact of Accounting Standards Updates1 –12 –12 0 Realised/unrealised gains/losses: Included in net income 16 16 4 4 Included in other comprehensive income 0 0
Purchases 4 4 0 Issuances 0 –65 –65 Sales –11 –11 95 95 Settlements –1 –1 –2 –2 Transfers into level 32 0 0 Transfers out of level 32 0 0 Impact of foreign exchange movements 0 0
Closing balance as of 31 December 13 0 13 –74 –74 1 Impact of ASU 2015-07. Please refer to Note 1 of the 2016 Annual Report. 2 Transfers are recognised at the date of the event or change in circumstances that caused the transfer.
Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) for the years ended 31 December were as follows: Gains/losses included in net income for the period 20 12 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date 16 22
Sensitivity of recurring level 3 measurements to changes in unobservable inputs The significant unobservable inputs used in the fair value measurement of the Group’s weather contracts are risk margin, correlation, volatility and index value. Where the Group has a long position, a significant increase (decrease) in the risk margin input in isolation would result in a significantly higher (lower) fair value measurement. Where the Group has a long volatility or correlation position a significant increase (decrease) in the correlation and volatility inputs would result in a significantly higher (lower) fair value measurement. Where the Group has a long index position, an increase (decrease) in the index value input in isolation would result in a significantly higher (lower) fair value measurement. Where the Group has a short position, a significant increase (decrease) in the risk margin input in isolation would result in a significantly lower (higher) fair value measurement. Where the Group has a short volatility or correlation position a significant increase (decrease) in the correlation and volatility inputs would result in a significantly lower (higher) fair value measurement. Where the Group has a short index position, an increase (decrease) in the index value input in isolation would result in a significantly lower (higher) fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Group’s power outage contracts are risk margin and average power forward price. A significant increase (decrease) in these inputs in isolation would result in a significantly lower (higher) fair value measurement.
Assets and liabilities not measured at fair value but for which the fair value is disclosed As of 31 December 2016 and 2017, the subordinated financial debt issued by the Group was valued at USD 490 million and USD 519 million, respectively. The debt position is fair valued based on executable broker quotes and is classified as a level 2 measurement.
Fair values and notional amounts of derivative financial instruments As of 31 December, the fair values and notional amounts of the derivatives outstanding were as follows: 2016 Notional amount assets/liabilities
Derivatives not designated as hedging instruments Foreign exchange contracts 391 6 –1 5 ECM/Weather contracts/ILW 1 106 16 –76 –60 Credit contracts 700 –13 –13
The notional amounts of derivative financial instruments give an indication of the Group’s volume of derivative activity and are presented without set-off. The fair value assets are included in “Other invested assets” and the fair value liabilities are included in “Accrued expenses and other liabilities”.
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” in the income statement. The gains and losses of derivative financial instruments not designated as hedging instruments for the years ended 31 December were as follows: Derivatives not designated as hedging instruments Foreign exchange contracts –4 14 ECM/Weather contracts/ILW 16 10 Credit contracts –4
Maximum potential loss The maximum potential loss as of 31 December 2016 and 2017 was approximately USD 22 million. The maximum potential loss is based on the positive market replacement cost assuming non-performance of all counterparties.
9 Acquisitions Bradesco Seguros, S.A. On 3 July 2017, the Group and Bradesco Seguros, S.A. (Bradesco) entered into a partnership combining the large Commercial Risk business of Bradesco with Swiss Re Corporate Solutions Brasil Seguros S.A. (SRCSB). Upon closing this transaction, SRCSB became one of the leading insurers in the commercial large-risk insurance market in Brazil. The acquisition cost was BRL 210 million paid in cash and 40% shares of SRCSB. The transaction includes Bradesco’s related operations, its team of experts and a business portfolio, including existing, new and renewal business.
44 Swiss Re Corporate Solutions Ltd 2017 Annual Report 10 Debt The Groupʼs debt as of 31 December was as follows: Long-term subordinated financial debt 497 497
Long-term debt In 2014, Swiss Re Corporate Solutions Ltd issued a 30-year subordinated fixed rate resettable callable loan note with a first optional redemption date on 11 September 2024 and a scheduled maturity in 2044. The note has a face value of USD 500 million, with a fixed coupon of 4.5% per annum until the first optional redemption date.
At 31 December 2017, the tax rate includes a tax benefit of USD 15 million from US tax reform impact. The impact is included within the change in statutory rate component of the tax rate reconciliation. The benefit arises from revaluing the US deferred tax assets and liabilities to the new US statutory tax rate of 21% (from 35%).
Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows: Deferred tax assets Deferred acquisition costs 36 21 Income accrued/deferred 19 7 Unearned premium reserve 66 42 Technical provisions 23 21 Benefit on loss carryforwards 28 229 Currency translation adjustments 37 24 Other 47 32
Gross deferred tax assets 256 376 Valuation allowance –7 –11 Unrecognised tax benefits offsetting benefits on loss carryforwards –1 –2
For the year ended 31 December 2017, there were USD 18 million net operating losses and net capital losses of nil utilised.
Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: Balance as of 1 January 8 5 Reductions for tax positions of prior years –1 –1 Statute expiration –1 Settlements –1
As of 31 December 2016 and 2017 the amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 5 million and USD 4 million, respectively.
48 Swiss Re Corporate Solutions Ltd 2017 Annual Report 12 Benefit plans SRCS is a wholly owned subsidiary of Swiss Re Ltd. Swiss Re Ltd is the ultimate parent company of the Swiss Re Group. SRCS and its subsidiaries participate in various pension plans sponsored by affiliated companies of the Swiss Re Group. These pension plans include the “Pension Fund Swiss Reinsurance Company (Swiss Re)“ among others.
13 Related parties The Group assumes and cedes certain re/insurance contracts from/to affiliated companies within the Swiss Re Group, but outside the Group. The Group also conducts various investing activities, including derivatives, with affiliated companies in the Swiss Re Group. In addition, the Group enters into various arrangements with affiliated companies in the Swiss Re Group for the provision of services. These activities result in the following related party transactions on the income statement and balance sheet: Revenues Gross premiums written 163 137
Liabilities Unpaid claims and claim adjustment expenses 294 283 Unearned premiums 131 108 Funds held under reinsurance treaties 713 652 Reinsurance balances payable 146 269 Accrued expenses and other liabilities 125 137
50 Swiss Re Corporate Solutions Ltd 2017 Annual Report 14 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 investment vehicles, which meet the definition of a VIE.
Investment vehicles The Group’s variable interests in investment partnerships arise through ownership of the limited partner interests. Many investment partnerships are VIEs because the limited partners as a group lack kick-out or participating rights. The Group does not hold the general partner interest in the limited partnerships and therefore does not direct investment activities of the entity. Therefore, the Group lacks power over the relevant activities of the vehicles and, consequently, does not qualify as the primary beneficiary. The Group is exposed to losses when the values of the investments held by the investment vehicles decrease. The Group’s maximum exposure to loss equals the Group’s share of the investment.
The Group is a passive investor in structured securitisation vehicles issuing residential and commercial mortgage-backed securities (RMBS and CMBS, respectively) and other asset-backed securities (ABS). The Group’s investments in RMBS, CMBS and other ABS are passive in nature and do not obligate the Group to provide any financial or other support to the issuer entities. By design, RMBS, CMBS and ABS securitisation entities are not adequately capitalised and therefore considered VIEs. The Group is not the primary beneficiary, because it does not have power to direct most significant activities. These investments are accounted for as available-for-sale as described in the investment note and not included in the tables below.
The following table shows the Group’s assets and maximum exposure to loss related to VIEs in which the Group held a variable interest but was not the primary beneficiary as of 31 December: USD millions Total assets Maximum exposure to loss1 Total assets Maximum exposure to loss1 1 Maximum exposure to loss is the loss the Group would absorb from a variable interest in a VIE in the event that all of the assets of the VIE are deemed worthless.
Other matter Accounting principles generally accepted in the United States of America require that the supplementary information based on the requirements of ASU 2015-09, Disclosures about Short-Duration Contracts, on pages 24 to 28 be presented to supplement the consolidated financial statements. Such information, although not part of the consolidated financial statements, is required by the Financial Accounting Standards Board, which considers it an essential part of financial reporting for placing the consolidated financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the consolidated financial statements and other knowledge we obtained during our audit of the consolidated financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Key audit matter Investment valuation continues to be an area with inherent risk for certain level 2 and 3 investments that have unobservable or interpolated inputs. The risk is not the same for all investment types and is greatest for those listed below. These investments are more difficult to value because quoted prices are not always available and valuation requires unobservable or interpolated inputs and complex valuation models: Fixed income securitised products Fixed income mortgage and asset-backed securities Derivatives
On the basis of the work performed, we consider that the methodology, methods, assumptions and underlying data used in the valuation of actuarially determined P&C loss reserves are reasonable and in line with financial reporting requirements and accepted industry practice.
Premiums earned increased 4% to CHF 2 798 million in 2017 (2016: CHF 2 684 million), due to general growth mainly in credit & surety and non-life disability, partially offset by lower premiums in marine. Excluding the effects of foreign exchange movements, premiums earned increased by 4%.
Claims and claim adjustment expenses increased by 76% to CHF 2 666 million in 2017 (2016: CHF 1 622 million). The increase was mainly due to several large natural catastrophe losses, partially offset by release of equalisation provision. Excluding the effects of foreign exchange movements, claims and claim adjustment expenses increased by 75%.
In 2017, the Company released the equalisation provision of CHF 183 million. There was no change in 2016.
Investment result Net investment result amounted to CHF 56 million, compared to CHF 119 million in the prior year.
Result from other income and expenses The decrease in the result from other income and expenses was due to lower foreign exchange gains compared to prior year, mainly due to the weakening of the US dollar against the Swiss franc.
Assets Total assets increased by 20% to CHF 9 466 million at 31 December 2017 (31 December 2016: CHF 7 906 million). Excluding the effects of foreign exchange movements, total assets increased by 22%.
Total investments increased from CHF 5 555 million at 31 December 2016 to CHF 5 769 million at 31 December 2017, driven by higher reinsurance business volume and the capital contribution from Swiss Re Ltd, partially offset by the pre-funding of large natural catastrophe claims with the US subsidiary and the ordinary cash dividend to Swiss Re Ltd.
Liabilities Total liabilities increased by 26% to CHF 7 814 million at 31 December 2017 (31 December 2016: CHF 6 202 million). Excluding the effects of foreign exchange movements, total liabilities increased by 29%.
The decrease resulted from the ordinary cash dividend of CHF 150 million and the net loss for 2017 of CHF 904 million, largely offset by a capital contribution from Swiss Re Ltd of CHF 1 002 million on 1 November 2017.
Outlook The three major hurricane events of 2017 led to rate hardening for both loss-affected accounts, and to a lesser extent for loss-free accounts during the January 2018 renewals. Capital abundance in traditional reinsurance has been reduced, and alternative capital will require additional funds from investors to operate at the same level as before the hurricane losses. In 2018, advanced markets non-life reinsurance premium growth will likely reflect a hardening of rates and slightly stronger nominal growth in the primary market. Demand should also be supported by new solvency regulations: non-life reinsurance has become more attractive for European insurers under Solvency II, since it better reflects the risk mitigating effect of reinsurance.
Investments Strategy and priorities Financial investments are managed in accordance with Swiss Re‘s asset management policy and the Company’s investment guidelines, which are intended to ensure compliance with regulatory requirements. The general principle governing investment management in the Company is the creation of economic value on the basis of returns relative to the liability benchmark, while adhering to the investment guidelines and the general prudence principle. The liability benchmark is determined by approximating an investable benchmark from projected liability cash flows. A cash benchmark is used for the economic surplus.
Outlook In terms of the economic outlook, the moderate global growth environment is set to continue during 2018, both in developed and emerging market economies, while inflation is forecast to modestly increase globally. From a regional perspective, growth is set to stay solid in the Eurozone and the US where it is supported by expected improvements in US corporate earnings from the recently passed tax reform legislation, while growth for China is expected to slow somewhat in 2018. For the UK, growth is expected to be more modest amid continued Brexit-related uncertainty.
The Group CRO is appointed as the principal independent risk controller of Swiss Re. The Group CRO is a member of the Group EC and reports directly to the Group CEO as well as to the Board’s Finance and Risk Committee. The Group CRO also advises the Group EC, the Chairman or the respective Group Board Committees, in particular the Finance and Risk Committee, on significant matters arising in his area of responsibility. The Group CRO leads the independent Risk Management function, which is responsible for risk oversight and control across Swiss Re. It thus forms an integral part of Swiss Re’s business model and risk management framework. The Risk Management function comprises risk teams for legal entities and regions as well as central teams that provide specialised risk expertise and oversight.
Legal entity risk teams of the Company and its subsidiaries are led by dedicated CROs who reports directly or indirectly to their top-level entity CRO (Company CRO), who reports directly to the Group CRO, with a secondary reporting line to the Company CEO. These legal entity CROs are responsible for risk oversight in their respective legal entities, as well as for establishing the proper risk governance to ensure efficient risk identification, assessment and control.
The central teams support the CROs at Group and legal entity levels in discharging their oversight responsibilities. They do so by providing services, such as: ̤ Financial risk management ̤ Specialised risk category expertise and accumulation control ̤ Risk modelling and analytics ̤ Regulatory relations management ̤ Maintaining the central risk governance framework
Investments 2 Investment income 183 124 Investment expenses –20 –13 Allocated investment return –44 –55 Investment result 119 56
Investments Investments in subsidiaries and affiliated companies 1 438 1 513 Fixed income securities 730 1 168
Provisions for profit commissions gross 3 35 50 Equalisation provision gross 3 183 0 Total technical provisions gross 5 481 6 711
Non-technical provisions Tax provisions 6 1 Provision for currency fluctuation 39 0 Other provisions 52 43 Total non-technical provisions 97 44
Liabilities from derivative financial instruments 0 16 Reinsurance balances payable 3 62 480 Other liabilities 41 60 Accrued expenses 13 16 Subordinated liabilities 508 487
Time period The financial year 2017 comprises the accounting period from 1 January 2017 to 31 December 2017.
Fixed income securities are measured at their amortised cost for the first time in 2017. Until the year-end 2016, fixed income securities were carried at cost, less necessary and legally permissible depreciation observing valuation rules prescribed by the Swiss Financial Market Supervisory Authority FINMA. The effect of this change as of 1 January 2017 was CHF 2 million.
Assets in derivative financial instruments Assets in derivative financial instruments are accounted based on the lower of cost or market principle.
Funds held by ceding companies Funds held by ceding companies consist mainly of assets that belong to the Company but are withheld by the cedent due to regulatory or legal requirements, or to retain control over investments and reduce a potential credit risk. Assets are initially measured based on the consideration received. Subsequently the funds held by ceding companies are measured at the consideration received or market value of the underlying assets.
Intangible assets Intangible assets, consisting of capitalised development costs for software for internal use, are measured at cost less straight-line amortisation over the estimated useful life of the software.
Other assets Other assets include deferred expenses on retroactive reinsurance policies, which are amortised through earnings over the expected claims-paying period.
Liabilities assumed and consideration provided in connection with portfolio transactions are established through the respective lines in the income statement. The initial recognition of assumed outstanding claims is recorded as change in unpaid claims, with the consideration being recognised as negative claims paid. The assumption of the provision for unearned premiums is recorded through the change in unearned premiums, with the respective consideration accounted as premiums written. The initial set up of assets and liabilities in respect of retroactive treaties with external counterparties is accounted as a balance sheet transaction.
Investment expenses Subsidiaries and affiliated companies – – – – Fixed income securities – – –1 –1 Equity securities – – – 0 Loans – – – – Shares in investment funds – – – – Short-term investments – – 0 0 Other investments – – 0 0 Investment management expenses –12 – – –12 Investment expenses –12 0 –1 –13
Investment expenses Subsidiaries and affiliated companies – – – – Fixed income securities – –3 –1 –4 Equity securities – – –1 –1 Loans – – – – Shares in investment funds – – – – Short-term investments – – 0 0 Other investments – – 0 0 Investment management expenses –15 – – –15 Investment expenses –15 –3 –2 –20
Provisions for profit commissions 35 – 35 50 – 50 Equalisation provision 183 – 183 – – –
Retained earnings brought forward Net result for the financial year Total Shareholder’s equity
Allocation to voluntary profit reserves – – 250 – –250 – Allocation to retained earnings – – – –72 72 – Dividend for the financial year 2015 – – –240 – – –240 Net result for the year – – – – 176 176
8 Security deposits To secure the technical provisions at the 2017 balance sheet date, securities with a value of CHF 484 million (2016: CHF 453 million) were deposited in favour of ceding companies. There were no security deposits to external third parties in 2017 and 2016.
First Specialty Insurance Corporation United States Jefferson City 100% 100% North American Capacity Insurance Company United States Manchester 100% 100% North American Elite Insurance Company United States Manchester 100% 100% North American Specialty Insurance Company United States Manchester 100% 100% Washington International Insurance Company United States Manchester 100% 100% Westport serviços e participações Ltda Brazil São Paulo 100% 100%
The Palatine Insurance Company Ltd United Kingdom London 100% 100% Swiss Re Specialty Insurance (UK) Ltd United Kingdom London 100% 100% Swiss Re International SE Luxembourg Luxembourg 100% 100%
Flint Hills Insurance Agency, LLC United States Overland Park 100% 100% Swiss Re Accident and Health Risk Solutions, LLC United States Delaware 100% 100% Swiss Re Corporate Solutions Global Markets Inc United States New York 100% 100% Westport Insurance Corporation United States Jefferson City 100% 100% First Specialty Insurance Corporation United States Jefferson City 100% 100% North American Capacity Insurance Company United States Manchester 100% 100%
North American Elite Insurance Company United States Manchester 100% 100% North American Specialty Insurance Company United States Manchester 100% 100% Washington International Insurance Company United States Manchester 100% 100% Swiss Re Frankona Maria-Theresia-Straße GbR Germany München 6% 6% Westport serviços e participações Ltda Brazil São Paulo 100% 100% Swiss Re Corporate Solutions Brasil Seguros S.A. Brazil São Paulo 100% 100%
In order to comply with the Swiss Code of Obligations, dividends paid in foreign currencies must meet the capital protection requirements in CHF. In addition, maximum amounts in CHF must be approved by the Annual General Meeting. The Board of Directors proposes to set this maximum amount to CHF 60 million, which shall be funded from the disposable result as in the tables below.
Retained earnings brought forward 8 14 Net result for the financial year 176 –904 Disposable result 184 –890 Allocation to voluntary profit reserves –170 – Retained earnings after allocation 14 –890
Voluntary profit reserves after proposed allocation of legal reserves from capital contributions and after cash dividend 46 891 1 The translation into CHF at spot rate on the settlement date may result in a lower cash dividend by a respective amount on the settlement date. 2 The 2016 figure was recalculated based on the final cash dividend, converted into CHF at spot rate on the settlement date.
Report of the statutory auditor on the financial statements As statutory auditor, we have audited the financial statements of Swiss Re Corporate Solutions Ltd (the ‘Company’), which comprise the income statement, balance sheet and notes (pages 60 to 71) for the year ended 31 December 2017.
Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the Company’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control system. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Investment valuation continues to be an area with inherent risk for investments with no observable market price. The risk is not the same for all investment types and is greatest for derivatives, where the investments are more difficult to value because quoted prices are not always available.
In particular, loss reserves for ‘long tail’ lines of business (for example, the Liability, Motor Liability and Workers’ Compensation portfolios) are generally more difficult to project. This is due to the protracted period over which claims can be reported as well as the fact that claim settlements are often less frequent but of higher magnitude. They are also subject to greater uncertainties than claims relating to ‘short-tail’ business. Long-tailed lines of business generally rely on many assumptions based on experts’ judgement.
In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Testing the completeness and accuracy of underlying data utilised by the Company’s actuaries in estimating P&C loss reserves.
The impairment assessment is considered a key audit matter due to the considerable judgement in the valuation model and inputs applied.
̤ Engaging our internal valuation specialists to assist in the testing of key assumptions and inputs.
Any of the foregoing factors, developments and trends could have an adverse effect on the Group’s investment results, which in the current low interest rate environment and soft (albeit hardening) insurance cycle could have a material adverse effect on the Group’s overall results, make it difficult to determine the value of certain assets in the Group’s portfolio, make it more difficult to acquire suitable investments to meet its risk and return criteria and otherwise have a material adverse effect on its business and operations.
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 United Kingdom and the European Union 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.
In addition, regulatory changes could occur in areas of broader application, such as competition policy and tax laws. Changes in tax laws, for example, could increase the taxes the Group pays, the attractiveness of products offered by the Group, the Group’s investment activities and the value of deferred tax assets. Any number of these changes could apply to the Group and its operations. Recently enacted changes to the US tax regime is prompting the Group to consider modifications to its operating model for its US business. These changes, or inconsistencies between the various regimes that apply to the Group, could increase the costs of doing business (including due to increased capital requirements), reduce access to liquidity, limit the scope of current or future business or affect the competitive balance, or could make insurance less attractive to primary insurers.
The Group’s exposure to interest rate risk is primarily related to the market price and cash flow variability associated with changes in interest rates. In general, a low interest rate environment, such as the one experienced in recent years, poses significant challenges to the insurance industry, with earnings capacity under stress unless lower investment returns from fixed income assets can be offset by lower combined ratios or higher returns from other asset classes. 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.
The Group could also be adversely affected by the insolvency of, or other credit constraints affecting, counterparties in its insurance operations. Moreover, the Group could be adversely affected by liquidity issues at clients or at third parties to whom the Group has retroceded risk, and such risk could be exacerbated to the extent any such exposures are concentrated.
Risks relating to credit rating downgrades Ratings are an important factor in establishing the competitive position of insurance companies. Third-party rating agencies assess and rate the financial strength of 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.
The Group is also involved, from time to time, in investigations and regulatory proceedings, which could result in adverse judgements, settlements, fines and other outcomes. The number of these investigations and proceedings involving the financial services industry has increased in recent years, and the potential scope of these investigations and proceedings has also increased, not only in respect of matters covered by the Group’s direct regulators, but also in respect of compliance with broader business conduct rules, including those in respect of market abuse, bribery, money laundering, trade sanctions and data protection and privacy. Aggressive tax enforcement is becoming a higher priority for many tax authorities, and the Group also is subject to audits and challenges from time to time by tax authorities, which could result in increases in tax costs, changes to internal structures and interest and penalties. Tax authorities may also actively pursue additional taxes based on retroactive changes to tax laws. The Group could be subject to risks arising from alleged, or actual, violations of any of the foregoing, and could also be subject to risks arising from potential employee misconduct, including non-compliance with internal policies and procedures and malfeasance, such as undertaking or facilitating cyber attacks on internal systems. Substantial legal liability could materially adversely affect the Group’s business, financial condition or results of operations or could cause significant reputational harm, which could seriously affect its business.
Deterioration in market conditions could have an adverse impact on assumptions used for financial reporting purposes, which could affect possible impairment of present value of future profits, fair value of assets and liabilities, deferred acquisition costs or goodwill. Moreover, regulators could require the use of standard models instead of permitting the use of internal models. To the extent that management’s estimates or assumptions prove to be incorrect, it could have a material impact on underwriting results (in the case of risk models) or on reported financial condition or results of operations, and such impact could be material.
While further changes to the overall Swiss Re Group structure may not have a financial statement impact on a Swiss Re Group consolidated basis, they would impact the Group to the extent that operations are transferred into or from the Group, or as a result of intra-group transactions (from the perspective of the Swiss Re Group) to the extent the Group is a counterparty to any such transactions.
Swiss Re Corporate Solutions Ltd Mythenquai 50/60 P.O. Box 8022 Zurich Switzerland