Targets Our Group financial targets are focused on profitability and economic growth (see page 15).
We aim to meet these targets on an ‘over-the-cycle’ timeframe, thus setting a long-term goal without being distorted by outlying years.
Our Group delivered a good net income of USD 3.6 billion, supported by all Business Units.
Return on equity in %1 13.7 10.6 Return on investments in % 3.5 3.4 Net operating margin in %2 17.1 13.0
Property & Casualty Reinsurance Net income attributable to common shareholders4 3 008 2 100 –30
Combined ratio in %4 93.2 101.1 Net operating margin in %4 14.1 4.2 Return on equity in %1,4 15.5 6.0 Life Capital Net income attributable to common shareholders4,5 424 638 50 Premiums earned and fee income5 1 129 1 193 6 Gross cash generation6 543 721 33 Net operating margin in %4,5 17.8 27.0 Return on equity in %1,4,5 7.5 10.4 1 Return on equity is calculated by dividing net income attributable to common shareholders by average common shareholders’ equity. 2 Letter of credit fees of USD 55 million in 2015, thereof USD 45 million in Life & Health Reinsurance and USD 10 million in Property & Casualty Reinsurance, have been reclassified from “Operating expenses” to ”Interest expenses”.
Board of Directors 30 Group Executive Committee 31 Cautionary note 32 Contacts 34
A successful capital allocator We have been a successful capital allocator, using our knowledge-based approach to access the most attractive risk pools and target an optimal portfolio of assets and liabilities.
Corporate Solutions Corporate Solutions serves mid-sized and large corporations, with product offerings ranging from traditional property and casualty insurance to highly customised solutions. Corporate Solutions serves customers from more than 50 offices worldwide.
Life Capital Life Capital manages closed and open life and health insurance books. The Business Unit provides alternative access to the life and health risk pool, helping to generate stable returns and seize attractive new opportunities. For our clients and partners, it provides a primary insurance balance sheet, efficient policy administration services, life and health expertise and knowledge for reaching more markets and offering new products.
+700 At least 700 basis points greater than Swiss Re’s designated risk-free rate, currently ten-year US government bonds.
Net premiums earned and fee income by region (Total USD 33.2 billion)
Dear shareholders, 2016 was a year of profound changes. However, despite many difficulties, Swiss Re was able to stay on course and deliver good results. In brief: Property & Casualty Reinsurance and Life & Health Reinsurance have continued to generate sound returns. Our direct insurance unit Corporate Solutions faced a very difficult market environment, which is reflected in the results. Meanwhile, our newest Business Unit, Life Capital, which is still in development, had great success in integrating the acquired Guardian Financial Services portfolio in 2016.
̤ The shift in the monetary policies of major central banks, perhaps even a restructuring of the roles of these institutions
In my view, the geopolitical environment is becoming less predictable, with the UK’s vote to leave the EU (Brexit) and the US presidential election showing how wrong ‘conventional wisdom’ can be. Other geopolitical circumstances that have been taken as a given for years seem to now be in question. Those aspects include security alliances, European integration, global trade, even globalisation in general, and the international regulation of financial markets and their institutions, including insurance regulation — not to mention the place of liberal values and the recognition of human rights.
In the course of our 153 years of experience, we have shown an undisputed ability to operate successfully in ever-changing and highly challenging situations. Just think of the problems that our forerunners had to deal with in the 20th century alone. The organisation of the Group is set up in a way that we can operate as a local competitor in key markets — this has been the case not only recently, but for a very long time. Swiss Re has a strong footing in its markets and risk segments: we have experienced local staff across the globe, and a highly loyal client base in virtually every country in the world. Few competitors can offer anything similar.
To a large extent this is already possible thanks to our investment in this very flexibility in recent years, as demonstrated by the organisation of our two Business Units Corporate Solutions and Life Capital.
In addition to all these strategic challenges, we also need to address the price cycle in the Property & Casualty Reinsurance markets. Our Group CEO, Christian Mumenthaler, and the CEOs of the individual Business Units, will address this in greater detail in this Annual Report. The Board of Directors supports the long-term underwriting policy of the Group Executive Committee, the partial withdrawal from conventional business that does not meet our pricing standards, and the stronger focus on larger individual transactions, which are of great strategic importance for the clients concerned. We monitor the performance of these individual transactions very carefully over their entire life cycle.
Let me end with some personnel announcements. We are pleased to be able to propose the election of Jay Ralph, Joerg Reinhardt and Jacques de Vaucleroy to the Board of Directors at our upcoming Annual General Meeting. We believe their international experience and diverse backgrounds will be an important asset for Swiss Re. On behalf of my colleagues, I would like to thank Carlos E. Represas, who has decided not to stand for re-election after serving on the Board since 2010.
̤ offer our clients and partners research-based assistance, providing sound support for their business decisions.
Swiss Re is rapidly evolving. Christian Mumenthaler explains his vision for the future.
A Swiss Re has a large amount of risk knowledge on topics such as pandemics, nuclear pools and natural catastrophes. Our teams have a deep understanding of medical indications, biometric trends and political risk. We may think that is normal, but it is not — it sets Swiss Re apart. The Swiss Re Institute is an evolution to structure our knowledge and deploy this strength to our clients. We are transitioning into a risk knowledge company that invests into risk pools with long-term growth potential.
A Risk pools are the original risks, both people and goods, that can be insured. With global GDP growth, these pools are growing, especially in high growth markets, and this trend is likely to continue. The question is: who will insure these risks? As a reinsurer, we only access a fraction of the risk through our clients, so building access to risk pools is a key part of our strategy. One way is through Corporate Solutions, which has direct access to commercial clients. Another way is through Life Capital, where we are targeting the retail life risk pool. All of Life Capital’s activities, from ReAssure buying inforce books, to insuring pools of individuals with elipsLife and building up iptiQ as a very lean insurance company, create access to this risk pool.
The personal digital assistant is going to make rational decisions for them, based on their individual behaviours and situation. They will advise, recommend, select and purchase directly — that’s my digital assistant hypothesis. This, combined with simplified processes and more cost-effective offers, will help close the protection gap.
Q Swiss Re’s vision is to make the world more resilient. What does that mean in reality?
A Every claim we pay for a family who lost somebody helps them to continue a more or less normal life — financially at least. Every payment in P&C helps to
“ We are transitioning into a risk knowledge company that invests into risk pools with longterm growth potential.”
Christian Mumenthaler Group Chief Executive Officer rebuild something that has been destroyed. One of the most visible examples in 2016 were the Canadian wildfires. They lasted for a long time and there was uncertainty about the damage, but we worked very closely with our customers in Canada, making payments as fast as possible so they could start the reconstruction. Every bit helps, but we have more work to do. For instance in Italy, a country I know very well for family reasons, only about 1% of residential buildings are insured against earthquakes and most of the destruction we saw in 2016 was not covered.
Strategic ambition ̤ Formulate a strategy for building resilience and sustainable value
Business planning ̤ Execute capital allocation to liability & asset risk portfolios
Over time Swiss Re has been an agile capital allocator and we are continuing to steer capital toward lines of business where the outlook is most positive and pruning in lines where trends are unfavourable.
One way to achieve growth in a challenging reinsurance market is through large and tailored transactions, where margins are seen as more favourable. We can also achieve growth by getting closer to policyholders, such as corporate customers of Corporate Solutions and life and health policyholders through Life Capital. Finally we are increasing our presence in high growth markets, where we expect substantial, long-term growth.
Economic net worth (ENW) per share 10% growth per annum per share, using year-end ENW plus dividends, divided by prior year-end ENW.
Making the world more resilient means protecting our customers against the difficulties and hardships that life inevitably brings. Here are some examples of the way we help people around the world.
A new parametric insurance programme for China has the potential to transform the way public authorities prepare for disasters.
Swiss Re is closing health gaps in an ageing world and contributing to the prevention of global health crises.
Today, there’s enormous potential for change in our industry (see box, page 21).
And for insurers that set out on a different path, the payoff can be more than simply finding new revenue streams — they can expand the reach of insurance and build a more resilient future.
Technology is driving the biggest opportunities for change. Insurers can reach more consumers through their mobile devices. Mobile devices also help consumers reach their insurers — especially as their phones and tablets come to serve as their ‘digital advisors’, pointing them to the right products and services, such as which health insurance to buy.
Insurers who underwrite based solely on traditional insurance policy application forms will miss out on the deluge of data available to them. Think of sensors that can say where a car is located and how fast it’s going. Think of roads that can warn authorities when they’re congested and when they need repair. Think of the watch that tells you when your blood pressure is too high or when you’re getting drowsy. Then think of the interaction of all these things and imagine the impact they could have on reducing motorway accidents and fatalities. This is only one scenario across the universe of activities where insurers are the ultimate risk-taker: health, trade, construction and more.
The combination of emerging and existing technologies will have an impact on the whole of society. Risk pools will shift — perhaps from driver to manufacturer, for example, in the case of the autonomous car. New technologies will create new opportunities, while at the same time they will also make some current offerings of the insurance industry obsolete.
With CatNet®, clients can see risk exposure across the globe — quickly and easily. CatNet® is browser-based, ready to use and available free of charge for Swiss Re’s clients.
Even more complex technologies underlie some of our products, such as parametric solutions that employ satellites to monitor weather data and provide quick payouts (see page 22). We are also working with IBM Watson’s cognitive computing technologies, with the eventual aim of developing an industry-wide range of solutions to transform underwriting processes.
Toward a digital future: Swiss Re has run more than 500 case studies on digital products and applications over the last three years.
In combination, these technologies are expected to have an impact on the whole of society — and insurers will not be excluded.
Digital analytics and cognitive computing can aid in: ̤ Simplifying and/or accelerating underwriting
Digital advisors could buy insurance for the consumer, integrating: ̤ New distribution channels (eg, online retailers and social media)
Quicker recovery The payout was the first from an innovative Swiss Re-led parametric insurance programme for China launched in 2016. The programme has the potential to transform the way public authorities prepare for disasters, and thus to make the world more resilient.
The pioneering models, which stem from a close and fruitful collaboration with Chinese authorities and regulators, aim to increase both urban and rural resilience, and bear testimony to the flexibility of this kind of insurance tool. In these solutions, parameters such as cyclone wind speed or rainfall amounts can trigger policy claims. This makes the process quicker as it no longer relies on surveys and lengthy damage assessments, as in more traditional insurance schemes.
Scaleable and replicable The goal of the models, developed with a pool of local insurers, is to pave the way for other scaleable and replicable public private partnership schemes, including in other large countries with a comparable diversity of environments.
6 teams Global Partnerships, Property Underwriting, Agro, Cat Perils, Client Market and Legal in Zurich, New York, Singapore and Beijing.
In 2016 Guangdong Provincial and Heilongjiang Provincial Governments signed the largest natural disaster insurance program in China, designed and reinsured by Swiss Re. As impressive as that may sound, it does not even come close to reflecting the knowledge, talent, hard work, engagement and collaboration that went into this project to make it work.
Teamwork and commitment For this initiative, Swiss Re combined significant resources in product design, modelling and underwriting from multiple specialty teams in Zurich, New York, Singapore and Beijing. The cross-functional team undertook massive research in conjunction with prominent think tanks and lobbied senior officials at both ministerial and provincial levels. They have been through a journey of stress, challenge, negotiation, excitement, hardship, misery, despair and finally achievement — and reward — well beyond the average experience of normal insurance and reinsurance professionals. The outcome is not only a successful pilot for new business models for Swiss Re in China and across the region, but also a model in developing our talent in high growth markets.
Team effort: Employees at Swiss Re’s Beijing office working to build resilience
Insurers commonly observe a large shortfall between the total losses caused by a catastrophe, such as an earthquake or flood, and the amount that is actually compensated by insurance. The difference is referred to as a ‘protection gap’ — a gap where insurance could have helped, but wasn’t used or wasn’t available. The gap is not only confined to property: today, billions of people are either uninsured or underinsured for health risks. Swiss Re is working to close this protection gap, too.
Preventing a global crisis In 2014, an outbreak of Ebola virus in West Africa claimed thousands of lives and caused widespread disruption mainly in Guinea, Liberia, and Sierra Leone. The epidemic also left many survivors with severe post-recovery symptoms, including pain and neurological issues. The crisis exposed how ill-prepared the world is to respond to deadly disease outbreaks.
Sadly, pandemic risk is only rising due to population growth, increased mobility and environmental and climate change. This is a dangerous and global health protection gap where we are putting our knowledge and expertise to work.
The PEF is scheduled to pay when an outbreak meets a predetermined threshold, such as the number of deaths or infections in a given time. This will allow funds to reach affected countries in as little as ten days, avoiding lengthy contractual delays and other bureaucratic hurdles. In this way, the PEF is intended to prevent a potentially serious outbreak from becoming a larger international crisis.
To do our part, we are looking at innovative ways to care for seniors, increase adoption of healthier lifestyles and, in the long run, encourage healthy ageing.
In a world increasingly ruled by data and constant streams of information, individuals can self-monitor their lifestyles. Our sector, and especially life and health insurers, is seizing the opportunity to better cover and protect policyholders.
The Swiss Re Foundation’s 2016 “Entrepreneurs for Resilience Award” focused on our ageing population and ways to help people live more independently and longer at home.
The winner was SimpleTherapy, whose invention addresses gradual musculoskeletal deterioration, an issue that affects many elderly people and often results in falls, expensive hospital visits, and even fatal injuries. Physical therapy can help, but it is expensive, and often involves leaving the house for specific appointments. SimpleTherapy offers an online platform that uses artificial intelligence to assess patient needs and enables them to exercise anywhere and anytime by watching a personalised and adaptive rehabilitation video. It then adapts exercises based on user feedback, essentially inviting a virtual “physiotherapist” into the user’s living room.
In third place were Care.com — a company that, through the “virtual assistance” of a pet avatar, engages patients and health providers to discuss health issues — and Kompaï, which developed an assistant robot to help the elderly, both in-home and in assisted living facilities.
The award program involves a financial grant of CHF 800 000 from the Swiss Re Foundation and, depending on the initiative’s nature, scope and needs, non-financial contributions from Swiss Re employees such as coaching and technical advice. The award is divided between the winner and the runners-up.
Changes in 2016 At the Annual General Meeting on 22 April 2016, Sir Paul Tucker was elected as new non-executive and independent member of the Board of Directors for a one-year term of office. At the same time, the shareholders re-elected Walter B. Kielholz (Chairman), Raymond K.F. Ch’ien, Renato Fassbind, Mary Francis, Rajna Gibson Brandon, C. Robert Henrikson, Trevor Manuel, Philip K. Ryan, Carlos E. Represas and Susan L. Wagner for a one-year term of office as members of the Board of Directors. Mathis Cabiallavetta, Hans Ulrich Maerki and Jean-Pierre Roth did not stand for re-election.
From left to right: Raymond K.F. Ch’ien, C. Robert Henrikson, Susan L. Wagner, Renato Fassbind, Walter B. Kielholz, Philip K. Ryan, Mary Francis, Trevor Manuel, Rajna Gibson Brandon, Carlos E. Represas, Sir Paul Tucker 30 Swiss Re 2016 Business Report
̤ the outcome of tax audits, the ability to realise tax loss carryforwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings; ̤ the possibility that the Group’s hedging arrangements may not be effective; ̤ the lowering or loss of financial strength or other ratings of one or more Group companies, and developments adversely affecting the Group’s ability to achieve improved ratings; ̤ the cyclicality of the reinsurance industry; ̤ uncertainties in estimating reserves; ̤ uncertainties in estimating future claims for purposes of financial reporting, particularly with respect to large natural catastrophes, as significant uncertainties may be involved in estimating losses from such events and preliminary estimates may be subject to change as new information becomes available; ̤ the frequency, severity and development of insured claim events; ̤ acts of terrorism and acts of war; ̤ mortality, morbidity and longevity experience; ̤ policy renewal and lapse rates; ̤ extraordinary events affecting the Group’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events; ̤ current, pending and future legislation and regulation affecting the Group or its ceding companies and the interpretation of legislation or regulations by regulators; ̤ legal actions or regulatory investigations or actions, including those in respect of industry requirements or business conduct rules of general applicability; ̤ changes in accounting standards; ̤ significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions; ̤ changing levels of competition; and
Head office Swiss Re Ltd Mythenquai 50/60, P.O. Box, 8022 Zurich, Switzerland Telephone +41 43 285 2121 Fax +41 43 285 2999 34 Swiss Re 2016 Business Report
Photography: Geri Krischker (p. 4, 30, 31) Marc Wetli (p. 8, 10, 11) Amanda Zheng (p. 25) All other images provided by Getty Images and Shutterstock
The 2016 Annual Report is also available in German. The web version of the 2016 Annual Report is available at: reports.swissre.com
Combined ratio in %2,4 85.7 93.5 Net operating margin in %2,4 22.5 15.4 Return on equity in %1,4 22.4 16.4 Life & Health Reinsurance Net income attributable to common shareholders4,5 968 807 –17 Premiums earned and fee income5 10 616 11 527 9 Net operating margin in %2,4,5 12.2 10.4 Return on equity in %1,4,5 16.2 12.8 Corporate Solutions Net income attributable to common shareholders4 357 135 –62
The global economy and financial markets 16 Group strategy 24 Group results 26 Group underwriting 28 Group investments 30 Summary of financial statements 34 Reinsurance 36 Property & Casualty Reinsurance 38 Life & Health Reinsurance 40 Corporate Solutions 42 Life Capital 46 Share performance 50
Group financial statements 164 Notes to the Group financial statements 172 Report of the statutory auditor 276 Group financial years 2007–2016 280 Swiss Re Ltd 282
The challenges for the coming years must not be underestimated, but our strategic priorities are clear, and we are well-positioned to thrive, shape the industry, and provide our clients with proficient and loyal support even in rocky times. It is a privilege to have worked for so long with many of our clients, in some cases for over 100 years now. Day after day, our clients motivate us to put our convictions into practice and strive to make the world more resilient on a shared and sustainable basis.
The only consolation is that we have a strong pipeline of talent to draw from. Edouard Schmid, currently Head Property & Specialty Reinsurance, is the ideal candidate to take on the role, especially due to his strong underwriting background in various lines of business across Reinsurance and Corporate Solutions, in catastrophe modelling and in a number of markets. He was also a key contributor in developing Insurance Linked Securities. I have every confidence that Edouard Schmid will succeed in the role and we wish Matthias Weber all the best for the future.
Many thanks to you, valued shareholders, for your support and for placing your confidence in us to lead your company successfully into the future.
The Swiss Re Institute — research, knowledge and expertise set us apart We aim to shape, anticipate and understand the future; with research, knowledge and expertise, we can offer our clients added value that helps them succeed. To keep expanding our leading position as a ‘risk knowledge company’ and strengthen this competitive advantage, we have created the Swiss Re Institute — a very important milestone when it comes to preparing Swiss Re for the future. In the Swiss Re Institute, we are pooling our extensive research and development activities and will ̤ coordinate our diverse projects and research activities more efficiently ̤ put our research and development to targeted use for forward-looking capital allocation; ie, use our research even more effectively to aid decisions about the risks in which we want to invest, and
A The current environment is challenging. There is nothing we can do to completely avoid these challenges, but we are prepared for them. We see low economic growth around the world in a low interest rate environment, persistent pricing pressure on the Property & Casualty side and political uncertainties in many regions. But we still had a good performance in 2016 and that shows the strength of our franchise.
A It was the first full year for our newest Business Unit, Life Capital, opening up many opportunities to grow in life and health. Even though Corporate Solutions had a challenging year, we made progress with our growth strategy: we bought IHC Risk Solutions in the US, opened an office in Kuala Lumpur, obtained an insurance license in Hong Kong, and signed an agreement with Bradesco Seguros, which will make us a leading commercial large-risk insurer in Brazil once the joint venture transaction is closed. In Reinsurance, large and tailored transactions continued to support growth.
accumulating knowledge and data. This is now even more important than in the past, because pure capital is, and will stay, plentiful. I am convinced that proprietary risk knowledge creates competitive advantage. In Reinsurance, our major strength is clearly the access we have to our clients’ C-suite, our financial strength and how we use knowledge to help clients grow. In Corporate Solutions, our knowledge helps us do better underwriting and select better risks. And for Life Capital, it’s the deep knowledge we have around biometric risk, paired with efficient technology-led systems and processes that focus on clients.
A IptiQ is a tool we put in the hands of insurance companies who are, for example, seeking access to markets. These clients want to profit from our technology and knowledge, but distribute products under their brand. We are not competing with our clients. Actually, we are supporting them.
A I think the long-term trends for the industry are positive. Insurance penetration is still low in many parts of the world, especially in high growth markets but also in industrialised countries. We are keen to close these protection gaps, which have different root causes. A first gap is where insurance is not available at all. In those regions, we work with governments or local institutions to insure people. The second gap is where insurance is available but people cannot afford it. In these areas, penetration is going up quite quickly and we support our insurance clients with our products. The third gap — the largest in terms of GDP impact — is in industrialised countries, where insurance is available and people can afford it but are still not buying it. California earthquake insurance is a good example: less than 12% of homeowners have insurance against earthquakes even though they are a major risk in the region.
A Every claim we pay for a family who lost somebody helps them to continue a more or less normal life — financially at least. Every payment in P&C helps to rebuild something that has been destroyed. One of the most visible
Swiss Re delivered a Group net income of USD 3.6 billion, supported by a continued solid underwriting performance and a strong investment result.
Global economy The US economy barely grew in the first half of 2016 but recovered in the third quarter as the dual headwinds of the impact of low oil prices on energy investments and of the strong dollar on exports abated. The Eurozone continued to grow at a moderate pace, supported by a weak euro. Germany and Spain were among the stronger performers, while growth in France and Italy remained lacklustre. Growth in the UK remained robust even in the aftermath of the Brexit referendum result in June, defying expectations of a slowdown. The Japanese economy continued to muddle along.
Interest rates Monetary policy in the major advanced markets remained accommodative in 2016. Given worries about China, Brexit and weak capital investments in the energy sector, the Fed delayed hiking US interest rates until December, when it increased its policy rate by 25 basis points. In contrast, the European Central Bank (ECB) lowered interest rates further into negative territory and expanded its asset purchase programme. The Bank of Japan (BoJ) continued its asset purchases and shifted its policy focus towards keeping 10-year government bond yields close to 0%. The Bank of England reacted to the political uncertainty resulting from the Brexit vote by cutting rates to 0.25%. Some emerging market central banks, including those of Brazil, Russia and India, also lowered interest rates during 2016.
German 10-year government bond dropped into negative territory and yields in many other markets reached new lows, too, after the Brexit vote. Yields recovered towards the end of the year, supported by the election of Donald Trump which fostered expectations of higher growth, inflation and fiscal deficits in the United States. The US 10-year yield ended the year at 2.4%, roughly unchanged from a year earlier. Other yields were mostly lower at the end of 2016. The German yield was 0.2% (down from 0.6% at end 2015), the UK yield 1.2% (vs 2.0%) and the Japanese yield 0.0% (vs 0.3%).
Stock market performance Market jitters in China, declining oil prices and worries about the stability of European banks caused a sharp decline in equity markets at the beginning of the year. As of February, equity markets started recovering along with rising oil prices and stabilising growth in China, supported by continued expansionary monetary policy. The Brexit vote caused
Currency movements The UK’s vote to exit the European Union was the key driver behind the British pound’s weakening. It ended the year 16% lower against the US dollar. Despite the BoJ’s monetary expansion the Japanese yen strengthened during the first half of the year, ending the year up 3% against the US dollar. The euro (–3%) and the Swiss franc (–2%) ended the year slightly weaker against the US dollar.
Economic and political risks affecting re/insurers The balance of risks to the economic outlook is tilted to the downside. Growth in China remains heavily dependent on government stimulus and credit expansion. Also, some emerging markets are viewed as vulnerable to rising interest rates in the US, with policy tightening leading to capital outflow.
Economic indicators 2015–2016 USA Eurozone UK Japan China 1 Yearly average 2 Year-end 3 USD per 100 units of foreign currency
Political instability has the potential to undermine economic growth and derail the projected modest global recovery. Increased anti-globalisation sentiment and immigration issues bolstered the Brexit vote and boosted support for populist politicians like Donald Trump in the US and Marine Le Pen in France. In addition, ongoing geopolitical tensions around the world, most notably in Ukraine, the Middle East and parts of Southeast Asia, are a serious impediment to economic growth. These developments are likely to continue to shape the political risk environment next year.
� Reduced market liquidity � Increased cost/reduced availability of credit � Capital flight/bank runs
Market overview The global non-life industry generated around USD 2 100 billion of premium income in 2016, of which 20% came from emerging markets. Non-life insurance ranges from standardised motor and household insurance to sophisticated tailor-made liability and property covers, including specialty commercial and industrial risk insurance.
Underwriting results in Japan and Australia, the largest mature markets in Asia Pacific, have been mixed. In Japan, overall underwriting results deteriorated, reflecting mainly higher natural catastrophes due to the Kumamoto earthquake and higher losses in auto insurance. Underwriting performance in Australia improved. By line of business, deteriorating liability and motor segment results were offset by improvements in property risk (homeowners, fire and industrial special risks).
Investment returns for primary non-life insurers remain under pressure as average yields are stalling and operating cash flows are weak. The investment environment remains challenging for fixed income securities, the main asset class in insurance, with low yields and exposure to mark-to-market losses when interest rates rise again. Portfolio yields are close to bottoming out, but even with market rates forecast to rise, insurers’ running yields will improve only gradually. For 2016, investment returns in non-life are estimated to have been about 9.5% of net premiums earned, down from 10.3% in 2015. Overall industry profitability has declined with return on equity (ROE) estimated to be 6% in 2016, down from around 8% in 2015 and 10% in 2014.2
Outlook The global economic outlook for 2017 and 2018 is for moderate growth. With respect to primary non-life insurance, the emerging markets will be the main driver with an estimated strong improvement to 6%–7% premium growth in real terms expected in 2017 and 2018. Real growth in advanced markets is expected to slow slightly next year since macroeconomic conditions will improve only modestly.
Primary non-life 2 100 Market size in USD billions Estimated global premium income in 2016 4% Market performance Estimated global premium growth in 2016 1 Based on an aggregated sample of large European insurers active in Germany, France, the UK, Italy, Spain, Switzerland and the Nordic countries.
2 The calculation of the industry average profitability is based on data for the following eight leading non-life insurance markets: Australia, Canada, France, Germany, Italy, Japan, the UK and the US.
Market performance Non-life reinsurance premium growth was stagnant in US dollar terms. Revenue growth was strongly constrained by soft reinsurance market conditions and weak premium growth in the primary market (see above).
In contrast, the industry saw a fifth year of strong, albeit lower, underwriting results amidst an absence of large natural catastrophe losses. Preliminary data indicate a combined ratio of around 93%–94% for 2016. However, this does not reflect underlying underwriting profitability, because natural catastrophe losses have been lower than anticipated and the claims ratio has been reduced by positive reserve releases from redundant reserves for prior years’ claims.3 Excluding these factors, the underlying combined ratio would be around 99% for 2016.
In the low-investment yield environment, underwriting results remain the main profit driver for non-life reinsurers. The industry achieved a meagre 3.5% in its average annualised investment yield in 2016. Nevertheless, based on the strong underwriting results, an overall ROE of around 9% was achieved for non-life reinsurance for 2016, down from 12% in 2015.
Comparing capital and premium developments in non-life reinsurance shows that premiums — as a proxy for insured exposures — have roughly traced capital development since 2009. Capital growth has been managed increasingly via dividend payments and share buy-back programmes.
One important source of capital in the non-life reinsurance segment and a contributor to the softening of the market has been the expansion of alternative capacity (AC) into the peak risk segment of the industry. By the end of 2016, aggregate AC amounted to USD 61 billion (excluding retrocession), equivalent to an 18% share of the global property catastrophe market. In the broader context of the overall non-life reinsurance market, however, the market share of AC is less than 2%.
Outlook Real premium growth in the non-life reinsurance sector is expected to increase in 2017, based on higher cessions from emerging markets. Advanced markets’ premium growth will reflect a moderation in rate pressures and slowing growth in the primary market. Demand will likely be supported by new and stronger solvency regulations.
Market overview The global life insurance industry generated about USD 2 600 billion in premium income in 2016, of which 18% came from emerging markets. Around 85% of premium income in life insurance derives from savings and retirement products. The protection business, which covers mortality and morbidity risks and represents the balance of the market, has a declining share of premium income.
Market performance Global life insurance premium income increased by 4% in US dollar terms as well as in real terms in 2016.
In mature markets, real premium income growth is estimated to have slowed to 2% in 2016 from 3.4% in 2015. Growth continued to decline in the US, the UK and most Continental European markets, and premiums grew at a slower pace in Canada and Japan. In Australia, premium income contracted again, following robust growth in 2015, the weakness stemming mainly from volatility in investment-linked products as well as poor performance of disability and income protection products.
Life insurance is a long-term business and new business is an important contributor to industry growth. In the US, sales of term insurance products increased 2% in the first half of 2016, while sales of disability insurance improved at a stronger 5%. In Canada, term sales recovered modestly (up 2%) in the first half of 2016, following solid growth of 7% in 2015.
The protection business in the UK is growing again after a long period of contraction. In the first half of the year, protection sales rose by 4% following three consecutive years of declining premiums. In Germany, term sales grew by 2% in the first two quarters of the year, while sales of disability products grew by 4%. Long-term care insurance sales in Germany also improved. In Italy, protection sales are projected to have grown marginally.
Outlook There is significant potential for sales growth in mortality and health protection given the large protection gap in many markets and growing consumer awareness of the risks of underinsurance. Global real premium income is forecast to rise between 4% and 5% annually in 2017 and 2018, respectively. The major driver for the global life sector is expected to be the emerging markets, where stabilising growth, growing populations, urbanisation and a rising middle class underpin the positive outlook for insurers and insurance penetration.
Primary life 2 600 Market size in USD billions Estimated global premium income in 2016 4% Market performance Estimated global premium growth in 2016 22 Swiss Re 2016 Financial Report
Market overview The size of the global life reinsurance business was around USD 70 billion in 2016. Most (65%) of this stems from the US, Canada and the UK. Ceding companies from emerging markets accounted for only 14% of global demand. Life reinsurers are increasingly diversifying away from traditional mortality business.
The operating margin of the life reinsurance industry was 7% of revenues in 2016, slightly up from 2015, based on improvements in the underwriting results. The contribution from investments further declined, due to the ongoing low interest rate environment.
Reinsurance delivered net income of USD 2.9 billion, compared to USD 4.0 billion in 2015.
Property & Casualty Reinsurance contributed USD 2.1 billion in 2016, down from USD 3.0 billion in 2015. The current year’s performance demonstrated the benefit of continued solid underwriting against the backdrop of higher large losses and a lower contribution from positive prior-year development. The net operating margin was 15.4%, compared to 22.5% in 2015.
Corporate Solutions delivered net income of USD 135 million in 2016, compared to USD 357 million in 2015. The 2016 result was impacted by continued pricing pressure and large man-made losses. The net operating margin for Corporate Solutions was 4.2% and 14.1% for 2016 and 2015, respectively.
Life Capital, which includes ReAssure (formerly Admin Re®) and, as of 6 January 2016, the operations formerly known as Guardian Financial Services (Guardian), reported net income of USD 638 million in 2016, compared to USD 424 million in 2015. The increase was driven by investment performance, mainly from the Guardian portfolio, and solid business performance. Life Capital’s net operating margin increased to 27.0% in 2016, compared to 17.8% for 2015.
Book value per common share increased to USD 105.93 or CHF 107.64 at the end of 2016, compared to USD 95.98 or CHF 96.04 at the end of 2015. Book value per common share is based on common shareholders’ equity and excludes non-controlling interests and the impact of contingent capital instruments.
Business performance Premiums earned and fee income for the Group totalled USD 33.2 billion in 2016, an increase of 10.0% from USD 30.2 billion in 2015. At constant exchange rates, premiums and fees rose by 12.1%, reflecting growth in selected markets and lines of business, often through large and tailored transactions.
Premiums earned by Property & Casualty Reinsurance amounted to USD 17.0 billion in 2016, an increase of 12.7% from USD 15.1 billion in 2015. The rise was driven by large and tailored transactions in the US and in Europe. The Property & Casualty Reinsurance combined ratio was 93.5% in 2016, up from 85.7% in 2015. The increase was mainly driven by a higher large loss burden, continued price softening and a lower contribution from positive prior-year development compared to 2015. The prior year also benefited from particularly benign natural catastrophe experience.
Corporate Solutions premiums earned were USD 3.5 billion for 2016, an increase of 3.7% compared to the previous year, driven by the acquisition of IHC Risk Solutions. The Corporate Solutions combined ratio was 101.1% in 2016, up from 93.2% in the previous year, primarily impacted by large man-made losses.
Gross cash generation for Life Capital amounted to USD 721 million in 2016, up from USD 543 million in 2015 despite the unfavourable impact of decreasing interest rates in the UK across the year.
The Group’s non-participating net investment income increased to USD 3.7 billion in 2016, compared to USD 3.4 billion in 2015, largely driven by net asset inflows. The Group reported non-participating net realised investment gains of USD 1.5 billion in 2016, compared to USD 1.2 billion in 2015, reflecting a positive impact from interest rate derivatives.
The Group reported a tax charge of USD 749 million on a pre-tax income of USD 4.4 billion for 2016, compared to a tax charge of USD 651 million on a pre-tax income of USD 5.3 billion for the same period in 2015. This translated into an effective tax rate in the current and prior-year reporting periods of 17.1% and 12.2%, respectively. The tax rate in 2016 was largely driven by benefits from the effective settlement of tax audits in certain jurisdictions and releases of valuation allowances on net operating losses, partially offset by tax on profits earned in higher tax jurisdictions. The lower tax rate in 2015 was largely driven by a tax benefit arising from a local statutory accounting adjustment for restructuring of subsidiaries and higher tax benefits from foreign currency translation differences between statutory and US GAAP accounts.
Net premiums and fees earned by business segment, 2016 (Total: USD 33.2 billion)
At Swiss Re, we believe that both superior bottom-up transactional underwriting and top-down capital allocation — or portfolio steering — are absolutely key. To be successful, we need to be able to forecast insurance lossrelevant developments. We therefore conduct research to understand, for example, economic, legal, political and societal changes, all of which are highly relevant for the assessment of casualty risks. We focus on identifying trend patterns related to natural catastrophes, cyber-threats, credit defaults, mortality or morbidity to better understand the potential for future losses for these perils. We apply advanced analytics to large amounts of data and work together with universities, government organisations, NGOs, consultants, investment management firms, law firms and many more. Findings related to loss, premium or exposure trends are used to underwrite individual risks and strategically allocate capital, both of which — if done well — create value for shareholders. The Swiss Re Institute will further strengthen and steer our R&D activities across the organisation.
The total life and health benefits increased from USD 8.0 billion in 2015 to USD 9.0 billion in 2016. The increase was mainly supported by large transactions in the US in early 2016, a large transaction won in Australia in 2015, other new business wins in Asia in 2016, partially offset by lower performance in the UK life and health portfolio.
Financial markets overview Financial markets continued to face high volatility throughout 2016, driven by monetary policy and political uncertainties. The year started in a “risk-off” mode on the back of continued oil price declines and China growth concerns, before recovering from February onwards. The improved sentiment was supported by the recovery in oil markets, improving US labour conditions, and stabilising growth in China. Having suffered persistent capital outflows since mid-2013, emerging markets started to enjoy inflows again from February onwards.
Core government bond yields fell further in the first half of the year, some into negative territory, and hit historic lows after the unexpected outcome of the vote in favour of “Brexit” in late June. Meanwhile, Donald Trump’s victory in the US presidential election in November led to a sharp repricing in financial markets, including higher bond yields due to rising inflation expectations. Meanwhile, uncertainty around trade barriers and other protectionist measures from the new US administration resulted in capital outflows from emerging markets.
The return on investments for 2016 was strong at 3.4%, with approximately 80% of the result attributable to net investment income and net realised gains from equities and alternative investments. This compared to 3.5% in 2015, with the decrease reflecting slightly lower investment-related net realised gains on an increased asset base in addition to the impact of lower reinvestment yields. The Group’s non-participating net investment income increased to USD 3.7 billion in 2016 compared to USD 3.4 billion in 2015, largely driven by net asset inflows. The Group’s fixed income running yield of 2.9% was lower than the fixed income running yield of 3.0% for 2015, driven by the continued impact of lower yields for most of the year, partially offset by a positive impact from the Guardian acquisition.
The Group reported non-participating net realised investment gains of USD 1.5 billion in 2016 compared to USD 1.2 billion in 2015, reflecting a positive impact from interest rate derivatives. The total return on investments was 5.3% for 2016 compared to being flat in 2015, reflecting the impact of credit spread tightening and declining interest rates in the UK over the year.
Outlook Similar to last year, the global outlook for 2017 remains one of moderate economic growth. In particular, advanced economies are expected to grow at a subdued pace of around 2% according to the latest International Monetary Fund (IMF) forecasts. While US economic growth may pick up due to the expected fiscal stimulus, the risks for Europe are skewed to the downside. Clearly, political uncertainty will remain high and will continue to be an important driver of financial market performance. Central bank policy divergence is also set to remain a key theme, with the Fed expected to raise interest rates further, while monetary policy from the ECB, the Bank of England, and the BoJ are likely to remain extremely accommodative. Finally, growth in emerging markets is forecast to accelerate somewhat, especially with Russia and Brazil exiting recession, while the structural trend of Chinese economic growth is likely to find a more sustainable level.
Against the backdrop of muted global growth and heightened political uncertainty, we will continue to seek to maintain a well-diversified and high-quality investment portfolio.
Net investment income in USD billion, 2016 (2015: USD 3.4 billion)
In December 2016, Swiss Re published the flagship report “Growth Recipes” as part of its Long-Term Investors’ series. The report proposes policy measures to strengthen private capital markets and support financial market resilience. It also puts forward a comprehensive policy agenda that includes unwinding central bank crisis policies in an orderly manner, concrete structural reforms and targeted fiscal stimulus in infrastructure with supporting innovative private market solutions.
In a world with a record-high level of debt, Swiss Re is also advocating risk-sharing sovereign bonds as an innovative financing solution. In particular, GDP-linked sovereign bonds would offer optionality for pay-outs and act as a countercyclical stabiliser. The pay-out of GDP-linked sovereign bonds would be driven by the actual GDP outcome with the coupon floored at zero similar to US Treasury Inflation-Protected Securities (TIPS). Governments would benefit from more fiscal flexibility, making the implementation of longerterm, growth-friendly policies easier. Positive public policy actions would feed through GDP-linked sovereign bonds and could therefore incentivise good government behaviour.
Building resilience through its own investments Through its investments, Swiss Re aims to generate sustainable and attractive risk-adjusted returns. This is entirely consistent with the idea of building resilience because sustainable sources of value would not be discernible without a clear view on the underlying drivers and risk factors. For this reason, Swiss Re integrates Environmental, Social and Governance (ESG) criteria as a key component of its investment process — a priority that is also reflected in being a PRI1 signatory since 2007.
Swiss Re continues to integrate ESG considerations across the entire investment portfolio. As a critical further step on that journey, best-in-class ESG benchmarks for credit and equity portfolios are being implemented. The adoption of ESG benchmarks is a natural development to support our main goal to generate long-term sustainable investment returns, allowing financial performance tracking relative to the ESG profile.
Europe % of global *Includes insurance companies, pension funds, sovereign wealth funds, endowments and foundations.
Source: IMF (GDP figures), Towers Watson, SR ER&C, Sovereign Wealth Funds Institute, Insurance Europe.
Income/loss attributable to non-controlling interests –3 3 – Net income after attribution of non-controlling interests 4 665 3 626 –22
Interest on contingent capital instruments –68 –68 0 Net income attributable to common shareholders 4 597 3 558 –23 1 Letter of credit fees of USD 55 million in 2015 have been reclassified from “Operating expenses” to “Interest expenses”.
Change in unrealised gains/losses on securities, net –2 670 1 711 – Change in other-than-temporary impairment, net of tax –8 6 – Change in foreign currency translation –1 012 –387 –62 Purchase/sale of treasury shares and shares issued under employee plans –521 –1 084 108 Other changes in equity –191 –126 –34 Total shareholders’ equity as of 31 December 33 517 35 634 6 Non-controlling interests 89 82 –8 Total equity as of 31 December 33 606 35 716 6 34 Swiss Re 2016 Financial Report
Strategy and priorities Differentiation is at the core of our strategy. That differentiation is built on deep understanding of our clients. We create that understanding through our advanced interaction model and by focusing on building applied knowledge that helps address the challenges our clients face. We continue to systematically allocate capital towards the risk pools that we expect will grow over the long term in both Property & Casualty (P&C) and Life & Health (L&H) Reinsurance. We believe that broad macro factors such as demographic changes and the expected rise in global GDP will continue to expand these risk pools. These factors work in addition to the significant global protection gap which already exists and which continues to offer opportunities today, especially in high growth markets, which are also an area of focus.“Differentiation is at the core of our strategy.”
The business generated in L&H Reinsurance remains strategically attractive for us because we see opportunity to deploy unique knowledge which addresses the needs of our clients in a differentiated way. New business continues to show attractive economic profit, while management of in-force business remains a key priority in delivering returns in line with our target. Our L&H portfolio has also been improved through greater product, duration, and geographic diversification.
Our risk knowledge company approach in these focus markets has enabled new product launches, including the largest disaster insurance programme in China’s Heilongjiang Province, and the opportunity to be the sole reinsurer of natural catastrophe risks for the economic hub of Guangdong Province, also in China.
We remain committed to developing a strong local talent base to identify opportunities and drive sustainable growth and fully engage with regulators and governments to address challenges faced in these markets. Our workforce in our focus markets has more than doubled since 2011.
We also prioritise internal efficiency. One example is our P&C Business Management Intelligence tool, which leverages big data techniques for claims management. Another is our L&H Underwriting Document Analytics capabilities, which automate content identification and extraction to streamline handling of non-digital and unstructured data inputs. Technology is a critical catalyst for change which we will continue to use in order to address the needs of our clients more effectively.
Performance Net income for 2016 was USD 2.1 billion. The result reflected solid underwriting, a higher large loss burden compared to last year and a lower contribution from positive prior-year development. The investment result was higher in 2016 than in 2015, mainly due to a positive impact from foreign exchange remeasurement.
2016 was impacted by various new large losses, notably wildfires in Canada, an earthquake in New Zealand and Hurricane Matthew. In addition, we strengthened our reserves for the New Zealand earthquakes in 2010 and 2011.
The underwriting result for 2016 was USD 1.1 billion, largely due to the higher large loss burden compared to 2015, a lower contribution from positive prior-year development, and the impact of more proportional business and more casualty business, both of which typically result in a higher combined ratio.
Net investment income 1 097 985 –10 Net realised investment gains/losses 445 770 73 Other revenues 45 37 –18
Expenses Claims and claim adjustment expenses –7 892 –10 301 31
Income before interest and income tax expense 3 751 2 890 –23 Interest expenses –272 –293 8 Income before income tax expense 3 479 2 597 –25
Claims ratio in % 52.3 60.5 Expense ratio in % 33.4 33.0 Combined ratio in % 85.7 93.5
Combined ratio P&C Reinsurance reported a combined ratio of 93.5% in 2016, compared to 85.7% in the previous year. The increase was mainly driven by a higher burden from large losses, less favourable prior-year development and continued price softening of the market.
Lines of business Property The property combined ratio increased to 86.6% in 2016, compared to 72.7% in 2015. 2016 was impacted by various large losses, whereas 2015 profited from an exceptionally benign natural catastrophe loss experience and a higher favourable prior-year claims experience.
Specialty lines The specialty combined ratio decreased to 77.8% in 2016, compared to 80.1% in 2015. 2015 included the impact of the explosion in Tianjin, China.
Net investment income decreased by USD 144 million to USD 892 million in 2016, mainly due to reduced income across government bonds and a lower level of equity-accounted income.
Insurance-related investment results as well as foreign exchange remeasurement are not included in the figures above.
Shareholders’ equity Common shareholders’ equity was USD 12.7 billion as of 31 December 2016 compared to USD 13.0 billion as of 31 December 2015. The decrease was primarily driven by dividends in the amount of USD 2.5 billion paid to Swiss Re Ltd, partly offset by net income for the period and the impact of foreign exchange movements. The return on equity for 2016 was 16.4% compared to 22.4% in 2015. The decrease was mainly due to lower net income in 2016.
Outlook While natural catastrophe property rates still experienced pressure due to relatively low loss occurrence and abundant capital in the markets, rate decreases have started to slow down. We deployed less natural catastrophe capacity and will continue to do so where price levels fall below our return hurdles. Specialty lines experienced rate pressure with notable differences by lines of business and markets. Casualty rates overall remained more stable with varying trends based on market and product.
47% Casualty 39% Property 14% Specialty 47% Property 39% Casualty 14% Specialty
Premiums earned by line of business, 2016 47% Property 39% Casualty 14% Specialty
Swiss Re is driving an industry-wide shift away from backward-looking to forwardlooking modelling (FLM) for casualty. FLM is about anticipating future business outcomes for the re/insurance industry in the light of changing economic, societal, and legal dynamics, without having to wait for claims to emerge.
Net operating margin The net operating margin for 2016 was 10.4%, compared to 12.2% in 2015. The current year was impacted by adverse experience in the UK and less favourable valuation adjustments compared to the prior year.
Lines of business Life The Life segment reported income before interest and income tax expense (EBIT) of USD 783 million for 2016, compared to USD 725 million for 2015. The prior year benefited from favourable mortality experience and recapture impact. The current period was mostly supported by favourable valuation updates, partially offset by adverse experience in the UK life portfolio.
Investment result The return on investments for 2016 was 3.6% compared to 3.4% in 2015, reflecting an increase in the investment result of USD 110 million.
Net realised gains were USD 184 million in 2016 compared to net realised gains of USD 85 million in 2015, which included losses on interest rate derivatives as well as a lower contribution from sales of fixed income securities.
Outlook We expect life and health reinsurance business to be relatively flat in mature markets and to increase in high growth markets.
In mature markets the prolonged low interest rate environment continues to have an unfavourable impact on primary sales. Cession rates in the US have decreased and have now generally flattened as primary insurers retain more risk. However, we see a strong focus on capital, risk and balance sheet optimisation in mature markets, leading to positive opportunities for large transactions.
Recent political instability has given rise to uncertainty for growth in many regions of the world that could last two years or more. Market volatility is increasing in the short-term, with uncertain impact on Swiss Re’s new business overall.
We believe high growth markets will continue to see strong increases in primary life and, in particular, health volumes, while cession rates are expected to be stable.
We will continue to pursue growth opportunities in high growth markets and in large transactions, including longevity deals. We are responding to the expanding need for health protection driven by ageing societies and we will apply our experience to help reduce the protection gap in all regions.
Magnum is another good example. This automated underwriting tool processes 30 000 applications for life and health insurance daily and is used as a point-ofsale device on more than 100 000 tablets in China today. Investing to create such tools sets us apart in the marketplace and builds lasting partnerships with clients that can use our support to further expand their business.
Investment in R&D also leads to tangible results. Our Behavioural Research Unit applies the lessons of behavioural economics to improve client and consumer outcomes. By re-framing the messages in one client’s renewal letter, for example, we helped drive a 33% relative reduction in lapses. In another test case we increased smoking disclosure by 14%. With the creation of the Swiss Re Institute, announced in late 2016, we expect this record of innovation to continue.
Corporate Solutions continued on its path of disciplined growth by expanding into primary lead and further broadening its footprint.
In October 2016, Corporate Solutions and Bradesco Seguros S.A. (Bradesco) signed an agreement under which Bradesco will contribute its commercial large-risk portfolio to Swiss Re Corporate Solutions Brazil Seguros S.A. (SRCSB), subject to regulatory approval. Upon closing the transaction, Bradesco will take a 40% equity stake in SRCSB, while Corporate Solutions will retain the remaining 60%. SRCSB will have exclusive access to Bradesco’s distribution network and will become a leading commercial large-risk insurer in Brazil.
Agostino Galvagni CEO, Corporate Solutions 42 Swiss Re 2016 Financial Report
Performance Net income was USD 135 million in 2016, compared to USD 357 million in 2015, with a net operating margin of 4.2%, down from 14.1%. The 2016 result was impacted by continued pricing pressure and large man-made losses, especially in casualty, offset by lower-than-expected natural catastrophe losses, income from investment activities and realised gains from insurance in derivative form.
Lines of business The property combined ratio for 2016 increased by 8.1 percentage points to 84.4%, mainly due to higher natural catastrophe losses, partially offset by lower large man-made losses compared to 2015.
In other specialty lines, the combined ratio for 2016 decreased by 10.2 percentage points to 99.4%, mainly due to lower aviation and satellite losses compared to 2015.
Net investment income 135 138 2 Net realised investment gains/losses 142 51 –64 Other revenues 9 5 –44
Income/loss attributable to non-controlling interests –2 2 – Net income attributable to common shareholders 357 135 –62
Corporate Solutions offers insurance protection against weather perils and other risks, which are accounted for as derivatives. Insurance in derivative form reported net realised gains of USD 16 million in 2016, compared to USD 33 million in 2015, reflecting a more challenging market in 2016.
Outlook Prices for commercial insurance are under significant pressure, with many segments operating at unattractive rate levels. Underwriting discipline remains a key focus for Corporate Solutions. Thanks to its value proposition, strong balance sheet and selective underwriting approach, Corporate Solutions is well positioned to successfully navigate the current market, but it is not fully insulated from the general market environment.
Corporate Solutions’ new Centre of Competence for Wind Power (CoCWP) helps make the world more resilient.
Many countries are committed to reducing carbon emissions, most recently under the 2015 Paris Agreement; consequently, the wind power market is growing rapidly.
Thierry Léger CEO, Life Capital 46 Swiss Re 2016 Financial Report
Revenues Premiums earned 715 694 –3 Fee income from policyholders 414 499 21 Net investment income – non-participating business 939 1 256 34 Net realised investment gains/losses – non-participating business 274 503 84 Net investment result – unit-linked and with-profit business 772 5 367 – Other revenues 1 1 –
Expenses Life and health benefits –1 068 –1 896 78 Return credited to policyholders –1 106 –5 060 – Acquisition costs –159 –63 –60 Operating expenses –365 –503 38 Total expenses before interest expenses –2 698 –7 522 179
Outlook Life Capital continues to pursue selective acquisition opportunities within the closed book market in EMEA and to grow its individual and group life and health business in Europe and the US. Life Capital seeks to optimise capital and asset management to maximise cash generation and return on equity. In the closed book business, the focus remains on achieving operational efficiencies by leveraging our operating platform, while in the open book business, the aim is to grow via innovation and the use of digital technology. Life Capital aims to generate significant cash while continuing to invest in its open book strategy.
Share performance way of a public share buy-back programme of up to CHF 1.0 billion purchase value to be executed before the 2018 AGM.
Index representation In addition to its relevant industry indices, Swiss Re is also represented in various equity indices, including the SMI and the SXIP. Swiss Re is also a member of various sustainability indices, including the Dow Jones Sustainability and FTSE4Good index families. In 2016, Swiss Re was named as the insurance industry sector leader in the Dow Jones Sustainability indices. This is the tenth time since 2004 that Swiss Re has led the insurance sector in these rankings.
Swiss Re shares Swiss Re had a market capitalisation of CHF 34.7 billion on 31 December 2016, with 360.1 million shares outstanding, of which 326.0 million are entitled to dividends. Swiss Re shares are listed in accordance with the International Reporting Standard on the SIX Swiss Exchange (SIX) and are traded under the ticker symbol SREN.
Share price performance Swiss Re shares opened the year at CHF 97.35 on 4 January 2016. The shares experienced an intra-day low of CHF 79.00 on 27 June 2016. An intra-day high of CHF 97.85 was achieved on 27 December 2016. The year-end share price was CHF 96.50.
Dividends are typically paid out of current earnings and Swiss Re pays its dividend annually. Shares are ex-dividend two working days after the Annual General Meeting (AGM).
Dividends The Board of Directors proposes a regular dividend of CHF 4.85 per share for 2016. As the tax privileged legal reserves from capital contributions were exhausted with the payment of the 2014 dividend, the dividend paid for 2016 will be subject to 35% Swiss withholding tax.
Public share buy-back programme The Board of Directors launched on 4 November 2016 the public share buy-back programme authorised by the AGM 2016. This programme was completed on 9 February 2017.
1 Swiss Re’s ADRs are not listed but traded over the counter; four ADRs correspond to one Swiss Re share
Weighting in indices As of 31 December 2016 Index weight (in %)
Key share statistics 2012–2016 of which Treasury shares and shares reserved for corporate purposes 27 537 673 28 511 298 28 507 491 32 967 2262 34 093 8343
Price per share year-end 65.90 82.05 83.65 98.15 96.50 Price per share year high (intra-day) 68.10 84.75 86.55 99.75 97.85 Price per share year low (intra-day) 47.25 66.10 69.25 74.95 79.00 Daily trading volume (in CHF millions) 58.00 78.00 95.00 134.00 120.00 Market capitalisation10 (in CHF millions) 24 430 30 417 31 010 36 385 34 747 ADR price at year-end (in USD) 72.30 92.38 84.57 24.5311 23.76 1 Nominal value of CHF 0.10 per share.
2 Includes 4.4m shares repurchased under the share buy-back programme launched on 12 November 2015, which concluded on 2 March 2016. 3 Includes 5.5m shares repurchased under the share buy-back programme launched on 4 November 2016, which concluded on 9 February 2017. 4 In addition to the regular dividend of CHF 3.50 per share a special dividend of CHF 4.00 per share was paid in 2013. 5 In addition to the regular dividend of CHF 3.85 per share a special dividend of CHF 4.15 per share was paid in 2014. 6 In addition to the regular dividend of CHF 4.25 per share a special dividend of CHF 3.00 per share was paid in 2015. 7 Dividend divided by year-end share price of corresponding year.
In 2016, Swiss Re’s capitalisation remained very strong. Our profound risk knowledge enables us to efficiently allocate capital and pursue controlled risk-taking.
Capitalisation During 2016, Swiss Re surpassed its target of deleveraging USD 4 billion since 2012, further strengthened its capital base with the issuance of innovative capital instruments and continued to direct excess capital from its Business Units to the Group’s holding company, Swiss Re Ltd. The Group’s Swiss Solvency Test ratio remains comfortably above Swiss Re’s adjusted respectability level of 220%, reflecting recent changes implemented by the Swiss Financial Market Supervisory Authority FINMA. Rating agencies A.M. Best, Moody’s and Standard & Poor’s (S&P) rated Swiss Re’s financial strength ‘superior,’ ‘excellent’ and ‘very strong’, respectively (see page 58).
Our overall goal for capital management is to maintain a capital structure that operates efficiently within the above constraints and maximises our financial flexibility. Our underwriting and investment decisions are steered to make capital and liquidity fungible to the Group wherever possible, while complying with local regulations and client needs. Cash dividends paid to the Group’s parent holding company, Swiss Re Ltd, totalled USD 18.8 billion since 2012.
Swiss Re established two further pre-funded subordinated debt facilities as part of the implementation of the target capital structure: ̤ a USD 400 million 15-year facility at an interest rate of 6.05% ̤ a USD 800 million 11-year facility at an interest rate of 5.625%.
Based on the Group’s capital strength, the Board of Directors propose a 2016 regular dividend of CHF 4.85 per share. In addition, the Board of Directors proposes a public share buy-back programme of up to CHF 1.0 billion purchase value, exercisable until the AGM in 2018.
The amount of liquidity held is largely determined by internal liquidity stress tests, which estimate the potential funding requirements stemming from extreme loss events. Based on these internal liquidity stress tests, we estimate that the Swiss Reinsurance Company Ltd liquidity pool, the primary liquidity pool of the Group, holds surplus liquidity.
Swiss Re’s risk profile in 2016 During 2016, Swiss Re’s overall risk remained stable at USD 19.5 billion (compared to USD 19.6 billion at the end of 2015), as a decrease in financial market risk was offset by higher life and health risk. Property and casualty risk and credit risk both remained broadly unchanged.
The decrease in financial market risk is mainly driven by lower equity risk. On the insurance risk side, our life and health risk increased due to the acquisition of a large block of in-force US term life business in the first quarter of 2016.
Risk Management is embedded throughout our business. For each Business Unit and major legal entities, we have dedicated Chief Risk Officers and other risk experts who analyse and challenge business decisions. They apply a consistent Enterprise Risk Management approach across the Group to ensure a fully integrated view of risk. The independence of the Business Unit CROs is maintained by a direct reporting line to the Group CRO.
Our proprietary integrated risk model provides a meaningful assessment of the risks to which the Group is exposed and represents an important tool for managing our business. It determines the capital requirements for internal purposes and forms the basis for regulatory reporting under the Swiss Solvency Test and under Solvency II for our legal entities in continental Europe.
̤ Reduction in vanilla subordinated debt of c. USD 1.7 billion ̤ Issuance of USD 2.9 billion of innovative capital instruments including USD 1.9 billion of pre-funded subordinated debt facilities at Swiss Re Ltd
1 Core capital of Swiss Re Group is defined as economic net worth (ENW). 2 Senior debt excluding non-recourse positions.
3 Unsecured LOC capacity and related instruments (usage is lower). 4 Includes subordinated debt facility by Swiss Re Ltd. 5 Senior debt plus LOCs divided by total capital. 6 Subordinated debt divided by sum of subordinated debt and ENW.
Achievements since year-end 2012 ̤ Letters of Credit reduction of USD 3 billion ̤ USD 4.3 billion net reduction in senior debt ̤ ReAssure GBP 550 million revolving credit facility ̤ ReAssure inaugural senior debt issuance of
Established funding platforms in all Business Units to fund ongoing capital and liquidity requirements
̤ Financial flexibility significantly strengthened due to deleveraging and issuance of innovative capital instruments
We have achieved our target capital structure to create a stronger, more flexible capital base.
During 2016, Swiss Re surpassed its target of deleveraging USD 4 billion since 2012, further strengthened its capital base with the issuance of innovative capital instruments and continued to direct excess capital from its Business Units to the Group’s holding company, Swiss Re Ltd.
Key milestones achieved in 2016 Swiss Re passed two important milestones to complete the full implementation of the target capital structure in 2016: Swiss Re Ltd established two further pre-funded subordinated debt facilities: the first in April 2016, a USD 400 million 15-year facility at an interest rate of 6.05% and the second in June 2016, a USD 800 million 11-year facility at an interest rate of 5.625%. These facilities bring the total amount of our contingent capital platform to around USD 4 billion, achieving our target of having roughly 10% of our total capital base in the form of innovative capital instruments, further enhancing the Group’s financial flexibility while increasing resilience.
External dividends to shareholders Based on the Group’s capital strength, the Board of Directors proposes a 5.4% increase in the 2016 regular dividend to CHF 4.85 per share, up from CHF 4.60 in 2015. In addition, the Board of Directors proposes a public share buy-back programme of up to CHF 1.0 billion purchase value, exercisable until the AGM in 2018. The programme will only be launched if excess capital is available, no major loss event has occurred, other business opportunities do not meet Swiss Re’s strategic and financial objectives and the necessary regulatory approvals have been obtained.
As of 31 December 2016 Financial strength rating Outlook Last update
The agencies evaluate Swiss Re based on a set of criteria that include an assessment of our capital adequacy.
On 15 December 2015, Moody’s affirmed Swiss Re’s insurance financial strength rating and outlook at “Aa3” stable. The rating reflects Swiss Re’s excellent market position, very strong business and geographic diversification and strong balance sheet in terms of capital and financial flexibility. Moody’s next rating affirmation will take place in the course of 2017.
Performance split of underwriting and investment activities EVM values insurance underwriting and investment activities separately. Underwriting activities create value by raising funds in insurance markets at a lower cost than through other sources. The investment functions are assessed on a risk-adjusted basis. This makes possible a like-for-like comparison of underwriting and investment activities.
Closed-book approach EVM recognises all cash flows associated with a new contract at inception, and any changes in estimates as they occur. In comparison, the deferral and matching principle under US GAAP postpones recognition of revenues until they are earned and matches expenses to those revenues. EVM excludes the recognition of all potential future new business activities, as well as potential renewals.
Performance measurement after capital costs EVM explicitly recognises opportunity costs for shareholder capital. Cost-of- capital charges include the base cost of capital and frictional capital costs. The base cost of capital is reflected through a charge for risk-free returns on available capital and market risk premiums. Market risk premiums compensate for systematic, non-diversifiable risk exposure, mainly assumed through investing activities. Frictional capital costs compensate for agency costs, costs of potential financial distress and regulatory (illiquidity) costs; they are reflected through a 4.5% charge on available capital and an average 2% charge on leverage.
Economic net worth in 2016 Economic net worth (ENW) is defined as the difference between the market Value of assets and the marketconsistent value of liabilities. ENW is the EVM measure of shareholders’ equity and the starting point in determining available capital for SST calculations.
Liquidity risk management Our core liquidity policy is to retain sufficient liquidity in the form of unencumbered liquid assets and cash to meet potential funding requirements arising from a range of possible stress events. To allow for regulatory restrictions on intra-Group funding, liquidity is managed within groups of entities known as liquidity pools. Swiss Re is served by four main liquidity pools representing the parent companies of the Group and each of the three Business Units. Each liquidity pool comprises the respective parent company and its unregulated subsidiaries whose funds are freely transferable to the parent company. The amount of liquidity held is largely determined by internal liquidity stress tests, which estimate the potential funding requirements stemming from extreme loss events. The funding requirements under stress include: ̤ cash and collateral outflows, as well as potential capital and funding support required by subsidiaries as a result of loss events; ̤ repayment or loss of all maturing unsecured debt and credit facilities; ̤ additional collateral requirements associated with a potential ratings downgrade; ̤ further contingent funding requirements related to asset downgrades; and
The stress tests also assume that funding from assets is subject to conservative haircuts, that intra-Group funding is not available if it is subject to regulatory approval, that no new unsecured funding is available, and that funding from new re/insurance business is reduced.
Composition of spot liquidity in the central liquidity pool as of 31 December 2016 Total USD 18.5 billion
Composition of one-year spot liquidity in the SRZ liquidity pool as of 31 December 2016 (Total USD 13.4 billion)
The primary liquidity stress test is based on a one-year time horizon, a loss event corresponding to 99% Tail Value at Risk (see pages 69–70), and a three-notch ratings downgrade.
Swiss Re’s liquidity stress tests are reviewed regularly and their main assumptions are approved by the Group Executive Committee. Swiss Re provides FINMA with a yearly report on its liquidity position, in accordance with FINMA’s circular 13/5,“Liquidity — Insurers.”
In 2016, the amount of surplus liquidity reduced slightly. The reduction of liquidity due to the payment of the dividend for 2015 to Swiss Re Ltd and repayments of external debt was partially offset by positive operating cash flows and dividends from subsidiaries.
Controlled risk-taking Swiss Re operates within a clearly defined risk control framework. This comprises a body of standards that establish an internal control system for taking and managing risk. These standards set responsibilities for risk takers and risk controllers. The risk control framework defines five key tasks, which are the core components of Swiss Re’s risk management cycle: ̤ Risk oversight of planning: ensures that the risk implications of plans are understood and determines whether the business and investment plans adhere to Swiss Re’s risk appetite and tolerance.
̤ Risk identification: ensures that all risks to which Swiss Re is exposed are transparent in order to make them controllable and manageable.
̤ Risk measurement: enables the Group to understand the magnitude of its risks and to set quantitative controls that limit its risk-taking.
The Risk Management function facilitates risk awareness by promoting a forwardlooking assessment of the Group’s risk profile. The function is integrated into the Group’s key business decisions, seeking to be a trusted partner within Swiss Re as well as for our external stakeholders.
While the risk appetite guides what types of risk the Group aims to write, risk tolerance is an expression of the extent to which the Group Board of Directors has authorised the Group Executive
̤ Risk tolerance describes the extent to which the Group Board of Directors has authorised executive management to assume risk. It represents the amount of risk that Swiss Re is willing to accept within the constraints imposed by its capital and liquidity resources, its strategy, and the regulatory and rating agency environment within which it operates.
During strategic planning and targetsetting, Risk Management provides an opinion on the proposed strategy and targets to the Group EC and ultimately the Group Board of Directors. The opinion focuses on the risk impact of the proposed strategy and the risks related to its implementation. The strategic plan, risk appetite and capital allocation ambition are expressed in a target portfolio for the Group’s assets and liabilities, which should ultimately deliver the Group’s targeted performance.
In the context of the annual planning process, ie during the phase of operational and financial planning, Risk Management reviews and challenges plan assumptions and assesses the risks and feasibility related to implementing the proposed plan. It provides transparency on the detailed risk implications of the plan and tests its adherence to risk appetite and risk tolerance.
C o n tr o l r is k ex p o su re s 64 Swiss Re 2016 Financial Report
Swiss Re’s risk governance is defined in the policies and standards that describe the risk management framework and establish risk management practices for the Group and its subsidiaries. The Group risk governance pyramid illustrates the hierarchy within which risk governance documentation is established.
Level 1 ‒ Risk selection criteria, Risk Appetite Framework, Risk Management principles
̤ Changes in risk exposure from increased understanding of interdependencies between risks
Board of Directors Responsible for Group‘s governance principles and policies, acting through the Finance and Risk Committee, the Investment Committee and the Audit Committee
Group Internal Audit Performs independent assessments of adequacy and effectiveness of internal control systems
̤ The Investment Committee reviews the financial risk analysis methodology and valuation related to each asset class, and ensures that the relevant management processes and controlling mechanisms are in place.
The three Business Unit risk teams are led by dedicated Chief Risk Officers who report directly to the Group CRO, with a secondary reporting line to their respective CEO. The Business Unit CROs are responsible for risk oversight in their respective entities, as well as for establishing the proper risk governance to ensure efficient risk identification, assessment and control. They are supported by functional, regional and legal entity CROs who are responsible for overseeing risk management issues that arise at regional or legal entity level.
While the risk management organisation is closely aligned to Swiss Re’s business structure, in order to ensure effective risk oversight, all embedded teams and CROs remain part of the Group Risk Management function under the Group CRO, thus ensuring their independence as well as a consistent Group-wide approach to overseeing and controlling risks.
For more information on our audit and compliance functions, see page 106.
The model generates a probability distribution for economic profit and loss, specifying the likelihood that the outcome will fall within a given range. Risk measures derived from the model are expressed as economic loss severities taken from the total economic profit and loss distribution.
In line with the SST, the Group measures its economic risk capital requirement at the 99% shortfall (or tail value at risk) level. This represents an estimate of the average annual loss likely to occur with a frequency of less than once in one hundred years, thus capturing the potential for severe, but rare, aggregate losses.
The Group risk model is used to determine regulatory capital requirements in Switzerland. It has been validated by external experts and accepted by FINMA for regulatory usage purposes, and is currently undergoing the revised FINMA approval process. Furthermore, the model is approved by the Luxembourg regulator for the Solvency II reporting of Swiss Re’s legal entities in Continental Europe.
in y e ar lo ss in y e ar lo ss
In 2016, Swiss Re’s overall risk remained stable, as the decrease in financial market risk was offset by higher life and health risk. Property and casualty risk as well as credit risk remained broadly stable.
Swiss Re’s internal risk model (see box on page 68) is used to measure the Group’s capital requirements and for defining the risk tolerance, risk limits, and liquidity stress tests. Based on the internal risk model, our overall risk exposure in terms of 99% tail value at risk (tail VaR) remained stable at USD 19.5 billion in 2016 (compared to USD 19.6 billion at the end of 2015).
̤ Life and health risk changed by 2% to USD 7.4 billion. The increase mainly resulted from the acquisition of a large block of in-force US term life business in the first quarter of 2016.
̤ Financial market risk decreased by 3% to USD 12.3 billion. The decrease is mainly driven by lower equity risk.
Swiss Re is exposed to a broad landscape of risks. These include risks that are actively taken as part of insurance or asset management operations and are calculated in the internal risk model as part of the Group’s economic capital requirement as well as to allocate risk-taking capacity: Property and casualty risk Property and casualty insurance risk arises from coverage provided for property, liability, motor, and accident risks, as well as for specialty risks such as engineering, aviation, and marine; this includes underlying risks inherent in the business Swiss Re underwrites, such as inflation or uncertainty in pricing and reserving.
Credit risk Credit risk reflects the potential financial loss that may arise due to diminished creditworthiness or default of counterparties of Swiss Re or of third parties; credit risk arises from investment and treasury activities, structured transactions and retrocession, as well as from liabilities underwritten by credit and surety insurance units.
Model risk Model risk reflects the potential impact of model errors or the inappropriate use of model outputs. It may arise from data errors or limitations, operational or simulation errors, or limitations in model specification, calibration or implementation; model risk may also be caused by insufficient knowledge of the model and its limitations, in particular in management and other decision-makers.
Some of these risks are reflected indirectly in the model, as their realisations may be contained in the historical data used to calibrate some of the risk factors. In addition, output from the risk model is used in measuring liquidity risk under stressed conditions. As separate risk categories, these risks are an integral part of Swiss Re’s risk landscape. They are monitored and managed within the Risk Management organisation, and included in risk reports to executive management and the Board of Directors at Group and Business Unit level as well as for selected major legal entities.
The Risk Management function is embedded throughout Swiss Re’s business, with dedicated CROs and risk experts for each Business Unit, region and major insurance carrier.
The decrease in natural catastrophe risk is reflected in the stress test figures on page 73. The table shows Swiss Re’s exposure to a set of major natural catastrophe scenarios, net of retrocession and securitisation. These risk exposures take into account the fact that such a scenario will trigger claims in other lines of business in addition to the most affected property line.
In the context of a challenging market environment, major natural catastrophe scenarios show lower stress results. Atlantic hurricane and Californian earthquake scenarios show the most significant decreases with 10% and 11%, respectively. Japanese earthquake is down by 4% due to the reduction in exposure being partly offset by foreign exchange movements. European windstorm decreased by 2%.
The CROs of Reinsurance and Corporate Solutions are responsible for overseeing all property and casualty exposures written in their area. In addition, Group Risk Management monitors and controls accumulated exposures across Swiss Re to ensure that they remain within defined risk tolerance level.
Large transactions that could materially impact the risk at Group, Business Unit or legal entity level require independent review and sign-off by Risk Management before they are authorised. This is part of a three-signature principle, under which key transactions must be approved by Client Markets, Underwriting and Risk Management. For transactions of defined types and within defined limits, this may be applied through the approval of underwriting or pricing guidelines. For other transactions, the signatures must be secured through an individual review.
In addition to underwriting and capacity limits, Swiss Re’s limit framework includes aggregate Group limits for property and casualty risk as well as individual limits for major natural catastrophe scenarios – Atlantic hurricane, Californian earthquake, European windstorm and Japanese earthquake. These limits guard against exposure accumulations and ensure that risk-taking remains within Swiss Re’s risk tolerance.
Swiss Re further manages property and casualty risks through external retrocession, risk swaps or transferring risk to the capital markets through insurance-linked securities to reduce peak exposures.
Swiss Re’s overall life and health risk is 2% higher at USD 7.4 billion. The increase resulted predominantly from the acquisition of a large block of in-force US term life business in the first quarter of 2016, which led to an increase in our mortality trend (death), lethal pandemic, and lapse exposure. It was partly offset by the impact of model enhancements — in particular the improvements made to the valuation of our US business.
The overall life and health risk increased further due to new business written in Asian markets, which together with the decrease in Japanese interest rates led to higher critical illness risk.
Life and health risk Change from 2015 99% tail VaR: +2%
Natural catastrophes Atlantic hurricane −5.6 −5.1 −10 Californian earthquake −3.8 −3.4 −11 European windstorm −2.6 −2.6 −2 Japanese earthquake −3.2 −3.1 −4
Life insurance Lethal pandemic −2.4 −2.4 −1 1 Single event losses with a 200-year return preriod show for example that there is a 0.5% probability over the next year that the loss from a single Atlantic hurricane event could exceed USD 5.1 billion. The impact excludes earned premiums for the business written and reinstatement premiums that could be triggered as a result of the event.
Financial risk management involves identifying, assessing and controlling risks inherent in the financial markets as well as counterparty credit risks, while monitoring compliance with Swiss Re’s risk appetite and risk management standards.
Swiss Re’s central Financial Risk Management team oversees all activities that generate financial market or credit risk. Its mandate covers internally and externally managed assets, principal investments, treasury activities and the credit risks that derive from Swiss Re’s underwriting and retrocession activities, including structured transactions, credit insurance and surety business. The Head of Financial Risk Management reports to the Group CRO, with a secondary reporting line to the Group Chief Investment Officer.
In addition, Swiss Re uses financial market derivative instruments as well as financial market securities to hedge financial market and credit risks arising from investments and insurance liabilities. Interest rate risk from insurance liabilities is managed through investments in fixed-income instruments whose pricing is sensitive to changes in government yields, such as government bonds.
The table on page 75 shows Swiss Re’s sensitivity to various market scenarios. The decrease in equity risk resulted from asset management sales as well as a strengthening of the US dollar. Foreign exchange movements and asset management activities led to a lower sensitivity towards changes in credit spreads. This impact was, however, largely offset by assets assumed through a large block of in-force US term life business. The increase in real estate stress reflects new investments in particular in the US. The sensitivity to interest rates is minimal due to the well-matched duration position.
Group EC then establishes limits for aggregate financial market and credit risk at Group and Business Unit level, with additional limits set for individual risk factors, business lines and portfolio managers. There are also limits set on a legal entity level. Risk limits may be expressed in terms of losses in a stress scenario, value at risk or linear sensitivities to a particular risk factor.
Group Financial Risk Management regularly reports on key financial market risks and risk aggregations, as well as on specific limits for internally and externally managed investment mandates. These reports track exposures, document limit usage and provide information on key risks that could affect the portfolio. The reports are presented and discussed with those responsible for the relevant business line at the weekly Financial Market Risk Committee. This process is complemented by regular risk discussions between Financial Risk Management, Asset Management and the Group’s external investment managers.
In 2016, Swiss Re’s credit risk — which includes default and migration (deterioration in credit rating) risk — remained stable at USD 3.4 billion. At the same time, the credit default stress test increased by 5%.
Financial market and credit risk stress tests Pre-tax impact on economic capital in USD billions, as of 31 December 2015 2016 Change in %
Market scenarios 100bp increase in credit spreads –4.4 –4.4 –1 30% fall in equity markets (incl. hedge funds) –2.9 –2.5 –13 15% fall in real estate markets –0.6 –0.7 7 100bp parallel increase in global yield curves 0.1 –0.1 –177
All operational losses, incidents and issues are reported and monitored in a central Operational Risk Management system to ensure that they are resolved as well as to avoid the recurrence of similar events.
Recent efforts in operational risk management have focused on further evolving Swiss Re’s risk framework and refining the Group’s integrated Internal Control System. As a result, a centrally governed global risk register and a global control catalogue have been implemented that form an improved basis for quarterly risk and control self-assessments.
Swiss Re is a founding member of the insurance sector within the Operational Riskdata eXchange Association (ORX). ORX is dedicated to advancing the measurement and management of operational risk within the insurance industry. Swiss Re actively participates in various research projects on topics such as risk boundaries, scenario analysis and cyber risk.
Regulatory developments and related risks that may affect Swiss Re and its subsidiaries are identified, assessed and monitored as part of regular oversight activities. Periodic reports and recommendations on regulatory issues are provided to the executive management and Boards of Directors at Group, Business Unit and legal entity level.
The regulatory environment of the insurance industry continues to evolve on the national, regional and international level, with re/insurers facing a multitude of new or modified regulations that affect their business model. While some regulatory changes create new business opportunities, others come with significant costs and business restrictions. Growing regulatory complexity, increased national protectionism and a fragile global economy are persistent themes affecting regulation and the way Swiss Re operates worldwide.
While prudential regulation is developing towards more risk-sensitive and economic-based capital regimes, regulatory fragmentation remains high. Local capitalisation rules often fail to fully recognise the benefits of risk mitigation and diversification. In addition, there are moves to limit the use of internal models influenced by post-crisis banking regulation. Swiss Re strongly supports the use of internal models, full recognition of risk mitigation and diversification, appropriate consideration of counterparty default and concentration risk, and efficient application of eligible capital instruments.
A dedicated Political Risk team identifies, assesses and monitors political developments worldwide. Swiss Re’s political risk experts exercise oversight and control functions for named political risks, such as in the political risk insurance business; this includes monitoring political risk exposures, providing recommendations on particular transaction referrals, or risk reporting. In addition, the Political Risk team provides specific country ratings that cover political, economic and security-related country risks; these ratings complement sovereign credit ratings and are used to support risk control activities and inform underwriting or other decision-making processes throughout the Group.
Under Swiss Re’s framework, the appropriateness of models is assessed in an independent end-to-end validation process that includes specification, algorithms, calibration, implementation, results and testing. Material models used for costing and valuation of reserves and assets are validated by dedicated teams within Risk Management. These teams provide independent assurance that the framework has been adhered to as well as conduct independent validations. Swiss Re’s Group Risk Model, which is owned by Risk Management, is subject to independent validation by experts within and outside Swiss Re. It is also subject to regulatory scrutiny.
Valuation risk Financial valuation risk is managed by a dedicated team within Financial Risk Management, who perform independent price verification for financial risk positions to confirm that valuations are reasonable and ensure there are no material misstatements of fair value in Swiss Re’s financial reports. The results of the independent price verification process are reviewed by the Asset Valuation Committee. Summary results are regularly reported to executive management as well as to the Board. In addition, Swiss Re’s external auditor conducts quarterly reviews as well as a comprehensive year-end audit of controls, methodology and results.
Potential sustainability risks are mitigated through clear corporate values, active dialogue and engagement with affected external stakeholders, and robust internal controls. These include a Group-wide Sustainability Risk Framework to identify and address sustainability risks across Swiss Re’s business activities. The framework comprises sustainabilityrelated policies – with pre-defined exclusions, underwriting criteria and quality standards – as well as a central due diligence process for related transactional risks.
Swiss Re is a founding signatory to the UN Principles for Sustainable Insurance (UN PSI) and is currently a board member of this initiative. The UN PSI provide a global framework for managing environmental, social and governance challenges. Swiss Re has been actively contributing to the initiative for several years, co-chaired it from 2013 to 2015 and publicly reports progress against the principles in its annual Corporate Responsibility Report; the 2016 report has been published together with the 2016 Financial Report.
For more information on our Sustainability practices, see also the Corporate Responsibility section on page 122.
Emerging risk Anticipating possible developments in the risk landscape is a central element of Enterprise Risk Management. Swiss Re promotes pre-emptive thinking on risk in all areas of the business in order to reduce uncertainty and diminish the volatility of the Group’s results, while also identifying new business opportunities and raising awareness of emerging risks.
Findings are reported to senior management and other internal stakeholders through various channels, including reports that provide a prioritised overview of newly identified emerging risks and an estimate of their potential impact on Swiss Re’s business. Swiss Re also publishes an annual emerging risk report to share findings, raise awareness within the Group and across the industry, and initiate a risk dialogue with key external stakeholders.
Swiss Re’s corporate governance adheres to the SIX Swiss Exchange’s Directive on Information Relating to Corporate Governance, including its annex. It is also in line with the principles of the Swiss Code of Best Practice for Corporate Governance (Swiss Code) of September 2014, issued by economiesuisse, the Swiss business federation. Swiss Re also conforms to the Swiss Financial Market Supervisory Authority (FINMA) provisions on corporate governance, risk management and internal control systems. Swiss Re’s corporate governance furthermore complies with applicable local rules and regulations in all jurisdictions where it conducts business. The Board of Directors regularly assesses the Group’s corporate governance against relevant best practice standards as well as new stakeholder demands. It monitors corporate governance developments globally and it considers the relevant studies and surveys on corporate governance. Information on compensation of and loans to members of the Board of Directors and the Group Executive Committee (Group EC) is included in the Compensation Report beginning on page 138 of this Financial Report and their shareholdings in Swiss Re are shown in the notes on page 292 to the Swiss Re Ltd financial statements.
Swiss Re’s corporate governance framework Swiss Re Ltd’s Board of Directors is responsible for oversight, while the Group EC is responsible for managing operations. This structure maintains effective mutual checks and balances between these top corporate bodies. Our corporate governance principles and procedures are defined in a series of documents governing the oversight, organisation and management of the company. These include at the Group level: ̤ the Group Code of Conduct, outlining our compliance framework and setting out the basic ethical and legal principles and policies we apply globally; ̤ the Corporate Governance Guidelines (Guidelines), setting forth the Group’s governance framework, principles, processes and requirements, ensuring consistent and fitted corporate governance across the Group; ̤ the Articles of Association of Swiss Re Ltd (SRL), defining the legal and organisational framework of the Group’s holding company SRL, (available at www.swissre.com/ about_us/corporate_governance/ corporate_regulations.html); ̤ the SRL & Group Bylaws, defining the governance structure for SRL and within the Group including the responsibilities of the Board of Directors, Chairman, Vice Chairman, Lead Independent Director, Board committees, Group EC, Group CEO and of the other individual Group EC members including the Regional Presidents, as well as the relevant reporting procedures; and
In addition, they include at the Business Unit level: ̤ the Articles of Association of Swiss
Reinsurance Company Ltd (SRZ), Swiss Re Corporate Solutions Ltd (SRCS) and Swiss Re Life Capital Ltd (SRLC), defining the legal and organisational framework of the Business Unit (BU) top-level companies SRZ, SRCS and SRLC; Co rp ora te Go vernance Guidelines
̤ the Board Committee Charters, outlining the duties and responsibilities of the board committees of SRZ, SRCS and SRLC.
̤ alignment with the latest best practice corporate governance standards and with stakeholders’ demands.
Crisis management and EVM training In 2016, the Board of Directors undertook further efforts to enhance its expertise, with an emphasis on Economic Value Management (EVM) and crisis management. ̤ The Board of Directors held an in-depth educational session on EVM. ̤ The Board members participated in a full-day workshop on crisis management, together with the members of the Group EC and representatives of significant subsidiaries of the Swiss Re Group. The workshop participants were asked to respond to crisis situations by applying the Group Recovery Plan, one of Swiss Re’s key instruments to manage capital and liquidity in severe adverse financial conditions. The session included comprehensive simulations of stress scenarios, considering large loss events, financial market disruptions and adverse political developments. The fact that real figures, including Swiss Re’s own consolidated balance sheet, were used for the simultations, was seen as particularly valuable.
Board of Directors ̤ Sir Paul Tucker was elected as a new member to the Board of Directors by the shareholders at the Annual General Meeting which took place in Zurich on 22 April 2016.
̤ The Annual General Meeting 2016 re-elected Walter B. Kielholz for a further one-year term of office as Chairman of the Board of Directors.
̤ Raymond K.F. Ch’ien, Renato Fassbind, Mary Francis, Rajna Gibson Brandon, C. Robert Henrikson, Trevor Manuel, Carlos E. Represas, Philip K. Ryan and Susan L. Wagner were individually re-elected by the Annual General Meeting 2016 for a further one-year term of office as members of the Board of Directors.
̤ The Annual General Meeting 2016 re-elected Renato Fassbind, C. Robert Henrikson and Carlos E. Represas as members and elected Raymond K.F. Ch’ien as new member of the Compensation Committee, all members for a one-year term of office.
̤ Thierry Léger was appointed CEO Life Capital and joined the Group EC as a member as of 1 January 2016.
̤ Edouard Schmid will become Group Chief Underwriting Officer and a member of the Group EC as of 1 July 2017, succeeding Matthias Weber who has decided to step down as Group Chief Underwriting Officer.
Swiss Re’s Code of Conduct provides key principles that guide Swiss Re in making responsible decisions and achieving results using the highest ethical standards.
Swiss Re’s Code of Conduct is built on the five Swiss Re Corporate Values, which are the heart of everything we do: ̤ Integrity ̤ Team Spirit ̤ Passion to Perform ̤ Agility ̤ Client Centricity
The Corporate Values are put in action by the Leadership as well as Personal Imperatives. They represent the behaviours that strongly reinforce and advance our business goals. They provide a solid basis for assessing our performance and they reward each of us for not only what we achieve, but how we achieve it.
Swiss Re’s Code of Conduct was revised in 2016 with the particular aim to make it short and easy to understand while meeting the requirements of an increasingly complex business, regulatory and legal environment. It can be found on: files.swissre.com/codeofconduct/index.html
Swiss Re Ltd has a level I American Depositary Receipts (ADRs) programme in the US. The ADRs are traded over the counter (OTC) (ISIN US8708861088, OTC symbol SSREY). Following a split in 2015, one Swiss Re Ltd share equals four ADRs. Neither the ADRs, nor the underlying Swiss Re Ltd shares are listed on a securities exchange in the US.
The following table provides a summary of the current disclosure notifications of major shareholders holding more than 3% of the voting rights: Significant shareholders
In addition, Swiss Re Ltd and Group companies held, as of 31 December 2016, directly and indirectly, 34 093 834 shares, which includes 5 542 500 shares repurchased under the public share buy-back programme Swiss Re Ltd launched on 4 November 2016. The public share buy-back programme was completed on 9 February 2017. This represents 9.47% of voting rights and share capital.
Capital As a result of the cancellation of shares repurchased under the share buy-back programme which ended on 2 March 2016, the fully paid-in share capital of Swiss Re Ltd as of 31 December 2016 amounted to CHF 36 007 256.10. It is divided into 360 072 561 registered shares, each with a par value of CHF 0.10.
Existing shareholders’ subscription rights are excluded. The then current holders of the conversion and/or option rights granted in connection with Equity-Linked Financing Instruments shall be entitled to subscribe for the new registered shares. Subject to the Articles of Association, the Board of Directors may decide to restrict or exclude existing shareholders’ advance subscription rights with regard to these Equity-Linked Financing Instruments. Such a decision may be made in order to issue EquityLinked Financing Instruments on national and/or international capital markets (including private placements to selected strategic investors), and/or to finance or re-finance the acquisition of companies, parts of companies, participations or new investments planned by the company and/or Group companies.
If advance subscription rights are excluded, then the Equity-Linked Financing Instruments are to be placed at market conditions, the exercise period is not to exceed ten years for option rights and 20 years for conversion rights, and the conversion or exercise price for the new registered shares is to be set at least in line with the market conditions prevailing at the date on which the Equity-Linked Financing Instruments are issued.
Authorised capital As of 31 December 2016, the authorised capital of Swiss Re Ltd was as presented in the table below.
The Board of Directors may exclude or restrict the subscription rights of existing shareholders with respect to a maximum of CHF 3 500 000 through the issue of up to 35 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10, out of the total amount of authorised capital. Such exclusion or restriction relates to the use of shares in connection with mergers, acquisitions (including take-over) of companies, parts of companies or holdings, participations or new investments planned by the company and/or Group companies, financing or re-financing of such mergers, acquisitions or new investments, the conversion of loans, securities or equity securities. Exclusion and restriction may also relate to improving the regulatory capital position of the company or Group companies, including private placements, in a fast and expeditious manner if the Board of Directors deems it appropriate or prudent to do so.
Joint provision for conditional capital for Equity-Linked Financing Instruments and for the abovementioned authorised capital The total of registered shares issued from the authorised capital, where the existing shareholders’ subscription rights were excluded, and from the shares issued from conditional capital, where the existing shareholders’ advance subscription rights on the Equity-Linked Financing Instruments were excluded, may not exceed 74 000 000 registered shares up to 21 April 2017.
On 22 April 2016 the Annual General Meeting has authorised the Board of Directors to repurchase up to a maximum of CHF 1 billion purchase value of Swiss Re Ltd’s own shares prior to the Annual General Meeting 2017 by way of a buy-back programme (the “Programme”) for cancellation purposes. The Programme was launched on 4 November 2016 and completed on 9 February 2017. The purchase value of the repurchased own shares corresponded to CHF 999 999 942.06.
For further details on the past share buy-back programmes, please visit: www.swissre.com/investors/shares/ share_buyback/
Changes in 2015 The Annual General Meeting 2015 approved that the authority to issue registered shares from authorised capital as set forth in the Articles of Association be extended to 21 April 2017 and that the limitation included in the Articles of Association to issue registered shares from authorised capital where the existing shareholders’ subscription rights are excluded, be extended to 21 April 2017.
Information about changes in share capital of Swiss Re Ltd as well as of our former parent company Swiss Reinsurance Company Ltd for earlier years is provided in the Annual Reports of these companies for the respective years.
The company cannot exercise the voting rights of treasury shares. As of 31 December 2016, shareholders had registered 193 711 538 shares for the purpose of exercising their voting rights, out of a total of 360 072 561 shares issued. As of 31 December 2016, 325 978 727 shares were entitled to dividend payment.
Admissibility of nominee registrations Persons not expressly declaring in their application for entry in the share register that they are holding shares for their own account (nominees) are entered without further inquiry in the share register of Swiss Re Ltd as shareholders with voting rights of up to a maximum of 2% of the outstanding share capital available at the time. Additional shares held by such nominees that exceed the limit of 2% of the outstanding share capital are entered in the share register with voting rights only if such nominees disclose the names, addresses and shareholdings of any persons for whose account the nominee is holding 0.5% or more of the outstanding share capital. In addition, such nominees must comply with the disclosure requirements of the FMIA.
Convertible bonds and options Convertible bonds As of 31 December 2016, neither Swiss Re Ltd nor any of its subsidiaries has any bonds outstanding that are convertible into equity securities of Swiss Re Ltd solely at the option of bondholders. The same applied as of 31 December 2015 and 31 December 2014.
Independence The SRL & Group Bylaws stipulate that at least three-quarters of the members of the Board of Directors must be independent. Independence is defined in line with best practice corporate governance standards. To be considered independent a Group Board member may not be, and may not have been in the past three years, employed as a member of the Group EC, or by any subsidiary of the Swiss Re Group or may not have a material relationship with any part of the Swiss Re Group (either directly or as a partner, director or shareholder of an organisation that has a material relationship with the Swiss Re Group) other than serving as an independent board member in any subsidiary. In addition, the Group Board agrees on other criteria that disqualify a Group Board member from being considered independent, taking into consideration provisions of applicable law, regulations and best practice. All the members of the Board of Directors meet our independence criteria with the exception of our Chairman. As a full-time Chairman he is not considered independent.
C. Robert Henrikson American 69 2012 Trevor Manuel South African 60 2015 Carlos E. Represas Mexican 71 20101
Philip K. Ryan American 60 2015 Sir Paul Tucker British 58 2016 Susan L. Wagner American 55 2014 1 Initially elected to the Board of Directors of Swiss Reinsurance Company Ltd, the Group’s former parent company, and subsequently elected to the Board of Directors of Swiss Re Ltd in 2011.
Services Round Table ̤ Member of the Board of Trustees of
Renato Fassbind was elected to the Board of Directors of Swiss Re Ltd in 2011. He was appointed as Vice Chairman in 2012 and as Lead Independent Director in 2014. Renato Fassbind chairs the Audit Committee and is a member of the Chairman’s and Governance Committee and the Compensation Committee.
Raymond K.F. Ch’ien was elected to the Board of Directors of Swiss Reinsurance Company Ltd in 2008 and to the Board of Directors of Swiss Re Ltd in connection with its formation in 2011. He is a member of the Compensation Committee and the Investment Committee.
Professional experience Mary Francis held a number of senior positions in the UK Treasury and Cabinet Office, including Financial Counsellor in the British Embassy in Washington DC, Private Secretary to the Prime Minister (John Major), and Deputy Private Secretary to the Queen. Between 1999 and 2005 she was Director General of the Association of British Insurers. She is a former non-executive Director of the Bank of England and Aviva plc, and was Senior Independent Director of the British energy company Centrica plc from 2006 to 2014.
C. Robert Henrikson was elected to the Board of Directors of Swiss Re Ltd in 2012. He chairs the Compensation Committee and is a member of the Chairman’s and Governance Committee and the Finance and Risk Committee.
̤ Member of the International Advisory Board of the Rothschild Group
Carlos E. Represas was elected to the Board of Directors of Swiss Reinsurance Company Ltd in 2010 and to the Board of Directors of Swiss Re Ltd in connection with its formation in 2011. He is a member of the Compensation Committee.
Professional experience Between 1968 and 2004, Carlos E. Represas held various senior positions at Nestlé in the US, Latin America and Europe, including Executive Vice President and Head of the Americas of Nestlé S.A. in Switzerland from 1994 to 2004. He was Chairman of the Board of Nestlé Group Mexico from 1983 to 2010.
America, Bombardier Inc. ̤ President of the Mexico Chapter of the Latin American Chamber of Commerce, Switzerland
Management Inc. ̤ Operating Partner Corsair Capital ̤ Member of the Advisory Board of
Sir Paul Tucker was elected to the Board of Directors of Swiss Re Ltd in 2016. He is a member of the Finance and Risk Committee and the Investment Committee.
Services Volunteers Corps ̤ Member of the Advisory Committee of Autonomous Research
BlackRock, Inc. ̤ Member of the Boards of Trustees of the Hackley School, US, and Wellesley College, US
In addition, no member of the Board of Directors shall serve on the board of directors of a listed company in which another member of the Board of Directors holds an executive function, or where a member of the Board of Directors is able to determine the compensation of another member of the Board of Directors.
The Board of Directors ensures that in any event the number of external mandates held by members of the Board of Directors does not conflict with their 96 Swiss Re 2016 Financial Report
Selection criteria The Board of Directors defines the selection criteria against which candidates for Board membership are assessed. Membership on the Board of Directors requires experience in key sectors such as insurance and reinsurance, finance, accounting, capital markets, risk management and regulatory matters as well as leadership and decision-making experience in a large, complex financial institution. The mandate also demands significant commitment, integrity and intercultural communication competence. The principles of gender and age diversity, inclusion, regional representation, transparency and the avoidance of conflicts of interest are also considered in the nomination process. As determined by applicable law, a Board member may not have any management or executive function within the Swiss Re Group.
Board members’ training In the interest of our stakeholders, the company constantly develops further the abilities of its Board members. Newly elected Board members receive a comprehensive introduction in order to gain a sound understanding of the Group’s organisation and business, allowing them to perform their duties effectively. All Board members update and enhance their knowledge of emerging business trends and risks through regular meetings with internal and external experts throughout the year. One to one educational sessions are offered any time through the year with our top executives and experts.
Furthermore, the Board of Directors proposes: ̤ Jay Ralph ̤ Joerg Reinhardt ̤ Jacques de Vaucleroy to the Annual General Meeting 2017 for first-time election as members of the Board of Directors for a one-year term of office as part of the continued aim to further diversify and renew its composition.
Joerg Reinhardt has been Chairman of the Board of Directors of Novartis since 2013. He was Chairman of the Board of Management and the Executive Committee of Bayer HealthCare from 2010 to 2013 and, prior to that, held various executive positions at Novartis. He was Chief Operating Officer from 2008 to 2010, headed the Vaccines and Diagnostics Division from 2006 to 2008 and held a number of other senior roles, primarily in research and development, in the preceding years. Joerg Reinhardt started his career at Sandoz Pharma Ltd, a predecessor company of Novartis, in 1982.
Jacques de Vaucleroy is Vice Chairman of the Board of Directors of Ahold Delhaize and a member of the Boards of Directors of Fidelity International Limited and MyMicroInvest SA. Furthermore, he serves on the Boards of the Simõn I. Patiño Foundation and the TADA non-profit organisation.
Jacques de Vaucleroy is a Belgian citizen born in 1961. He graduated with a Bachelor in Law from the Facultés Universitaires de Namur and received a Master in Law from the Université Catholique de Louvain and a Master in Business Law from the Vrije Universiteit Brussel.
The Board of Directors proposes that Walter B. Kielholz be re-elected as Chairman of the Board of Directors for a further one-year term. It furthermore proposes that Raymond K.F. Ch’ien, Renato Fassbind and C. Robert Henrikson be re-elected as members of the Compensation Committee, for a one-year term and Joerg Reinhardt be elected as a new member of the Compensation Committee, for a one-year term.
Director, who may be the same member acting in both roles as well as the Chairpersons and members of the Group Board Committees as proposed by the Chairman’s and Governance Committee. The Vice Chairman and the Lead Independent Director are appointed amongst the independent members of the Board of Directors. The Board of Directors may remove the members from any such special function at any time. The Board of Directors also appoints its secretaries who do not need to be members of the Board.
The organisation of the Board of Directors is set forth in the SRL & Group Bylaws, which define the organisational structure of Swiss Re Ltd and the responsibilities and authorities of the Board of Directors, its committees and the Group Executive Committee (Group EC) and their members. The SRL & Group Bylaws also provide an overview on periodic reports to be submitted to the Board of Directors and its committees. The Chairman’s and Governance Committee and the entire Board of Directors review at least annually the SRL&Group Bylaws to ensure their continued effectiveness and compliance with the Articles of Association, applicable laws, regulations and best practice.
Allocation of tasks within the Board of Directors Chairman of the Board of Directors The Chairman of the Board of Directors leads the Board of Directors, convenes the Board and committee meetings, establishes the agendas and presides over Board meetings. The Chairman coordinates the work of the Board committees together with the respective Chairpersons and ensures that the Board is kept informed about the committees’ activities and findings. In cases of doubt, the Chairman makes decisions about the authority of the Board or its committees and about interpreting and applying the SRL & Group Bylaws.
The Chairman chairs the Chairman’s and Governance Committee and develops and continually adapts Swiss Re’s governance to regulatory and corporate requirements. He keeps himself informed about the activities within the Group and may sit on Group and Business Unit Executive Committee meetings as he deems necessary. He also has access to all corresponding documentation and minutes. He ensures adequate reporting by the Group EC and the Group CEO to the Board of Directors and facilitates their communication with the Board. He annually assesses the Group CEO’s performance and discusses with the Group CEO the annual performance assessment of the Group EC members.
Lead Independent Director The Vice Chairman may also assume the role of the Lead Independent Director. The Lead Independent Director acts as an intermediary between the Swiss Re Group and its shareholders and stakeholders in the absence of the Chairman or in particular when a senior independent member of the Board is required. He may convene and chair sessions where the Chairman is not present. He will communicate the outcome of these sessions to the Chairman.
Each committee consists of a chairperson and at least three other members elected from among the Board of Directors. The members of the Compensation Committee are elected by the Annual General Meeting.
The term of office of a Board committee member is one year, beginning with the appointment at the constituting Board meeting following an Annual General Meeting and ending at the Board meeting following the subsequent Annual General Meeting. For the Compensation Committee members the term of office begins with the election at the Annual General Meeting until completion of the next Annual General Meeting.
Audit Committee Responsibilities The central task of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities as they relate to the integrity of Swiss Re’s and the Group’s financial statements, the Swiss Re Group’s compliance with legal and regulatory requirements, the external auditor’s qualifications and independence, and the performance of Group Internal Audit (GIA) and the Group’s external auditor. The Audit Committee serves as an independent and objective monitor of Swiss Re’s and the Group’s financial reporting process and system of internal control, and facilitates ongoing communication between the external auditor, Group EC, Business Units, GIA, and the Board with regard to the Swiss Re Group’s financial situation.
Members ̤ Renato Fassbind, Chair ̤ Mary Francis ̤ Philip K. Ryan ̤ Trevor Manuel (since AGM 2016) ̤ Raymond K.F. Ch’ien (until AGM 2016) ̤ Hans Ulrich Maerki (until AGM 2016)
Independence and other qualifications All members of the Audit Committee are non-executive and independent. In addition to the independence criteria applicable to Board members in general, additional independence criteria apply to members of the Audit Committee. They are required to possess such additional attributes as the Board of Directors may, from time to time, specify. Each member of the Audit Committee has to be financially literate. At least one member must possess the attributes to qualify as an Audit Committee financial expert, as determined appropriate by the Board of Directors. Members of the Audit Committee should not serve on audit committees of more than four listed companies outside the Swiss Re Group. Audit Committee members have to advise the Chairman of Swiss Re Ltd before accepting any further invitation to serve on an audit committee of another listed company outside the Group and observe the limitations set in the Articles of Association in relation to external mandates (see other mandates, activities and functions on page 96).
Finance and Risk Committee Responsibilities The Finance and Risk Committee annually reviews the Group Risk Policy and proposes it for approval to the Board of Directors, reviews risk and capacity limits as well as their usage across the Swiss Re Group and reviews the Risk Control Framework. It reviews important risk exposures, including new products and strategic expansions. It reviews the risk aspects of Control Transactions. It reviews critical principles used in internal risk measurement, asset and liability valuation, capital adequacy assessment, and economic performance management.
In addition, it reviews the capital adequacy and the Swiss Re Group’s treasury strategy.
Members ̤ Susan L. Wagner, Chair ̤ Raymond K.F. Ch’ien ̤ Rajna Gibson Brandon ̤ Trevor Manuel ̤ Sir Paul Tucker (since AGM 2016) ̤ Mathis Cabiallavetta (until AGM 2016) ̤ Jean-Pierre Roth (until AGM 2016)
Work methods of the Board of Directors and its committees Convening meetings and invitation Swiss Re Ltd’s Board of Directors oversees governance, audit, compensation, finance and risk and investment and is supported in this responsibility by its committees. The entire Board of Directors and its committees meet at the invitation of the Chairman of the Board of Directors as often as business requires or at least quarterly. Any member of the Board of Directors or the Group EC may, for a specific reason, require the Chairman to call an extraordinary Board of Directors or committee meeting. The members of the Board of Directors ensure that they are able to fulfil the responsibilities of their position even in periods when there are increased demands on their time. The Chairman defines the agenda for each meeting and therefore works closely with the chairpersons of the committees and the Group CEO. The agenda, along with any supporting documents, is delivered to the participants as a rule at least ten calendar days in advance of a meeting in order to allow enough preparation time. The Chairman may determine a Board of Directors meeting be held on an ad hoc basis, if circumstances require.
Board and committee meetings deal with the items on the agenda incorporating presentations by members of the Group EC and, where needed, by subject matter experts or outside advisers. It is contemplated for every meeting that an executive session is held for discussions between the Board of Directors and the Group CEO.
Board of Directors and Board committee meetings in 2016 – overall attendance rate of 97.8%
Chairman’s and Governance Committee 6 meetings2 Group CEO, Company Secretary 2 hours
Compensation Committee 6 meetings Group CEO, Group COO, Chief Human Resource Officer, Head Reward, Advisers33 hours
Finance and Risk Committee 6 meetings Group CEO, Group CFO, Group CRO, Group Chief Strategy Officer,
Investment Committee 5 meetings2 Group CEO, Group CFO, Group CRO, Group Chief Strategy Officer, Group Chief Investment Officer, Head Financial Risk Management, CFO Asset Management, Company Secretary 3 hours 1 In addition, two decisions by circular resolution. 2 In addition, one decision by circular resolution. 3 The human resources consulting firm Mercer and the law firm Niederer Kraft & Frey Ltd (NKF) provided support and advice for compensation issues during the reporting year. Representatives of Mercer participated in all committee meetings in 2016, representatives of NKF in five meetings.
Individual attendance rates of Board members1: Board of Directors and Board committee meetings in 2016 Attendance in % Number of Board members (Total 14 members2)
1 The attendance rate for the Board members was calculated relative to the meetings taking place during their term of office. 2 Includes members who stepped down from the Board of Directors during the year.
shall be passed if the majority of the total number of Board members (or Board committee members) express their agreement or disagreement with the resolution.
Each committee provides a report of its activities and recommendations following a committee meeting at the next Board of Directors meeting. If any significant topic comes up, the committees contact the Board of
Directors immediately. It is the responsibility of each committee to keep the full Board of Directors informed on a timely basis as deemed appropriate.
Group based on proposals by the Group EC; ̤ approves the capital allocation plan for both Underwriting and Asset Management; ̤ approves the Swiss Re Group Risk Strategy, Risk Limits and Risk Management Framework; ̤ approves the entry into new business activities and the exit of existing activities, provided they are of strategic relevance; ̤ approves significant Corporate Transactions, Participations and Principal Investments and approves an annual capital expenditure plan; ̤ approves the financial objectives and the means necessary to achieve them; and
Governance and organisation ̤ determines the operating model of the Swiss Re Group and the organisational structure in line with this model and the strategy; ̤ issues and regularly reviews the SRL & Group Bylaws, necessary policies and directives, including governance standards and the Group Code of Conduct; ̤ regulates and supervises internal control; and
Under the leadership of the Group CEO, the Group EC has management responsibility for Swiss Re Ltd and the Swiss Re Group. It supports the Board of Directors in its decision-making process and prepares any proposals for the Board of Directors in the Group EC’s area of responsibility. In particular with respect to the below topics, it: Governance ̤ has overall responsibility for managing operations, subject to delegation by the Board of Directors; and
Financial Reporting ̤ prepares and presents to the Board of Directors the annual and interim financial statements of the Group together with segment reporting on the Business Units.
Risk Management ̤ establishes the principles for external retrocession and the balancing of Group-wide catastrophe and accumulated risk; and
The Group EC discharges its responsibilities as a joint body, except for responsibilities delegated to the Group CEO and further individual Group EC members as outlined in the SRL & Group Bylaws.
Group Chief Investment Officer The Group CIO is responsible for the Group-wide Asset Management function and its investment results. He manages the investment portfolio, advises the Business Units on defining their strategic asset allocation (SAA), and implements the Group and Business Units SAAs within the risk limits set by the Group EC. The Group CIO retains responsibility for decisions on investment tactics and also provides financial market advice on strategic projects and transactions. In addition, the Group CIO is responsible for the Asset Management organisation as well as operational and compliance risks pertinent to his responsibilities.
Group Chief Strategy Officer The Group CSO is responsible for the Group strategic process and initiates the respective discussions in the Group EC as preparation for submission of strategic content to the Board of Directors for approval. The Group CSO supports and advises the Board of Directors and the Group EC by developing and articulating a Group strategy in close cooperation with the
Group Chief Underwriting Officer The Group CUO is responsible for steering capital to the most attractive areas in underwriting leading themes that are of strategic importance for the Swiss Re Group’s underwriting, and providing Research & Development that improves both capital allocation and risk selection.
Involvement of executive management in meetings of the Board of Directors As a matter of principle, all members of the Group EC are invited to attend the meetings of the Board of Directors. The Group EC members attend Board meetings as far as deemed appropriate by the Chairman and the other Board members. The Group EC members do not attend the constitutional meeting of the Board of Directors following the Annual General Meeting and the Board self-assessment session.
Involvement of executive management in Board committee meetings As a matter of principle, selected members of the Group EC as well as further senior management members participate at Board committee meetings as advisers. The Charter of the Board committees specifies management participation at committee meetings.
US GAAP Board Report The report provides factual financial highlights from an accounting perspective, with a focus on historical development of the business as an informational basis before the publication of results.
EVM Board Report The report provides factual financial highlights from an economic perspective, with a focus on historical value creation.
Right to obtain information The Board of Directors has complete and open access to the Group CEO and the other members of the Group EC, the Group Chief Legal Officer, the Chief Compliance Officer and the Head of GIA. Any member of the Board of Directors who wishes to have access to any other officer or employee of the Group will coordinate such access through the Chairman. The chairpersons may approach the Group EC members as well as further key executives directly should they require information supporting the respective Board committee’s duties.
Group Internal Audit GIA is an independent assurance function, assisting the Board of Directors and Group EC to protect the assets, reputation and sustainability of the organisation. GIA assesses the adequacy and effectiveness of the Group’s internal control system, and adds value through improving the Group’s operations.
External auditor For information regarding the external auditors, please refer to pages 116–117.
Members of the Group Executive Committee The Group Executive Committee (Group EC) consisted of the following members as of 31 December 2016: Name Nationality Age Function
Professional experience Christian Mumenthaler started his career in 1997 as associate with the Boston Consulting Group. He joined Swiss Re in 1999 and was responsible for key company projects. In 2002, he established and headed the Group Retro and Syndication unit. Christian Mumenthaler served as Group Chief Risk Officer between 2005 and 2007 and was Head of Life & Health between 2007 and 2010. In January 2011, he was appointed Chief Marketing Officer Reinsurance and member of the Group Executive Committee, and became Chief Executive Officer Reinsurance that October. On 1 July 2016 Christian Mumenthaler was appointed as Group Chief Executive Officer.
External appointments ̤ Board member of Geneva Association; of the Swiss American Chamber of Commerce and of the Society for the Promotion of the Institute of Insurance Economics, St. Gallen
̤ Member of Insurance Europe’s Reinsurance Advisory Board (RAB); of the Pan-European Insurance Forum (PEIF); of the IMD Foundation Board; of the Global Reinsurance Forum and of the Steering Board Insurance Development Forum (IDF)
Professional experience Guido Fürer commenced his career at Swiss Bank Corporation/O’Connor & Associates in 1990. During the following seven-year period, he held leading positions in option trading and at its Capital Market division in Chicago, New York, London and Zürich.
Jean-Jacques Henchoz joined Swiss Re in 1998 as facultative property underwriter in the Europe Division, and in 1999 moved to the Swiss Re New Markets Division as finite risk underwriter. From 2000 he served as Head Financial Solutions until becoming Head of Strategy for Property & Casualty in 2003. From 2005 to 2010, he was Chief Executive Officer of Swiss Re Canada. Jean-Jacques Henchoz assumed leadership of the Europe Division in March 2011. He was appointed Chief Executive Officer Reinsurance EMEA, Regional President EMEA and member of the Group Executive Committee in January 2012.
Jayne Plunkett is a Fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries. Additionally, she was named a Young Global Leader of the World Economic Forum in 2010.
Professional experience Matthias Weber started his career at Swiss Re in Zurich in 1992 as an expert for natural perils. He moved to the Swiss Re Americas Division in 1998 and in 2000 became Regional Executive for the Western Region of the United States located in San Francisco. From 2001, he was responsible for property underwriting in the US Direct Business Unit, and in 2005 was named Head of the Americas Property Hub in Armonk. From 2008, Matthias Weber served as Division Head of Property & Specialty.
Moses Ojeisekhoba was appointed CEO Reinsurance as of 1 July 2016, succeeding Christian Mumenthaler.
Jayne Plunkett was appointed CEO Reinsurance Asia/Regional President Asia and a member of the Group EC as of 1 July 2016, succeeding Moses Ojeisekhoba.
Thierry Léger was appointed CEO Life Capital and a member of the Group EC as of 1 January 2016.
Other mandates, activities and vested interests In line with Swiss Re Ltd’s Articles of Association the members of the Group EC may not hold more than five additional mandates of which no more than one additional mandate can be with listed companies. Mandates (i) in companies which are controlled by Swiss Re Ltd or which control Swiss Re Ltd, (ii) mandates held at the request of Swiss Re Ltd or companies controlled by Swiss Re Ltd as well as (iii) mandates in associations, charitable organisations, foundations, trusts, employee welfare foundations, investment companies, equity partnerships or limited liability partnerships are not subject to the above limitations. No member of the Group EC may hold more than five mandates as set out in (ii) above and not more than 15 mandates as set out in (iii) above. Mandates shall mean mandates in the supreme governing body of a legal entity which is required to be registered in the commercial register or a comparable foreign register. Mandates in different legal entities that are under joint control are deemed one mandate.
Professional experience Thomas Wellauer started his career with McKinsey & Company, specialising in the financial services and pharmaceutical industry sectors, and was elected Partner in 1991 and Senior Partner in 1996. In 1997, he was named Chief Executive Officer of the Winterthur Insurance Group, which was later acquired by Credit Suisse. At Credit Suisse he was a member of the Group Executive Board, initially responsible for the group’s insurance business before becoming Chief Executive Officer of the Financial Services division in 2000. From 2003 to 2006, Thomas Wellauer headed the global turnaround project at Clariant. In 2007, he joined Novartis as Head of Corporate Affairs and became member of the Executive Committee of Novartis. From April 2009 until September 2010, he was a member of the Supervisory Board of Munich Re.
̤ Master of Business Economics, University of Zurich, Switzerland Swiss Re 2016 Financial Report 113
Duration of the mandate and term of office of the lead auditors PricewaterhouseCoopers Ltd (PwC) was appointed as the external auditor of Swiss Re Ltd when the company was founded on 2 February 2011. PwC had been elected as the external auditor of the previous parent company of the Group, Swiss Reinsurance Company Ltd, at its Annual General Meeting 1991 and had been re-elected annually since then. The Annual General Meeting 2016, following the proposal of the Board of Directors based on the recommendation by the Audit Committee, re-elected
Cooperation and flow of information between the auditor and the Audit Committee The Audit Committee liaises closely with the external auditor. The lead auditors participate as advisers at all the Audit Committee’s meetings. For more information, see page 102.
Fees for audit and non-audit services Fees (excluding value added taxes) for professional services provided by PwC in 2016 were as follows: Fees USD millions
Audit-related fees included engagements for Solvency II model validation and various assurance assignments required by Swiss Re’s regulators. Corporate finance fees related primarily to the issuance of comfort letters for capital market transactions. Other non-audit fees included permitted advisory services related to various projects.
Performance This assessment measures the external auditor’s performance against a number of criteria, including: understanding of Swiss Re’s business; technical knowledge and expertise; comprehensiveness of the audit plans; quality of the working relationship with management and clarity of communication. It is compiled based on the input of key people involved in the financial reporting process and the observations of the Audit Committee members.
We use www.swissre.com to provide comprehensive, timely news and information on our activities.
As a company which manages global risk, Swiss Re’s information policy goes well beyond legal requirements in establishing transparency in our communications and equal access to the facts for all investors and the public.
The Chairman annually conducts a governance roadshow to meet with large shareholders in Switzerland, the UK and the US. Furthermore, our Investor Relations team holds regular meetings with institutional investors and analysts. At the 2016 Investors’ Day in Zurich in December, Swiss Re provided an update on the Group’s strategy, insights on the current most relevant topics related to the activities of Asset Management, Capital Management, Risk Management and Underwriting and provided business updates for each of the three Business Units Reinsurance, Corporate Solutions and Life Capital. All these presentations as well as the conference call recordings from this event are also available on our website: www.swissre.com/investors/ presentations
Swiss Re observes strict close periods around the publications of the Group’s annual results and quarterly results/key data. The close periods apply throughout the preparation of the results/ key data and provide for an appropriate cooling-off period after the release of the results/key data. During such close periods, employees of Swiss Re and members of the Board of Directors are prohibited from trading in Swiss Re securities.
Date News Method of dissemination 23 February Swiss Re reports 31% rise in 2015 net income to USD 4.6 billion, increases dividend to CHF 4.60 and proposes new share buy-back; Christian Mumenthaler to become Group CEO as of 1 July 2016
News release, media conference call 25 May Swiss Re’s new SONAR report explores top emerging risks for the re/insurance industry and society
News release, sigma study 13 October Swiss Re Corporate Solutions and Bradesco Seguros launch joint venture to create leading commercial large-risk insurer in Brazil
News release 3 November Swiss Re reports strong net income of USD 3.0 billion for the first nine months of 2016; to start share buy-back programme
News release 2 December Swiss Re further expands its R&D capabilities to efficiently allocate capital into growing risk pools
Date Event 23 February 2016 annual results 16 March Publication of 2016 Annual Report and 2016 EVM results as well as of AGM 2017 invitation 21 April 153rd Annual General Meeting 4 May Release of first quarter 2017 key financial data 4 August Release of second quarter 2017 results 2 November Release of third quarter 2017 key financial data
Our actions are guided by sustainable, long-term value creation and have a tangible link to our financial performance.
Swiss Re has a long-standing commitment to being a responsible company. A key element in our understanding of what this means is the desire to contribute to sustainable, long-term value creation. Based on our values, doing business the Swiss Re way includes: “Taking the long-term view and playing our part in enabling sustainable progress — for stakeholders and society in general.”
A) Metrics to assess climate- related risks and opportunities: Understanding the risk, pp. 125–126
B) Process for managing climate-related risks: Understanding the risk, pp. 125–126
Based on these internal and external insights, in 2016 we conducted a comprehensive review of our key Corporate Responsibility Topics and developed a two-dimensional Corporate Responsibility Map to display them according to our stakeholders’ expectations and their relevance for our management. You can view both the revised list of topics and this map in our 2016 Corporate Responsibility Report, which has been published concurrently with the Annual Report.
The table below shows where we disclose information relevant to the FSB disclosures: Swiss Re 2016 Financial Report 123
Natural catastrophes are a key risk in our property and casualty (P&C) businesses. The damage caused by floods, storms, earthquakes and other natural disasters can affect millions of lives and the economies of entire countries. In 2016, the total worldwide economic losses from natural and man-made catastrophes were estimated at USD 175 billion — of these, USD 54 billion were insured.
intensity, spatial extent, duration and timing of extreme weather events. If climate change remains unchecked, the relative importance of the main drivers will thus gradually shift, with climate change accounting for an increasingly large share of natural catastrophe losses.
It is important to note that while the effect of climate change will increase gradually over the coming decades, most of our business is renewed annually and our risk models are refined every few years. Risks are normally covered for 12 months (up to five years for cat bonds). Thus, for risk management and underwriting purposes, our models provide an estimate of the current risk, and reinsurance premiums do not reflect expected loss trends over the next decades. But as natural catastrophe losses continue to rise as a result of the different factors described above, our models will gradually reflect this trend, since they are updated and refined at regular intervals.
Our proprietary integrated risk model is an important tool for managing the business: we use it to determine the economic capital required to support the risks on our books as well as to allocate risk-taking capacity to the different lines of business.
The four weather-related perils with the highest gross annual expected loss per end of 2016 are shown in the table below: Weather-related peril Annual expected loss in USD millions
Rentel offshore wind farm In 2016, Swiss Re Corporate Solutions signed two new offshore wind farm projects as co-lead insurer. One of them is Rentel (www.rentel.be) in the Belgian North Sea, situated approximately 34 km from Zeebrugge and 40 km from Ostend. It is being developed by a consortium of eight Belgian shareholders with a strong track record in offshore wind, who joined forces in a strategic competence centre. The insurance cover offers Rentel compensation for material damage and loss of profit both in the construction phase and the first three years of the farm’s operational phase.
Recently we have contributed to regulatory developments that aim to increase transparency regarding climate-related risks and opportunities. For example, we have provided a member of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), to which we refer in this section of our Financial Report. Starting from the premise that climate change creates physical, liability and transition risks, the TCFD aims to develop consistent and effective financial disclosures that will allow stakeholders to properly assess the climate risks faced by companies and to take appropriate actions.
We were also present at the launch event of the Sustainable Insurance Forum for Supervisors, held by the California Department for Insurance and the UN Environment Programme. The Forum’s goal is to promote cooperation on critical sustainable insurance challenges, such as climate change. Insurance regulators and supervisors are increasingly exploring how these factors impact their goals of ensuring the safety, soundness and accountability of the sector. For the first time, the Forum provides an international platform to share experience and explore common approaches.
We have played a prominent part in this initiative, joining up with utility company Veolia to help make the city’s vital systems more resilient to disasters, on the one hand, and to facilitate speedy relief and recovery on the other. At a ceremony celebrating Resilient Nola’s first anniversary in September 2016, the key measures of the project were 128 Swiss Re 2016 Financial Report
Unfortunately, a typical problem of such traditional crop insurance schemes is that their administration costs are often too high in the early stages when they do not yet have the critical mass of policies necessary to make them viable for its key stakeholders, ie governments, insurance companies and farmers. To overcome this obstacle and scale up the scheme, we have worked closely with the Thai government over the last two years.
In 2016, MiCRO launched a new product in Guatemala offering insurance protection against losses resulting from excessive rainfall, severe drought or earthquakes. It is an index-based solution, paying out automatically according to predetermined parameters and event data from objective sources, including NASA satellites. Local partners Banrural (www.banrural.com.gt) and Aseguradora Rural (www.aseguradorarural.com.gt) sell the policies. Swiss Re has provided technical assistance during product development and reinsures the risks.
In 2016, we also helped to launch two large natural catastrophe pilots in two provinces of China. You can read about these programmes in our 2016 Business Report on pages 22–25.
In southern China, Typhoon Haima fortunately had a less severe human toll but destroyed many houses and crops. The city of Shanwei in Guangdong Province is one of the prefectures that earlier in the year had signed up to our parametric insurance programme against natural disaster risks and so received a payout less than a week after the impact (see 2016 Business Report, page 23).
In Mexico, the MultiCat cat bond, which we helped to develop in 2009 in cooperation with the World Bank, made a payout of USD 50 million to the Mexican government early in the year. The payment was triggered by Hurricane Patricia in October 2015. When the storm formed off Mexico’s western coast, it was one of the strongest hurricanes on record. Fortunately, it weakened before making landfall and took a track over more rural areas, sparing many lives.
... to the Grow Africa Partnership In our efforts to bring risk protection to underinsured communities, the African continent — Sub-Saharan Africa in particular — has been a focus area in recent years. Reflecting this engagement, we made a commitment to the Grow Africa Partnership (www.growafrica.org), an initiative launched by a number of organisations to promote public-private collaboration and investment in African agriculture. As most smallholder farmers in Sub-Saharan Africa have lacked access to insurance protection so far, addressing this problem is crucial to protect families’ livelihoods, facilitate economic development and reduce poverty.
Sometimes, business transactions that create economic value and are in compliance with all legal and regulatory requirements may nevertheless have negative impacts on the environment or certain vulnerable groups. Furthermore, such transactions may damage our brand and/or reputation.
The Sustainability Risk Framework consists of: ̤ Two umbrella policies on human rights and environmental protection, and seven guidelines on sensitive sectors or issues; ̤ The Sensitive Business Risk (SBR) process with an online assessment tool and a referral tool — due diligence mechanisms to assess our business transactions; ̤ Company exclusions; and ̤ Country exclusions beyond mere compliance with international trade controls.
We assess such transactions through our Sensitive Business Risk (SBR) process, which consists of two due diligence mechanisms — the SBR online assessment tool and the SBR referral tool. The online tool, which we introduced in mid-2015, enables our underwriters to quickly screen all transactions for possible impacts on the local environment and on the human rights of the people and workforces affected.
If this screening reveals any potential issues, the underwriters carry out further due diligence. Finally, the most critical transactions are referred to our team of sustainability experts, who then conduct targeted research to decide whether the transaction at hand is acceptable on ethical grounds.
Due diligence checks carried out by our underwriters to detect potential sustainability risks (3 550 in second half of 2015, after introduction)
Country exclusions Swiss Re also excludes certain countries from its business, beyond compliance with international trade controls (ITCs). The criterion for these country exclusions is a particularly poor human rights record. Our goal is not to directly underwrite risks or make investments in entities that are based in these countries. At the end of 2016, the countries excluded from our business for human rights reasons were the Central African Republic, Chad, DR Congo, North Korea, Somalia, Sudan (both North and South) and Syria. We review this list annually based on independent human rights assessments and update it if warranted. The review carried out in 2016 did not produce any changes.
 19% Defence  17% Oil and gas  11% Excluded/critical country  11% Mining  9% Dams  9% Environmental degradation  8% Other industry/issue  6% Human rights  4% Forestry and logging
Living up to this promise, our global D&I community, a committed group of business D&I Champions, local D&I Councils and inclusive Employee Networks, continued their strong efforts to ensure our diversity and inclusion framework is firmly embedded in our corporate culture. These efforts are reflected in our 2016 employee engagement results, which tell us that our employees are positive about Swiss Re’s open and inclusive culture, and that they see the value we place on diversity.
Advancement of women Almost half of Swiss Re’s global workforce are women and we are steadily improving gender balance at management levels. To underline our commitment to reducing bias in talent decision-making, this year we integrated line manager training and tools into the recruiting process and across the talent life cycle. As part of our new employer brand positioning, we systematically apply D&I best practices, such as forming diverse hiring panels and using gendersensitive language and visuals in all job advertisements.
We have made considerable efforts to ensure our employees own the way they work and can effectively collaborate in an agile and flexible working environment. This is reflected in a variety of formal and informal flexible working arrangements that focus on performance outcomes versus face time. Our trademarked programme, Own the Way You Work™, is a cultural change initiative which gives managers and employees autonomy to decide how, when and where work is carried out, in compliance with the applicable laws, rules and regulations of their particular region. This has become a differentiating part of Swiss Re’s employee value proposition.
Code of Conduct In line with Swiss Re’s policy of fostering diversity, we have strong provisions in place to penalise any infringing behaviour. Our Code of Conduct, of which we published an updated version in 2016, clearly states that discrimination in the workplace against any employee or job applicant based on the person’s age, (dis)ability, origin, gender, religion or sexual orientation, or any other characteristic protected by local law, is not tolerated under any circumstances. We encourage our employees to report violations of the Code of Conduct, laws, rules or regulations, and make it clear to them that reporting in good faith is treated with discretion and that retaliation will not be tolerated.
Report from the Compensation Committee 138 Compensation context and highlights in 2016 140 Compensation framework 143 Compensation governance 150 Compensation disclosure and shareholdings 2016 154 Report of the statutory auditor 161
Dear shareholders, I am pleased to share with you Swiss Re’s Compensation Report for the financial year ended 31 December 2016, which has been prepared in accordance with applicable laws, rules and regulations.
Our vision “we make the world more resilient” is supported by our mission — to create smarter solutions for our clients through new perspectives, knowledge and capital. The combination of these strengths makes Swiss Re a partner of choice for our clients. At the same time Swiss Re wants to be an employer of choice for our employees. Its compensation framework is therefore designed to attract, motivate and retain the qualified talent the Group needs to succeed globally while providing superior returns to our shareholders. During the last year, the Compensation Committee continued to monitor: ̤ The alignment of the compensation framework with our long-term business strategy and shareholder interests; ̤ The effectiveness of the current performance measurement approach which assesses actual performance versus goals and then determines compensation outcomes; ̤ The competitiveness of compensation for the Group Board of Directors, Group Executive Committee (Group EC) and other executives; and
̤ Legal and regulatory developments including continued compliance of Board of Directors’ and Group EC compensation with the Ordinance against Excessive Compensation at Public Corporations (the Ordinance).
“ During the last year, the Compensation Committee continued to monitor the alignment of the compensation framework with our long- term business strategy and shareholder interests.”
The Compensation Committee would like to acknowledge the strong shareholder support at the Annual General Meeting (AGM) 2016. Swiss Re’s shareholders again approved the proposed aggregate compensation of the members of the Board of Directors and the Group EC. Additionally, all proposals for re-election and election to the Compensation Committee were approved and the 2015 Compensation Report received a positive outcome in the consultative vote.
Compensation framework Swiss Re’s compensation framework is designed to promote long-term sustainable performance for the Group and its shareholders through a mix of fixed and variable compensation components. It comprises fixed components such as base salary, pensions and other benefits, as well as a combination of variable short- and long-term incentives as outlined later in this Compensation Report. The Compensation Committee continues to review and monitor the compensation framework of Swiss Re considering business strategy, targets, risk awareness and corporate values. External factors with respect to regulatory requirements and legal developments, the international context and relevant market data are also taken into account.
Pay for performance The Compensation Committee ensures that executive management compensation is linked to the business performance of Swiss Re by delivering a substantial portion of compensation in the form of variable and performancerelated incentives.
2 Disclosure includes all awards for a reporting year, ie the 2016 aggregated compensation values include the fair value of the Leadership Performance Plan (LPP) granted in April 2016. The API for 2016 for members of the Group EC is subject to approval by the shareholders at the AGM 2017.
3 Represents incumbents and not positions. 4 Including previous and current Group CEO.
USD millions (unless otherwise stated) 2014 % 2015 % 2016 %
̤ 10% Variable compensation ̤ 16% Income tax expense ̤ 54% Net income paid out as dividend or share buy-back ̤ 20% Net income added to retained earnings compensation for the Group compensation framework and regulatory and performance of members sessions
Swiss Re Group and Business Units The Group delivered good US GAAP and strong economic results. Net income was supported by all Business Units, with a strong contribution from investments. The Group’s overall underwriting performance was solid, with technical profitability across all businesses. Property & Casualty Reinsurance delivered good US GAAP and solid economic results. Life & Health Reinsurance exceeded its return on equity (ROE) target and reported strong economic results. The Corporate Solutions US GAAP result was driven by continued pricing pressure and large man-made losses, and the economic result was impacted by the non-recognition of intangible assets (including goodwill) related to the IHC acquisition. Life Capital delivered a strong performance across all metrics and generated significant gross cash for the Group.
US GAAP financial performance Property & Casualty Reinsurance achieved good results in a challenging market environment. Despite various large losses, notably wildfires in Canada, Hurricane Matthew and an earthquake in New Zealand, the business segment delivered a good ROE for the year, supported by favourable prior accident year development and investment results. Life & Health Reinsurance continues to report good US GAAP results, demonstrating sustainability in its performance. Premium growth reflects the realisation of attractive opportunities, in particular through large transactions in the US, successful renewals and new business deals in Asia. The net operating margin of the business segment remains solid, underlining the quality of the in-force book and the profitability of the new business.
Economic Value Management financial performance The Group’s EVM profit in 2016 reflects a strong investment result and a strong Life & Health Reinsurance new business result. The EVM result of P&C Reinsurance was driven by a favourable previous years’ business result and a new business profit reflecting market softening and large losses. The Life & Health Reinsurance underwriting result was strong, driven by large transactions in the US, health initiatives and business growth in Asia, partially offset by higher capital costs for previous years’ business. Corporate Solutions generated a small EVM new business loss primarily driven by the non-recognition of intangible assets (including goodwill) related to the IHC acquisition, continued pricing pressure and large man-made losses, partially offset by higher profit from investment activities. Life Capital reported a strong EVM profit driven by strong investment results, partially offset by new business expenses and higher capital costs due to the adoption of Solvency II and lower risk-free interest rates.
Investment activities generated a strong EVM profit in 2016 mainly driven by the impact of credit spread tightening and performance from equities and alternative investments. The largest EVM profits were in Life Capital and Life & Health Reinsurance, which hold the majority of the Group’s credit investments.
Qualitative and overall assessment Qualitatively, Swiss Re has made noticeable improvements in 2016. Global employee engagement survey scores increased and remain above the relevant external benchmarks. Client centric behaviour also improved and is now close to the relevant externally benchmarked high performance norm. Additionally, Corporate Solutions concluded two important acquisitions (IHC in the US and Bradesco Seguros in Brazil) while Life Capital oversaw a very successful transition of the recent Guardian acquisition.
Both the Compensation Committee and the full Board of Directors assessed the 2016 performance of Swiss Re Group as solid across all metrics. The overall performance in the reported year was lower compared to the very good performance in 2015 but stronger compared to 2014. Consequently, variable compensation pools for the Group EC and other employees were set at lower levels than in 2015.
The LPP 2013 plan was granted on 1 April 2013 and vested on 31 March 2016. The Restricted Share Unit (RSU) component is measured against an ROE performance condition. At the end of each year, the performance is assessed and one third of the RSUs are locked in within a range of 0% to 100%. At the end of the three-year period, the total number of units locked in vests. For the LPP 2013 the average performance factor for the RSUs was 99.7% for the three-year period.
The Performance Share Unit (PSU) component is based on relative TSR, measured against a pre-defined basket of peers and vests within a range of 0% to 200%. For the LPP 2013 the performance factor for the PSUs was 60% for the three-year period.
The Human Resources function conducts a regular self-assessment of Swiss Re’s compliance with the Compensation Policy. The Compensation Committee reviews this self-assessment and identifies potential areas of improvement. The Compensation Committee receives reports on compensation decisions as appropriate, including a comprehensive review of the effectiveness of the annual compensation review cycle.
Swiss Re is required to assess the compliance of the Compensation Policy with the requirements of FINMA. As part of this process, the Board’s Finance and Risk Committee is required to review risks related to the Compensation Policy.
To facilitate the compliance certification process, a comprehensive risk analysis of the Compensation Policy is conducted on an annual basis.
The aim is to provide compensation that is competitive in local labour markets and to ensure that employees focus on delivering outstanding results while supporting appropriate and controlled risk-taking. A balanced compensation package is complemented by competitive pension plans and benefits.
Swiss Re has several incentive programmes that reflect the long-term nature of the business: both the VAI as the deferred part of the Annual Performance Incentive (API) and the LPP aim to reward sustained performance rather than short-term results. These programmes support closer alignment of the interests of shareholders and employees.
In addition, Swiss Re seeks to ensure that total compensation is well-balanced in terms of fixed versus variable compensation and in terms of short-term versus long-term incentives. This is to encourage sustainable performance and appropriate risk-taking.
The illustration below shows a summary of Swiss Re’s compensation and benefit components which are now further described.
Summary of compensation and benefit components Fixed Variable compensation Participation plans
No Yes Yes Yes No No * Certain members of Business Unit Executive Committees (BU ECs) and all Group Managing Directors (GMDs).
Value Alignment Incentive Purpose The VAI is a mandatory deferral of a portion of the API and introduces a time component to this performance-based, variable compensation. This supports the Group’s business model by aligning a portion of variable compensation with sustained long-term results. The aim is to ensure that the ultimate value of the deferred variable compensation through VAI is affected by the longer-term performance of the relevant Business Unit and the Group.
Leadership Performance Plan Purpose The purpose of the LPP is to provide an incentive for Swiss Re’s senior management to create sustainable company performance over the long term. The LPP is a forward-looking instrument awarded to participants with an objective to incentivise decisionmaking that is also in the shareholders’ interest.
Plan duration For LPP awards granted to Group EC members and other key executives, the duration of the LPP is five years comprising a three-year vesting and performance measurement period and an additional two-year holding requirement. For all other participants, the vesting and performance measurement period is three years with no additional holding requirement.
Structure At the grant date, the award amount is split into two underlying components, RSUs and PSUs, using a fair market value methodology executed by a third party.
Restricted Share Units The performance condition for RSUs is ROE with a linear vesting line. Vesting is at 0% for an ROE at the risk-free rate* and at 100% for an ROE at a predefined premium above the risk-free rate. The premium is set at the beginning of the plan period and for LPP 2016 this premium has been set at 900 basis points above the risk-free rate. At the end of each year, the performance against the ROE condition is assessed and one third of the RSUs are locked in within a range of 0% to 100%. At the end of the three-year period, the total number of units locked in at each measurement period will vest (capped at 100%**).
Performance Share Units The performance condition for PSUs is relative TSR measured over three years. The PSUs vest within a range of 0% to 200%.
Vesting starts at the 50th percentile of TSR relative to peers with 50% vesting and is capped at 200%** vesting at the 75th percentile relative to peers. In case of a negative TSR over three years, the Compensation Committee retains the discretion to reduce the level of vesting.
Performance period * The annual risk-free rate is determined as the average of 12 monthly rates for 10-year US treasury Bonds of the corresponding performance year. ** Maximum vesting percentage excludes share price fluctuation until vesting.
The Compensation Committee receives proposals from management requesting the total funding for variable compensation pools for both API and LPP. The management proposal for the annual API pool is generally based on the Group’s overall performance for the year. The LPP pool is reviewed in the context of sustainable business performance and affordability. The Compensation Committee considers these proposals and recommends a total pool to the full Board of Directors for approval. The Compensation Committee and the Chairman of the Board of Directors also propose an individual award for the Group CEO within this overall pool. The VAI is not funded as a separate pool: the API pool will include amounts paid in immediate cash and amounts to be deferred into the VAI.
Swiss Re uses a three-step process to assess business performance to help determine the overall Group API pool. The process comprises a financial, a qualitative and an overall assessment. The financial assessment covers ROE, net operating margin, EVM profit (% of economic net worth) and economic net worth growth measures for both the Group and each Business Unit individually. Also, multi-year comparisons and an assessment of the quality of earnings are considered. The chart below gives more detail on the criteria used to determine the size of the pool. The Business Units then allocate their pools following a similar assessment.
Global Share Participation Plan Swiss Re offers its employees an opportunity to directly participate in the long-term success of the Group by purchasing Swiss Re Ltd shares (for up to a maximum of CHF 7 000 per year and capped at 10% of base salary), through the Global Share Participation Plan (GSPP). Swiss Re provides a 30% match on the number of shares held by employees at the end of the three-year plan cycle. The match is subject to forfeiture rules in case of termination of employment before the end of the plan cycle. The GSPP has the same core design in all locations.
Includes assessment of the financial performance versus targets, a multi-year view and review of the quality of earnings that then impacts the overall assessment. KPIs include ROE,net operating margin, EVM profit (% of economic net worth) and economic net worth growth
The guidelines define target ownership by role and the ownership levels required are: ̤ Group CEO — 3x annual base salary; and ̤ Group EC members — 2x annual base salary.
The determination for whether a Group EC member has met the guidelines will include all vested shares that are owned directly or indirectly by the relevant member and related parties.
It is important that the compensation components are structured to achieve a strong alignment with the interests of the other shareholders of Swiss Re. In line with best practice, a significant portion (40%) of the compensation for the Board of Directors consists of Swiss Re Ltd shares.
The aggregate maximum amount of compensation for the members of the Board of Directors is approved by the AGM in advance of the term of office for which the Board of Directors are elected. The Board of Directors receive no variable or performance-based compensation. The fee level for each Board member, subject to their re-election, is reviewed annually to ensure that it remains appropriate.
Roles and time commitment The fees for the members of the Board of Directors reflect different responsibilities and committee memberships. The individual levels of pay therefore vary. Certain committees, such as the Audit Committee and the Finance and Risk Committee meet more frequently or hold longer meetings and hence have higher workloads.
The Chairman of the Board of Directors devotes himself full-time to his role. In defining the position of Chairman as a full-time role, Swiss Re applies best practice for highly regulated, complex financial institutions. The Chairman participates in developing the firm’s strategy, supervises the implementation of the agreed strategy and organises the work of the Board of Directors and its committees so these bodies can fulfill their responsibilities and authorities. The Chairman also has the important task, together with the Group CEO, in representing the firm to outside parties including shareholders, industry associations, the media, political and regulatory authorities (including the Group regulator, FINMA), government officials and the general public, in all key locations where Swiss Re operates.
Valid cross-border comparisons of the roles and responsibilities of the Swiss Re Board against the boards of other international companies are clearly difficult to make, given both the differing legal environment and operating context within each country. Nevertheless, it is apparent that the demands on the Swiss Re Board members continue to be high.
In addition to their core responsibilities, Board members, similar to the Chairman, are regularly asked to meet with external stakeholders including regulators and investors, all of which warrant additional time, dedication and commitment from the individuals concerned.
The Articles of Association of Swiss Re Ltd include rules on: ̤ the approval of compensation at the AGM (Art. 22); ̤ the additional amount for changes in the Group EC (Art. 23); ̤ the compensation principles for both the members of the Board of Directors and the Group EC covering short-term and long-term elements, performance-related pay, payment in shares, financial instruments or units, compensation in kind or other types of benefits (Art. 24); and
̤ Consists of at least three independent members of the Board of Directors, and each member of the Compensation Committee is elected individually at the AGM for a term of office until completion of the next AGM.
̤ Assesses the individual performance of the Group EC including the Group CEO and periodically reviews the effectiveness of the performance management process.
̤ Is responsible for making recommendations and overseeing the design and implementation of compensation principles, policy, framework, plans and disclosure.
̤ Reviews compensation principles, policies and share-based plans annually to ensure that they remain in line with Swiss Re’s objectives and strategy, shareholders’ interests, and legal and regulatory requirements.
Management ̤ The Group CEO, the Group Chief Operating Officer and the Chief Human Resources Officer participate in the Compensation Committee meetings.
Secretary ̤ The Head Reward serves as the Secretary to the Compensation Committee and attends its meetings (apart from the executive sessions).
̤ These advisors are retained by the Compensation Committee and provide the Compensation Committee with an external perspective.
Maximum aggregate amount of fixed compensation and long-term compensation of Group EC members
̤ 22% Variable compensation for the Group ̤ 14% Review of compensation framework ̤ 16% Compliance and regulatory ̤ 19% Compensation and performance of Group EC members ̤ 14% Executive sessions ̤ 15% Other topics compensation for the Group compensation framework and regulatory and performance of members sessions
Compensation Committee activities The Compensation Committee has an annual agenda to ensure that important reviews take place at the appropriate times throughout the year. The Compensation Committee also commits time to executive sessions and conducts periodic self-assessments to ensure its continued high level of effectiveness.
Outlined below is an overview of the main topics discussed during 2016: Items relating to the past performance cycle Meeting
̤ Performance assessment process and proposal of the variable compensation pool January and February
Compensation of the Board of Directors The compensation of the Board of Directors is reviewed annually and the Compensation Committee formulates proposals for the approval of the Board of Directors accordingly2.
̤ Review of the role and mandate of external advisors September 1 Within the maximum aggregate amount of compensation approved by the AGM and the additional amount available for changes in the Group EC after the AGM as per the Articles of Association respectively.
Risk and Control Related Behaviour assessment of Group and business functions Focus on the link between compensation and risk and control related behaviours continues. The Control Functions annually perform a quantitative and qualitative assessment of each of these behaviours independently and summarise the outcomes in a consolidated Group report.
Risk and Control Related Behaviour assessment of Key Risk Takers Key Risk Takers are defined as individuals who, by the nature of their role, can materially commit or control Swiss Re’s resources, or influence its risk profile. Swiss Re bears risks in the course of its business activities, including market, credit and liquidity, underwriting, operational (including legal and compliance) and reputational risk.
In 2016, Swiss Re has identified 210 positions that qualify as Key Risk Takers. This group consists of the members of the Group EC, BU EC members, GMDs and other roles with significant risk taking authority. The list of Key Risk Takers is reviewed on an annual basis.
The Control Functions assess the risk and control related behaviour of each Key Risk Taker and deliver a report to the business, the Group Chief Risk Officer and the Chief Human Resources Officer on an annual basis. This assessment serves as an additional factor when considering individual performance and compensation outcomes.
Independence of the Control Functions In order to ensure the continued independence of Control Functions, their compensation approval processes differ in that the annual compensation decisions for these functions are approved at the Board level.
Aggregate compensation for Key Risk Takers The aggregate compensation of the individuals that held a key risk-taking position during the performance years 2015 and 2016 was as follows: Performance Year 2015 Performance Year 2016
Annual Performance Incentive Cash Annual Performance Incentive 11 575 372 12 609 352
Annual Performance Incentive Cash Annual Performance Incentive 212 64 210 57
Long-term variable compensation Leadership Performance Plan 185 39 187 43 Other payments Severance payments1 1 0 3 0 1 Severance payments in the table above include (i) payments under standard severance packages, (ii) other payments that are over and above what is contractually or legally required, and (iii) voluntary supplementary departure payments, but exclude similar legally permitted payments or garden leave which are aligned with local market practice for comparable positions in respect of amount, nature or duration. No severance payments were made to members of the Group EC.
Compensation decisions for the Group EC The variable compensation awarded to all members of the Group EC (including the previous and current Group CEO) totalled CHF 32.4 million for 2016, compared to CHF 32.5 million for 2015. The following table covers payments to 14 members for 2016 of whom 12 were employed for the full year. The 2015 payments cover 12 members who were all employed for the full year.
Total fixed and variable compensation5 47 360 50 521 Compensation due to members leaving6 909 1 Represents incumbents and not positions.
Compensation decisions for the highest paid member of the Group EC The table below shows for 2015 the compensation paid to the Group CEO Michel Liès and for 2016 the compensation paid to Christian Mumenthaler, Group CEO since 1 July 2016.
3 Disclosure reflects all awards for a reporting year, ie the 2015 value reflects the fair value of the LPP award granted in April 2015 and the 2016 value reflects the fair value of the LPP award granted in April 2016.
4 Amounts are gross and include social security contributions of the employees. Additionally and not included are company contributions to social security systems paid by
Leadership Performance Plan units held by members of the Group EC The following table reflects total unvested LPP units (RSUs and PSUs) held by members of the Group EC as of 31 December: Loans to members of the Group EC As per Art. 27 of the Articles of Association, credits and loans to members of the Group EC may be granted at employee conditions applicable for the Swiss Re Group, with a cap on the total amount of such credits and loans outstanding per member.
In general, credit is secured against real estate or pledged shares. The terms and conditions of loans and mortgages are typically the same as those available to all employees of the Swiss Re Group in their particular locations to the extent possible.
The following table reflects total mortgages and loans for members of the Group EC as of 31 December: Christian Mumenthaler, Group CEO 49 755 75 458 Michel Liès, previous Group CEO 99 490 64 125 David Cole, Group Chief Financial Officer 49 755 49 426 John R. Dacey, Group Chief Strategy Officer 49 755 49 426 Guido Fürer, Group Chief Investment Officer 49 755 53 765 Agostino Galvagni, CEO Corporate Solutions 49 755 49 426 Jean-Jacques Henchoz, CEO Reinsurance EMEA 39 805 39 540 Moses Ojeisekhoba, CEO Reinsurance 39 805 43 011 Jayne Plunkett, CEO Reinsurance Asia n/a 33 130 J. Eric Smith, CEO Reinsurance Americas 39 805 39 540 Thierry Léger, CEO Life Capital n/a 43 011 Matthias Weber, Group Chief Underwriting Officer 49 755 49 426 Thomas Wellauer, Group Chief Operating Officer 49 755 49 426 Patrick Raaflaub, Group Chief Risk Officer 12 435 29 791
Compensation for the members of the Board of Directors The following two tables illustrate (1) the individual compensation for the members of the Board of Directors for the reported financial years 2015 and 2016 and (2) the individual compensation for the members of the Board of Directors paid or payable for the term of office from AGM 2016 to AGM 2017.
(1) Individual Board compensation for the reported financial years 2015 and 2016 was: (2) Individual Board compensation for the term of office between the AGM 2016 and the AGM 2017.
The table below provides more detailed information on the compensation paid or payable to each Board member against the maximum aggregate amount of CHF 10 100 000 as approved by the AGM 2016 (figures in CHF thousands): CHF thousands Total 2015 Fees and allowances in cash Fees in blocked shares Total 2016
Rajna Gibson Brandon, Member 316 195 130 325 C. Robert Henrikson, Chairman of the Compensation Committee 462 284 190 474 Hans Ulrich Maerki, former Member3 343 63 42 105
Swiss Re in line with applicable laws which amounted to CHF 478 385 in 2015 and CHF 410 271 in 2016. For Board members domiciled outside of Switzerland, company social security contributions are refunded, if bilateral social security agreements between Switzerland and the country of domicile apply and provide for such refund.
Sir Paul Tucker, Member M M 225 100 325 Susan L. Wagner, Member M C 225 350 575 Total compensation for the term of office from AGM 2016 to AGM 2017 9 9343
Legend: C = Chairperson of the respective Committee, M = Member of the respective Committee 1 Includes Vice Chairman fees and subsidiary fees. 2 Excluding company contributions to social security systems paid by Swiss Re in line with applicable laws. 3 Including an amount of approximately CHF 11 000 for minimal benefits.
Loans to members of the Board of Directors No loans were granted to current or former members of the Board in 2016 and no loans were outstanding as of 31 December 2016.
Compensation for former members of governing bodies During 2016, payments to the total amount of CHF 0.1 million were made to five former members of the Group EC. This amount is made up of company contributions payable by Swiss Re to governmental social security systems in line with applicable laws, benefits in the context of the outstanding mortgages and loans not at market rates, risk benefits and company commitments for tax related services.
Renato Fassbind, Vice Chairman, Chairman of the Audit Committee1 15 844 19 954 Mathis Cabiallavetta, former Member2 71 346 n/a Raymond K.F. Ch’ien, Member 18 459 19 978
Shareholder Compensation Resolutions and Awarded Compensation The following explanations give an overview of the applicable framework in Swiss Re’s Articles of Association based on the Ordinance, the high acceptance by the shareholders in the AGM 2016 of the respective motions by the Board of Directors and the reconciliation of the shareholders’ resolutions with the compensation awarded in the reporting year 2016.
Framework of the Articles of Association In accordance with Art. 22 of the Articles of Association, the Shareholders’ Meeting shall approve annually and with binding effect the proposals of the Board of Directors in relation to: a) the maximum aggregate amount of compensation of the Board of Directors for the next term of office; b) the maximum aggregate amount of (i) fixed compensation and (ii) long-term compensation of the Group EC for the following financial year; and c) the aggregate amount of short-term compensation of the Group EC for the preceding completed financial year.
At the AGM 2015, shareholders approved a prospective maximum aggregate amount of CHF 31.0 million for fixed compensation and variable long-term compensation for the financial year 2016 for the 12 members holding positions in the Group EC at the time of the AGM 2015.
Pursuant to applicable rules, the compensation for the two new members of the Group EC, Thierry Léger promoted to CEO Life Capital as from 1 January 2016 and Jayne Plunkett promoted to CEO Reinsurance Asia as from 1 July 2016, was first allocated in the amount of CHF 1.5 million to exhaust the approved compensation amount of CHF 31.0 million and then in the amount of CHF 2.2 million against the additional amount available of CHF 12.4 million of which CHF 1.2 million relates to compensation for Thierry Léger and CHF 1.0 million for Jayne Plunkett. The variable short-term compensation for the financial year 2016 is not part of the additional amount and it will be approved retrospectively by the AGM 2017 as part of the total variable short-term compensation of the Group EC. The compensation granted to the 14 members of the Group EC, which includes the previous CEO Michel Liès, for the financial year 2016 is shown on page 155.
At the AGM 2016, shareholders approved the maximum aggregate amount of compensation for the 11 members of the Board of Directors for the term of office from the AGM 2016 to the AGM 2017 of CHF 10.1 million.
AGM 2017 motion for variable short-term compensation for the Group EC for the financial year 2016 At the AGM 2017, the Board of Directors will propose to the shareholders to approve retrospectively an aggregate amount of variable short-term compensation for the 14 members of the Group EC for the completed financial year 2016 of CHF 18 263 261. This amount has been included in the items “Cash Annual Performance Incentive” and “Value Alignment Incentive” in the table for the Group EC compensation on page 155.
Opinion In our opinion, the Compensation Report included in the 2016 Financial Report of the Company for the year ended 31 December 2016 complies with Swiss law and Articles 14 to 16 of the Ordinance.
Notes to the Group financial statements 172 Note 1 Organisation and summary of significant accounting policies 172 Note 2 Information on business segments 182 Note 3 Insurance information 193 Note 4 Premiums written 198 Note 5 Unpaid claims and claim adjustment expenses 199 Note 6 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) 218 Note 7 Investments 220 Note 8 Fair value disclosures 228 Note 9 Derivative financial instruments 239 Note 10 Acquisitions and disposals 243 Note 11 Debt and contingent capital instruments 246 Note 12 Earnings per share 249 Note 13 Income taxes 250 Note 14 Benefit plans 253 Note 15 Share-based payments 261 Note 16 Compensation, participations and loans of members of governing bodies 264 Note 17 Related parties 265 Note 18 Commitments and contingent liabilities 266 Note 19 Significant subsidiaries and equity investees 267 Note 20 Variable interest entities 270 Report of the statutory auditor 276 Group financial years 2007–2016 280
Fee income from policyholders 3 463 540 Net investment income – non-participating business1 7 3 436 3 661 Net realised investment gains/losses – non-participating business2 7 1 206 1 484 Net investment result – unit-linked and with-profit business 7 814 5 382 Other revenues 44 28
Expenses Claims and claim adjustment expenses 3 –9 848 –12 564 Life and health benefits 3 –9 080 –10 859 Return credited to policyholders –1 166 –5 099
Operating expenses3 –3 248 –3 358 Total expenses before interest expenses –29 761 –38 808
Earnings per share in CHF4 1 Total impairments for the years ended 31 December of USD 83 million in 2015 and USD 66 million in 2016, respectively, were fully recognised in earnings. 2 Total impairments for the years ended 31 December of USD 57 million in 2015 and USD 88 million in 2016, respectively, were fully recognised in earnings. 3 Letter of credit fees of USD 55 million for the year ended 31 December 2015 have been reclassified from “Operating expenses” to “Interest expenses”. 4 The translation from USD to CHF is shown for informational purposes only and has been calculated using the Group’s average exchange rates.
Net income before attribution of non-controlling interests 4 668 3 623 Other comprehensive income, net of tax: Change in unrealised investment gains/losses –2 670 1 711 Change in other-than-temporary impairment –8 6 Change in cash flow hedges –7 Change in foreign currency translation –1 012 –387 Change in adjustment for pension benefits –191 –119
Amounts reclassified out of accumulated other comprehensive income –704 2 –39 61 –680 Tax –441 –2 –120 21 –542 Balance as of period end 4 459 –5 –7 –6 074 –1 135 –2 762 1 Reclassification adjustment included in net income is presented in “Net realised investment gains/losses – non-participating business”. 2 Reclassification adjustment included in net income is presented in “Operating expenses”.
Fixed income securities: Available-for-sale (including 11 897 in 2015 and 10 036 in 2016 subject to securities lending and repurchase agreements) (amortised cost: 2015: 76 155; 2016: 85 171) 79 435 90 581 Trading (including 1 729 in 2015 and 1 871 in 2016 subject to securities lending and repurchase agreements) 2 896 2 695
Equity securities: Available-for-sale (including 605 in 2015 and 23 in 2016 subject to securities lending and repurchase agreements) (cost: 2015: 4 294; 2016: 2 897) 4 719 3 375
Short-term investments (including 1 278 in 2015 and 2 960 in 2016 subject to securities lending and repurchase agreements) 7 405 10 909
Investments for unit-linked and with-profit business (including fixed income securities trading: 4 069 in 2015 and 5 153 in 2016, equity securities trading: 22 783 in 2015 and 25 807 in 2016) 28 241 32 178
Income taxes payable 488 633 Deferred and other non-current tax liabilities 8 093 8 583
Additional paid-in capital 482 341 Treasury shares, net of tax –1 662 –1 763 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax 2 748 4 459 Other-than-temporary impairment, net of tax –11 –5 Cash flow hedges, net of tax –7 Foreign currency translation, net of tax –5 687 –6 074 Adjustment for pension and post-retirement benefits, net of tax –1 016 –1 135
Common shares Balance as of 1 January 35 35 Issue of common shares Cancellation of shares bought back –1 Balance as of period end 35 34
Additional paid-in capital Balance as of 1 January 1 806 482 Cancellation of shares bought back –176 Share-based compensation 17 2 Realised gains/losses on treasury shares –61 33 Dividends on common shares1 –1 280 Balance as of period end 482 341
Other-than-temporary impairment, net of tax Balance as of 1 January –3 –11 Changes during the period –8 6 Balance as of period end –11 –5
Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January –825 –1 016 Changes during the period –191 –119 Balance as of period end –1 016 –1 135
Non-controlling interests Balance as of 1 January 111 89 Changes during the period –25 –4 Income attributable to non-controlling interests 3 –3 Balance as of period end 89 82 1 The distributions to shareholders in 2015 were paid in the form of a withholding tax exempt repayment of legal reserves from capital contributions.
Cash flows from operating activities Net income attributable to common shareholders 4 597 3 558 Add net income attributable to non-controlling interests 3 –3
Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items 594 643 Net realised investment gains/losses –1 221 –5 787 Income from equity-accounted investees, net of dividends received 202 135 Change in: Technical provisions and other reinsurance assets and liabilities, net –121 5 845 Funds held by ceding companies and under reinsurance treaties 764 862 Reinsurance recoverable on unpaid claims and policy benefits 670 434 Other assets and liabilities, net 87 –37 Income taxes payable/recoverable –567 –24 Trading positions, net 404 489
Cash flows from financing activities Policyholder account balances, unit-linked and with-profit business: Issuance/repayment of long-term debt 199 762 Issuance/repayment of short-term debt –1 155 –1 331 Purchase/sale of treasury shares –579 –1 170 Dividends paid to shareholders –2 608 –1 561 Net cash provided/used by financing activities –6 008 –6 397
Foreign currency remeasurement and translation Transactions denominated in foreign currencies are remeasured to the respective subsidiary’s functional currency at average exchange rates. Monetary assets and liabilities are remeasured to the functional currency at closing exchange rates, whereas non- monetary assets and liabilities are remeasured to the functional currency at historical rates. Remeasurement gains and losses on monetary assets and liabilities and trading securities are reported in earnings. Remeasurement gains and losses on available-for-sale securities, investments in consolidated subsidiaries and investments accounted for using the equity method are reported in shareholders’ equity.
Investments The Group’s investments in fixed income and equity securities are classified as available-for-sale (AFS) or trading. Fixed income securities AFS and equity securities AFS are carried at fair value, based on quoted market prices, with the difference between the applicable measure of cost and fair value being recognised in shareholders’ equity. Trading fixed income and equity securities are carried at fair value with unrealised gains and losses recognised in earnings. A trading classification is used for securities that are bought and held principally for the purpose of selling them in the near term or for securities where the Group has decided to apply the fair value option.
The Group recognizes the effect of income tax positions only if sustaining those positions is more likely than not. Changes in recognition or measurement are reflected in the period in which a change in judgement occurs.