collateral accepted which the Group has the right to sell or repledge as of 31 December 2012 and 2013, the fair value of the government and corporate bond securities received as collateral was usD 4 329 million and usD 4 367 million, respectively. of this, the amount that was sold or repledged as of 31 December 2012 and 2013 was usD 1 195 million and usD 1 472 million, respectively. the sources of the collateral are reverse repurchase agreements and derivative transactions.
Net amounts of financial assets presented in the balance sheet related financial instruments not set off in the balance sheet Net amount securities borrowing 0 0 2013 usD millions
Net amounts of financial liabilities presented in the balance sheet related financial instruments not set off in the balance sheet Net amount 2012 usD millions
Gross amounts of recognised financial liabilities collateral set off in the balance sheet
mortgages, loans and real estate as of 31 December, the carrying values of investments in mortgages, policy and other loans, and real estate (excluding unit-linked and with-profit business) were as follows: the fair value of the real estate as of 31 December 2012 and 2013 was usD 2 536 million and usD 2 551 million, respectively. the carrying value of policy loans, mortgages and other loans approximates fair value.
Depreciation expense related to income-producing properties was usD 24 million and usD 25 million for 2012 and 2013, respectively. accumulated depreciation on investment real estate totalled usD 549 million and usD 577 million as of 31 December 2012 and 2013, respectively.
fair value, as defined by the fair Value measurements and Disclosures topic, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
the fair Value measurements and Disclosures topic requires all assets and liabilities that are measured at fair value to be categorised within the fair value hierarchy. this three-level hierarchy is based on the observability of the inputs used in the fair value measurement. the levels of the fair value hierarchy are defined as follows: level 1 inputs are quoted prices in active markets for identical assets or liabilities that the Group has the ability to access. level 1 inputs are the most persuasive evidence of fair value and are to be used whenever possible.
level 3 inputs are unobservable inputs. these inputs reflect the Group’s own assumptions about market pricing using the best internal and external information available.
the fair values of assets are adjusted to incorporate the counterparty risk of non-performance. similarly, the fair values of liabilities reflect the risk of non-performance of the Group, captured by the Group’s credit spread. these valuation adjustments from assets and liabilities measured at fair value using significant unobservable inputs are recognised in net realised gains and losses. for the year ended 31 December 2013, these adjustments were not material. Whenever the underlying assets or liabilities are reported in a specific business segment, the valuation adjustment is allocated accordingly. Valuation adjustments not attributable to any business segment are reported in Group items.
corporate debt securities mainly include us and european investment-grade positions, which are priced on the basis of quotes provided by third-party pricing vendors and first utilise valuation inputs from actively traded securities, such as bid prices, bid spreads to treasury securities, treasury curves, and same or comparable issuer curves and spreads. issuer spreads are determined from actual quotes and traded prices and incorporate considerations of credit/default, sector composition, and liquidity and call features. Where market data is not available, valuations are developed based on the modelling techniques that utilise observable inputs and optionadjusted spreads and incorporate considerations of the security’s seniority, maturity and the issuer’s corporate structure.
the category “other aBs” primarily includes debt securitised by credit card, student loan and auto loan receivables. pricing inputs for these securities also focus on capturing, where relevant, collateral quality and performance, payment patterns, and delinquencies.
the Group uses third-party pricing vendor data to value agency securitised products, which mainly include collateralised mortgage obligations (cmo) and mortgage-backed government agency securities. the valuations generally utilise observable inputs consistent with those noted above for rmBs and cmBs.
equity securities held by the Group for proprietary investment purposes are mainly classified in levels 1 and 2. securities classified in level 1 are traded on public stock exchanges for which quoted prices are readily available. level 2 equities include equity investments fair valued pursuant to the fair value option election and certain hedge fund positions; all valued based on primarily observable inputs.
the category “other invested assets” mainly includes the Group’s private equity and hedge fund investments which are made directly or via ownership of funds. substantially all these investments are classified as level 3 due to the lack of observable prices and significant judgment required in valuation. Valuation of direct private equity investments requires significant management judgment due to the absence of quoted market prices and the lack of liquidity. initial valuation is based on the acquisition cost, and is further refined based on the available market information for the public companies that are considered comparable to the Group’s holdings in the private companies being valued, and the private company-specific performance indicators; both historic and projected. subsequent valuations also reflect business or asset appraisals, as well as market transaction data for private and public benchmark companies and the actual companies being valued, such as financing rounds and mergers and acquisitions activity. the Group’s holdings in the private equity and hedge funds are generally valued utilising net asset values (NaV), subject to adjustments, as deemed necessary, for restrictions on redemption (lock-up periods and amount limitations on redemptions).
the Group’s otc credit derivatives include index and single-name credit default swaps, as well as more complex structured credit derivatives. plain vanilla credit derivatives, such as index and single-name credit default swaps, are valued by the Group based on the models consistent with the industry valuation standards for these credit contracts, and primarily utilising observable inputs published by market data sources, such as credit spreads and recovery rates. these valuation techniques warrant classification of plain vanilla otc derivatives as level 2 financial instruments in the fair value hierarchy.
Governance around level 3 fair valuation the Group risk & capital committee, chaired by the Group chief risk officer, has a primary responsibility for governing and overseeing all of the Group’s valuation policies and operating parameters (including level 3 measurements). the Group risk & capital committee delegates the responsibility for implementation and oversight of consistent application of the Group’s pricing and valuation policies to the pricing and Valuation committee, which is a management control committee. Key functions of the pricing and Valuation committee include: oversight over the entire valuation process, approval of internal valuation methodologies, approval of external pricing vendors, monitoring of the independent price verification (ipV) process and resolution of significant or complex valuation issues.
a formal ipV process is undertaken monthly by members of the ipV team within a financial risk management function. the process includes monitoring and in-depth analyses of approved pricing methodologies and valuations of the Group’s financial instruments aimed at identifying and resolving pricing discrepancies.
the risk function is responsible for independent validation and ongoing review of the Group’s valuation models. the product control group within finance is tasked with reporting of fair values and is empowered to challenge vendor- and model-based valuations.
assets and liabilities measured at fair value on a recurring basis as of 31 December, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: 2012 usD millions
impact of netting1 total assets fixed income securities held for proprietary investment purposes 13 474 74 676 698 88 848
impact of netting1 total assets fixed income securities held for proprietary investment purposes 5 454 73 180 662 79 296
corporate debt securities residential mortgagebacked securities commercial mortgage-backed securities other asset-backed securities equity securities held for proprietary investment purposes Derivative interest rate contracts Derivative foreign exchange contracts Derivative equity contracts Derivative credit contracts other derivative contracts other invested assets total assets realised/unrealised gains/losses: included in net income 49 –1 20 7 –192 –430 44 –15 –518 included in other comprehensive income –18 2 3 121 108 issuances 0 sales –448 –40 –32 –18 –33 –216 –787 settlements –58 –9 –7 –81 –12 –2 –169 transfers out of level 31 –26 –4 –3 –7 –1 474 –112 –41 –257 –74 –1 998 impact of foreign exchange movements 10 10 closing balance as of 31 December 2012 685 0 13 0 74 0 0 636 223 151 2 098 3 880
Derivative credit contracts other derivative contracts liabilities for life and health policy benefits total liabilities realised/unrealised gains/losses: included in other comprehensive income 0 purchases 0 issuances –2 –19 –50 –71 transfers into level 31 –368 –126 –29 –523 impact of foreign exchange movements 1 1 closing balance as of 31 December 2012 0 0 –232 –271 –2 362 –272 –3 137 1 transfers are recognised at the date of the event or change in circumstances that caused the transfer. With the introduction of asu No. 2011-4 the Group has reassessed the observability of fair value inputs as of 1 January 2012. Yield curves for instruments with maturities above 20 years were deemed observable and related positions were therefore reclassified to level 2. the inputs of one level 2 position were assessed to be unobservable, the respective assets and liabilities were therefore shifted to level 3.
Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) the gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) for the years ended 31 December were as follows: assets and liabilities measured at fair value on a non-recurring basis the acquired present value of future profits (pVfp) of business in force is recorded in connection with the acquisition of life and/or health business. the initial value is determined actuarially by discounting estimated future gross profits as a measure of the value of business acquired. the resulting asset is amortised on a constant yield basis over the expected revenue recognition period of the business acquired, generally over periods ranging up to 30 years, with the accrual of interest added to the unamortised balance at the earned rate. the carrying value of pVfp is reviewed periodically for indicators of impairment in value. adjustments to reflect impairment in value are recognised in earnings during the period in which the determination of impairment is made.
transfers between level 1 and level 2 transfers between level 1 and level 2 for the year ended 31 December 2012 were as follows: there were no material transfers between level 1 and level 2 for the year ended 31 December 2013.
Gains/losses included in net income for the period 1 234 1633 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date 1 005 1 484 2012 usD millions
Derivative credit contracts –271 –38 credit default swaps referencing various asset-backed securities (aBs) –86 –7 credit spreads derived based on a reciprocal of a reference instrument up-front credit default swap premium 1%–91% (65%) credit correlation tranche transactions –171 –30 Base correlation model correlation 40%–88% (64%)1 other derivative contracts and liabilities for life and health policy benefits –2 634 –910 Variable annuity and fair valued GmDB contracts –2 287 –677 Discounted cash flow model risk margin 4% (n.a.)
embedded derivatives in mod-co and coinsurance with funds Withheld treaties –170 –125 Discounted cash flow model lapse 3%–10% mortality adjustment 80% (n.a.)
Quantitative information about level 3 fair value measurements unobservable inputs for major level 3 assets and liabilities as of 31 December were as follows: 164 Swiss Re 2013 financial report
fair value fair value Valuation technique unobservable input range (weighted average)
the significant unobservable input used in the fair value measurement of the Group’s credit default swaps referencing aBs is a current up-front credit default swap premium. Where the Group is long protection, a significant increase (decrease) in this input in isolation would result in a significantly higher (lower) fair value measurement. Where the Group is short protection, a significant decrease (increase) in this input in isolation would result in a significantly higher (lower) fair value measurement.
the significant unobservable input used in the fair value measurement of the Group’s credit correlation tranche transactions is correlation. Where the Group is long correlation, a significant increase (decrease) in this input in isolation would result in a significantly higher (lower) fair value measurement. Where the Group is short correlation, a significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement.
the significant unobservable inputs used in the fair value measurement of the Group’s option referencing private equity underlying are: volatility and growth rate. Where the Group is long vega, a significant increase (decrease) in volatility in isolation would result in a significantly higher (lower) fair value measurement. Where the Group is short vega, a significant increase (decrease) in volatility in isolation would result in a significantly lower (higher) fair value measurement. Where the Group is long delta, a significant increase (decrease) in the growth rate in isolation would result in a significantly higher (lower) fair value measurement. Where the Group is short delta, a significant increase (decrease) in the growth rate in isolation would result in a significantly lower (higher) fair value measurement.
the significant unobservable inputs used in the fair value measurement of the Group’s variable annuity and fair valued guaranteed minimum death benefit (GmDB) contracts are: risk margin, volatility, lapse, mortality adjustment rate and withdrawal rate. a significant increase (decrease) in isolation in each of the following inputs: risk margin, volatility and withdrawal rate would result in a significantly higher (lower) fair value of the Group’s obligation. a significant increase (decrease) in isolation in a lapse rate for in-the-money contracts would result in a significantly lower (higher) fair value of the Group’s obligation, whereas for out-of-the-money contracts, an isolated increase (decrease) in a lapse assumption would increase (decrease) fair value of the Group’s obligation. changes in the mortality adjustment rate impact fair value of the Group’s obligation differently for living-benefit products, compared to death-benefit products. for the former, a significant increase (decrease) in the mortality adjustment rate (i.e. increase (decrease) in mortality, respectively) in isolation would result in a decrease (increase) in fair value of the Group’s liability. for the latter, a significant increase (decrease) in the mortality adjustment rate in isolation would result in an increase (decrease) in fair value of the Group’s liability.
the significant unobservable inputs underlying the fair valuation of an embedded derivative bifurcated from the Group’s modified coinsurance (mod-co) and coinsurance with funds Withheld treaties are lapse and mortality adjustment to published mortality tables; both are applied to build an expectation of cash flows associated with the underlying block of term business. Both inputs are not expected to significantly fluctuate over time.
the private equity direct portfolio consists of equity and equity-like investments directly in other companies. these investments have no contractual term and are generally held based on financial or strategic intent.
private equity and real estate funds generally have limitations imposed on the amount of redemptions from the fund during the redemption period due to illiquidity of the underlying investments. fees may apply for redemptions or transferring of interest to other parties. Distributions are expected to be received from these funds as the underlying assets are liquidated over the life of the fund, which is generally from 10 to 12 years.
Fair value option the fair value option under the financial instruments topic permits the choice to measure specified financial assets and liabilities at fair value on an instrument-by-instrument basis.
(if currently eligible) redemption notice period private equity funds 701 735 301 non-redeemable n.a. hedge funds 1 140 749 redeemable1 90–180 days2 private equity direct 96 138 non-redeemable n.a. real estate funds 223 231 97 non-redeemable n.a.
1 the redemption frequency varies from monthly to up to three years. 2 cash distribution can be delayed for up to three years depending on the sale of the underlyings.
usD millions 2012 2013 assets equity securities held for proprietary investment purposes 672 615 of which at fair value pursuant to the fair value option 509 544 other invested assets 11 164 of which at fair value pursuant to the fair value option 403 liabilities liabilities for life and health policy benefits –36 117 –36 033 of which at fair value pursuant to the fair value option –272 –145 usD millions 2012 2013 equity securities held for proprietary investment purposes 54 35 other invested assets 72 liabilities for life and health policy benefits 71 125 168 Swiss Re 2013 financial report
Debt positions, which are fair valued based on executable broker quotes or based on the discounted cash flow method using observable inputs, are classified as level 2 measurements. fair value of the majority of the Group’s level 3 debt positions is judged to approximate carrying value due to the highly tailored nature of the obligation and short-notice termination provisions.
significant unobservable inputs (level 3) total assets policy loans 284 284 other loans 653 653 liabilities 2013 usD millions significant other observable inputs
the Group uses a variety of derivative financial instruments including swaps, options, forwards, credit derivatives and exchange-traded financial futures in its trading and hedging strategies, in line with the Group’s overall risk management strategy. the objectives include managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities, as well as locking in attractive investment conditions for future available funds.
the fair values represent the gross carrying value amounts at the reporting date for each class of derivative contract held or issued by the Group. the gross fair values are not an indication of credit risk, as many over-the-counter transactions are contracted and documented under isDa master agreements or their equivalent. management believes that such agreements provide for legally enforceable setoff in the event of default, which substantially reduces credit exposure.
Notional amount assets/liabilities fair value assets fair value liabilities carrying value assets/liabilities
Derivatives not designated as hedging instruments foreign exchange contracts 15 580 252 –417 –165
for the years ended 31 December 2012 and 2013, the Group recorded an accumulated net unrealised foreign currency remeasurement gain of usD 220 million and a gain of usD 29 million, respectively, in shareholders’ equity. these offset translation gains and losses on the hedged net investment.
Derivatives not designated as hedging instruments interest rate contracts –141 –241 foreign exchange contracts –547 –584 equity contracts –774 –962 credit contracts –82 –71 total gain/loss recognised in income –514 –130 usD millions
Fair value hedging relationships interest rate contracts –26 33 –240 255 foreign exchange contracts –24 11 2 –1 total gain/loss recognised in income –50 44 –238 254 172 Swiss Re 2013 financial report
maximum potential loss in consideration of the rights of setoff and the qualifying master netting arrangements with various counterparties, the maximum potential loss as of 31 December 2012 and 2013 was approximately usD 3 463 million and usD 1 746 million, respectively. the maximum potential loss is based on the positive market replacement cost assuming non-performance of all counterparties, excluding cash collateral.
credit derivatives written/sold the Group writes/sells credit derivatives, including credit default swaps, credit spread options and credit index products, and total return swaps. the total return swaps, for which the Group assumes asset risk mainly of variable interest entities, qualify as guarantees under fasB asc topic 460. these activities are part of the Group’s overall portfolio and risk management strategies. the events that could require the Group to perform include bankruptcy, default, obligation acceleration or moratorium of the credit derivative’s underlying.
the following tables show the fair values and the maximum potential payout of the credit derivatives written/sold as of 31 December 2012 and 2013, categorised by the type of credit derivative and credit spreads, which were based on external market data. the fair values represent the gross carrying values, excluding the effects of netting under isDa master agreements and cash collateral netting. the maximum potential payout is based on the notional values of the derivatives and represents the gross undiscounted future payments the Group would be required to make, assuming the default of all credit derivatives’ underlyings.
the fair values of the credit derivatives written/sold do not represent the Group’s effective net exposure as the isDa master agreement and the cash collateral netting are excluded.
the Group has purchased protection to manage the performance/payment risks related to credit derivatives. as of 31 December 2012 and 2013, the total purchased credit protection based on notional values was usD 16 689 million and usD 2 061 million, respectively, of which usD 8 220 million and usD 514 million, respectively, were related to identical underlyings for which the Group sold credit protection. for tranched indexes and baskets, only matching tranches of the respective index were determined as identical. in addition to the purchased credit protection, the Group manages the performance/payment risks through a correlation hedge, which is established with non-identical offsetting positions.
total maximum potential payout 2012 usD millions 0–5 years 5–10 years over 10 years credit Default Swaps credit spread in basis points credit index Products credit spread in basis points total Return Swaps credit spread in basis points
No credit spread available 1 25 25 total credit derivatives written/sold 1 180 400 60 640
as of 31 December, the Dac were as follows: retroceded Dac may arise on retrocession of reinsurance portfolios, including reinsurance undertaken as part of a securitisation. the associated potential retrocession recoveries are determined by the nature of the retrocession agreements and by the terms of the securitisation.
in 2013, based on the results of shadow loss recognition testing the shadow loss reserve was reduced by usD 308 million, net of tax, impacting pVfp and other comprehensive income. the adjustment relates to admin re® business and is reflected in the “effect of change in unrealised gains/losses” in the table above. shadow loss recognition testing considers the adequacy of contractual liabilities, net of Dac and pVfp, using current best estimates of all future cash flows discounted at current market yields. the purpose is to reflect the fact that certain amounts recorded as unrealised investment gains and losses within shareholders’ equity will ultimately accrue to policyholders and not shareholders. shadow losses recognised can reverse up to the amount of losses recognised due to a loss recognition event.
usD millions life & health reinsurance admin re® total life & health reinsurance admin re® total opening balance as of 1 January 1 674 2 552 4 226 1 358 1 665 3 023 effect of acquisitions/disposals and retrocessions –206 126 –80 206 –30 176 amortisation –201 –244 –445 –151 –184 –335 interest accrued on unamortised pVfp 51 140 191 35 186 221 effect of foreign currency translation 40 56 96 3 44 47 effect of change in unrealised gains/losses –316 –316 405 405 Write-off of pVfp –649 –649 0 closing balance as of 31 December 1 358 1 665 3 023 1 451 2 086 3 537
The Groupʼs debt as of 31 December was as follows: The Group uses debt for general corporate purposes and to fund discrete pools of operational leverage and financial intermediation assets. Operational leverage and financial intermediation are subject to asset and liability matching, resulting in little to no risk that the assets will be insufficient to service and settle the liabilities. Debt used for operational leverage and financial intermediation is treated as operational debt and excluded by the rating agencies from financial leverage calculations. Certain debt positions are limited recourse, meaning the debtorsʼ claims are limited to assets underlying the financing. As of 31 December 2012 and 2013, debt related to operational leverage and financial intermediation amounted to USD 9.9 billion (thereof USD 6.1 billion limited recourse) and USD 9.0 billion (thereof USD 6.1 billion limited recourse), respectively.
Short-term debt – financial and operational debt 3 612 3 818
USD millions 2012 2013 1 Balance was reclassified to short-term debt.
Subordinated long-term debt maturity Instrument Issued in Currency Nominal in millions Interest rate Book value in USD millions
Various payment undertaking agreements various USD 559 various 707 Total senior debt as of 31 December 2013 3 941 Total senior debt as of 31 December 2012 6 656 1 Assumed in the acquisition of Ge Insurance Solutions.
Subordinated private placement (amortising, limited recourse) 2007 GBp 1 355 4.90% 2 223
Subordinated private placement (amortising, limited recourse) 2007 GBp 1 929 4.77% 3 191 Subordinated perpetual loan note 2006 eUR 1 000 5.25% 2016 1 376 Subordinated perpetual loan note 2006 USD 752 6.85% 2016 752 Subordinated perpetual loan note 2007 GBp 500 6.30% 2019 826 2 subordinated perpetual loan notes 2007 AUD 750 various 2017 669
interest expense on long-term debt and contingent capital instruments Interest expense on long-term debt for the years ended 31 December was as follows: Interest expense on contingent capital instruments was USD 56 million and USD 67 million for the years ended 31 December 2012 and 2013, respectively.
contingent capital instruments issued in 2012 In February 2012, Swiss Reinsurance Company ltd issued a perpetual subordinated instrument with stock settlement. The instrument has a face value of ChF 320 million, with a fixed coupon of 7.25% per annum until the first optional redemption date (1 September 2017).
In march 2012, Swiss Reinsurance Company ltd issued a perpetual subordinated capital instrument with stock settlement. The instrument has a face value of USD 750 million, with a fixed coupon of 8.25% per annum until the first optional redemption date (1 September 2018).
Both instruments may be converted, at the option of the issuer, into Swiss Re ltd shares at any time through at market conversion using the retrospective five-day volume weighted average share price with a 3% discount or within six months following a solvency event at a pre-set floor price (ChF 26 for the instrument with face value of ChF 320 million and USD 32 for the instrument with face value of USD 750 million, respectively). These instruments are referred to in these financial statements as “contingent capital instruments”.
The liability for unpaid claims and claim adjustment expenses as of 31 December is analysed as follows: A reconciliation of the opening and closing reserve balances for non-life unpaid claims and claim adjustment expenses for the period is presented as follows: The Group does not discount liabilities arising from prospective property and casualty insurance and reinsurance contracts, including liabilities which are discounted for US statutory reporting purposes. liabilities arising from property and casualty insurance and reinsurance contracts acquired in a business combination are initially recognised at fair value in accordance with the purchase method of accounting.
Reinsurance recoverable –6 610 –7 101 Deferred expense on retroactive reinsurance –320 –229 net balance as of 1 January 46 897 45 680
Deferred expense on retroactive reinsurance 229 56 182 Swiss Re 2013 Financial Report
A summary of prior year claims development by lines of business is shown below: US asbestos and environmental claims exposure The Groupʼs obligation for claims payments and claims settlement charges also includes obligations for long-latent injury claims arising out of policies written prior to 1986, in particular in the area of US asbestos and environmental liability.
At the end of 2013, the Group carried net reserves for US asbestos and environmental liabilities equal to USD 1 950 million. During 2013, the Group incurred net losses of USD 352 million and paid net against these liabilities USD 393 million.
Premiums earned and fees assessed against policyholders 2012 USD millions property & Casualty Reinsurance life & health Reinsurance
Premiums earned, thereof: Intra-group transactions (assumed and ceded) –278 250 278 –250 0
Premiums earned before retrocession to external parties 15 819 10 935 2 859 1 150 6 30 769
Fee income from policyholders, thereof: Intra-group transactions (assumed and ceded) 8 –8 0
Fee income ceded to external parties 0 184 Swiss Re 2013 Financial Report
claims and claim adjustment expenses acquisition costs 2012 USD millions property & Casualty Reinsurance life & health Reinsurance
Receivables from retrocession to external parties 1 620 2 209 379 293 4 501 change in unpaid claims and claim adjustment expenses; life and health benefits, thereof: Intra-group transactions (assumed and ceded) 1 219 –85 –1 225 91 0
Reinsurance ceded to external parties 316 –398 95 –29 –16 net unpaid claims and claim adjustment expenses; life and health benefits 2 445 –525 –730 359 4 1 553 claims and claim adjustment expenses; life and health benefits –6 306 –6 787 –1 448 –2 086 –14 –16 641 2012 USD millions property & Casualty Reinsurance life & health Reinsurance
Corporate Solutions Admin Re® Group items Total acquisition costs, thereof: Gross acquisition costs with external parties –3 522 –2 057 –362 –177 –3 –6 121 Intra-group transactions (assumed and ceded) 55 –14 –55 14 0 acquisition costs before impact of retrocession to external parties –3 467 –2 071 –417 –163 –3 –6 121 net acquisition costs –2 316 –1 787 –300 –142 –3 –4 548 186 Swiss Re 2013 Financial Report
claims and claim adjustment expenses acquisition costs 2013 USD millions property & Casualty Reinsurance life & health Reinsurance
Corporate Solutions Admin Re® Group items Total claims paid, thereof: Gross claims paid to external parties –10 421 –8 564 –3 086 –2 269 –2 –24 342 Intra-group transactions (assumed and ceded) –1 417 –334 1 422 331 –2 0 claims before receivables from retrocession to external parties –11 838 –8 898 –1 664 –1 938 –4 –24 342
Reinsurance recoverable on unpaid claims and policy benefits For the year ended 2013 the Group recorded a reinsurance recoverable of USD 8.3 billion. The concentration of credit risk is regularly monitored and evaluated. The reinsurance programme with Berkshire hathaway and subsidiaries accounts for 62% of the Group’s reinsurance recoverable.
Reinsurance receivables Reinsurance receivables as of 31 December were as follows: Policyholder dividends policyholder dividends are recognised as an element of policyholder benefits. The relative percentage of participating insurance of the life and health policy benefits in 2012 and 2013 was 8% and 7%, respectively. The amount of policyholder dividend expense in 2012 and 2013 was USD 124 million and USD 139 million, respectively.
Receivables invoiced from ceded re/insurance business 447 446 Assets arising from the application of the deposit method of accounting and meeting the definition of financing receivables 1 322 1 273 Recognised allowance –109 –101 188 Swiss Re 2013 Financial Report
For the years ended 31 December 2012 USD millions property & Casualty Reinsurance life & health Reinsurance
Gross premiums written before retrocession to external parties 15 978 11 101 3 490 1 154 31 723
Gross premiums written before retrocession to external parties 17 022 11 355 3 648 909 32 934
Dividends are declared in Swiss francs. During the years ended 31 December 2012 and 2013, the Groupʼs regular dividends declared per share were CHF 3.00 and CHF 3.50 respectively, as well as an additional special dividend of CHF 4.00 for the 2012 financial year paid in 2013. All dividends were paid in the form of withholding tax exempt repayment of legal reserves from capital contributions.
Earnings per share for the years ended 31 December were as follows: USD millions (except share data) 2012 2013
Non-controlling interests –141 –2 Interest on contingent capital instruments1 –56 –67 Net income attributable to common shareholders 4 201 4 444 Attribution of value to option on redeemable non-controlling interest –132 Net income attributable to common shareholders after adjustment to non-controlling interest 4 069 4 444 Weighted average common shares outstanding 343 380 921 342 764 609 Net income per share in USD 11.85 12.97 Net income per share in CHF2 11.13 12.04
Effect of dilutive securities Change in income available to common shares due to contingent capital instruments1 54 69 Change in average number of shares due to contingent capital instruments 28 617 588 35 745 192 Change in average number of shares due to employee options 720 579 1 094 715
For 2013, the Group reported a tax expense of USD 312 million. This represents an effective tax rate of 6.5%, compared to an effective tax rate of 20.4% in the prior year. The lower tax rate in the current year is primarily due to lower taxes on the geographical mix of earnings, non-taxable income in Switzerland and the release of uncertain tax liabilities upon effective settlements with local tax authorities.
Current taxes 472 641 Deferred taxes 653 –329 income tax expense 1 125 312
Income tax at the Swiss statutory tax rate of 21.0% 1 160 1 013 Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates 150 61 Impact of foreign exchange movements –2 –8 Tax exempt income/dividends received deduction –61 –164 Change in valuation allowance –274 –257 Tax effects of losses not recognised 73 Basis differences in subsidiaries –74 –152 Change in statutory tax rates –44 2 Change in liability for unrecognised tax benefits including interest and penalties 146 –144 other, net 51 –39
As of 31 December 2013, the Group had USD 11 172 million net operating tax loss carryforwards, expiring as follows: USD 70 million in 2017, USD 152 million in 2018, USD 6 380 million in 2019 and beyond and USD 4 570 million never expire.
Income taxes paid in 2012 and 2013 were USD 123 million and USD 447 million, respectively.
Net deferred and other non-current taxes –3 724 –2 479 192 Swiss Re 2013 Financial Report
Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: The amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 871 million and USD 778 million at 31 December 2012 and 31 December 2013, respectively.
Australia 2009–2013 Korea 2009–2013 Belgium 2010–2013 luxembourg 2008–2013 Brazil 2008–2013 Malaysia 1996–2013 Canada 2008–2013 Mexico 2008–2013 China 2003–2013 Netherlands 2010–2013 Denmark 2009–2013 New Zealand 2008–2013 France 2008–2013 Singapore 2008–2013 Germany 2007–2013 Slovakia 2009–2013 Hong Kong 2007–2013 South Africa 2004, 2009–2013 India 2005–2013 Spain 2009–2013 Ireland 2010–2013 Switzerland 2009–2013 Israel 2008–2013 United Kingdom 2008, 2011–2013 Italy 2009–2013 United States 2009–2013 Japan 2009–2013
Benefit obligation as of 1 January 3 328 1 952 363 5 643
Benefits paid –158 –74 –15 –247 Employee contribution 25 25 Acquisitions/disposals/additions –9 –9 Effect of curtailment and termination benefits 1 –56 –55 Effect of foreign currency translation 81 56 1 138 Benefit obligation as of 31 December 3 692 2 192 383 6 267
Amendments 0 Actuarial gains/losses –338 57 –47 –328 Benefits paid –137 –73 –15 –225 Employee contribution 26 26 Acquisitions/disposals/additions 0 Effect of curtailment and termination benefits 1 1 Effect of foreign currency translation 97 35 3 135 Benefit obligation as of 31 December 3 531 2 305 341 6 177
Fair value of plan assets as of 1 January 3 214 2 001 5 215 Actual return on plan assets 221 141 362
Non-current assets 130 49 179 Current liabilities –2 –16 –18 Non-current liabilities –107 –325 –432 Net amount recognised 130 –60 –341 –271
Net gain/loss 521 385 –109 797 Prior service cost/credit –2 2 –88 –88
other changes in plan assets and benefit obligations recognised in other comprehensive income for the years ended 31 December were as follows: The estimated net loss and prior service cost for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2014 are USD 61 million and USD 1 million, respectively. The estimated net gain and prior service credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2014 are USD 11 million and USD 11 million, respectively.
Pension plans with an accumulated benefit obligation in excess of plan assets as of 31 December were as follows: USD millions Swiss plan Foreign plans other benefits Total
Prior service cost/credit 2 2 Amortisation of: Net gain/loss –42 –12 9 –45
Effect of settlement, curtailment and termination –10 –10 Exchange rate gain/loss recognised during the year 11 11 total recognised in other comprehensive income, gross of tax 83 111 44 238 total recognised in net periodic benefit cost and other comprehensive income, gross of tax 210 135 43 388
Net gain/loss –457 15 –46 –488 Prior service cost/credit 0 Amortisation of: Net gain/loss –57 –18 6 –69
Effect of settlement, curtailment and termination 0 Exchange rate gain/loss recognised during the year 10 10 total recognised in other comprehensive income, gross of tax –514 7 –30 –537 total recognised in net periodic benefit cost and other comprehensive income, gross of tax –368 20 –29 –377
Projected benefit obligation 4 652 594 Accumulated benefit obligation 4 584 593 Fair value of plan assets 3 938 490
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend rates would have had the following effects for 2013: Swiss plan Foreign plans weighted average other benefits weighted average assumptions used to determine obligations at the end of the year assumptions used to determine net periodic pension costs for the year ended
assumed medical trend rates at year end Medical trend – initial rate 6.2% 6.0% Medical trend – ultimate rate 4.5% 4.5% Year that the rate reaches the ultimate trend rate 2019 2018
Equity securities include Swiss Re common stock of USD 5 million (0.1% of total plan assets) and USD 7 million (0.1% of total plan assets) as of 31 December 2012 and 2013, respectively.
Equity securities: Equity securities held for proprietary investment purposes 1 030 801 1 831
Derivative financial instruments 16 16 total assets at fair value 1 236 3 714 763 5 713 200 Swiss Re 2013 Financial Report
assets measured at fair value using significant unobservable inputs (level 3) For the years ended 31 December, the reconciliation of fair value of pension plan assets using significant unobservable inputs were as follows: Expected contributions and estimated future benefit payments The employer contributions expected to be made in 2014 to the defined benefit pension plans are USD 195 million and to the post-retirement benefit plan are USD 16 million.
As of 31 December 2013, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: Defined contribution pension plans The Group sponsors a number of defined contribution plans to which employees and the Group make contributions. The accumulated balances are paid as a lump sum at the earlier of retirement, termination, disability or death. The amount expensed in 2012 and in 2013 was USD 71 million and USD 74 million, respectively.
Balance as of 1 January 572 125 697 Realised/unrealised gains/losses: Relating to assets still held at the reporting date 31 1 32 Relating to assets sold during the period 4 4
Total compensation cost for share-based compensation plans recognised in net income was USD 69 million and USD 126 million in 2012 and 2013, respectively. The related tax benefit was USD 17 million and USD 28 million, respectively.
Restricted shares The Group granted 38 930 and 10 458 restricted shares to selected employees in 2012 and 2013, respectively. Moreover, as an alternative to the Group's cash bonus programme, 275 309 and 295 535 shares were delivered during 2012 and 2013, respectively, which are not subject to forfeiture risk.
A summary of the movements in shares relating to outstanding awards granted under the restricted share plans for the year ended 31 December 2013 is as follows: The weighted average fair value of restricted shares, which equals the market price of the shares on the date of the grant, was CHF 50 and CHF 67 in 2012 and 2013, respectively.
Board level Performance Share Plan In 2010, the Group granted a share plan for the Chairman and one Vice Chairman of the Board of Directors. Since 2011 no more plan was granted. The plan has a requisite service period of three years and is settled in shares. The plan is measured based on Swiss Reʼs Total Shareholder Return (TSR), representing the share price performance plus paid dividend in any performance period, against a selected peer group. The final number of shares to be released upon vesting can vary between 0% and 150% of the original grant. The fair value of the 2010 plan was based on the share price as of the date of grant, which was CHF 53.60. The 2010 plan vested in 2013.
Number of options outstanding as of 1 January 72 958 902 options sold 68 –713 772 options forfeited or expired 76 –145 130 Outstanding as of 31 December 89 100 000 Exercisable as of 31 December 89 100 000
Outstanding as of 31 December 67 528 974 202 Swiss Re 2013 Financial Report
As of 31 December 2013 the 2011 lTI grant was outstanding. The plan is expected to be settled in shares in March 2014. The payout factor is driven by average RoE and average EPS over the vesting period. The unit grant date fair value was CHF 39.39.
For the lPP 2012, the grant date fair value of the RSU component is CHF 42.00 and of the PSU component CHF 35.60. For the lPP 2013, the grant date fair value of the RSU component is CHF 61.19 and of the PSU component CHF 52.59.
In 2012, 1 664 419 options were issued to employees. From 2013 onwards, the Employee Participation Plan was discontinued and no more options were issued. In 2012 and 2013, the Group contributed USD 41 million and USD 34 million, respectively, to the outstanding plans.
If the employee is still employed by Swiss Re at the end of a plan cycle, the employee will receive an additional number of shares equal to 30% of the total number of purchased and dividend shares held at that time. In 2013, Swiss Re contributed USD 3 million to the plan and authorised 28 218 shares as of 31 December 2013.
As of 31 December 2012 and 2013, the Group’s investment in mortgages and other loans included USD 279 million and USD 304 million, respectively, of loans due from employees, and USD 215 million and USD 233 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
Share ownership and loans extended to members of BoD and Group EC are disclosed in Note 14 Compensation, participations and loans of members of governing bodies in the financial statements of Swiss Re ltd. The total number of shares, options and related instruments held by members of the BoD and the Group EC and persons closely related to, amounts to less than 1% of the shares issued by Swiss Re ltd. None of the members of BoD and the Group EC has any significant business connection with Swiss Re ltd or any of its Group companies.
Share in earnings and dividends received from equity-accounted investees for the years ended 31 December, were as follows: USD millions 2012 2013
Legal proceedings In the normal course of business operations, the Group is involved in various claims, lawsuits and regulatory matters. In the opinion of management, the disposition of these matters is not expected to have a material adverse effect on the Group’s business, consolidated financial position or results of operations.
property & Casualty includes the business lines property, casualty including motor, and specialty. Life & health includes the life and health sub-segments.
Group items Items not allocated to the business segments are included in the “Group items” column, which encompasses Swiss Re Ltd, the Group holding company, the former Legacy business in run-off, principal Investments and certain Treasury units. The holding company charges trademark licence fees to the operating segments which are reported as other revenues. Certain administrative expenses of the corporate centre functions that are not recharged to the operating segments are reported as Group items.
consolidation Segment information is presented net of external and internal retrocession and other intra-group arrangements. The Group total is obtained after elimination of intra-group transactions in the “Consolidation” column. This includes significant intra-group reinsurance arrangements, recharge of trademark licence fees, and intersegmental funding.
a) Business segments – income statement For the year ended 31 December 2012 USD millions property & Casualty Reinsurance
Fee income from policyholders 72 713 785 Net investment income – non-participating 1 451 1 365 109 1 548 18 –18 4 473 Net realised investment gains/losses – non-participating 259 562 142 –89 73 947 Net investment result – unit-linked and with-profit 222 2 348 2 570 expenses Claims and claim adjustment expenses –6 306 –1 448 –14 5 –7 763 Life and health benefits –6 787 –2 086 –5 –8 878 Return credited to policyholders –271 –2 688 –2 959
Interest expenses –111 –586 –53 –51 65 –736 income before income tax expense 4 076 1 008 339 89 11 0 5 523 Income tax expense/benefit –934 –231 –143 101 82 –1 125 net income before attribution of non-controlling interests 3 142 777 196 190 93 0 4 398
Income attributable to non-controlling interests –134 –7 –141 net income after attribution of non-controlling interests 3 008 777 196 183 93 0 4 257
Interest on contingent capital instruments –18 –38 –56 net income attributable to common shareholders 2 990 739 196 183 93 0 4 201
Fee income from policyholders 56 486 542 Net investment income – non-participating 1 098 1 442 98 1 180 150 –21 3 947 Net realised investment gains/losses – non-participating 184 269 150 201 –38 766 Net investment result – unit-linked and with-profit 249 3 098 3 347 expenses Claims and claim adjustment expenses –7 884 –1 773 2 –9 655 Life and health benefits –8 075 –1 506 –9 581 Return credited to policyholders –286 –3 392 –3 678
Management expense ratio in % 8.3 operating margin in % 5.2
b) Property & casualty Reinsurance business segment – by line of business For the year ended 31 December 2012 USD millions property Casualty Specialty Total expenses Claims and claim adjustment expenses –2 832 –2 818 –656 –6 306 Acquisition costs –781 –1 128 –407 –2 316 other expenses –687 –406 –232 –1 325 Total expenses before interest expenses –4 300 –4 352 –1 295 –9 947
Net investment income 1 451 Net realised investment gains/losses 259 other revenues 95 Interest expenses –111 income before income tax expenses 4 076 214 Swiss Re 2013 Financial Report
Net investment income 1 098 Net realised investment gains/losses 184 other revenues 61 Interest expenses –207 income before income tax expenses 3 561
Fee income from policyholders 72 72 Net investment income – non-participating 899 466 1 365 Net investment income – unit-linked and with-profit 32 32 Net realised investment gains/losses – unit-linked and with-profit 190 190 Net realised investment gains/losses – insurance-related derivatives –147 –147 other revenues 1 1 Total revenues before non-participating realised gains/losses 7 223 3 340 10 563 expenses Life and health benefits –4 625 –2 162 –6 787 Return credited to policyholders –271 –271 Acquisition costs –1 299 –488 –1 787 other expenses –613 –220 –833 Total expenses before interest expenses –6 808 –2 870 –9 678
Management expense ratio in % 9.0 6.8 8.3 1 operating margin is calculated as operating income divided by total operating revenues. Total operating revenues are total revenues excluding unit-linked and with-profit revenues.
Net premiums earned and fee income from policyholders are allocated by country based on the underlying contract.
method of consolidation f full e equity fv fair value 1 Net asset value instead of share capital
Denmark Swiss Re Denmark Services A/S, Copenhagen 0 0 100 f
Liechtenstein elips Life AG, Vaduz 14 12 100 f elips Versicherungen AG, Vaduz 6 5 100 f
Switzerland european Reinsurance Company of Zurich Ltd, Zurich 291 258 100 f Swiss Re Asset Management Geneva SA, Geneva 0 0 100 f Swiss Re Corporate Solutions Ltd, Zurich 119 106 100 f Swiss Re Direct Investments Company Ltd, Zurich 0 0 100 f Swiss Re Investments holding Company Ltd, Zurich 0 0 100 f Swiss Re Investments Company Ltd, Zurich 1 1 100 f Swiss Re Life Capital Ltd, Zurich 0 0 100 f Swiss Re principal Investments Company Ltd, Zurich 0 0 100 f Swiss Reinsurance Company Ltd, Zurich 32 29 100 f 220 Swiss Re 2013 Financial Report
South africa Swiss Re Life and health Africa Limited, Cape Town 0 0 100 f asia-Pacific australia Swiss Re Australia Ltd, Sydney 667 593 100 f Swiss Re Life & health Australia Limited, Sydney 787 700 100 f china Alltrust Insurance Company of China Limited, Shanghai 126 112 5 fv india Swiss Re Shared Services (India) private Ltd., Bangalore 2 2 100 f
Vietnam Vietnam National Reinsurance Corporation, hanoi 32 28 25 e 222 Swiss Re 2013 Financial Report
The party that has a controlling financial interest is called the primary beneficiary and consolidates the VIe. An enterprise is deemed to have a controlling financial interest if it has both of the following: ̤ the power to direct the activities of the VIe that most significantly impact the entity’s economic performance; and ̤ the obligation to absorb losses of the entity that could potentially be significant to the VIe or the right to receive benefits from the entity that could potentially be significant to the VIe.
Generally, the activities of a securitisation vehicle are pre-determined at formation. There are substantially no ongoing activities during the life of the VIe that could significantly impact the economic performance of the vehicle. Consequently, the main focus to identify the primary beneficiary is on the activities performed and decisions made when the VIe was designed. Typically, the Group is considered the primary beneficiary of a securitisation vehicle when the Group acts as a sponsor of risk passed to the VIe and enters at the same time into a total return swap with the VIe to protect the VIe’s assets from market risk. Under the total return swap, the Group would incur losses if some or all of the securities held as collateral in the securitisation vehicle decline in value or default. Therefore, the Group’s maximum exposure to loss equals the principal amount of the collateral protected under the total return swap.
Swaps in trusts The Group provides risk management services to certain asset securitisation trusts which qualify as VIes. As the involvement of the Group is limited to interest rate and foreign exchange derivatives, Swiss Re does not have power to direct any activities of the trusts and therefore does not qualify as primary beneficiary of any of these trusts. These activities are in run-off.
Debt financing vehicles Debt financing vehicles issue preference shares or loan notes to provide the Group with funding. The Group is partially exposed to the asset risk by holding equity rights or by protecting some of the assets held by the VIes via guarantees or derivative contracts. The assets held by the VIes consist of investment-grade securities, structured products, hedge fund units, derivatives and others.
As of 31 December 2013, the total assets of investment vehicles in which the Group holds variable interests but is not the primary beneficiary were USD 2 499 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 8 million.
As of 31 December 2013, the total assets of other VIes in which the Group holds variable interests but is not the primary beneficiary were USD 1 739 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 82 million.
Carrying value Whereof limited recourse: Carrying value Whereof limited recourse: Accrued expenses and other liabilities 76 76 20 20 226 Swiss Re 2013 Financial Report
Short-term debt 399 417 Accrued expenses and other liabilities 385 422 Total liabilities 784 839
In 2013, the Group set up total provisions of USD 46 million, and released USD 2 million.
Changes in restructuring provisions are disclosed in the “other expenses” line in the Group’s income statement.
Increase in provision 7 2 9 Release of provision –4 –4 Costs incurred –14 –1 –15 2013 USD millions property & Casualty Reinsurance
Increase in provision 46 46 Release of provision –2 –2 Costs incurred –12 –1 –1 –14 228 Swiss Re 2013 Financial Report
The Board of Directors is ultimately responsible for the Group’s governance principles and policies; these include the Group Risk policy, which establishes both the guiding principles of risk management as well as the overall risk tolerance of the Group.
̤ The Group products and Limits Committee determines Swiss Re’s product policy and underwriting standards, sets transaction limits, and decides on large or non-standard transactions.
̤ The Group Regulatory Committee is the central information and coordination platform for regulatory matters and compliance. It ensures a consistent approach to external communication on regulatory issues.
The Group Risk Management function is comprised of central departments providing shared services (such as Risk Reporting), along with dedicated departments for the Reinsurance, Corporate Solutions, and Admin Re® Business Units.
each of these Business Unit departments has a dedicated Chief Risk officer who reports directly to the Group CRo, with a secondary reporting line to the respective Business Unit Ceo. The Business Unit CRos are responsible for risk oversight in their respective Business Units, establishing the proper risk governance to ensure efficient risk identification, assessment, and control. There are also Regional CRos (Americas, Asia, and eMeA) with reporting duties to the Reinsurance regional management teams. They also provide functional support to the Regional presidents.
Senior managers of Business and corporate Units are responsible for managing operational risks in their areas of activity, based on a centrally coordinated methodology. Their self-assessments are reviewed and challenged by dedicated operational risk managers. Risk management experts also review Swiss Re’s underwriting decision processes.
Risk management activities are also supported by Group Internal Audit and Compliance. The Group Internal Audit department carries out independent, objective assessments of the adequacy and effectiveness of internal control systems. It evaluates the execution of processes within Swiss Re, including those within Risk Management.
auditor’s responsibility our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
In accordance with article 728a paragraph 1 item 3 Co and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.
2 Trading revenues are included in net investment income; long-term debt also includes debt positions from former Financial Markets. 3 The Group changed its reporting currency from ChF into USD in 2010. periods prior to 2010 have been translated to USD for informational purposes only based on the
Income/loss attributable to non-controlling interests –154 –172 –141 –2 net income after attribution of non-controlling interests 1 985 1 852 3 637 3 460 –663 699 1 980 2 626 4 257 4 511
The Company earned trademark license fees of CHF 284 million and incurred administrative expenses of CHF 174 million, of which CHF 148 million were charges for services provided by Swiss Reinsurance Company Ltd. In addition, the Company incurred other expenses of CHF 117 million, including changes in the provision for currency fluctuation and realised foreign exchange losses of CHF 112 million, and capital and indirect taxes of CHF 5 million.
As of 31 December 2013, the Company held short-term loans of CHF 1 774 million (2012: CHF 2 710 million) granted to Swiss Reinsurance Company Ltd. The decrease was mainly related to a partial funding of dividends to shareholders and aforementioned capital contributions.
Liabilities Short-term liabilities Payables to subsidiaries and affiliated companies – 7 other liabilities and accrued expenses 0 14 total short-term liabilities 0 21
Retained earnings brought forward 19 7 Net income for the financial year 2 718 2 707 total liabilities and shareholders’ equity 19 961 20 116
Basis of presentation On 1 January 2013, new Swiss accounting and financial reporting legislation entered into force based on partial revisions of the Swiss Code of Obligations. Based on the transitional provisions, the new provisions have to be implemented for annual accounts from the 2015 financial year onwards, at the latest. therefore, Swiss Re Ltd’s financial statements for the 2013 financial year have been prepared based on the accounting provisions of the Swiss Code of Obligations in effect until 31 december 2012.
time period the financial year 2013 comprises the accounting period from 1 January 2013 to 31 december 2013.
short-term investments Short-term investments contain investments with an original maturity between three months and one year. Such investments are carried at cost, less necessary and legally permissible depreciation.
investments in subsidiaries and affiliated companies these assets are carried at cost, less necessary and legally permissible depreciation.
Provisions the provision for taxation represents an estimate of taxes payable in respect of the reporting year.
Foreign exchange transaction gains and losses Foreign exchange gains and losses arising from foreign exchange transactions are recognised in the income statement and reported in other expenses or other income, respectively.
income tax expense As a holding company incorporated in Switzerland, Swiss Re Ltd is exempt from income taxation at cantonal/communal level. On federal level, dividends from subsidiaries and affiliated companies are indirectly exempt from income taxation (participation relief). However, income tax is payable on trademark license fees charged to certain subsidiaries and affiliated companies.
As of 31 december 2013, securities of CHF 334 million were lent to Group companies under securities lending agreements, whereas in 2012 securities of CHF 9 million were lent to Group companies. As of 31 december 2013 and 2012, there were no securities lent to third parties.
As of 31 december 2013 and 2012, Swiss Re Ltd held the following investments in subsidiaries and affiliated companies: as of 31 December 2013 domicile Affiliation Share capital
Swiss Reinsurance Company Ltd Zurich 100% CHF 34.4 million Swiss Re Corporate Solutions Ltd Zurich 100% CHF 100.0 million Swiss Re Life Capital Ltd Zurich 100% CHF 0.1 million Swiss Re investments Holding Company Ltd Zurich 100% CHF 0.1 million Swiss Re Principal investments Company Ltd Zurich 100% CHF 0.1 million Swiss Re Specialised investments Holdings (UK) Ltd London 100% GBP 1.0 million
Cash dividends from subsidiaries and affiliated companies 3 836 2 641 dividends in-kind from subsidiaries and affiliated companies 5 810 805 Realised gains on sale of investments 19 61 income from short-term investments 0 0 income from loans to subsidiaries and affiliated companies 9 13 investment management income 0 1 Other interest revenues 0 0
in the year under report, 5 998 405 (2012: 4 100 174) own shares were purchased at an average price of CHF 78.85 (2012: CHF 49.53) and 5 044 780 (2012: 3 897 216) own shares were sold at an average price of CHF 72.95 (2012: CHF 61.15).
As of 31 december 2013, there were three shareholders with a participation exceeding the 3% threshold of Swiss Re Ltd’s share capital: in addition, Swiss Re Ltd held, as of 31 december 2013, directly and indirectly 28 512 910 (2012: 27 560 372) own shares, representing 7.69% (2012: 7.43%) of voting rights and share capital. Swiss Re Ltd cannot exercise the voting rights of own shares held.
Opening balance of shareholders’ equity 18 268 19 954 dividend payments for the previous year –1 032 –2 5711 Net income for the financial year 2 718 2 707 shareholders’ equity as of 31 December before proposed dividend payments 19 954 20 090 Proposed dividend payments –2 574 –2 7382 shareholders’ equity as of 31 December after proposed dividend payments 17 380 17 352 1 Since the Board of directors’ proposal for allocation of disposable profit, included in the Annual Report 2012, the number of registered shares eligible for dividend, at the dividend payment date of 17 April 2013, decreased due to the transfer of 340 411 shares for employee participation purposes from eligible to not eligible for dividend. this resulted in a lower dividend of CHF 3 million, compared to the Board of directors’ proposal, and in higher legal reserves from capital contributions by the same amount.
with respect to a maximum of CHF 5 000 000 through the issuance of up to 50 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10, out of the total amount of authorised capital referred to above, the subscription rights of shareholders may not be excluded.
Joint provision for conditional capital for equity-linked Financing instruments and for the above-mentioned 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 10 April 2015.
Opening balance of legal reserves from capital contributions 8 995 7 994 Reclassification to other reserves for dividend payments –1 032 –2 571 Additions to legal reserves from capital contributions 31 – legal reserves from capital contributions as of 31 December 7 994 5 423 thereof confirmed by the Swiss Federal Tax Administration1 7 802 5 231 1 Under current Swiss tax legislation, the amount of legal reserves from capital contributions, which has been confirmed by the Swiss Federal tax Administration, can be paid out as dividends exempt from Swiss withholding tax, and for Swiss resident individual shareholders holding shares in private wealth also exempt from Swiss income taxes.
the identification, assessment and control of risk exposures of Swiss Re Ltd on a stand-alone basis are integrated in and covered by Swiss Re’s Group risk management organisation and processes.
compensation for acting members of governing bodies Article 663bbis of the Swiss Code of Obligations requires disclosure of total compensation paid to members of the Board of directors and the Group eC. Compensation to members of the Board of directors and the highest paid member of the Group eC is shown by individual. For a description of the compensation elements of this, see page 105, Compensation.
the value of the Value Alignment incentive (VAi) is based on the nominal amount of the grant. Subsequently, a disbursement factor, which can vary between 50% and 150%, is applied based on the economic results of the Group. the VAi disclosed in the table above assumes a disbursement factor of 100% at grant date. For a description of the VAi plan see page 116, Compensation.
8 Covers legally or contractually required payments for members who were in the role for only a part of the reporting period. 9 Represents incumbents and not positions.
For US GAAP and statutory reporting purposes, VAi and long-term incentive awards are accrued over the period during which they are earned. For the purpose of the disclosure required of this note, the value of awards granted is included as compensation in the year of performance, for the years 2013 and 2012 respectively.
Highest paid member of the Group ec in 2013, Michel M. Liès, CeO, was the highest paid member of the Group eC. the compensation of the Group CeOs for the respective periods was: CHF thousands1 20122 2013
Cash Annual Performance incentive 1 450 1 600 1 the company contributions to social security systems paid by Swiss Re in line with applicable laws amounted to CHF 613 490 in 2012 and CHF 491 381 in 2013. the table shows gross amounts.
compensation for former members of governing bodies in 2012, in the context of the outstanding mortgages and loans not at market rates for former members as well as of risk benefits, the equivalent of approximately CHF 60 000 was provided to three former members of the Group eC as a benefit in kind. No other compensation was paid to former members of the Group eC in 2012.
the table shows gross amounts. 3 Chairman of the Finance and Risk Committe since 13 April 2012, Chairman of the investment Committee. 4 elected to Vice Chairman as of 13 April 2012. 5 Chairman of the Finance and Risk Committe until 13 April 2012. 6 elected to Swiss Re’s Board of directors at the Annual General Meeting of 10 April 2013. 7 elected to Swiss Re’s Board of directors at the Annual General Meeting of 13 April 2012. 8 includes fees for duties on the board of US Group companies. 9 term of office expired as of 13 April 2012 and did not stand for re-election due to retirement.
Group ec and Board of Directors share ownership, options and related instruments share ownership the disclosure below is in line with article 663c para. 3 of the Swiss Code of Obligations, which requires disclosure of share ownership, options and related instruments individually for each member of the Board of directors and the Group eC.
Mathis Cabiallavetta, Vice Chairman1 54 546 109 177 Renato Fassbind, Vice Chairman2 5 073 7 655 Jakob Baer, Chairman of the Audit Committee 40 568 44 699
the number of performance units outstanding as of 31 december 2012 were 55 971 for walter B. Kielholz, Chairman, and 27 986 for Mathis Cabiallavetta, Vice Chairman. the plan vested in 2013 and therefore no more units were outstanding as of 31 december 2013.
Vested options the following vested options were held by members of Group governing bodies as of 31 december: the vested options held by members of Group governing bodies as of 31 december 2012 and 2013 will expire between 2013–2015 and 2014–2015, respectively. the underlying exercise price for the outstanding option series has been adjusted for the special dividend payout in 2013.
the stock options shown in the table above for the members of the Board of directors were awarded at a period when the recipients were still members of Swiss Re’s executive management.
Number of options Members of the Board of directors 2012 2013 weighted average strike price in CHF as of grant date 86.26 83.04 1 Chairman of the Finance and Risk Committe until 13 April 2012.
Members of the Group eC 2012 2013 weighted average share price in CHF as of grant date 53.10 53.10 Moses Ojeisekhoba, CeO Reinsurance Asia1 13 093 5 693 1 Appointed to the Group eC as of 15 March 2012.
loans to members of governing bodies the following tables provides an overview of loans to members of governing bodies as of 31 december: the loan shown in the table above for the member of the Board of directors was established when the recipient was still a member of Swiss Re’s executive management.
Related parties transactions disclosure in this note covers members of the Group eC and the Board of directors as indicated, and for both includes related parties to the extent applicable. Such related parties cover spouses, partners, children and other dependents or closely linked persons. in 2013, no compensation was paid to any related party.
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Board of Directors’ Responsibility the Board of directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the Company’s articles of incorporation. this responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. the Board of directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Auditor’s Responsibility our responsibility is to express an opinion on these financial statements based on our audit. we conducted our audit in accordance with Swiss law and Swiss Auditing Standards. those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
Opinion in our opinion, the financial statements for the year ended 31 december 2013 comply with Swiss law and the Company’s articles of incorporation.
Report on other legal requirements we confirm that we meet the legal requirements on licensing according to the Auditor oversight Act (AoA) and independence (article 728 Co and article 11 AoA) and that there are no circumstances incompatible with our independence.
in accordance with article 728a paragraph 1 item 3 Co and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of financial statements according to the instructions of the Board of directors.
we further confirm that the proposal for allocation of disposable profit complies with Swiss law and the Company’s articles of incorporation. we recommend that the financial statements submitted to you be approved.
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258 Glossary 264 Cautionary note on forward-looking statements 266 Note on risk factors 272 Business contact details 273 Corporate calendar
Business unit through which Swiss Re acquires closed blocks of in-force life and health insurance business, either through reinsurance or corporate acquisition, and typically assumes responsibility for administering the underlying policies.
Insurance that is reinsured: the passing of the insurer’s risks to the reinsurer against payment of a premium. the insurer is referred to as the ceding company or cedent.
Sum of claims paid, change in the provisions for unpaid claims and claim adjustment expenses in relation to premiums earned.
the ratio is a combination of the non-life claims ratio and the expense ratio.
the termination of a reinsurance contract by agreement of the parties on the basis of one or more lump sum payments by the reinsurer which extinguish its liability under the contract. the payment made by the reinsurer commonly relates to incurred losses under the contract.
the risk to which a pension fund or life insurance company could be exposed as a result of higher-than-expected payout ratios. Increasing life expectancy trends among policyholders and pensioners can result in payout levels that are higher than originally accounted for.
layer liability insurance life insurance longevity risk marine insurance mark-to-market motor insurance
net investment income on fixed income positions, including coupon income and amortisation, as a percentage of the cost of the securities.
new regulatory framework for Eu re/insurance solvency rules scheduled to replace the current Solvency I regime. Introducing a comprehensive, economic and risk-based regulation, Solvency II includes prudential requirements on solvency capital, risk modelling, supervisory control and disclosure.
Switzerland already introduced an economic and risk-based insurance regulation, similar to the objectives of the Solvency II project in the Eu. Since 2008, all insurance and reinsurance companies writing business in Switzerland have had to implement the SSt, and since 1 January 2011, the SSt-based target capital requirement is in force and companies must achieve economic solvency.
Operating income plus net unrealised gains/losses on available-for-sale securities as a percentage of average invested assets. Invested assets include investments, cash and cash equivalents, securities in transit, financial liabilities and exclude policy loans and certain Group items.
traditional uS life business subject to the naIc Valuation of life Insurance Model Regulation or new york Regulation 147 (collectively: ‘Regulation XXX’). Regulation XXX states that business retained in the uS does not require collateral, provided the reinsurer is licensed in the state of the company ceding business; however, business retroceded to a foreign reinsurer is subject to collateral (apart from funds withheld).
an insurance contract that has additional amounts added to the sum insured, or paid/ credited separately to the policyholder as a bonus, which result from a share of the profit generated by the with-profits insurance funds, including these funds’ interests in other blocks of business.
Swiss Re uses some of the term definitions provided by the glossary of the International association of Insurance Supervisors (IaIS).
certain statements and illustrations contained herein are forward-looking. these statements (including as to plans, objectives, targets and trends) and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact.
Swiss Re companies, and developments adversely affecting Swiss Re’s ability to achieve improved ratings; ̤ the cyclicality of the reinsurance industry; ̤ uncertainties in estimating reserves; 264 Swiss Re 2013 Financial Report
this communication is not intended to be a recommendation to buy, sell or hold securities and does not constitute an offer for the sale of, or the solicitation of an offer to buy, securities in any jurisdiction, including the united States. any such offer will only be made by means of a prospectus or offering memorandum, and in compliance with applicable securities laws.
the foregoing developments could have material adverse effects on the Group’s industry and on the Group.
although early regulatory efforts were focused primarily on banking institutions, there is a noticeable trend to extend the scope of proposals beyond banks to cover insurance and reinsurance operations. legislative initiatives directly impacting the Group’s industry include the establishment of a pan-European regulator for insurance companies, the European Insurance and Occupational Pension authority (the “EIOPa”), which has the power to overrule national regulators in certain circumstances. In addition, Swiss Re as a Group is subject to the Swiss Solvency test, and will be subject to Solvency II, which is expected to enter into force 1 January 2016. In the united States, as a possible step towards federal oversight of insurance, the uS congress created the Federal Insurance Office within the department of treasury and, more recently, as a result of the Solvency Modernization Initiative of the national association of Insurance commissioners, we are experiencing greater uS scrutiny of our global operations and more extensive reporting 266 Swiss Re 2013 Financial Report
Other changes remain focused principally on banking institutions, but some could have direct applicability to insurance or reinsurance operations and others could have a general impact on the regulatory landscape for financial institutions, which might indirectly impact our capital requirements and/or required reserve levels or have other direct or indirect effects on the Group. changes are particularly likely to impact financial institutions designated as “systemically important”, a designation which is expected to result in enhanced regulatory supervision and heightened capital, liquidity and diversification requirements under evolving reforms. there is an emerging focus on classifying certain insurance companies as systemically important as well. the Group could be designated as a global systemically important financial institution. Separately, the International association of Insurance Supervisors, an international body that represents insurance regulators and supervisors, published a methodology for identifying global systemically important insurers (G-SIIs) and a framework for supervision of internationally active insurance groups. Initial designation of insurers as G-SIIs took place in July 2013, and initial designation of reinsurers as G-SIIs is expected in July 2014. the Group could be subject to one or both of the resulting regimes, once implemented. In particular, the Group believes that there is a reasonable likelihood that it will be designated as a G-SII when the initial reinsurer designations are issued.
Significant policy decisions on a range of regulatory changes that could affect us and our operations remain undecided. the Group cannot predict which legislative and regulatory initiatives ultimately will be enacted or promulgated, what the scope and content of these initiatives ultimately will be, when they will be effective and what the implications will be for the industry, in general, and for the Group, in particular. certain of these initiatives could have a material impact on the Group’s business.
In addition, regulatory changes could occur in areas of broader application, such as competition policy and tax laws. changes in tax laws, for example, could increase the taxes the Group pays, the attractiveness of products offered by the Group, the Group’s investment activities and the value of deferred tax assets. any number of these changes could apply to the Group and its operations. these changes, or inconsistencies between the various regimes that apply or will apply to the Group, could increase the costs of doing business, reduce access to liquidity, limit the scope of business or affect the competitive balance, or could make reinsurance less attractive to primary insurers.
availability of credit and willingness of lenders to lend. In addition, the Group’s ability to meet liquidity needs may also be constrained by regulatory requirements that require regulated entities to maintain or increase regulatory capital, or that restrict intra-group transactions, the timing of dividend payments from subsidiaries or the fact that certain assets may be encumbered or otherwise non-tradable. Failure to meet covenants in lending arrangements could give rise to collateral-posting or defaults, and further constrain access to liquidity. Finally, any adverse ratings action could trigger a need for further liquidity (for example, by triggering termination provisions or collateral delivery requirements in contracts to which the Group is a party) at a time when the Group’s ability to obtain liquidity from external sources is limited by such ratings action.
Counterparty risks the Group’s general exposure to counterparty risk was heightened during the credit crisis, and this risk could still be exacerbated to the extent defaults, or concerns about possible defaults, by certain market participants trigger more systemic concerns about liquidity. losses due to defaults by counterparties, including issuers of investment securities (which include structured securities) or derivative instrument counterparties, could adversely affect the Group. In addition, trading counterparties, counterparties under swaps and other derivative contracts, and financial intermediaries may default on their obligations due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons, which could also have a material adverse effect on the Group.
the Group could also be adversely affected by the insolvency of, or other credit constraints affecting, counterparties in its reinsurance operations. Moreover, the Group could be adversely affected by liquidity issues at ceding companies or at third parties to whom the Group has retroceded risk, and such risk could be exacerbated to the extent any such exposures are concentrated.
the Group’s ratings reflect the current opinion of the relevant rating agencies. One or more of its ratings could be downgraded or withdrawn in the future. Rating agencies may increase the frequency and scope of ratings reviews, revise their criteria or take other actions that may negatively impact the Group’s ratings. In addition, changes to the process or methodology of issuing ratings, or the occurrence of events or developments affecting the Group, could make it more difficult for the Group to achieve improved ratings, which it would otherwise have expected.
Use of models; accounting matters the Group is subject to risks relating to the preparation of estimates and assumptions that management uses, for example, as part of its risk models as well as those that affect the reported amounts of assets, liabilities, revenues and expenses in the Group’s financial statements, including assumed and ceded business. For example, the Group estimates premiums pending receipt of actual data from ceding companies, and such actual data could deviate from the Group’s estimates. In addition, particularly with respect to large natural catastrophes, it may be difficult to estimate losses, and preliminary estimates may be subject to a high degree of uncertainty and change as new information becomes available. deterioration in market conditions could have an adverse impact on assumptions used for financial reporting purposes, which could affect possible impairment of present value of future profits, fair value of assets and liabilities, deferred acquisition costs or goodwill. to the extent that management’s estimates or assumptions prove to be incorrect, it could have a material impact on underwriting results (in the case of risk models) or on reported financial condition or results of operations, and such impact could be material.
the Group’s results may be impacted by changes in accounting standards, or changes in the interpretation of accounting standards. the Group’s results may also be impacted if regulatory authorities take issue with any conclusions the Group may reach in respect of accounting matters. changes in accounting standards could impact future reported results or require restatement of past reported results.
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