Group Net income attributable to common shareholders 4 444 3 500 –21 Premiums earned and fee income 28 818 31 262 8 Earnings per share in CHF 12.04 9.33 –23
Property & Casualty Reinsurance Net income attributable to common shareholders 3 228 3 564 10
Life & Health Reinsurance Net income attributable to common shareholders 420 –462 Premiums earned and fee income 10 023 11 265 12 Operating margin in % 5.8 2.6 Return on equity1 in % 6.4 –7.9
Business report We made progress in executing our strategy and took decisive steps to build and maintain long‑term value.
The year in review Our business 2 Message from the Chairman 4 Statement from the Group CEO 8
Inside Swiss Re Reinsurance 12 Corporate Solutions 16 Admin Re® 18 Corporate Responsibility 20 Our people 22
̤ strong p&C results demonstrate the benefit of a diversified earnings stream.
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 over 40 offices worldwide and is a growth engine of the swiss Re group.
̤ Business performance and strong balance sheet to support proposed regular dividend, special dividend and public share buy-back programme.
̤ property & Casualty (p&C) Reinsurance maintains very strong earnings quality through disciplined underwriting and differentiation of knowledge and services.
Admin Re® Admin Re® provides risk and capital management solutions by which swiss Re acquires closed books of in-force life and health insurance business, entire lines of business, or the entire capital stock of life insurance companies. Admin Re® solutions help clients free up capital to redeploy to new business opportunities while reducing administrative burdens.
Low interest rates are, however, not only an issue for the financial services industry. Low rates represent a de facto tax on all savers and result in low government funding costs which, coincidentally, make it easier to delay hard public policy decisions. Low interest rates also threaten to distort financial markets in important ways, such as by affecting the supply of capital for investments. Leaders in both the public and private sector need to address the problem underlying historically low interest rates, which is clearly low economic growth.
As I write this, we are just a few weeks past the Swiss National Bank’s decision to end the Franc’s minimum exchange rate against the euro. Shortly after that the ECB announced its own multi-billion euro agenda of quantitative easing. While these decisions have little impact on Swiss Re itself given our natural hedge of keeping premium and liabilities in the same currency, it is likely to have an impact on the overall Swiss economy. And the experienced volatility in the markets gives us a bit of a hint how disruptive a shift away from the ultra accommodative monetary policy might be if and when it comes.
“ In an increasingly global and interconnected environment, we are well positioned to capture opportunities the market offers.”
The second target is to grow economic net worth (ENW) per share by 10% per annum, also over the cycle.
All these achievements wouldn’t be possible if we didn’t have the right talent and employees. Please join me in thanking them for their hard work, great engagement and strong 2014 results. Our people are the reason we have a seat at the table with our clients, brokers and business partners. They are also the force for delivering shareholder value to you.
I’d also like to take the opportunity to thank you, dear shareholders, for your confidence in Swiss Re and your trust in us as we continue to plan our way forward. One important step is the introduction of two financial targets which will guide us as of 2016 and beyond (for more information see the box). They are chosen to continue to focus our efforts on profitability and economic growth and will provide you with the right metrics to measure our success.
Focus on: The skills to lead Growth in the insurance industry is fairly easy. Growing profitably takes much more skill. The challenge is especially difficult in markets where past experience is not a reliable guide, or where experience itself may be limited, such as Sub-Saharan Africa.
At Swiss Re we’re well-known for our excellent underwriting. To seize opportunities in new markets, we also need to be agile. One way to connect these strengths is by investing in research and development (R&D).
Through R&D we generate unique insights into the markets we serve. We share these insights with our clients to solve problems together. One example is forward-looking modelling of our insurance markets, which goes beyond traditional data analysis and predictive modelling approaches. Such innovative tools can support our expansion in both traditional and high growth markets.
We share Samuel’s vision of working smarter together — nowhere more than in Sub-Saharan Africa, where our ambitions are vast.
Building markets Sub-Saharan Africa is growing, and so are their insurance markets. Swiss Re is reaching out to forge long-term partnerships across the region.
A strategic partner in the region Insurance premiums in Sub-Saharan Africa are growing in line with the region’s economies, with a relatively high share of insurance premiums ceded to reinsurers. Infrastructure, agriculture, life and health and development of the region’s natural resources are all promising sectors where signs point to further, long-term expansion.
We’re eager to play a lead role. To demonstrate our commitment we’re partnering with our clients and sharing our expertise, as well as bringing together stakeholders from the public and private sector to encourage dialogue on better risk solutions for the region — as in the Nairobi event where we met Samuel. Such events are part of a comprehensive strategy of regional engagement — in addition to strategic investments, building our Africa talent pool and proving ourselves, day by day, as strategic partners who can be integral to our partners’ success in Africa.
Putting our minds together Four months after the Nairobi event we convened another knowledge-sharing event (“indaba” in Zulu) in Africa. This one was in Maputo, Mozambique. Here again we invited brokers, insurers, reinsurers and regulators to discuss developments in that country.
“It was great to meet the players who will support this transformation,” Fabrice continued. “I hope we’ll work on it together.” Stakeholders attending the indaba noted that it was the first event of its kind in the market and a key opportunity to gain fresh insights. In addition to energy, the Maputo indaba focused on other lines such as marine, construction and engineering and workmen compensation – all lines that will be in great demand in Mozambique.
Right: The port of Maputo, Mozambique, site of another Swiss Re indaba. Maputo has become a hub for intra-African trade.
The people of Kenya, Mauritania, Mozambique, Niger and Senegal also face the risk of drought — and no one more than their farmers. To combat this risk these five governments are participating in African Risk Capacity (ARC). ARC uses satellite data to establish when and where a drought has occurred and then pays out quickly to governments in need. We support ARC with both expertise and capacity.
Growing pains MDPCS is representative of global trends. More people are moving to urban, coastal environments. This puts more and more assets and lives at risk, and thus raises the costs of disasters when they do strike. Meanwhile climate change is making severe weather events even more unpredictable than before. To an increasing degree, the costs of such events are being borne by citizens and their governments.
Better answers At Corporate Solutions we did some hard thinking on how to improve risk management for a US public school district.
Our custom-made solution softens the impact of disaster protection for MDPCS. We structured a programme that would deliver USD 100 million in property protection from windstorms and associated floods. The protection is offered over a three-year period with fixed annual premiums. If MDPCS avoids a loss, we share the good fortune by giving a “no claims bonus”, reducing the disparity between how much they pay and how much they get back.
Proven skills to integrate new business We acquire closed in-force life and health books of business, which we administer through Admin Re®. By definition these ‘closed books’ naturally diminish over time, so to meet our ambitious growth targets we’re continually looking for new opportunities.
Admin Re® has successfully integrated more than five million policies over the last 10 years. Our platform in the UK is the cornerstone of this process, consolidating many of the complex tasks behind business integration.
A safe pair of hands Admin Re® has successfully integrated more than five million policies onto its in-house platform over the last 10 years.
The framework is applied to all business transactions, meaning re/insurance as well as investments, to the extent that we can influence their various elements.
The world’s heritage The island of Sumatra is a stronghold of the world’s biodiversity, with a human population density only one-third as high as Indonesia overall. More than 2.5 million hectares of pristine forest have been set aside to protect the island’s unique plant and animal species.
Leading the way We’re leading our sector and working with our clients to advance the cause of sustainability — even in places where you might not expect us.
Focus on: Breaking ‘silos’ Every large organisation struggles at one time or another to ensure that employees understand the over-arching mission and how their roles fit within it.
One way to address this potential problem — and to enhance career development — is to institutionalise job rotations.
Nurturing talent Our corporate culture is ethical and intelligent. We want to achieve our objectives by attracting the best talent from around the world.
Journey of a young talent Benedikt Heinen, a German national, joined us as an intern in 2011.
Benedikt continued to work with us in London while working on his master’s thesis: understanding how reinsurance could help insurers meet the new regulatory standard known as Solvency II.
The day-to-day work experience served as a valuable real-world complement to his studies. As part of the Business Development team, Benedikt saw first-hand how reinsurers help clients stay attuned to market and regulatory trends.
After earning his degree he continued his career with us through the graduates@swissre programme. This intensive eighteen-month rotation programme aims to attract people like Benedikt — young people with strong academic records, international experience and languages, but little or no work experience.
When asked if he is surprised to find himself generating business in the region today, he says: “I thought it would happen eventually — I just never thought it would happen so quickly.”
Big data and smart analytics the ability to gather and process information is profoundly altering the business landscape, and this process will not stop at the insurance sector.
new entrants telecommunications and technology companies are already starting to enter primary insurance markets. these new entrants have access to a large customer base and interact with those customers frequently.
focuS on execution We aim to apply our strong combination of capital, knowledge and brand to be the leading player across diversified re/insurance risks and businesses.
̤ effective implementation of in-force management actions, setting the foundation for future profitable growth.
̤ deploy capital at return that meets our strategic and financial targets.
MaRket foRCeS A changing world of risk Competitive re/insurers must find ways to do business in a changing risk landscape.
Alternative capital Pensions, hedge funds and other non-traditional sources are supplying funds to cover insurance risk, especially natural catastrophes.
Low interest rates Persistently low interest rates are a challenge to the re/insurance sector, especially where business is longterm in nature, like life businesses.
3 John R. Dacey Group Chief Strategy Officer 4 Guido Fürer Group CIO
10 J. Eric Smith CEO Swiss Re Americas 11 Matthias Weber Group CUO
̤ 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
Swiss Re’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events; ̤ current, pending and future legislation and regulation affecting Swiss Re 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 ̤ operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks.
Design: MerchantCantos, London Swiss Re Corporate Real Estate & Logistics/ Media Production, Zurich
Combined ratio in % 83.8 83.7 Return on equity1 in % 26.0 26.7
Combined ratio in % 95.1 93.0 Return on equity1 in % 9.6 12.5
Swiss Re at a glance Our business 2 Message from the Chairman 4 Statement from the Group CEO 8 How we operate 10 Financial targets 12
Financial year Market environment 16 Group strategy 24 Group results 26 Group investments 28 Summary of financial statements 32 Reinsurance 34 Corporate Solutions 40 Admin Re® 44 Share performance 46
Financial statements Group financial statements 148 Notes to the Group financial statements 154 Report of the statutory auditor 240 Group financial years 2005–2014 242 Swiss Re Ltd 244
About the cover: Swiss Re aims to support infrastructure through both our re/insurance businesses and our investments. See page 30.
Dear shareholders, Even before 2014 was over, it was clear that the year would be remembered as one of ‘war, terror and epidemic.’ Unfortunately there’s some justification for that. Still, I wonder if this misses some of the bigger forces at work. Extremists and extreme cases are simply that — extreme. However, I’ve been with Swiss Re for 24 years and on its Board of Directors for the last 17. And looking at 2014 from that perspective, I can say that the overall outlook is mixed but not all bad. Indeed there are some tough problems to solve, but there are also many bright spots. The key in my view is to always stay focused and not lose sight of the overall picture. See the challenges as well as the opportunities — opportunities which Group CEO Michel Liès and the Executive Committee are in good position to seize.
The new normal is getting old After the financial crisis, central banks did a commendable job of contributing to the stabilisation of financial markets and restoring confidence. Yet seven years later, the crisis response has almost become the norm. Interest rates remain at historically low levels, as does inflation. I am convinced that this still remains the single biggest threat to our industry.
“Our business has never been in a better position to deliver on the promise of supporting economic progress.”
In the case of Swiss Re we also had some homemade problems in our very large in-force life books from contracts going back 10 years or more. In 2013 we committed to our shareholders that we would fix the issues with these long-running contracts in cooperation with our clients. Together with her team, that is what Alison Martin, the Head of Business Management in this segment, has achieved. This largely explains the partial revaluation of contracts in our in-force life book that burdened the 2014 results, which in turn, however, eliminates a drag on our future results in the segment. We are optimistic about future returns in Life & Health.
Well diversified asset allocation Guido Fürer, our Group Chief Investment Officer, is in charge of managing our portfolio investments along with his team. In addition, our Treasury Department manages our considerable cash position and the team under John Dacey, our Group Chief Strategy Officer and Chairman of Admin Re®, is managing our book of private equity and Principal Investments. I am very proud that the contribution to profits from our asset base remains significant despite the difficult investment environment. We are convinced that a well-diversified asset allocation is the safest way to achieve a good risk /return profile even in those circumstances.
The year ahead is bound to be at least equally challenging but Swiss Re is very well positioned. The Board of Directors and I would like to thank all our employees for making this possible and giving us the confidence to meet the numerous opportunities and challenges with optimism — as we are committed to continue delivering shareholder value to you.
Dear shareholders, As we start into the last year of our five-year financial target period, we can look back at 2014 as a successful year. Even though we’ve had other strong earnings years over this period, 2014 stands out. Why? These results were generated in a much more challenging environment. We maintained our underwriting discipline and could — as shown — actively differentiate ourselves via our services and our knowledge. In addition, we decisively addressed problematic areas in our Life & Health business and took important steps to ensure our future success.
If you follow the industry closely, you will know that capital in various forms in the reinsurance market is abundant these days. That fact underlines the significance of our strong 2014 performance and demonstrates that we go beyond providing pure capacity. Our success lies in putting Swiss Re’s expertise and capital strength to work in solving problems together with our clients. We continue to innovate in traditional areas such as natural catastrophe and liability lines and are active in game-changing, long-term developments such as big data and cyber-risk. This means, looking ahead,
Finding solutions — together I hope you share my confidence in our company. In an increasingly global and interconnected environment, we are well positioned to capture opportunities the market offers. We are equally well positioned to rise to meet challenges such as the abundance of capital or the more over-arching challenges of climate change and the insurance protection gap. Our differentiated position, our strong capitalisation, our disciplined underwriting and, last but far from least, our strong client relationships are all the foundation of Swiss Re’s profitability. They are the key to our sustainability and, therefore, to Swiss Re generating long-term shareholder value.
that we will stay committed to delivering continued profitability through disciplined underwriting and a systematic allocation of capital to risk portfolios.
MaRket FoRCeS A changing world of risk Competitive re/insurers must find ways to do business in a changing risk landscape.
Shifting risk burdens economic growth and demographic changes are putting more assets and lives at risk of natural catastrophes. Governments are often hard-pressed to deal with the consequences.
Protecting societies We are constantly looking for constructive, sustainable ways to expand the reach of re/insurance, for example through our Global Partnerships business.
We aim to deliver a return on equity that is at least 700 basis points higher than the risk-free rate. We use US government five-year treasury bonds to measure the risk-free rate. The average rate of return for those bonds over 2011–2014 has been 1.3%; our reported return on equity has been on average 1054 basis points above this risk-free average over the same period.
The second target is to grow economic net worth (ENW) per share by 10% per year, also over the cycle.
This timeframe provides a long-term aspiration without being distorted by individual outlying results.
2011–2015 FINaNcIal TaRgETS achieving our 2011–2015 financial targets is our top priority. In 2014 we continued to remain on track.
Swiss Re delivered a strong net income of USD 3.5 billion, with all Business Units achieving strategic goals.
After a weak first quarter due to adverse weather conditions, the US economy continued to expand at a solid pace and unemployment declined significantly. Growth of the UK economy picked up strongly, particularly in the first half of the year. By contrast, economic activity in the Eurozone remained modest and weakened significantly in the second quarter as Germany’s economy contracted. While economic performance in France and Italy was disappointing, Spain, Portugal and Ireland performed surprisingly well. Nevertheless, unemployment remained very high in those European economies most
affected by the financial crisis. After rapid growth in the first quarter, the Japanese economy contracted sharply in the subsequent two quarters, following a sales tax hike in April.
Africa is an exception, with extended strikes in the mining sector and electricity bottlenecks limiting growth. Growth in the Middle East and North Africa remained relatively subdued due to lower oil production and political uncertainty. In Latin America, growth slowed in the face of deteriorating terms of trade and less favourable external financing conditions. Growth in Central and Eastern European economies also slowed in 2014. In particular, the Russian economy weakened significantly while inflation rose rapidly, in part driven by the depreciating rouble.
Interest rates The uneven economic performance across regions led to diverging monetary policies by the major central banks. Whereas the US Fed gradually phased out its asset purchases (“quantitative easing”, or “QE”), the BoJ decided to ratchet up its own QE programme in October to boost the faltering Japanese economy. The ECB also continued to ease monetary policy by lowering
Benchmark government bond yields dropped again after having increased in 2013 (see interest rate chart). The decline in German yields was particularly pronounced, driven by lower expectations for growth and inflation and the ECB’s additional easing measures. The German 10-year Bund yield was 0.5% at the end of 2014, down from 1.9% a year earlier. US and UK yields declined from 3.0% to 2.2% and 1.8% respectively and Japanese yields decreased from 0.7% to 0.3%.
Stock market performance Global stock markets continued to perform well in 2014 although market volatility increased in the second half of the year. In addition to disappointing economic indicators out of China and the Eurozone, political risks also contributed to the increase in risk aversion. The conflict between Russia and Ukraine, instability in Iraq and Syria, the selective technical default of Argentina, the Ebola outbreak in some African countries as well as the Scottish independence referendum all led to political uncertainty. Most major markets ended the year in positive territory with the US S&P 500 up 11%, the Swiss Market Index 10%, the Japanese TOPIX 7% and the Eurostoxx 50 1%. The MSCI UK declined by 3% (see stock markets chart).
Economic risks affecting re/insurers Despite improvements in many economies in 2014, there remain plenty of risks that could derail global growth and adversely impact financial markets and re/insurers. In the Eurozone, reform fatigue may lead to a prolonged period of stagnation and deflation. In this environment, populist parties in favour
Although the current low-yield environment affects all re/insurers, some lines of business are more vulnerable than others. Interest rates have the largest impact on long-term business where investment income is a major source of earnings. In non-life insurance, however, the interest rate
of extreme policies, such as a country’s exit from the Eurozone, may gain power, which could trigger financial market turbulence. Also, risks to growth in China are tilted to the downside. The main risk stems from a sharp housing market correction. The property sector is highly leveraged and credit quality is deteriorating. Defaults in real estaterelated “shadow-banking” products could bring big problems to China’s financial system. There are also concerns that the expected monetary policy normalisation by the US Fed could negatively impact emerging markets via capital outflows. Many economies have solid fundamentals and have taken corrective actions, such as allowing currency depreciation or tightening monetary policy, to weather the storm.
Market performance Global non-life insurance premiums grew at a 2% pace in real terms in 2014, down from 3% in 2013. In advanced markets, premium growth slowed to 1.4% from 1.6% in 2013, due mainly to weaker markets in the US and Canada. Western Europe had some strengthening based on moderate rate increases in Germany, France and the UK. In southern Europe, however, premium income fell significantly. This is in large part due to shrinking demand for motor insurance, with car sales at multi-year lows in some countries.
Underwriting profitability improved slightly in Western Europe and deteriorated slightly in the US in 2014, based on preliminary data covering the first half year. In the US, the positive impact of moderate rate increases was more than offset by slightly higher catastrophe and non-catastrophe losses and lower reserve releases. The combined ratio for the industry was 99% in the first half of 2014 compared to 97% in
the same period of 2013. Reserve releases continued to support underwriting profitability in the first half of 2014 but at a lower rate than in 2013.
Outlook Global economic growth forecasts for 2015 are more positive and demand for non-life insurance should increase. The emerging markets are expected to be the main driver. Premium growth in advanced markets is expected to slow slightly as the current cycle of moderate rate improvements loses steam along with only slight improvement in macroeconomic conditions.
The reinsurance industry’s capital base remains strong. In addition, so-called alternative capacity grew further, totalling around USD 60 billion at the end of 2014, which is about 15% of the global property catastrophe market. Because pricing has been softening and traditional capital has been growing rapidly, reinsurers have stepped up their capital management efforts by increasing dividend payments and intensifying share buy-back programmes. This will decrease capital and is expected to help stabilise prices for natural catastrophe and other reinsurance covers.
Market overview The global life insurance industry generated about USD 2 600 billion in premium income in 2014, of which 16% came from emerging markets. About 85% of premium income in life insurance derives from savings and retirement products. The share attributable to protection business, which covers mortality and morbidity risks, has been declining.
Life insurance is a long-term business and new business is an important contributor to industry growth. New business in seven major markets, representing 61% of global premium income, increased by more than 5% in 2014 (after inflation), following a 1.5% decline in 2013. The increase has been driven by strong sales in the savings business. Protection products, which normally exhibit more stable demand than savings business, were weak in a number of leading markets. In the US, sales of term insurance products fell 3% in the first half of 2014 and sales of disability and long-term care insurance have weakened also. In Canada, term sales were slightly lower (down 1%) in the first half of 2014 following a year of solid growth in 2013. In the UK, protection premiums declined by 2% in the first half of 2014 compared with the same period a year ago. In Germany, term sales were down 2% in
the first three quarters of the year, while sales of disability products have been flat. Long-term care insurance had a sharp decline of 20% (the first-ever decline in this line of business). In Italy, on the other hand, protection sales increased by around 3%.
Life insurers’ balance sheets remain solid as companies continue to de-risk and asset impairments have moderated as a result of stronger credit and equity markets.
Market performance The life & health reinsurance industry registered an inflation-adjusted increase in premium income of around 3% in 2014. Life reinsurance is still mostly linked to the relatively stable protection business. Yet in 2014 volumes were fuelled by increasing demand for nontraditional reinsurance transactions in various forms. Momentum in the market for longevity risk transfer remains strong, with a record high amount of longevity liabilities transferred or protected via longevity reinsurance and swap transactions in 2014. The market is traditionally most active in the UK. There have also been transactions with Australian, Canadian and French insurers. The US has an active market for pension buy-outs and several large deals have been completed in 2014.
Global premiums from traditional life reinsurance consisting of mortality and morbidity were up slightly in 2014. In advanced markets, a 3.7% decline in premiums in the US due to declining cession rates and weak protection sales was offset by more positive developments in the UK and the large continental European markets. In the emerging markets, premiums stagnated due to negative developments in CEE and Latin America.
Operating margins in the life reinsurance industry improved to 7% of net earned premiums in 2014, compared to 5% the year before. The underwriting side registered normal results after 2013, which was impacted by strengthening of claims reserves in Australian group disability business after strongly rising claims trends. On the investment side, the low interest rate environment leads to declining returns, lowering the profit contribution of investments.
Outlook Traditional life reinsurance is expected to continue to stagnate in the next few years, driven by ongoing contraction of this segment in the US and UK, while other advanced markets will record moderate growth in line with the growth of protection business on the primary side. In emerging markets, life reinsurance is expected to increase by about 6%–7%. In these markets, life reinsurers’ main value proposition will be to support primary insurance in product development, underwriting and claims management. In addition, a number of primary life insurers will require capital solutions and other forms of non-traditional reinsurance.
Admin Re® Admin Re® aims to enhance business profitability by leveraging its core competencies of selective growth, value extraction and operational excellence. Selective growth means pursuing opportunities to build and enhance the franchise through transactions that meet Swiss Re’s Group investment criteria and hurdle rates. Value extraction relates to the active management of the portfolios of assets and blocks of businesses and a focus on consistently creating value through capital and tax synergies. Operational excellence involves continuous improvement of the scalable operating platform. It also means focusing on transformation and management actions, including business efficiency and cost reductions.
The Swiss Re Group The priority for the Group is to allocate capital to risk pools that meet our strategic and financial targets. We are on track to implement our target capital structure. This structure reduces our cost of capital and optimises our financial flexibility.
We continue to look systematically for opportunities to deploy our capital through smart acquisitions while remaining committed to paying a strong and sustainable dividend. Reinsurance and Corporate Solutions can quickly deploy capital to correctly priced risk, as can Admin Re® within its specific focus. Acquisitions must meet our standards for economic rate of return and will be handled mainly through Principal Investments, which has a mandate to generate long-term economic value via investments in insurance-related businesses. Principal Investments is focused exclusively on the insurance sector, and especially on providing equity capital financing to primary insurers in high growth markets and complementing our reinsurance activities and generating long-term value for our shareholders.
Given our baseline of moderate global growth recovery and the start of US Fed policy normalisation in 2015, government bond yields are expected to move modestly higher from current levels. Swiss Re maintains a balanced investment portfolio with a focus on high-quality credit investments. We are focused on expert and disciplined underwriting, which will remain a key driver of performance in the sector.
Our ambition for 2015 will be to continue executing the current strategy and to successfully position the Group to meet the newly announced financial targets for 2016 and beyond.
support return on equity of 10.5% and earnings per share of USD 10.23.
̤ Consistent underwriting performance continues through disciplined underwriting and differentiation of knowledge and services.
̤ Continued expansion into high growth markets across Reinsurance, Corporate Solutions and Principal Investments.
̤ Continue to shift capital and talent to high growth markets.
̤ Focus on differentiation to generate value for clients and shareholders.
̤ Admin Re® delivers excellent gross cash generation; strengthens UK franchise and continues exit of US business to extract capital.
̤ Meet return on equity target of 10%–12% in Life & Health Reinsurance (based on June 2013 equity base).
̤ Continue to grow new life business and further develop health opportunities.
Group results Strong underwriting and strategic focus drove our Group’s net income of USD 3.5 billion for 2014.
Net income for Reinsurance was USD 3.1 billion in 2014, compared to USD 3.6 billion in 2013. Property & Casualty Reinsurance contributed USD 3.6 billion, compared to USD 3.2 billion in the prior-year period. The increase was driven by strong underwriting results and supported by net reserve releases from prior accident years and benign natural catastrophe experience. Life & Health Reinsurance reported a loss of USD 462 million, compared to a profit of USD 420 million in 2013, mainly reflecting the impact from previously announced management actions addressing the pre-2004 US individual life business.
“Through our disciplined underwriting approach and active differentiation, Swiss Re generated strong earnings despite the challenging industry environment.”
Common shareholders’ equity, excluding non-controlling interests and the impact of contingent capital instruments, rose to USD 34.8 billion at the end of 2014 from USD 31.9 billion at the end of 2013. The increase reflected continued strong earnings and higher unrealised investment gains, partially offset by the 2013 regular and special dividends of USD 3.1 billion. Return on equity was
The Group reported non-participating net realised investment gains of USD 567 million for 2014, compared to USD 766 million for 2013. The current year was driven by gains from active management of the listed equity portfolio, partially offset by losses from the unwinding of an asset funding structure in Life & Health Reinsurance and the Aurora sale in Admin Re®.
The Group reported a tax charge of USD 658 million on a pre-tax income of USD 4.2 billion for 2014, compared to a charge of USD 312 million on a pre-tax income of USD 4.8 billion for 2013. This translates into an effective tax rate in the current and prior year reporting periods of 15.6% and 6.5%, respectively. The higher tax rate in 2014 results from profits earned in higher tax jurisdictions and lower one-off tax benefits, partially offset by a higher tax benefit from foreign currency translation differences between statutory and GAAP accounts. The particularly low effective tax rate in 2013 was also driven by the conclusion of audits, rulings and revised tax opinions, as well as the implementation of lower tax rates and the transition to a new tax regime in the UK.
Net premiums and fees earned by Business Unit, 2014 (Total: USD 31.3 billion)
Financial markets overview for 2014 Global central banks were one of the key market drivers in 2014. While the US Federal Reserve (Fed) steadily reduced its asset purchases and ended its quantitative easing programme in October, the ECB cut interest rates to zero and introduced additional unconventional measures. The Bank of Japan eased monetary policy further. The diverging monetary policies were largely a reflection of different growth and inflation dynamics, as the US economy posted solid growth after the weather-related slowdown in the first quarter, while Eurozone growth remained weak with inflation falling further. Japan fell back into recession.
Investment result The size of the Group’s investment portfolio, excluding unit-linked and with-profit investments, decreased to USD 125.4 billion at the end of 2014 compared to USD 130.1 billion at the end of 2013. The decrease was impacted by the unwinding of an asset funding structure in L&H Reinsurance as well as other outflows, partially offset by increases stemming from lower interest rates and positive equity markets.
The Group’s non-participating net investment income increased to USD 4.1 billion compared to USD 3.9 billion in 2013, largely driven by asset re-balancing in 2013 as well as duration lengthening in 2014. On a full year basis, the Group’s fixed income running yield of 3.3% was slightly higher than 3.2% for 2013.
The Group reported non-participating net realised investment gains of USD 567 million in 2014, mainly as a result of gains from sales of equities and alternative investments, partially offset by losses on interest rate derivatives, management actions in L&H Reinsurance and the sale of Aurora in the US. This compares to net realised gains of USD 766 million in 2013.
The total return on investments in 2014 was 8.2% as a result of market value gains arising from lower interest rates as well as a rise in equity markets during the year.
Net investment income in USD billion, 2014 (2013: USD 3.9 billion)
Who pays the price for these unintended consequences? Institutional investors such as insurers certainly pay the price when trying to match long-term liabilities, such as their pension obligations. Financial repression depresses running yields — a cost we can estimate by comparing current yields to “fair value” estimates implied by potential economic growth and equilibrium inflation of 2%. The difference amounts to a ‘tax’ of around 0.8% p.a. of insurers’ financial assets. Assuming an asset leverage of 4 to 8 times, this would translate into a drag on return on equity of about 4% on average per annum, and roughly USD 20–40 billion additional income per annum for US and European insurers over the period from 2008–2013.
Of course ordinary savers also have to deal with low or even negative real interest rates. Using the US as an example, the net tax on US savers amounts to a cumulative USD 470 billion of foregone interest over the same period (2008–2013). If wealthier savers benefited from the consequent equity rally, this would raise further questions about economic inequality.
One final way to tally the consequences of financial repression is by the cost to the real economy. Financial repression necessarily reduces the savings available to sustain financial market stability and support economic growth. One way to mitigate this impact would be to make regulatory changes that could encourage long-term investors (such as insurers) to invest directly in infrastructure.
January 2000 January 2002 January 2004 January 2006 January 2008 January 2010 January 2012 January 2014
Total shareholders’ equity as of 1 January 34 002 32 952 –3 Net income attributable to common shareholders 4 444 3 500 –21 Change in unrealised gains/losses on securities, net –2 785 3 796 – Change in other-than-temporary impairment, net of tax 22 3 –86 Change in foreign currency translation –288 –778 –170
Income attributable to non-controlling interests –2 – Net income after attribution of non-controlling interests 4 511 3 569 –21
Policy loans, mortgages and other loans 2 895 3 205 11 Investment real estate 825 888 8 Short-term investments, at amortised cost which
Deferred acquisition costs and other intangible assets 8 293 8 137 –2
Strategy and priorities Our Reinsurance strategy is to achieve excellence in our core business, continuously improve the value provided by our products and services, and expand selectively in target areas.
Excellence in our core businesses relies on underwriting as a key differentiator, based on cycle management and portfolio steering. This includes the steering of peak perils, our risk transformation capabilities and research and development. In property, an inhouse research team develops and maintains proprietary models for storm, earthquake and flood. In casualty, we are developing an equivalent forwardlooking model based on a systematic assessment of risk drivers. In Life & Health, the breadth and depth of our experience data give us an advantage in pricing and managing risks for our clients and on our own balance sheet.
“We strive to help our clients manage their capital and risk through tailored transactions, and to help them grow in new areas by combining our technical expertise with their market knowledge.”
Life & Health In 2014, Swiss Re set the foundations for delivering 10%–12% ROE in the Life & Health Reinsurance (L&H) business by 2015: we addressed the negative profitability of US pre-2004 portfolios, grew in profitable and attractive new business lines and built market presence in Asia.
We have successfully executed agreements with targeted clients to address and resolve the performance issues related to pre-2004 US individual life business. Furthermore, we continue with the implementation of other management actions, such as the 2014 unwinding of an asset funding structure supporting a longevity transaction, that will provide a significant contribution to meeting our financial targets.
In terms of geography, L&H in Asia continues to enjoy strong profitable growth and to provide increasingly meaningful diversification to the earnings from our more mature markets. Our client franchise in Asia has also been confirmed by a strong showing in external market surveys, including Asia Insurance Review’s Life Reinsurer of the Year for the second year running, and best overall reinsurer in China and Asia-wide, according to the Flaspöhler survey.
We continue to believe that L&H is strategically attractive, as it adds to the profits and diversification of the Group, enhances the value proposition to core clients and represents an attractive growth opportunity. Due to our recognised expertise, strong balance sheet, excellent track record and dedicated teams, we are the ideal partner for product development, large capital-driven transactions, longevity deals and structured solutions tailored to client needs.
We expect natural catastrophe business to grow globally. Despite an increase in alternative capacity, particularly in the US, we believe we will continue to achieve attractive returns on the property business we write. We also see growth opportunities in casualty.
The traditional mortality business environment for life and health reinsurance continues to be highly competitive, with low margins and a low yield environment. We continue to find opportunities to leverage our expertise, capacity and brand to select the best deals. Life and health reinsurance is a knowledge- and service-intensive business with high entry barriers and only a handful of relevant players in the space. We aim to use our superior tools and capabilities to capture an over-proportionate share of life and health risk pools and outperform our competitors in terms of profitable growth. This will mainly be achieved through superior client services in traditional life, innovation and product development in health, knowhow and capital strength in structured solutions and longevity transactions, but also through pro-active portfolio steering and capital management.
Performance Net income for 2014 was USD 3.6 billion. The result was mainly driven by good underwriting results supported by benign natural catastrophe experience and better man-made loss experience, as well as net reserve releases from prior accident years. The 2014 result also benefited from a release of a premium tax provision in Asia in the third quarter.
The composition of gross premiums earned by region changed slightly year on year, with Asia having a higher share of premiums in 2014 compared to 2013.
Casualty The casualty combined ratio for 2014 was 104.1%, compared to 102.3% in 2013. 2014 included lower net reserve releases compared to 2013.
Specialty lines The specialty combined ratio improved to 68.1% in 2014, compared to 75.0% in 2013, reflecting favourable prior-year developments.
Expense ratio The administrative expense ratio decreased to 7.5% in 2014, compared to 10.6% in 2013, mainly driven by the release of a premium tax provision in Asia in the third quarter of 2014 and by premium growth year on year.
Expenses Claims and claim adjustment expenses –7 884 –8 493 8
Net investment income increased by USD 53 million to USD 999 million in 2014, mainly from re-balancing activities completed in 2013 as well as additional income resulting from bond purchases to lengthen duration during 2014.
Return on equity Common shareholders’ equity for the business segment increased to USD 13.9 billion in 2014 from USD 12.8 billion in 2013, mainly due to unrealised gains. The return on equity for 2014 was 26.7%, compared to 26.0% in 2013, mainly due to higher earnings in 2014, partially offset by the increased equity base.
Outlook We observed further softening of property reinsurance rates for all regions due to the absence of losses and to abundant capital. Swiss Re maintained large shares of catastrophe business at profitable levels. Most special lines are experiencing moderate rate reductions, with the exception of aviation, where some market hardening was seen. Differences in price development by casualty segment were observed. Opportunities for new, attractive casualty business present themselves in selected markets.
We have the expertise, knowledge and services to meet the increased demand for innovative and tailored solutions and we are well positioned to support clients in both developed and high growth markets. Our superior risk selection remains a key value driver in this environment.
Casualty insurers and reinsurers have often been caught out by relying on predominantly backward-looking models to price and manage the business. While acquiring more risk, some of the real drivers of eventual claims — such as tort reform, social norms and other ‘human’ factors — remain ignored by such models.
As part of our commitment to industry-leading R&D we’re developing forwardlooking models (Swiss Re Liability Risk Drivers™) that anticipate the impact of such trends early on without having to wait for claims to emerge. This is just one way we seek to enhance underwriting quality as we grow our casualty share of business. Today we share a suite of services based on our knowledge of such ‘risk drivers’ with selected clients. Further applications of forward-looking models beyond risk selection (eg, in risk accumulation) are in development.
Net income Net loss for 2014 was USD 462 million compared to a net income of USD 420 million in 2013. The loss was mainly due to the management actions in respect of the pre-2004 US individual life business, as well as to realised losses driven by the unwinding of the asset funding structure and non-economic losses on interest rate hedges in the first half of 2014. Excluding the management actions and the unwinding of the asset funding structure, net income would have been USD 358 million.
Operating income for the Health segment increased to USD 397 million, compared to USD 231 million in 2013. The 2014 results were impacted by unfavourable experience in the UK and increased disabled life reserves reflecting latest experience studies and interest rate movements. The prior-year result included reserves strengthening for the Australia group disability business of USD 369 million.
Net investment income increased by USD 141 million to USD 1.2 billion in 2014 mainly due to additional income stemming from the asset re-balancing completed in 2013.
Net realised losses were USD 72 million for 2014, mainly due to mark-to-market losses on hedging positions. This compares to net realised gains of USD 386 million in the prior year, which were driven by mark-to-market gains on hedging positions as well as a positive impact from foreign exchange re-measurement.
Insurance-related investment results, including the realised losses on the unwinding of the asset funding structure, are not included in the figures above.
Shareholdersʼ equity Common shareholders’ equity stands at USD 6.2 billion at the end of 2014 compared to USD 5.5 billion as of the end of 2013. The increase was mainly attributable to an increase in unrealised gains, partly offset by operating and foreign exchange losses. Return on equity was negative 7.9% for 2014 compared to a positive 6.4% for 2013.
Outlook Life & Health Reinsurance business is expected to grow modestly in the medium term. Cession rates in mature markets are decreasing as primary insurers retain more risk. In addition the low interest rate environment will continue to have an unfavourable impact on the long-term life business growth for our cedents. As a result we expect reinsurance volumes from these markets to be flat.
The growing challenge to health care systems around the world will come from non-communicable diseases such as diabetes and stroke. Swiss Re and the Harvard School of Public Health (HSPH) have just completed a two-year programme to improve our understanding of the risk factors behind these trends.
Funds support 11 post-doctoral fellows who have strong ties to the focus countries and an intimate grasp of the cultural context of observed trends in risk factors. They also have a deep understanding of the data sources.
Management expense ratio in % 7.6 6.9 Operating margin in % 5.8 2.6
Premiums earned and fee income by L & H segment, 2013–2014 (USD millions)
̤ Life ̤ Health believe will allow us to write new business at attractive returns. We are also improving our capabilities to help close the protection gap. We continue to aim that our future new business meets the Group’s return on equity hurdle rates.
Corporate Solutions The year was characterised by strategic acquisitions in China and Colombia and by further profitable growth.
In November 2014, Corporate Solutions completed the previously announced acquisition of a 51% stake in Compañía Aseguradora de Fianzas S.A. Confianza (“Confianza”). Confianza is a Colombian insurer that offers a broad range of surety insurance products, third-party liability and all-risk construction insurance solutions to local corporations. Confianza is Corporate Solutions’ second locally licensed insurance carrier in Latin America and will complement existing teams in Mexico City, Miami, Rio de Janeiro and São Paulo.
Net investment income 98 94 –4 Net realised investment gains 150 168 12
Income before income tax expense 391 497 27 Income tax expense –111 –179 61 Income attributable to non-controlling interests –1 1 – Net income attributable to common shareholders 279 319 14
Claims ratio in % 60.6 59.6 Expense ratio in % 34.5 33.4 Combined ratio in % 95.1 93.0
Performance Net income was USD 319 million in 2014, an increase of 14.3% compared to USD 279 million in 2013. The 2014 result was driven by continued profitable business growth across most lines of business, primarily property and credit.
Net premiums earned Net premiums earned increased by 17.9% to USD 3.4 billion in 2014 compared to USD 2.9 billion in 2013, driven by continued successful organic growth across most lines of business, especially property, casualty and credit, and across all regions, with the highest growth in Europe and Latin America. Gross premiums written, net of internal fronting for the Reinsurance Business Unit, increased 6.8% to USD 4.0 billion in 2014 compared to 2013.
Combined ratio The combined ratio improved by 2.1 percentage points to 93.0% in 2014 from 95.1% in 2013. The quality of the book remained consistently high year on year with natural catastrophe experience lower than expected, offset by a larger number of man-made losses.
reflecting continued profitable growth across all regions, with the highest growth in Latin America and Asia, lower than expected natural catastrophe losses and favourable prior-year development.
The casualty combined ratio deteriorated by 2.3 percentage points to 110.7% in 2014, mainly due to unfavourable prioryear development on liability losses in North America.
In other specialty lines, the combined ratio deteriorated by 5.3 percentage points to 100.6% in 2014 from 95.3% in 2013. The deterioration was due to higher man-made losses, including a large Asian satellite loss, and a reduction in favourable prior-year development in North America.
Surety Insurance is a well-established product which covers contractual, legal and/ or regulatory obligations, such as the completion of privately or publicly funded projects. For this, we issue contract and commercial surety bonds in many forms, under which both Corporate Solutions and the contractor/principal are liable. In case of a loss we are entitled to full recourse to the contractor/principal for the amount paid under the bond. Corporate Solutions writes surety insurance through its network of local offices, benefiting from a solid market position and track record, as well as providing meaningful capacity as a risk taker.
The global annual market premium from the combined Trade & Infrastructure and Surety Insurance business is estimated at more than USD 10 billion.
Net realised gains increased by USD 35 million to USD 94 million in 2014, primarily due to unfavourable movements in foreign exchange rates in the prior year.
Corporate Solutions offers insurance protection against weather perils and other risks which are accounted for as derivatives. Insurance in derivative form, which reported realised gains of USD 53 million in 2014 compared to a gain of USD 91 million in 2013, was impacted by the 2013–2014 unusually cold winter in the US and the mild winter in Europe.
Admin Re®’s strategy of selective growth means pursuing opportunities to build and enhance the franchise in the UK market. All transactions need to meet Swiss Re’s Group investment criteria and hurdle rates.
Performance In June 2014, Admin Re® announced that it had entered into a transaction with HSBC to acquire individual and group pension and related annuity policies from HSBC Life (UK) Limited. As part of the transaction, a reinsurance agreement was signed with HSBC. The economic risks and rewards of the business were transferred to Admin Re® starting 1 January 2014 until completion of the legal transfer of the business, which is expected in the second half of 2015. In October 2014 Admin Re® also announced the sale of Aurora National Life Assurance Company (Aurora). Both transactions underline the focus on the UK market as part of Admin Re®’s overall strategy.
Admin Re® In 2014 Admin Re® made a strong contribution to the Group and delivered against its strategy.
Revenues Premiums earned 844 502 –41 Fee income from policyholders 486 453 –7 Net investment income – non-participating 1 180 1 256 6 Net realised investment gains/losses – non-participating 201 –114 – Net investment result – unit-linked and with-profit 3 098 1 306 –58
reflecting a decrease in the investment result of USD 95 million primarily driven by lower net realised gains. As the portfolio is primarily comprised of fixed income assets, the result for 2014 was driven by net investment income on corporate and government bonds.
Net investment income increased by USD 12 million to USD 901 million in 2014, mainly due to additional income related to the asset re-balancing completed in 2013.
Net realised gains decreased by USD 108 million to USD 175 million in 2014 primarily due to fewer realised gains from sales in 2014.
Shareholdersʼ equity Common shareholders’ equity increased by USD 0.6 billion to USD 6.4 billion compared to 31 December 2013. The increase was mainly due to higher unrealised gains, driven by decreasing interest rates in the UK and the US during 2014, partially offset by the USD 407 million dividend paid to the Group in June 2014 and foreign exchange movements during 2014. The return on equity was 0.6% for 2014 compared to 6.8% for 2013. Excluding the loss on the Aurora sale, the return on equity was 3.8% for the year. The year-over-year decrease was mainly due to lower net income in 2014.
the shares experienced an intra-day low of CHF 69.25. An intra-day high of CHF 86.55 was achieved on 12 March 2014. The year-end share price was CHF 83.65.
During 2014 the STOXX Europe 600 Insurance index (SXIP) and the broader index of Swiss blue chips (SMI) increased by 9.8% and 9.5% respectively. The Swiss Re share increased by 2.0%.
Dividends The Board of Directors proposes a regular dividend of CHF 4.25 per share and an additional special dividend of CHF 3.00 per share for 2014. Both dividends will be in the form of Swiss withholding tax exempt distributions out of legal reserves from capital contributions.
Public share buy-back programme The Board of Directors proposes to authorise the company to repurchase own shares for the purpose of cancellation by way of a public share buy-back programme of up to CHF 1.0 billion at any time ahead of the 2016 AGM. Swiss Re will ask the AGM in April 2016 permission to cancel the repurchased shares.
Index representation In addition to its relevant industry indices, Swiss Re is also represented in various Swiss, European and global indices, including the SMI and the SXIP. The composition of these indices is typically based on free-float market capitalisation.
Swiss Re is also a member of various sustainability indices, including the Dow Jones Sustainability and FTSE4Good index families. Swiss Re has been named as the insurance industry sector leader in the Dow Jones Sustainability indices for 2014. This is the eighth time since 2004 that Swiss Re has led the insurance sector in these rankings.
Weighting in indices As of 31 December 2014 Index weight (in %)
Key share statistics 2010 –20141 of which Treasury shares and shares reserved
2 Nominal value of CHF 0.10 per share. 3 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. 4 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. 5 Dividend divided by year-end share price of corresponding year.
6 Calculated by dividing net income by the weighted average number of common shares outstanding. 7 Based on shareholders’ equity (excluding convertible perpetual capital instruments) divided by the number of external common shares entitled to dividend. 8 Based on shares outstanding.
We remained strongly capitalised through 2014. We aim to combine this capital strength with financial flexibility, maximising return on equity within our risk tolerance.
In 2014, we actively reduced our overall risk exposure by re-balancing our investment portfolio. We continue to hold excess capital under applicable external capital requirements, as well as surplus liquidity and capital relative to our own, more conservative risk tolerance criteria.
In 2014, we also passed two major milestones in optimising the capital structure of our Business Units. In April 2014, Admin Re® secured GBP 550 million in bank funding. The funding was used to repay an internal loan from Reinsurance to Admin Re®, as well as to finance a major transaction with HSBC (see page 44). Five months later, Swiss Re Corporate Solutions Ltd issued USD 500 million in subordinated debt, maintaining Corporate Solutions’ capital strength while lowering the cost of capital. At Group level deleveraging has totalled USD 4.8 billion since the end of 2012.
Our risk profile in 2014 Throughout 2014, Swiss Re’s overall risk decreased, as we reduced our financial market exposure in line with planned changes in our asset allocation. Property and casualty risk remained stable as Swiss Re defended its book and implemented planned reductions in external hedging to offset the effects of a challenging market environment. Swiss Re’s portfolio of risks from underwriting and investment activities remains widely diversified.
Overall credit risk decreased while life and health risk increased compared to 2013, primarily as a result of enhancements and updates to our risk model. In addition, the rise in life and health risk was also driven by a further decrease in interest rates throughout 2014. We continuously refine our model and its parameters to reflect our experience and changes in the risk, as well as advances in current best practice and the regulatory environment.
As a global reinsurer, Swiss Re continues to be exposed to a very dynamic regulatory and political environment. We are strongly engaged in the regulatory debate, leveraging our broad expertise to mitigate negative impacts, support the convergence of regulatory standards and generate business opportunities.
Senior leverage plus LOC ratio4 (target range: 15–25%) Subordinated leverage ratio5 (target range: 15–20%)
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 Senior debt plus LOCs divided by total capital 5 Subordinated debt divided by sum of subordinated debt and ENW
During 2014, Swiss Re continued deleveraging, maintained its strong capitalisation and further directed excess capital from its Business Units to the Group’s holding company, Swiss Re Ltd. This active capital management allows us to return capital to our shareholders via a proposed regular dividend of CHF 4.25, a special dividend of CHF 3.00 per share and a share buy-back programme of up to CHF 1.0 billion.
Key milestones achieved in 2014 The implementation of the Group’s target capital structure has progressed further with three important milestones achieved in 2014: External senior bank funding has been introduced in Admin Re® through Swiss Re Life Capital Ltd entering into a GBP 550 million multi-bank revolving credit facility in April 2014. The senior bank funding has been used to repay an internal loan from Reinsurance to Admin Re® and to finance the Admin Re® transaction with HSBC.
Swiss Re Corporate Solutions Ltd, in its inaugural public debt issuance, issued USD 500 million subordinated fixed rate
Optimising the capital structure Swiss Re’s level of capitalisation and its capital structure are driven by regulatory and rating capital requirements, and management’s view of risks and opportunities arising from our underwriting and investing activities. As announced at the June 2013 Investors’ Day, we set a target capital structure that aims to operate efficiently within these constraints by maximising financial flexibility. Its focuses are on the reduction of senior leverage, including letters of credit (LOCs), the issuance of contingent capital to replace traditional subordinated debt and extending the Group’s funding platform by creating access to external funding for Corporate Solutions and Admin Re®.
Overall Group deleveraging has totalled USD 4.8 billion since year-end 2012, and is on track to implement its target capital structure. Net senior deleveraging in 2014 amounted to USD 1.8 billion, driven by USD 2.8 billion senior debt maturities and a net USD 0.2 billion reduction in LOCs and related instruments. New senior issuances and bank funding reached USD 1.2 billion.
Swiss Re Group’s capital adequacy Regulatory capital requirements Swiss Re is supervised at Group level and for its regulated legal entities domiciled in Switzerland by FINMA. FINMA supervision comprises minimum solvency requirements, along with a wide range of qualitative assessments and governance standards.
Market-consistent valuations All traded assets and liabilities are marked to market, based on quoted prices in active markets or observable inputs. Untraded assets and liabilities are valued consistently with market prices. The Group’s insurance liabilities are valued on a market-consistent basis by replicating future expected cash flows with liquid financial market instruments. As the majority of the Group’s insurance liabilities do not contain embedded financial market risk exposure other than to interest rates, the market consistent value can be determined by discounting future cash flows using prevailing riskfree interest rates. If insurance liabilities include embedded options or guarantees (eg, variable annuities or interest rate-sensitive life business), they are valued on a market-consistent basis using stochastic models and other appropriate valuation techniques.
Performance split of underwriting and investment activities EVM values insurance underwriting and investment activities separately. Underwriting activities create value by raising funds on 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
Best estimates Swiss Re values assets and liabilities based on best estimates of underlying cash flows — premiums, claims, expenses, taxes, capital costs, etc. — taking into consideration all the information available when a contract incepts. As with other valuation methods that depend on projections of future cash flows, EVM involves a significant degree of judgment in establishing what assumptions should be used. Swiss Re actively and carefully reviews its assumptions, seeking both to achieve consistency across business activities and to reflect all available information.
Performance measurement after capital costs EVM explicitly recognises opportunity costs for shareholder capital. Cost-ofcapital 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% charge on available capital and an average 2% charge on leverage.
Economic Value Management (EVM) is Swiss Re’s integrated economic valuation framework for planning, pricing, reserving and steering the business. Since 2003, Swiss Re has used the EVM framework as a tool to support business and strategic financial decisions, including compensation. EVM also provides the basis for determining available capital under the SST and, in the future, Solvency II.
In 2014, ENW increased by USD 1.2 billion to USD 38.4 billion at the end of December 2014. 2014 EVM income of USD 5.2 billion was partially offset by the Swiss Re Group’s dividend payments.
EVM results for 2014 The 2014 EVM Report, showing Swiss Re’s results for the full year 2014, is available on swissre.com/ investors/financial_ information
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
̤ other large committed payments, such as expenses, commissions and tax.
In 2014, the surplus liquidity increased substantially due to management actions, including a decrease of investment risk, the optimisation of intra-group transactions and a reduction in funding requirements under stress. This facilitated a further reduction in leverage.
̤ Open risk culture: risk transparency, knowledge sharing and responsiveness to change are integral to our risk control process.
̤ Clear accountability: our operations are based on the principle of delegated and clearly defined authority. Individuals are accountable for the risks they take on, and their incentives are aligned with Swiss Re’s overall business objectives.
Risk policy and risk control framework All risk-taking activities are subject to our Group Risk Policy, which articulates Swiss Re’s core risk management and capital structure principles. It describes Swiss Re’s risk mandate, including risk tolerance criteria and targets at Group and Business Unit level. The Group Risk Policy is established by the Group Board of Directors and Swiss Re employees are bound by it at all times.
̤ Risk reporting — creates internal risk transparency and enables Swiss Re to meet external disclosure requirements.
More information on Swiss Re’s risk tolerance and limit framework is provided at the end of this section. For details on risk measurement, exposure control and reporting for individual risk categories, see the risk assessment section on pages 64–71.
̤ The ability to respond quickly and dynamically. Awareness and deliberate acceptance of different risks allows us to evaluate our current risk position and take advantage of opportunities it offers.
̤ Risk controller — is tasked by the risk owner with independent oversight of risk-taking activities to mitigate potential conflicts of interest between the risk owner and risk taker; risk controllers are responsible for escalating any concerns.
Risk-taking activities are typically subject to three lines of control. The first line comprises control activities performed by front-line employees (risk taskers), such as the use of authority limits, deal sign-offs and portfolio management in underwriting units. This is supported by independent functions (risk controllers), including Risk Management, Compliance and Group Internal Audit, who provide the second and third lines of control.
The three Business Unit risk teams are led by dedicated Chief Risk Officers, who report directly to the Group CRO, and have a secondary reporting line to their respective Business Unit CEO. The Business Unit CROs are responsible for risk oversight in their respective Business Unit, as well as for establishing 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 the business organisation 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.
Group Internal Audit Performs independent, objective assessments of adequacy and effectiveness of internal control systems
Compliance Manages compliance risks, and oversees compliance with applicable laws, regulations, rules and Swiss Re’s Code of Conduct
Risk tolerance and limit framework Swiss Re’s risk tolerance is an expression of the extent to which the Board of Directors has authorised the Group EC and Business Unit management teams to assume risk. It represents the maximum amount of risk that Swiss Re is willing to accept within the constraints imposed by its capital and liquidity resources, its strategy, its risk appetite, and the regulatory and rating agency environment within which it operates. Risk tolerance criteria are specified for the Group and Business Units, as well as for Swiss Re’s major legal entities.
A key responsibility of Risk Management is to ensure that Swiss Re’s risk tolerance is adhered to throughout the business. As part of this responsibility, Risk Management ensures that our business planning is assessed against our risk tolerance. Furthermore, both our risk tolerance and risk appetite — the types and level of risk we seek to take within the constraints imposed by our risk tolerance — are reflected in a limit framework across all risk categories. Individual limits are established through an iterative process to ensure that the overall framework complies with our Group-wide policies on capital adequacy and risk accumulation. The limit framework is approved by the Group EC.
The Group’s risk tolerance and limits are monitored on a current as well as prospective basis. The latter is performed as part of the Group-wide planning processes.
The central teams also oversee Group liquidity and capital adequacy and maintain the Group frameworks for controlling these risks throughout Swiss Re.
Swiss Re uses its internal risk model to measure the Group’s capital requirements, as well as for defining risk tolerance, risk limits, and liquidity stress tests (see box on page 68). Based on our internal risk model, Swiss Re’s overall risk exposure in terms of 99% tail value at risk (tail VaR) decreased to USD 19.1 billion in 2014, down 5% from USD 20.0 billion in 2013. 99% tail VaR (also known as expected shortfall) represents an estimate of the average annual loss likely to occur with a frequency of less than once in 100 years.
̤ Credit risk was 13% lower at USD 2.6 billion. The decrease was mainly driven by a regular update to default and migration probabilities used in our integrated risk model. Credit migration — which is included in credit risk — represents the risk of deterioration in credit ratings.
̤ Property and casualty risk remained stable overall at USD 9.1 billion, as Swiss Re successfully defended its book in a challenging market environment and implemented planned reductions in external hedging.
̤ Life and health risk rose 23% to USD 8.0 billion. The increase was driven by enhancements to Swiss Re’s risk model as well as a further decrease in interest rates (see page 65).
Financial market ̤ Credit spread ̤ Equity market ̤ Foreign exchange ̤ Interest rate ̤ Inflation ̤ Real estate
The risk categories shown in the table on the right are discussed on the following pages. Across these categories we identify and evaluate emerging threats and opportunities through a systematic framework that includes the assessment of potential surprise factors that could affect known loss potentials. Liquidity risk management is discussed above, on page 57.
Insurance risk management includes overseeing risk-taking activities, as well as ensuring that an appropriate risk governance framework is defined and applied.
Swiss Re’s property and casualty risk remained stable overall. The impact of the challenging January renewals and strengthening of the US dollar led to a reduction in natural catastrophe risk, which was offset by strong business growth and down-scaling of external hedges later in the year.
The natural catastrophe stress tests on page 65 show an overall decrease for all scenarios, except for Californian earthquake, which grew by 13%. US natural catastrophe exposures (particularly Atlantic hurricane) were lower following the January renewals, but rose later in the year due to successful defence of the book, new business obtained, and the implementation of planned reductions in external hedges. As a result of this, Atlantic hurricane risk was slightly lower, while Californian earthquake risk increased. European windstorm and Japanese earthquake risk decreased by 18% and 5% respectively, driven primarily by the weakening of the euro and Japanese yen against the US dollar.
Swiss Re writes property and casualty business using the four-eye principle: every transaction must be approved by at least two authorised individuals — with the exception of single risk acceptances, which can be authorised by one underwriter, with the four-eye principle taken care of by spot checks after acceptance. Each underwriter is assigned an individual underwriting authority based on technical skills and experience; any business exceeding this authority triggers a well-defined escalation process.
Large individual transactions that could materially affect the Group’s and Business Units’ risk exposure require independent review and sign-off by Risk Management before they can be authorised. This is part of our threesignature approval process (involving Swiss Re’s underwriting, client management and risk management functions) that establishes the accountability of each of the parties for significant transactions.
Insurance risk stress tests: Single event losses with a 200-year return period1 Pre-tax impact on economic capital in USD billions, as of 31 December 2013 2014 Change in %
Life insurance Lethal pandemic –2.9 –2.4 –16 1 Single event losses with a 200-year return period 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 4.3 billion. The impact excludes earned premiums for the business written and reinstatement premiums that could be triggered as a result of the event.
For overall life and health risk, the increased impact from the inclusion of the mortality impact on premium income and from interest rates is partly offset by other model enhancements — in particular a more granular view of mortality changes in different regions — as well as by lower lethal pandemic risk.
We have an aggregate Group limit governing the acceptance of all life and health risks, with separate individual limits for mortality, longevity and lethal pandemic risk.
At the Business Unit level, acceptance of life and health risks is governed by aggregated Business Unit limits. Local teams can write reinsurance within their allocated capacity and clearly defined boundaries, such as per-life retention limits for individual business.
We further manage the risk exposure of Swiss Re’s life and health book by external retrocession and also issue insurance-linked securities to reduce peak exposures.
Our central Financial Risk Management team oversees financial market activities, proposes limits, provides quantitative risk assessment across financial risk factors, and monitors portfolio risk; it also develops tactical proposals for risk mitigation or risk reduction, reviews risk and valuation models, assesses asset valuations, and approves transactions and new products. These responsibilities are exercised through defined governance procedures, including monthly reviews by our Senior Risk Committee, where the Head of Financial Risk Management is a voting member. Risk Management is responsible for both internally managed assets and Swiss Re’s external investment mandates.
In line with planned changes to Swiss Re’s asset allocation, overall financial market risk decreased by 9% (see table on page 63). This was mainly driven by sales of listed equities (predominantly exchangetraded funds) and hedge fund holdings, partly offset by additional investments in corporate bonds.
Financial market risk is subject to limits at various levels of the organisation (eg, Group, Business Units, lines of business and legal entities). Individual limits are expressed in terms of stress testing, VaR and risk factor sensitivities. Asset Management determines a more detailed set of risk limits for its portfolio mandates.
Financial Risk Management regularly reviews and updates the risk framework. It is also responsible for monitoring financial market risk in accordance with our risk management standards. Risk Management provides daily and weekly Group-level reports on risks, and on specific limits for internally and externally managed investment mandates as well as for the Business Units. These reports track exposures, document limit usage (which is independently monitored by Financial Risk Management) and provide information on key risks that could affect the portfolio. Specific limits are assigned to the line of business heads, who seek to optimise their portfolios within those limits. The reports are presented and discussed with those responsible for the relevant business line at the weekly Financial Market Risk Committee.
In 2014, Swiss Re’s credit risk — which includes default and migration (deterioration in credit rating) risk — decreased by 13% to USD 2.6 billion (see table on page 63). This was mainly a result of updated default and migration probabilities in the course of Swiss Re’s regular model maintenance as well as, adjusted parameters for surety underwriting to better reflect correlation with financial market risk. These effects were partly offset by increased exposures from credit underwriting and investments in corporate bonds.
Credit risk is managed and monitored by our Credit Risk Management unit within the central Financial Risk Management team. This is supported by dedicated teams under the Business Unit CROs that manage risks assumed through credit and surety underwriting.
In addition to the credit stress limit set by the Group EC, we assign aggregate credit limits by Business Unit, corporate counterparty and country. These limits are based on multiple factors, including the prevailing economic environment and the nature of the underlying credit exposures, as well as (for corporate counter parties) a detailed internal assess ment of a corporate entity’s financial strength, industry position and other qualitative factors. Financial Risk Management is also responsible for regularly monitoring corporate counterparty credit quality and exposures, and compiling watch lists of cases that merit close attention.
Risk Management monitors and reports credit exposure and limits for the Group and its Business Units on a weekly basis. The reporting process is supported by a Group-wide credit exposure information system that contains all relevant data, including corporate counterparty details, ratings, credit risk exposures, credit limits, and watch lists. All credit practitioners in the Group and Business Units have access to this system, thus providing the necessary transparency to implement exposure manage ment strategies for individual counterparties, industry sectors, and geographic regions.
To take account of country risks other than from credit default, Swiss Re’s Political and Sustainability Risk Management unit prepares specific country ratings in addition to the sovereign ratings used by the Group and the Business Units. These ratings are considered in the decision-making process, and cover political, economic and security-related country risks.
Market scenarios 100bp increase in credit spreads –3.6 –3.8 4 30% fall in equity markets (incl. hedge funds) –4.3 –3.2 –26 15% fall in real estate markets –0.6 –0.6 –9 100bp parallel increase in global yield curves 0.6 0.4 –31
For example, in 2014, we further refined our model for life and health risk. In particular, we enhanced our understanding of the way future mortality rates may deviate from current best estimates. In addition to the effect of changing mortality rates on claims, the refined model now captures this risk on future premium income from existing contracts.
The risk measures derived from the integrated risk model are expressed as economic loss severities taken from the total economic profit and loss distribution. In line with the SST, Swiss Re measures its total capital requirement at 99% tail VaR (expected shortfall). This represents an estimate of the average annual loss likely to occur with a frequency of less than once in one hundred years. A less conservative measure is the 99% VaR, which measures the loss likely to be exceeded in only one year out of one hundred. 99.5% VaR measures the loss likely to be exceeded in only one year out of two hundred.
Operational risk Operational risk is defined as the expected and unexpected economic impact of inadequate or failed internal processes, from people and systems, or from external events. This includes legal and regulatory compliance risks, as well as financial reporting risk, which represents the risk of a material misstatement in Swiss Re’s financial statements that could cause significant reputational damage.
Swiss Re’s approach to mitigating operational risk is based on three lines of defence: ̤ The first comprises the day-to-day risk management activities of individual risk takers in the Business Units as well as in corporate and enabling functions.
Members of Swiss Re’s Group Executive Committee are required to assess and certify the effectiveness of the internal control system for their respective function or unit on a quarterly basis.
In 2014, the global regulatory agenda continued to accelerate. Governments and regulators rolled out new policies, and also conducted numerous consultations and field tests on regulations with direct impact on the insurance sector. Many reform proposals reflect the financial supervision agenda set by the G20, which includes a focus on internationally active insurance groups and global systemically important insurers (G-SIIs).
Many countries, both in the developed and developing world, impose restrictions on the transaction of reinsurance business. Swiss Re is using its leading position in the Global Reinsurance Forum to actively promote the advantages of open and competitive markets, in particular the greater choice of reinsurers, products and prices, as well as benefits from diversification through the spreading of risk and increased financial stability.
Political risk Political risk is broadly defined as the consequences of political events or actions that could have an adverse impact on Swiss Re’s business or operations. As a global insurer and reinsurer, Swiss Re recognises the relevance of political developments to its risk portfolio, assets and operations both as threats to our operating model and opportunities for developing our business. We adopt a holistic view of political risk that covers developments in individual markets and jurisdictions, as well as cross-border issues such as war, terrorism, energy-related issues and international trade controls. In our analysis we examine the potential impact for Swiss Re and the wider insurance industry but also consider how political changes can open markets and provide new business opportunities.
Swiss Re’s political risk specialists work closely with experts across the Group to deliver tailored support to various lines of business, as well as to provide insights on business development, regulatory and compliance issues and reputational risk. We support relevant underwriting practices with proprietary risk ratings which cover political, socio-economic and security-related country risks. Our political risk experts are also engaged in Group-wide issue monitoring and scenario activities related to political crises, and coordinate actions through dedicated cross-functional task forces that bring together experts from all relevant areas, including our underwriting, asset management and legal functions. In 2014, key issues addressed by such task forces included the continued impact of a potential Eurozone breakup as well as the RussiaUkraine conflict.
Swiss Re seeks to raise awareness of political risk within the insurance industry and the broader public, and actively engages in dialogue with clients, media and other stakeholders. We also build relationships that expand our access to information and intelligence, and allow us to further enhance our methodologies and standards. For example, we participate in specialist events hosted by institutions such as the International Institute for Strategic Studies, the International Studies Association and the Risk Management Association, and maintain relationships with political risk specialists in other industries, think tanks and universities, as well as with governmental and nongovernmental organisations.
Sustainability risk Swiss Re’s continued business success depends on maintaining the trust of our clients, investors, employees and society at large. Environmental, social and ethical risks may arise from individual business transactions and affect our reputation.
We have a long-standing commitment to sustainable business practices, active corporate citizenship and good governance. We mitigate potential damage to our reputation through clear corporate values, robust internal controls, and active dialogue with external stakeholders. All our employees are required to commit to and comply with the values and rules of behaviour defined in the Group Code of Conduct and further internal Swiss Re policies and guidelines. We support these values with processes that enable us to identify potential problems early.
Our Sustainability Risk Framework manages environmental, socioeconomic, and related ethical risks that may be inherent in some of our business transactions. Currently, the framework contains eight policies for sectors or issues, each with pre-defined exclusions, criteria and quality standards. Transactions that could potentially compromise these standards must be submitted to our Sensitive Business Risks process, where they are reviewed by our sustainability experts (see also pages 117–118).
Swiss Re is a founding signatory of the UN Principles for Sustainable Insurance (UN PSI) and is currently co-chairing this initiative. The UN PSI creates a global framework for managing environmental, social and governance challenges. Swiss Re has been actively contributing to the initiative for several years and publicly reports progress against the UN principles in its annual Corporate Responsibility Report; the 2014 report will be published in May 2015.
To further advance risk awareness across the industry and beyond, Swiss Re continues to participate actively in strategic risk initiatives such as the International Risk Governance Council, and the CRO Forum’s Emerging Risk Initiative, which we chaired in 2014. Over the past year, we contributed to several publications on emerging risk topics, including the World Economic Forum’s annual Global Risks Report and a CRO Forum position paper, “Pushing the limits — managing risk in a faster, taller, bigger world”.
our compliance framework and setting out the basic legal and ethical principles and policies we apply globally; ̤ the Corporate Governance Guidelines (Guidelines), setting forth the Group’s governance framework, principles and processes, ensuring efficient and consistent corporate governance across the Group; ̤ the Articles of Association, defining the legal and organisational framework of the Group’s holding company (available at
corporate_governance/ corporate_regulations.html); Overview Shareholders approved the amendments to the Articles of Association required by the Ordinance Against Excessive Compensation with 93.71% of votes cast.
̤ the Group Bylaws, defining the governance structure within the Group as well as the responsibilities of the Board of Directors, Chairman, Board committees, Group EC, Group CEO and Regional Presidents and the relevant reporting procedures; ̤ the Board Committee Charters, outlining the duties and responsibilities of the Board committees; and
In addition, they include at the Business Unit level: ̤ Business Unit Bylaws, defining
The Board of Directors assesses the Group’s corporate governance on an annual basis against relevant best practice standards. It monitors corporate governance developments globally. It receives updates on developments affecting corporate governance and 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 on pages 120–144 of the Financial Report and their shareholdings in Swiss Re are listed in the notes to the Group financial statements.
2014 Key focus areas “Minder” ordinance The “Ordinance Against Excessive Compensation at Public Corporations” (Ordinance) entered into effect on 1 January 2014. Swiss Re has undertaken the steps necessary to ensure timely compliance with the Ordinance’s requirements. The requirement of electronic voting had already been introduced at the Annual General Meeting 2013.
The amended Articles of Associaton provide that going forward the General Meeting of shareholders will annually and with binding effect vote on the aggregate compensation amounts of the Board of Directors and the Group EC seperately. The General Meeting of shareholders will be voting on three
̤ Three members of the Board of Directors did not stand for re-election at the Annual General Meeting 2014: Jakob Baer, John R. Coomber and Malcolm D. Knight.
̤ At the Annual General Meeting 2014 the shareholders were given the opportunity to vote on amendments to the Articles of Association ensuring compliance with the Ordinance’s requirements. The shareholders approved the amendments with 93.71% of the votes validly cast. In line with the Ordinance’s requirements the shareholders elected at the Annual General Meeting 2014 individually for a one-year term the members of the Board of Directors, the Chairman of the Board of Directors as well as the members of the Compensation Committee. The shareholders also elected the Independent Proxy for a one-year term until completion of the Annual General Meeting 2015.
The amended Articles of Association also introduce limitations on additional mandates which can be held by
In line with the amendments, the shareholders elected at the Annual General Meeting 2014 individually for a one-year term the members of the Board of Directors, the Chairman of the Board of Directors as well as the members of the Compensation Committee.
Legal structure — listed and nonlisted Group companies Swiss Re Ltd, the Group’s holding company, is a joint stock company, listed in accordance with the Main Standard on the SIX Swiss Exchange (ISIN CH0126881561), domiciled at Mythenquai 50/60 in 8022 Zurich, and organised under the laws of Switzerland. Information on its market capitalisation is provided on page 47 of this Financial Report. No other Group companies have shares listed. More information on the Group companies is provided in Note 19 to the Group financial statements on pages 230–232.
Significant shareholders and shareholder structure Under the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA), anyone holding shares in a company listed on the SIX Swiss Exchange is required to notify the company and the SIX Swiss Exchange if its direct or indirect holding reaches,
the voting rights pursuant to the entry into the commercial register, whether or not the voting rights can be exercised. Notifications must also include financial instruments, regardless of whether cash or physically settled, constituting a purchase or a sale position. Upon receipt of such notifications, the company is required to inform the public by publishing within two trading days the notification on the electronic platform of the SIX Swiss Exchange. The following table provides a summary of the current disclosure notifications:
Warren E. Buffett and Berkshire 1 In the context of Swiss Reinsurance Company Ltd’s issuance of Perpetual Subordinated Capital Instruments in 2012 with a face value of USD 750 million with a stock settlement in registered shares of Swiss Re Ltd, Aquarius + Investments plc (“Aquarius”) reported in compliance with SESTA and the Ordinance of the Swiss Financial Market Supervisory Authority on Stock Exchanges and Securities Trading (Stock Exchange Ordinance – FINMA, SESTO-FINMA) a disclosable purchase and a sales position, each corresponding to 6.32% of the voting rights. Aquarius does not hold any registered shares of Swiss Re Ltd.
In addition, Swiss Re Ltd and Group companies held, as of 31 December 2014, directly and indirectly, 28 508 013 shares, representing 7.7% of voting rights and share capital. Neither the company nor the Group companies can exercise the voting rights of these shares.
As of 31 December 2014 Shareholders in % Shares in %
̤ 13.7% Other registered shareholders 67.4% Institutional shareholders 28.6% Individual shareholders 4.0% Swiss Re employees 53.8% Switzerland 17.0% United Kingdom 15.5% USA
Capital As of 31 December 2014, the fully paid-in share capital of Swiss Re Ltd amounted to CHF 37 070 693.10. It is divided into 370 706 931 registered shares, each with a par value of CHF 0.10.
registered shares, payable in full, each with a nominal value of CHF 0.10. Such shares are issued through the voluntary or mandatory exercise of conversion and/or option rights granted by the company or Group companies in connection with bonds or similar instruments, including loans or other financial instruments (Equity-Linked Financing Instruments).
According to the Articles of Association, the Board of Directors is authorised to increase the share capital of the company at any time up to 10 April 2015 by an amount not
the issue of up to 85 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10. Increases by underwriting as well as partial increases are permitted. The Board of Directors determines the date of issue, the issue price, the type of contribution and any possible acquisition of assets, the date of dividend entitlement as well as the expiry or allocation of non-exercised subscription rights.
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
Changes in 2013 The Annual General Meeting 2013 approved that the limitation included in the provisions of the Articles of Association to issue registered shares from conditional capital, where the existing shareholders’ advance subscription rights on the Equity-Linked
The Annual General Meeting 2013 also approved that the authority to issue registered shares from authorised capital as set forth in the Articles of Association be extended to 10 April 2015 and that the limitation included in the Articles of Association to issue registered shares from authorised capital where the existing shareholders’ subscription rights were excluded, be extended to 10 April 2015 and the maximum number of registered shares under that provision be set to 74 000 000 from
The Annual General Meeting 2013 further approved the cancellation of the authorised capital created for the use as consideration for any remaining minority shareholders of Swiss Reinsurance Company Ltd for any voluntary or mandatory surrendering of their shares in Swiss Reinsurance Company Ltd after the execution of the public exchange offer at any time up to 20 May 2013 by an amount not
Information about changes in share capital of our former parent company Swiss Reinsurance Company Ltd for earlier years is provided in the Annual Reports of this company for the respective years.
Conditional capital for Equity-Linked Financing Instruments 5 000 000.00 50 000 000 5 000 000.00 50 000 000
Shares All shares issued by Swiss Re Ltd are fully paid-in registered shares, each with a par value of CHF 0.10. Each share carries one vote. There are no categories of shares with a higher or limited voting power, privileged dividend entitlement or any other preferential rights, nor are there any other securities representing a part of the company’s share capital.
perpetual subordinated capital instruments both with stock settlement (collectively the “subordinated securities”), which provide Swiss Reinsurance Company Ltd with options to initiate settlement of the subordinated securities by delivery of shares of Swiss Re Ltd.
Options Valid exercise of stock options granted to Swiss Re employees are either cash or physically settled (with treasury shares). The number of issued shares will not be affected.
Independence Swiss Re’s Group Bylaws stipulate that the Board of Directors consists of at least a majority of independent members. To be considered independent, a director may not be employed as an executive officer of the Group, or have been employed in such function for the previous three years. Moreover, he or she must not have a material relationship with any part of the Group, directly or as a partner, director, or shareholder of an organisation that has a material relationship with the Group. Furthermore, in line with the Group’s independent criteria, a full-time Chairman is not considered independent. All members of the Board of Directors, with the exception of the full-time Chairman, meet our independence criteria.
Raymund Breu Swiss 69 2003 Raymond K.F. Ch’ien Chinese 62 2008 Mary Francis British 66 2013 Rajna Gibson Brandon Swiss 52 2000 C. Robert Henrikson American 67 2012 Hans Ulrich Maerki Swiss 68 2007 Carlos E. Represas Mexican 69 2010 Jean-Pierre Roth Susan L. Wagner
Career Walter B. Kielholz began his career at the General Reinsurance Corporation, Zurich, in 1976 where he held several positions in the US, UK and Italy before assuming responsibility for the company’s European marketing. In 1986, he joined Credit Suisse, where he was responsible for relationships with large insurance groups. He joined Swiss Re in 1989 where he became an Executive Board member in 1993 and was Chief Executive Officer from 1997 to 2002. He was Vice Chairman from 2003 until he was nominated Chairman in 2009. In addition, he chairs the Chairman’s and Governance Committee of the Swiss Re Board. Walter B. Kielholz was also a member of the Board of Directors of Credit Suisse Group AG from 1999 to May 2014 and served as Chairman from 2003 to 2009.
External appointments ̤ Board member of BlackRock, Inc. ̤ Executive Advisory Board member of
̤ Board member of China Resources Power Holdings Company Ltd, The Wharf (Holding) Ltd and the Hong Kong and Shanghai Banking Corporation Ltd
was Director General of the Association of British Insurers. She was a nonexecutive director of the Bank of England from 2001 to 2007 and a member of the board of directors of Aviva plc from 2005 to 2012. Mary Francis was elected to Swiss Re’s Board of Directors in 2013 and is a member of the Audit Committee and the Finance and Risk Committee.
Centrica plc ̤ Board member of Ensco plc ̤ Senior advisor to Chatham House
Career Raymund Breu started in group treasury at Sandoz in 1975, rising to Chief Financial Officer of Sandoz Corporation in New York in 1985. In 1990, he became Group Treasurer of Sandoz Ltd and in 1993 Head of Group Finance and a member of the Executive Board. From 1996 to 2010, he was Chief Financial Officer and member of the Executive Committee of Novartis. Raymund Breu was elected to Swiss Re’s Board of Directors in 2003 and is a member of the Finance and Risk Committee and the Investment Committee.
External appointments ̤ Board member of Invesco Ltd ̤ Board member of AmeriCares and
Career Hans Ulrich Maerki worked for IBM for 35 years, starting in 1973. From 1993 to 1995, he was General Manager of IBM Switzerland. He was appointed Chairman of the Board of Directors of IBM Europe, Middle East and Africa (EMEA) in 2001 and was Chief Executive Officer of IBM EMEA from 2003 to 2005. Hans Ulrich Maerki was elected to Swiss Re’s Board of Directors in 2007 and is a member of the Audit Committee and the Compensation Committee.
boards of the École des Hautes Études Commerciales (EDHEC), Paris, the IESE Business School University of Navarra and Bocconi University Milan
Career Jean-Pierre Roth joined the Swiss National Bank (SNB) in 1979. He was Chairman of the SNB Governing Board from 2001 to 2009, during which time he also served as the Swiss governor of the International Monetary Fund. From 2001, he was also a member and, from 2006, Chairman of the Board of the Bank for International Settlements. He was a Swiss Representative on the Financial Stability Board from 2007 to 2009. Jean-Pierre Roth was elected to Swiss Re’s Board of Directors in 2010 and is a member of the Investment Committee.
Career 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. Carlos E. Represas was elected to Swiss Re’s Board of Directors in 2010 and is a member of the Compensation Committee.
Information about managerial positions and significant business connections of nonexecutive directors Walter B. Kielholz, Chairman of the Board of Directors since 1 May 2009, was Swiss Re’s CEO from 1 January 1997 to 31 December 2002. In line with Swiss Re’s revised independence criteria, Walter B. Kielholz, being a full-time Chairman, is not considered independent. No other director has ever held a management position within the Group. None of the members of the Board of Directors has any significant business connections with Swiss Re Ltd or any of the Group companies.
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 commitment, availability, capacity and independence required in fulfilling their role as Board member.
Any activities of Board members in governing and supervisory bodies of important Swiss and foreign organisations, institutions and foundations, as well as permanent management and consultancy functions for important Swiss and foreign interest groups and official functions and political posts, which are material, are stated in each of the directors’ biographies, which can be found on pages 83–86.
The Chairman’s and Governance Committee evaluates candidates for Board membership and makes recommendations to the Board for election or re-election proposals. The Board nominates candidates for Board membership for election at the General Meeting of shareholders, ensuring that the Board retains an adequate size and well-balanced composition and that the majority of the Board remains independent.
The Board aims to assemble among its members the requisite balance of managerial expertise and knowledge from different fields required for sound independent decision-making according to business needs. Potential new candidates are assessed against Board approved selection criteria, which include: integrity, selected skills and qualifications, experience, communication ability and community
Term of office Effective since the Annual General Meeting 2014, the term is one year.
First election date The initial election year of each member is stated in the table on page 82.
Trevor Manuel was a minister in the South African government for more than 20 years, serving under the presidents Mandela, Mbeki, Motlanthe and Zuma. He served as Finance Minister from 1996 to 2009. Before his retirement from public office in 2014, he was Minister in the Presidency responsible for South Africa’s National Planning Commission. Throughout his career, he assumed a number of ex officio positions on international bodies, including the United Nations Commission for Trade and Development (UNCTAD), the World Bank, the International Monetary Fund, the G20, the African Development Bank and the Southern African Development Community. He has also served on a
Lead Independent Director One of the Vice Chairmen may also assume the role of the Lead Independent Director. The Lead Independent Director shall act 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.
(Chair since 11 April 2014) ̤ Raymond K.F. Ch’ien ̤ Mary Francis (since 11 April 2014) ̤ Hans Ulrich Maerki
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 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 87).
Compensation Committee Responsibilities The Compensation Committee supports the Board of Directors in establishing and reviewing Swiss Re Ltd’s compensation strategy and guidelines and performance criteria as well as in preparing the proposals to the General Meeting of shareholders regarding the compensation of the Board of Directors and of the Group EC. It proposes compensation principles in line with legal and regulatory requirements and the Articles of Association for the Swiss Re Group to the Board of Directors for approval and, within those approved principles, determines the establishment of new (and amendments to existing) compensation plans, and determines, or proposes as appropriate, individual compensation as outlined in its Charter. The Compensation Committee also ensures that compensation plans do not encourage inappropriate risk-taking within the Swiss Re Group and that all aspects of compensation are fully compliant with remuneration disclosure requirements.
Members ̤ C. Robert Henrikson, Chair ̤ Renato Fassbind ̤ Hans Ulrich Maerki ̤ Carlos E. Represas ̤ John R. Coomber (until 11 April 2014)
Members ̤ Mathis Cabiallavetta, Chair ̤ Raymund Breu ̤ Mary Francis ̤ Rajna Gibson Brandon ̤ C. Robert Henrikson ̤ Susan L. Wagner
Investment Committee Responsibilities The Investment Committee approves the strategic asset allocation and reviews tactical asset allocation decisions. It reviews the monthly performance of all financial assets of the Swiss Re Group and makes proposals to the Board on strategic holdings. It reviews the risk analysis methodology as well as the valuation methodology related to each asset class and ensures that the relevant management processes and controlling mechanisms in Asset Management are in place.
Members ̤ Mathis Cabiallavetta, Chair ̤ Raymund Breu ̤ Raymond K.F. Ch’ien ̤ Rajna Gibson Brandon ̤ Jean-Pierre Roth ̤ Susan L. Wagner
Board of Directors 10 meetings1 Group EC members, Group General Counsel, Company Secretary 4.5 hours
Compensation Committee 6 meetings Group CEO, Group COO, Chief Human Resources Officer, 3 hours Head Reward, Advisers3
Finance and Risk Committee 6 meetings Group CEO, Group CFO, Group CRO, Group Chief Strategy Officer & Chairman Admin Re®,
4 hours Group Chief Underwriting Officer, Group Chief Investment Officer, Group COO, 95.7% Group Treasurer, CEO Reinsurance, CEO Corporate Solutions, Company Secretary
reporting year. Mercer organised benchmark studies and helped to review and amend the compensation philosophy. NKF provided support in disclosure matters. Representatives of Mercer and of NKF participated in six committee meetings each in 2014. During 2014, the Compensation Committee also received independent advice from Hostettler, Kramarsch & Partner AG relating to compensation.
A quorum is constituted when at least half of the members of the Board or the committee are present in person or participate using some alternative means of communication. Resolutions are adopted by majority vote. Board and committee meetings consider and discuss the items on the agenda incorporating presentations by members of the Group EC and, where needed, by other specialist employees 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. Furthermore, private sessions are held for discussions involving all members of the Board of Directors only.
Each committee annually reviews the adequacy of the scope of its responsibilities, including processes and membership requirements, and also valuates its performance.
short- and medium-term business plan and endorses the business plans of the Business Units
̤ Approves aggregate limits for long-term debt issuances, bank facilities and similar instruments
̤ Ensures internal control system that is suitable for the company
̤ Regularly reviews the Group Code of Conduct and compares it to recognised best practice
̤ Approves legal, regulatory and compliance matters which have a material effect on the Group’s business
the members of the Board of Directors and of the Group EC to the General Meeting of shareholders for approval
external retrocession and the balancing of Group-wide catastrophe and accumulated risks
of Group-wide compliance procedures and monitors remediation of any regulatory and compliance deficiencies
Participation of Board members at executive management meetings The Chairman of the Board is invited to all meetings of the Group EC, Business Units Board of Directors and Executive Committees and receives the corresponding documentation and minutes.
Periodic reports to Board of Directors A comprehensive Executive Report on business developments, including major business transactions, claims, corporate development and key projects, is provided to the Board of Directors at each of its regular meetings.
̤ a description of trends and forecasts regarding the economic environment and the Property & Casualty and Life & Health re/insurance and financial markets.
Risk management Swiss Re’s Risk Management function provides regular risk reports to the Board of Directors, which are discussed in depth by the Finance and Risk Committee. These reports cover Swiss Re’s compliance with the Group’s risk tolerance criteria, major changes in risk and capital adequacy measures and a description of the Group’s main risk issues, including related risk management actions. The Finance and Risk Committee regularly reports to the full Board of Directors.
Duty to inform on extraordinary events As soon as the Group CEO or the Group EC becomes aware of any significant extraordinary business development or event, it is obliged to inform the Board of Directors immediately. The Board has specific respective reporting procedures in place.
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 General Counsel, the Group 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.
GIA applies a risk-based approach, performing its own risk assessment as well as making use of risk assessments performed by the Group’s Risk Management and other assurance functions (after reviewing the quality of the assurance work performed). Based on the results of the risk assessment, GIA produces an annual Audit Plan for review and approval by the Audit Committee. The Audit Plan is updated on a quarterly basis according to the Group’s evolving needs. GIA provides formal quarterly updates on its activities to the Audit Committee, which include audit results, the status of management actions required, the appropriateness of the resources and skills of GIA and any changes in the tools and methodologies it uses.
External auditor For information regarding the external auditors, please refer to pages 104-105.
MEMBERS OF THE GROUP EXECUTIVE COMMITTEE The Group Executive Committee (Group EC) consisted of the following members as of 31 December 2014: Name Nationality Age Function
Admin Re® Guido Fürer Swiss 51 Group Chief Investment Officer Agostino Galvagni Italian, Swiss 54 CEO Corporate Solutions Jean-Jacques Henchoz Swiss 50 CEO Reinsurance Europe, Middle East and
Africa (EMEA)/Regional President EMEA Christian Mumenthaler Swiss 45 CEO Reinsurance Moses Ojeisekhoba Nigerian, American 48 CEO Reinsurance Asia/Regional
President Americas Matthias Weber Swiss, American 53 Group Chief Underwriting Officer Thomas Wellauer Swiss 59 Group Chief Operating Officer
Professional experience Michel M. Liès joined Swiss Re in 1978, working initially for the life markets in Latin America and then Europe from 1983 to 1993. Moving to the non-life sector in 1994, he took responsibility for the Southern Europe/Latin America Division. In 2000, he was appointed Head of the Europe Division of the Property & Casualty Business Group. In 2005, he assumed the position of Head Client Markets and was appointed member of the Group Executive Committee. Michel was Chairman Global Partnerships from October 2010 until becoming Group CEO in February 2012.
Professional experience David Cole began his career in 1984 with ABN AMRO. In 1999, he was appointed Executive Vice President and regional Head of Risk Management for Latin America, located in Brazil. In 2001, he returned to Amsterdam to assume Corporate Centre responsibility within Group Risk Management. He became Chief Financial Officer of Wholesale Clients (WCS) in 2002 and was appointed Senior Executive Vice President and Chief Operating Officer of WCS in 2004. In January 2006, he became Head of Group Risk Management for ABN AMRO Bank and in 2008 was named Chief Financial Officer and Chief Risk Officer. David joined Swiss Re in November 2010 as Deputy Chief Risk Officer and was appointed Group Chief Risk Officer and member of the Group Executive Committee in March 2011. He was appointed Group Chief Financial Officer as of 1 May 2014.
Group Chief Strategy Officer, Chairman Admin Re® Born: 1960 Nationality: American
Professional experience John R. Dacey started his career in 1986 at the Federal Reserve Bank of New York. From 1990 to 1998, he was a consultant and subsequently Partner at McKinsey & Company. He joined Winterthur Insurance in 1998 and was its Chief Financial Officer from 2000 to 2004 as well as member of their Group Executive Board until 2007. From 2005 to 2007, he was Chief Strategy Officer and member of their risk and investment committees. He joined AXA in 2007 as Group Regional CEO and Group Vice Chairman for Asia-Pacific as well as member of their Group Executive Committee. John joined Swiss Re in October 2012 and was appointed Group Chief Strategy Officer and Chairman Admin Re® as well as member of the Group Executive Committee as of November 2012.
Chief Executive Officer Corporate Solutions Born: 1960 Nationality: Italian and Swiss
Chief Executive Officer Reinsurance Europe, Middle East and Africa (EMEA)/ Regional President EMEA Born: 1964 Nationality: Swiss
Professional experience Jean-Jacques Henchoz started his career in 1988 at the Swiss Federal Department of Economic Affairs and the European Bank for Reconstruction and Development. Jean-Jacques joined Swiss Re in 1998 and worked in several underwriting roles in the Europe Division 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 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.
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. He served as Group Chief Risk Officer between 2005 and 2007 and was Head of Life & Health between 2007 and 2010. In January 2011, Christian was appointed Chief Marketing Officer Reinsurance and member of the Group Executive Committee until he became Chief Executive Officer Reinsurance that October.
Professional experience Moses Ojeisekhoba started his career in insurance as a registered representative and agent of The Prudential Insurance Company of America in 1990. From 1992 to 1996, he was a Risk and Underwriting Manager at Unico American Corporation. He then joined the Chubb Group of Insurance Companies as regional Underwriting Manager and in 1999 became Corporate Product Development Manager in New Jersey and thereafter moved to London as Strategic Marketing Manager for Chubb Europe. In 2002, he was appointed International Field Operations Officer for Chubb Personal Insurance before becoming Head Asia Pacific in 2009, a position he remained in until he joined Swiss Re. Moses joined Swiss Re in February 2012 and was appointed Chief Executive Officer Asia, Regional President Asia and member of the Group Executive Committee in March 2012.
Professional experience Patrick Raaflaub began his career as a research fellow at the University of St. Gallen and then worked for Credit Suisse and a consulting start-up. He joined Swiss Re in 1994 and was appointed Chief Financial Officer of Swiss Re Italia SpA in 1997, and then was Divisional Controller Americas Division from 2000. He worked as Head of Finance Zurich from 2003, then Regional Chief Financial Officer Europe and Asia from 2005. From 2006, he was Head of Group Capital Management, where he was responsible for capital management at Group level and global regulatory affairs. In 2008 he joined the Swiss Financial Markets Supervisory Authority FINMA as Chief Executive Officer. Patrick Raaflaub returned to Swiss Re as Group Chief Risk Officer and member of the Group Executive Committee as of
̤ PhD in Natural Sciences, Swiss Federal Institute of Technology (ETH), Zurich, Switzerland
Chief Executive Officer Swiss Re Americas / Regional President Americas Born: 1957 Nationality: American
Changes in 2014 George Quinn stepped down as Group CFO and member of the Group EC as of
David Cole, Swiss Re’s Group Chief Risk Officer since March 2011, was appointed Group CFO as of 1 May 2014.
Patrick Raaflaub was appointed Swiss Re’s new Group Chief Risk Officer and member of the Group EC as of
Registrations in the share register In recent years, Swiss Re has recognised the voting rights of shares registered no later than two working days before the General Meeting of shareholders.
Statutory quorums The General Meeting of shareholders may pass resolutions regardless of the number of shareholders present or shares represented by proxy. Resolutions pass by an absolute majority of votes validly cast (excluding blank and invalid ballots), except where the law requires otherwise.
The Chairman of the General Meeting of shareholders determines the voting procedure. Provided that the voting is not done electronically, voting shall take place openly on show of hands or by written ballot.
Changes of Control and Defence Measures The Board of Directors believes that the efficiency of a free market is preferable to artificial obstacles, which can have a negative impact on the share price in the long term.
Change of control clauses Unvested incentive shares, share options and certain other employee benefit programmes would vest upon a change of control. In such an event, the rights of members of the Board of Directors and the Group Executive Committee (Group EC) as well as of further members of senior management are identical to those of all other employees.
The Articles of Association provide that the Board of Directors or, to the extent delegated to it, the Compensation Committee may decide on continuation, acceleration or removal of vesting, blocking or exercise conditions for the payment or grant of compensation based upon assumed target achievement, or for forfeiture.
The mandates and employment contracts of the members of the Board of Directors and of the Group EC do not contain any provisions such as severance payments, notice periods of more than 12 months or additional pension fund contributions that would benefit them in a change of control situation.
Auditors The external auditor is accountable to the Audit Committee, the Board of Directors and ultimately to the shareholders.
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 2014, following the proposal of the Board of Directors based on the recommendation of the Audit Committee, re-elected PwC for a term of one year as auditors.
Audit-related fees (apart from corporate finance due diligence services) include, among other tasks, Solvency II model validation, accounting advice and regulatory reports.
Additional fees In addition to the auditing fees, PwC fees totaled USD 1.5 million (excluding value add taxes) during the year ended 31 December 2014, primarily relating to: ̤ Income tax compliance and related
Other fees include permitted advisory work related to a range of projects.
Information tools pertaining to the external audit Responsibilities The external auditor is accountable to the Audit Committee, the Board of Directors and ultimately to the shareholders. The Board of Directors reviews the external auditor’s professional credentials, assisted in its oversight by the Audit Committee.
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.
Audit fees The Audit Committee reviews annually the audit fees as well as any fees paid to the external auditor for non-audit services, based on recommendations by the Group CFO.
Information Policy We use www.swissre.com to provide comprehensive, timely news and information on our activities.
Swiss Re’s core business – managing global risk – makes us by necessity an information company. Our information policy therefore goes well beyond legal requirements in establishing transparency in our communications and equal access to the facts for all investors and the public.
Our Investor Relations team holds regular meetings with institutional investors and analysts. In 2014, Swiss Re held a special Investors’ Day in London to discuss a Group strategy update, Capital Management and financial performance as well as maintaining outperformance in Property & Casualty. The presentations and conference call recordings from this event are also available on our website: investors/presentations
Swiss Re observes strict close periods around the publications of the Group’s quarterly and annual results. The close periods apply throughout the preparation of the results and provide for an appropriate cooling-off period after the release of the results. 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 20 February Swiss Re earns profit of USD 4.4 billion for 2013; regular dividend of CHF 3.85 per share and special dividend of CHF 4.15 per share to be proposed
News release, press conference 24 February Swiss Re Corporate Solutions joins forces with Seguros Confianza, Colombia's leading specialty insurer, and acquires a majority stake
News release 12 March Swiss Re denies being in discussions with the Agnelli family or any of its investment vehicles News release 18 March Swiss Re seeks shareholder approval to be fully compliant with new Swiss governance
News release, AGM in Zurich 7 May Swiss Re delivers strong first-quarter Group net income of USD 1.2 billion; 14.9% Group return on equity
News release 3 July Swiss Re Investors’ Day 2014: Focus stays on successful strategy execution, delivering the financial targets and capital management
Date Event 19 February 2014 annual results 18 March Publication of 2014 Annual Report and 2014 EVM results as well as of AGM 2015 invitation 21 April 151st Annual General Meeting 30 April First quarter 2015 results 30 July Second quarter 2015 results 29 October Third quarter 2015 results 8 December Investors’ Day in Rüschlikon
Overview Sustainable, long-term value creation serves as a guiding principle for our practical actions.
Based on this long-term view of our business, we seek to identify environmental and social issues that may prevent or threaten sustainable progress, and explore effective ways to address them. In doing so, we tap the vast risk expertise embedded in our company, both in our client-facing Business Units and the corporate functions set up to manage our own risks. Mirroring our long-standing commitment to enabling sustainable progress, we have been publishing a comprehensive yearly report on our performance as a responsible company since 1998.
Even though we have always identified material environmental and social issues in the specific context of our business, these two notions of materiality lead to differences in reporting focus and scope. For example, we place great emphasis on sharing our risk expertise with clients and other stakeholders. The effect of these endeavours on our financial performance is difficult to determine in isolation, however.
Against this background this Corporate Responsibility section is meant to highlight some key activities that create significant environmental and social benefits, and at the same time are strongly linked to our financial performance. Our Corporate Responsibility Report will continue to present all our initiatives with an environmental or social impact.
Sector leader in the Dow Jones Sustainability Indices Swiss Re has been named as the insurance industry sector leader in the Dow Jones Sustainability Indices for 2014. This is the eighth time since 2004 that we have led the sector in these rankings. The award highlights our long-term commitment to sustainable business and our efforts to continuously and progressively embed sustainability into key business processes and operations.
Meanwhile, our Economics of Climate Adaptation (ECA) studies look at the effects of climate change on a longer timescale. With a time horizon of 2030, the ECA methodology estimates the total climate risk of a given region or city due to both economic development and climate change. In a second step, it identifies the most cost-effective measures to address that risk. In this way, ECA studies provide decisionmakers with a fact base to integrate adaptation to climate change with economic development and sustainable growth.
Mitigation: renewable energy sources play a crucial role in reducing CO2 emissions and thus in mitigating climate change. Among them, offshore wind is considered one of the most promising. However, these infrastructures present highly complex risks, as the technology is moving rapidly and because there are no historical losses to rely upon for underwriting purposes. Our Corporate Solutions Business Unit takes a special interest in offshore wind, as we have both the large capacity and the technical expertise to assess and manage the associated complex risks (see case story to the left).
The Dudgeon Offshore Wind Park is planned to comprise 67 highly efficient turbines with a total capacity of 400 megawatts, sufficient to supply more than 410 000 UK homes with sustainable energy. When finished, its output will be transferred to the UK grid through a seabed cable of 38 km and an underground cable of 48 km.
Awareness raising and advocacy Three of our top topics address climate change or specific aspects of it: “Advancing sustainable energy solutions”, “Managing climate and natural disaster risk” and “Partnering for food security”. We engage in ongoing dialogue on all of them by holding or sponsoring stakeholder events, through our many risk publications and more.
Tackling our carbon footprint The fourth pillar of our climate strategy focuses on the emissions we cause in our own operations. Through our pioneering Greenhouse Neutral Programme we managed to halve our emissions per employee between 2003 and 2013 and set off all remaining emissions. Our new commitment, valid until 2020, is to keep our per-capita emissions stable at the level of 2013, even though we pursue an ambitious business strategy in high growth markets. As part of our new commitment, we have also extended the scope of our emissions accounting and reporting to include five additional emission sources.
Energy intensity (power consumption & heating) kWh/FTE1 6 5152 6 019 –7.6%
1 FTE = full-time equivalent 2 The 2013 figure for total CO2 emissions per FTE has been restated, reflecting two adjustments in the calculation of emissions from business travel: – use of updated emission factors, based on recent scientific evidence regarding the radiative forcing of C02 (DEFRA 2014); – correction of incompletely reported business flights, resulting in a 20% underestimation of km/FTE travelled in 2013.
Developing innovative risk transfer instruments Extending the reach of our re/insurance covers requires us to examine whether there may be special requirements to be considered. For example, effective protection against natural catastrophe risks means that funds for relief and emergency measures need to be available quickly, meaning that financing arrangements must be in place before an event (“ex-ante financing”). Likewise, agricultural insurance schemes in emerging and developing markets need to add real value yet be affordable. Parametric and index insurance products are suitable for these purposes, because they enable automatic payouts and have low administrative costs. As they are considered acceptable collateral by banks and input providers, they help secure and raise incomes. Swiss Re is an acknowledged leader in the development, structuring and pricing of such products.
– 10-year average insured losses – 10-year average total economic losses
Removing a major source of budget uncertainty will support continued investment in climate-friendly hydropower generation in Uruguay. This innovative weather coverage not only makes it easier for our client, the Uruguayan government, to adapt to the effects of climate change, it also supports mitigation efforts.
In a review of the insurance industry, the State Council has recently issued a mandate to formulate and promote natural catastrophe schemes, which has spurred interest both at central and provincial levels. We have worked with the China Development Forum to produce a report on “Parametric Insurance and Reform of Natural Disaster Relief System in China”, which was discussed with high-level officials, and are now involved in setting up major pilots in two provinces. These schemes are being designed to provide contingency funding for disaster relief and reconstruction efforts based on parametric triggers.
Offering smallholder farmers effective insurance protection through this programme in Nigeria has huge social and economic benefits beyond protecting their livelihoods. Once farmers can show they have insurance, banks are much more willing to provide them with loans. This puts them in a position to invest in better seeds and fertilisers to increase yields. With a secure minimum income, they can then gradually accumulate savings, leave subsistence farming behind and escape poverty. By supporting programmes such as this one and the ARC, we help develop the insurance markets that facilitate sustained economic and social progress.
Building on the experience we have gained with these solutions (see page 115), we made a significant commitment at the UN Climate Summit held in September 2014 in New York City. Personally addressing the government leaders present at the summit, our Group CEO Michel M. Liès made the following pledge: “By the year 2020, Swiss Re commits to having advised 50 sovereigns and sub-sovereigns on climate risk resilience, and to have offered them USD 10 billion against this risk.”
... to the Grow Africa Partnership The African continent, especially SubSaharan Africa, has for some time been a focus area of our efforts to bring risk protection to underinsured communities. Reflecting our engagement, we made an important commitment to the Grow Africa Partnership (www.growafrica.org) in 2012. This initiative was launched by a number of organisations with the objective of promoting public-private collaboration and investment in African agriculture. As most smallholder farmers in Sub-Saharan Africa have had no access to insurance protection so far, addressing this problem is a crucial precondition to protect families’ livelihoods, facilitate economic development and reduce poverty.
Our commitment to the Grow Africa Partnership thus includes the following three elements: ̤ Give farmers in Sub-Saharan Africa access to tools such as weather and yield index insurance products; ̤ Invest in resources equivalent to about USD 2 million per year to support the development of sustainable agricultural risk management markets; ̤ Provide agricultural insurance for up to 1.4 million smallholder farmers.
In creating effective insurance solutions, we work closely with several partners, for example Oxfam America, the World Food Programme, USAID and the Global Index Insurance Facility. By the end of 2014, we thus helped to establish a total of 20 programmes that brought weather insurance to 2 million smallholder farmers in 12 Sub-Saharan countries.
Policies At present, the framework comprises policies on eight sectors and issues where we perceive major sustainability risks: the defence industry, oil and gas (including oil sands), mining, dams, animal testing, forestry and logging, nuclear weapons proliferation, plus an overarching human rights and environmental protection policy (the list of key concerns addressed by the eight policies can be viewed at media.swissre.com/documents/Swiss_ Re_SBR_policy_concerns.pdf).
When making these decisions, we refer to internationally recognised ethical principles. Swiss Re is a signatory to the UN Global Compact, which derives its human rights principles from the Universal Declaration of Human Rights, its labour principles from the ILO Declaration on Fundamental Principles and Rights at Work, its environmental principles from the Rio Declaration on Environment and Development and its anti-corruption principles from the United Nations Convention against Corruption.
Country exclusions Swiss Re also excludes certain countries from its business, beyond compliance with international trade controls (ITCs). The criteria for these country exclusions are a particularly poor human rights record and no prospect of improvement. Our goal is not to directly underwrite risks or make investments in entities that are based in these countries. At the end of 2014, the countries excluded from our business for human rights reasons were North Korea, Somalia, Sudan (North only) and Syria.
 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  3% Nuclear weapons proliferation  2% Animal testing  1% Multi-issue
Number of Sensitive Business Risk referrals 20% Oil and gas 20% Excluded /critical country 14% Defence 14% Mining 9% Environmental degradation 6% Other industry /issue 5% Forestry and logging 4% Human rights 3% Dams 3% Multi-issue 1% Animal testing 1% Nuclear weapons profileration
There is strong evidence that diverse teams outperform non-diverse teams, avoid group think and therefore institutional blindness, and are more agile in responding to changes in the external environment. Furthermore, a strong representation of local talent is key to developing new markets, a strategic priority for Swiss Re.
̤ “Own the Way You Work”™: Living Team Spirit” forms the second pillar of our Global Inclusion Framework. It is a cultural change initiative that aims to give managers and employees more autonomy to decide how, when and where work is carried out. Our future success is dependent on our ability to create a flexible, global workforce that is responsive to the needs of our business. We have already made good progress in advancing our employment brand
internally and externally in this area — which is fully aligned with the needs of a multi-generational workforce.
̤ The third pillar, “Smashing Stereotypes, Opening Minds” includes but goes beyond “Gender Diversity” in recognition of the importance of tackling different forms of stereotypes to achieve a truly inclusive culture. It now centres on raising awareness of the “unconscious biases” all humans have and which can unintentionally influence decisionmaking and how we behave toward others.
Through awareness events as well as face-to-face and web-based training, employees participate in dialogues that increase self-awareness of unconscious bias such as those related to generations, sexual orientation and gender. Training on unconscious bias has also been embedded in our leadership development and manager training.
The Compensation Committee continues to review and monitor the compensation framework of Swiss Re considering business strategy, targets, risk awareness and corporate values. External requirements with respect to regulatory and legal developments, the international context and relevant market data are also taken into account.
Supporting Swiss Re’s pay-forperformance approach, compensation decisions are made considering a combination of US GAAP and Economic Value Management (EVM) based business results as well as qualitative considerations.
̤ Inclusion of the overarching compensation principles in the Articles of Association.
̤ Introduction of binding shareholders’ votes on remuneration for the members of the Board of Directors and the Group Executive Committee (Group EC) at the AGM in 2015 onwards.
̤ Adjustments to the Compensation Report in line with the new requirements under the Ordinance as of the reporting year 2014.
̤ Adjustments to employment contracts of the Group EC members in line with the provisions of the Ordinance.
In 2014, as per usual practice, the Compensation Committee reviewed its own effectiveness. Regular interactions with the Swiss Financial Market Supervisory Authority FINMA, shareholders and other key stakeholders were maintained.
The Compensation Committee monitors how compensation develops against specific business metrics, including US GAAP net income and EVM profit.
Group EC members3,4 16 12 13 Aggregate Group EC compensation (CHFm)2 44 46 5% 43 –7%
2 Aligning with new guidance as outlined on page 138, disclosure includes all awards for a reporting year, ie the 2014 aggregated compensation values include the fair value of LPP granted in April 2014. The numbers disclosed previously have been adjusted accordingly.
Income before tax and variable compensation 5 872 100% 5 262 100% 4 629 100%
Split of 2014 Group income (in USD million) Split of 2013 Group income (in USDm)
10% Variable compensation 14% Income tax expense 57% Net income paid out as dividend 19% Net income added to retained earnings
̤ 14% Income tax expense ̤ 57% Net income paid out as dividend ̤ 19% Net income added to retained earnings
The two-dimensional performance management system, the Target Annual Performance Incentive (TAPI) programme and the Leadership Performance Plan (LPP) were all launched in 2012, and the emphasis now is on embedding all of these changes. Additionally, there is a continued focus on linking pay to performance.
̤ First payout for all employees in 2014 after introduction of TAPI, which includes communication of target incentive that influences the level of payout when business and individual objectives are achieved.
updated vesting curve on the Performance Share Unit (PSU) component with vesting beginning at median, as well as introduction of an additional two-year holding period for senior management after vesting.
̤ Review of the Value Alignment Incentive (VAI) to ensure it continues to meet the requirements of all key stakeholder groups while supporting the overall balance of the compensation framework.
Other regulatory aspects covered the continued interaction with FINMA as well as monitoring of Solvency II developments to ensure alignment of the compensation framework with the current draft requirements which will enter into force on 1 January 2016.
Compensation Report 2013 was subject to a consultative vote. At the AGM on 11 April 2014, the Compensation Report was approved by 88.9% of shareholder votes (compared to 89.8% in 2013).
̤ At the AGM on 21 April 2015, the Compensation Report 2014 will be submitted for a consultative vote.
Guiding principles Swiss Re’s compensation framework is designed to attract, motivate, and retain the qualified talent the Group needs to succeed globally as well as creating a tangible link between performance and pay.
The aim is to provide compensation that is competitive in local labour markets while ensuring that employees focus on delivering outstanding results as well as supporting appropriate and controlled risk-taking. A balanced compensation package is complemented by competitive pension plans and benefits.
This approach contributes to the success of the business by: ̤ supporting a culture of high
performance with a focus on riskadjusted financial results; ̤ ensuring alignment of compensation to business results, individual contribution and compliance; ̤ supporting Swiss Re’s commitment to attract, motivate and retain key talent; ̤ aligning the interests of employees with those of Swiss Re’s shareholders; and
A TAPI is set based on multiple factors, including the Corporate Band, business and market benchmarks. Similar to the determination of the base salary, the employee’s total compensation and overall pay-mix are taken into account, when setting the TAPI. The possible payout for the API ranges from 0% to 200% of TAPI.
Annual Performance Incentive Purpose The API is a discretionary, variable component of compensation. Combined with the base salary, it provides competitive total cash compensation when both business and individual performance targets are achieved.
Structure In 2012 Swiss Re introduced the TAPI system along with a revised Performance Management framework that provides equal weighting to “behavioural” criteria along with quantitative “results” for senior executives, with continued roll-out within Swiss Re. In this way, API is awarded both for objectives achieved and for demonstration of desired behaviours.
The illustration below shows a summary of Swiss Re’s compensation and benefit components which are now further explained.
Plan duration 3 years 5 years for Group EC members and 3 years for the majority of participants 3 years 1 year
Forfeiture rules no yes yes yes yes (on match) no no
VAI awards granted prior to 2012 contained an additional mark-up element as compensation for the time value of money. This mark-up has been eliminated for awards starting with the VAI 2011 (awarded in 2012) onwards.
Structure The higher the API granted, the greater the portion of compensation that remains at risk through deferral in the VAI, as shown in the table below.
Value Alignment Incentive Purpose The VAI is a mandatory deferral of a portion of the API and introduces a time component to this 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, though awarded for short-term performance, is affected by the longerterm performance of the business unit and the Group.
Measurement of the economic impact of profit/loss from previous years’ business, measured over 3 years
The intention of the LPP is to: ̤ focus participants’ energies on
Structure At grant date, the award is split into two underlying components — Restricted
Restricted Share Units The performance condition for RSUs is return on equity (ROE) with a linear vesting line. Vesting is at 0% for an ROE at risk-free rate* and at 100% for an ROE at a predefined premium above risk free rate. The premium is set at the beginning of the plan period and for LPP 2014 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 from 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 total shareholder return (TSR) measured over three years. The PSUs vest within a range of 0% to 200%. The vesting curve starts with 50% vesting at the 50th percentile of TSR relative to peers and is capped at 200%** vesting at the 75% percentile. In case of a negative TSR over three years, the Compensation Committee retains the right to reduce the level of vesting.
Swiss Re’s TSR performance is assessed relative to the TSR of the peer group. The defined peer group consists of companies that are similar in scale, have a global footprint or a similar business mix as Swiss Re. The peer group which
* Annual risk-free rate is determined as the average of 12 monthly rates for 5-year US Treasury Bonds of the corresponding performance year. ** Maximum vesting percentage excludes share price fluctuation until vesting.
is set at the beginning of the plan period is ACE Ltd, Allianz SE, American International Group Inc, Amlin PLC, AXA SA, Catlin Group Ltd, Everest Re Group Ltd, Hannover Rueck SE, Muenchener Rueckversicherungs-Gesellschaft AG, PartnerRe Ltd, Reinsurance Group of America Inc, RenaissanceRe Holding Ltd, SCOR SE, XL Group PLC and Zurich Insurance Group Ltd.
A d d it io n a l 2 y e a r h o ld in g p e ri o d f o r
employees as it relates to pension, health matters, disability and death;
Includes consideration for indicators such as Client & Service Quality, Risk & Control Behaviour, Franchise Building, Human Capital & Talent Management as well as Strategic Initiatives
The Compensation Committee receives proposals from management requesting the total funding for variable compensation pools for both the API and the 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, but generally remains stable. 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
In 2012 Swiss Re introduced a threestep 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 US GAAP income, EVM profit, economic net worth and return on equity measures both for the Group and each business unit individually. Additionally, multi-year comparisons and an assessment of the quality of earnings are also considered. The chart below gives more detail on the criteria used to determine the size of the pool. The business units then allocate
̤ connect with Swiss Re values and enhance engagement where this is deemed important (in the form of global programmes).
Compensation framework for Group EC members The Group CEO and the other members of the Group EC are remunerated under the same compensation framework as all other Swiss Re employees, except for the following: ̤ Compensation approval: as of the
̤ Cap on API: an extra cap applies on actual API awards which means that actual API awards for Group EC members cannot exceed 300% of base salary.
̤ Stock Ownership Guidelines: the Group EC members are subject to the Stock Ownership Guidelines (covered below).
The Compensation Committee assesses the performance of the Group CEO and the Group EC members against a set of quantitative and qualitative objectives. The main financial performance indicators are based on US GAAP income, EVM profit, economic net worth and ROE. The qualitative criteria include client and service quality, franchise building, leadership and talent management as well as risk- and control-related behaviour objectives. These objectives are agreed at the beginning of the year and are aligned with the Group’s plans.
Benchmarking The external advisor to the Compensation Committee conducts an annual review of the compensation for the Group EC relative to a group of reference companies in the financial services industry to ensure that market competitiveness is maintained. The reference companies are regularly reviewed by the Compensation Committee to ensure their continued relevance. The core peer group consists of the following globally active primary insurance and reinsurance firms: ACE Ltd, Allianz SE, American International Group Inc, Aviva PLC, AXA SA, Generali, Hannover Rueck SE, Metlife Inc, Muenchener RueckversicherungsGesellschaft AG, PartnerRe Ltd, QBE Insurance Group Ltd, Reinsurance Group of America Inc, SCOR SE, XL Group PLC and Zurich Insurance Group Ltd.
The guidelines define target ownership by role and the ownership levels required are: ̤ Group CEO — 3x annual base salary;
The LTI awards vested after three years and were paid in Swiss Re shares, provided the performance thresholds were met. For each LTI plan year, final payment, if any, occurred at the end of the respective three-year performance measurement period. The plan included a payout factor which could vary between zero and two, driven by average ROE and average earnings per share (EPS) over the performance period. The final payment in respect of each plan depended on whether performance targets, expressed as average ROE and EPS, had been achieved over the plan period, as well as the share price at conclusion.
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 international 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. He also has an important task, together with the Group CEO, in representing the firm to outside parties including shareholders, industry associations, the media and the general public, at all key locations where Swiss Re operates.
Swiss Re has two Vice Chairmen. One Vice Chairman was appointed in 2009 and chairs the Investment Committee, and since 2012 also the Finance and Risk Committee. Additionally he is a member of the Chairman’s and Governance Committee. Throughout the year, this Vice Chairman devotes about three-quarters of his time to his tasks. An additional Vice Chairman was appointed in 2012, acting also as the Lead Independent Director since 2014. He is also a member of the Chairman’s and Governance Committee, chairs the Audit Committee and is a member of the Compensation Committee. The Board of Directors may assign further tasks to the Vice Chairmen. Such tasks may include representation of the Board of Directors in the Boards of the Group’s US or European subsidiaries, which are highly relevant to Swiss Re from both a risk and revenue perspective.
It is important that the compensation elements are used so as to achieve a strong alignment with the interests of the shareholders of Swiss Re. Therefore, a significant portion of the compensation arrangements for the Board of Directors consists of shares of Swiss Re Ltd, in line with best practice.
Fee approval As of the AGM 2015, the aggregate compensation of the Board of Directors until the next AGM is subject to shareholder approval as outlined in the Articles of Association.
̤ 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
̤ Has a Charter established by the Board of Directors, which defines purpose, composition and procedural rules of the Compensation Committee, including its responsibilities and authorities for making proposals and decisions related to compensation of the members of the Board of Directors and the Group EC
̤ Further details can be found in the Corporate Governance section on page 90
The Articles of Association of Swiss Re Ltd include rules on: ̤ the approval of compensation
changes in the Group EC (Art. 23); ̤ the compensation principles
Full details on these rules are available on the Swiss Re website: www.swissre.com – About us – Corporate Governance – Articles of Association of Swiss Re Ltd.
Compensation approval The table below shows the role of the Compensation Committee in approving compensation.
Compensation of the Group CEO Chairman of the Board of Directors, Compensation Committee
̤ 17% Variable compensation for the Group ̤ 14% Review of compensation framework ̤ 20% Compliance and regulatory ̤ 8% Compensation and performance of
Compensation and performance of Group EC The compensation of the Group EC follows the same cycle as that for the Group. Again, the Compensation Committee is fully involved through all stages of the process, and all decisions are owned by the Compensation Committee and the Board of Directors.
Compensation of the Board of Directors The compensation of the Board of Directors is reviewed annually and the Compensation Committee formulates proposals for the attention of the Board of Directors accordingly.
̤ Approval of the Board of Directors compensation policy February and March
̤ Review and update of the LPP principles January and February
Control 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.
This includes the approval by the Chairman of the Audit Committee as well as by the Chairman of the Finance and Risk Committee of the aggregate API pool of their respective Control Functions, as well as the approval of the individual compensation for the head of each Control Function.
Payouts of deferred compensation plans Value Alignment Incentive The VAI performance is measured for the Group and each underlying business area. Participants receive the performance factor relating to the business area that they were in at the time of award. In March 2014, the Group VAI 2010 (awarded in 2011) vested with an average performance factor of 105.9%.
VAI plan year Performance measurement period elapsed as of 31 December 2014 Performance factor 2011 (awarded 2012) 3 years to be determined 2012 (awarded 2013) 2 years to be determined 2013 (awarded 2014) 1 year to be determined
expense 1 Aligning with new guidance as outlined on page 138, disclosure reflects awards for a reporting year, ie the 2014
Aggregate compensation of the Swiss Re Group The aggregate compensation for the performance years 2013 and 2014 for all employees was as follows: As of 31 December 2014, Swiss Re Group employed 12 224 regular staff worldwide, compared to 11 574 employees at the end of 2013.
Other payments Severance payments2 355 19 397 22 1 Aligning with new guidance as outlined on page 138, disclosure reflects all awards for a reporting year, ie the 2013 value reflects the fair value of LPP granted in April 2013 and the 2014 value reflects the fair value of LPP granted in April 2014.
2 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.
Base salary and allowances1 12 984 12 711 Funding of pension benefits 1 914 1 845
2013 and the 2014 value reflects the fair value of LPP granted in April 2014. 4 Covers payments reflecting the time in the role as Group EC members. 5 For members leaving during the reporting period, this covers only legally or contractually required payments for
company contributions to social security systems paid by Swiss Re in line with applicable laws which amounted to CHF 3 116 428 in 2013 and CHF 3 802 474 in 2014.
Additional information on compensation decisions Amounts reported under base salary and allowances include the base salary which is paid in cash, as well as benefits or allowances paid in cash.
Total fixed compensation (excluding funding of pension benefits) reflects the portion of the total compensation that is fixed and therefore not variable with performance. For 2014, the portion of Group EC compensation that is fixed amounts to 31% (compared to 30% for 2013).
1 For 2014, subject to shareholders approval at the AGM 2015. 2 Disclosure reflects all awards for a reporting year, ie the 2013 value reflects the fair value of LPP granted in April
The following table reflects unvested restricted share unit ownership by members of the Group EC as of 31 December: Vested options held by members of the Group EC The following table reflects total vested option ownership by members of the Group EC as of 31 December: Swiss Re granted options to senior management in the past and the last grant was made in 2006. The underlying strike price for the outstanding option series has been adjusted for special dividend payouts. The remaining vested options held by active members of the Group EC will expire in 2015.
Michel M. Liès, Group CEO 171 947 187 690 David Cole, Group Chief Financial Officer1 28 755 John Dacey, Group Chief Strategy Officer, Chairman Admin Re® 45 Guido Fürer, Group Chief Investment Officer 21 253 32 315 Agostino Galvagni, CEO Corporate Solutions 108 060 64 860 Jean-Jacques Henchoz, CEO Reinsurance EMEA 16 335 38 280 Christian Mumenthaler, CEO Reinsurance 50 984 40 000 Moses Ojeisekhoba, CEO Reinsurance Asia 8 583 14 369 George Quinn, former Group Chief Financial Officer2 96 506 n/a Matthias Weber, Group Chief Underwriting Officer 38 592 57 649 Thomas Wellauer, Group Chief Operating Officer 17 708 75 973 1 Appointed as Group Chief Financial Officer as of 1 May 2014. 2 Member of the Group EC until 30 April 2014.
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. For example, in Switzerland fixed-rate mortgages have a maturity of five years and interest rates that correspond to the five-year Swiss franc swap rate plus a margin of 10 basis points.
The following table reflects total mortgages and loans for members of the Group EC as of 31 December.
Michel Liès, Group CEO 108 795 133 290 David Cole, Group Chief Financial Officer1 69 280 60 160 John R. Dacey, Group Chief Strategy Officer, Chairman Admin Re® 17 685 34 210 Guido Fürer, Group Chief Investment Officer 47 760 47 190 Agostino Galvagni, CEO Corporate Solutions 77 825 60 160 Jean-Jacques Henchoz, CEO Reinsurance EMEA 47 740 48 135 Christian Mumenthaler, CEO Reinsurance 77 825 60 160 Moses Ojeisekhoba, CEO Reinsurance Asia 34 915 48 135 George Quinn, former Group Chief Financial Officer2 86 375 n/a J. Eric Smith, CEO Swiss Re Americas 34 915 48 135 Matthias Weber, Group Chief Underwriting Officer 65 005 60 160 Thomas Wellauer, Group Chief Operating Officer 77 825 60 160 1 Appointed as Group Chief Financial Officer as of 1 May 2014. 2 Member of the Group EC until 30 April 2014. 3 Also includes unvested LTI 2011 units.
Total mortgages and loans to members of the Group EC 3 956 2 411 Highest mortgages and loans to an individual member of the Group EC: Total mortgages and loans not at market conditions to former members of
Renato Fassbind, Vice Chairman2 504 473 316 789 Jakob Baer, former Member and Chairman of the
Jean-Pierre Roth, Member 277 164 110 274 Susan L. Wagner, Member6 142 94 236
Compensation for term of office from AGM to AGM9 12 112 11 566 1 Chairman of the Finance and Risk Committee, Chairman of the Investment Committee. 2 Acting as the Lead Independent Director. Chairman of the Audit Committee since 11 April 2014. 3 Term of office expired as of 11 April 2014 and did not stand for re-election. 4 Elected to Swiss Re’s Board of Directors at the Annual General Meeting of 10 April 2013. Includes fees for duties
on the board of LUX Group companies in 2014. 5 Includes fees received for duties on the board of US Group companies. 6 Elected to Swiss Re’s Board of Directors at the Annual General Meeting of 11 April 2014. 7 Compensation for the members of the Board of Directors includes fixed fees and allowances both in cash and
shares. No sign-on or severance payments are made. 8 Amounts are gross and include social security contributions of the employee. Additionally and not included are
company contributions to social security systems paid by Swiss Re in line with applicable laws which amounted to CHF 1 282 026 in 2013 and CHF 598 083 in 2014. For BoD members domiciled outside of Switzerland, employer social security contributions are refunded, if bilateral social security agreements between Switzerland and the country of domicile apply and provide for such refund.
Loans to members of the Board of Directors The table below includes loans to the members of the Board of Directors. The loan included for 2013 was established when the recipient was still a member of Swiss Re’s executive management and was repaid during 2014.
Related parties transactions Disclosure on compensation decisions in 2014 covers members of the Group EC and the Board of Directors as indicated, and for both include related parties to the extent applicable. Such related parties cover spouses, partners, children and other dependents or closely linked persons. In 2014 no compensation was paid to any related party.
Report of the statutory auditor to the General Meeting on the Compensation Report 2014
Note 16 Compensation, participations and loans of members of governing bodies 227
Income before income tax expense 4 825 4 227 Income tax expense 13 –312 –658 Net income before attribution of non-controlling interests 4 513 3 569
Income attributable to non-controlling interests –2 Net income after attribution of non-controlling interests 4 511 3 569
Interest on contingent capital instruments –67 –69 Net income attributable to common shareholders 4 444 3 500
Amounts reclassified out of accumulated other comprehensive income –1 398 –41 36 –1 403
Balance as of period end 5 418 –3 –4 675 –825 –85 1 Reclassification adjustment included in net income is presented in the ’’Net realised investment gains/losses – non-participating business’’ line. 2 Reclassification adjustment is limited to translation gains and losses realised upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity.
3 Reclassification adjustment included in net income is presented in the ’’Other expenses’’ line.
Equity securities: Available-for-sale, at fair value (including 65 in 2013 and 311 in 2014 subject to securities lending and repurchase agreements) (cost: 2013: 6 110; 2014: 3 133) 7 076 4 024
Policy loans, mortgages and other loans 2 895 3 205 Investment real estate 825 888 Short-term investments, at fair value (including 4 425 in 2013 and 3 217 in 2014 subject to securities lending and repurchase agreements) 20 989 14 127
Liabilities Unpaid claims and claim adjustment expenses 61 484 57 954 Liabilities for life and health policy benefits 9 36 033 33 605
Foreign currency translation, net of tax Balance as of 1 January –3 609 –3 897 Changes during the period –288 –778 Balance as of period end –3 897 –4 675
Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January –953 –534 Changes during the period 419 –291 Balance as of period end –534 –825
Net income after attribution of non-controlling interests 4 511 3 569 Interest on contingent capital instruments, net of tax –67 –69 Purchase of non-controlling interests –9 Balance as of period end 30 766 34 257
Interest paid was USD 929 million and USD 885 million for the years ended 31 December 2013 and 2014, respectively.
Cash flows from operating activities Net income attributable to common shareholders 4 444 3 500 Add net income attributable to non-controlling interests 2
Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items1 403 458 Net realised investment gains/losses –3 324 –1 059 Income from equity-accounted investees, net of dividends received –152 –66 Change in: Technical provisions and other reinsurance assets and liabilities, net1 –935 –1 479 Funds held by ceding companies and under reinsurance treaties1 850 433 Reinsurance recoverable on unpaid claims and policy benefits 1 179 1 273 Other assets and liabilities, net1 269 –334 Income taxes payable/recoverable –162 134 Trading positions, net –263 283 Securities purchased/sold under agreement to resell/repurchase, net –28 331
Equity securities: Cash paid/received for acquisitions/disposal and reinsurance transactions, net –257 Net purchases/sales/maturities of other investments –96 –1 021 Net cash provided/used by investing activities –344 763
Total net cash provided/used –2 601 –235 Effect of foreign currency translation –164 –366 Change in cash and cash equivalents –2 765 –601 Cash and cash equivalents as of 1 January 10 837 8 072 Cash and cash equivalents as of 31 December 8 072 7 471 1 The Group revised the definition of certain items within the operating cash flow with no impact on “Net cash provided/used by operating activities“. The amortisation of deferred acquisition costs and present value for future profits is reclassified from “Depreciation, amortisation and other non-cash items“ and the changes in certain other reinsurance assets and liabilities are reclassified from “Funds held by ceding companies and under reinsurance treaties“ and “Other assets and liabilities, net“ to “Technical provisions and other reinsurance assets and liabilities, net“. Comparatives are adjusted accordingly.
In the fourth quarter of 2014, the Group entered into an agreement to sell Aurora National Life Assurance Company (Aurora), a US subsidiary, to Reinsurance Group of America, Incorporated (RGA). The transaction is expected to close in the second quarter of 2015 and, therefore, the subject business was still within the scope of the consolidated Swiss Re Group as of 31 December 2014. For more details on the transaction and its impact on the Swiss Re Group financial statements, please refer to Note 7.
Use of estimates in the preparation of financial statements The preparation of financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the related disclosure, including contingent assets and liabilities. The Swiss Re Group’s liabilities for unpaid claims and claim adjustment expenses and policy benefits for life and health include estimates for premium, claim and benefit data not received from ceding companies at the date of the financial statements. In addition, the Group uses certain financial instruments and invests in securities of certain entities for which exchange trading does not exist. The Group determines these estimates based on historical information, actuarial analyses, financial modelling and other analytical techniques. Actual results could differ significantly from the estimates described above.
Valuation of financial assets The fair value of the majority of the Group’s financial instruments is based on quoted prices in active markets or observable inputs. These instruments include government and agency securities, commercial paper, most investment-grade corporate debt, most high-yield debt securities, exchange-traded derivative instruments, most mortgage- and asset-backed securities and listed
equity securities. In markets with reduced or no liquidity, spreads between bid and offer prices are normally wider compared to spreads in highly liquid markets. Such market conditions affect the valuation of certain asset classes of the Group, such as some asset-backed securities as well as certain derivative structures referencing such asset classes.
For assets or derivative structures at fair value, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Although management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and judgment over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. As of 31 December 2014, the Group has not provided any collateral on financial instruments in excess of its own market value estimates.
Investment in real estate that the Group intends to hold for the production of income is carried at depreciated cost, net of any write-downs for impairment in value. Depreciation on buildings is recognised on a straight-line basis over the estimated useful life of the asset. Land is recognised at cost and not depreciated. Impairment in value is recognised if the sum of the estimated future undiscounted cash flows from the use of the real estate is lower than its carrying value. Impairment in value, depreciation and other related charges or credits are included in net investment income. Investment in real estate held for sale is carried at the lower of cost or fair value, less estimated selling costs, and is not depreciated. Reductions in the carrying value of real estate held for sale are included in realised investment losses.
The Group also designates non-derivative and derivative monetary financial instruments as a hedge of the foreign currency exposure of its net investment in certain foreign operations. From the inception of the hedging relationship, remeasurement gains and losses on the designated non-derivative and derivative monetary financial instruments and translation gains and losses on the hedged net investment are reported as translation gains and losses in shareholders’ equity.
account balances. Related assets are included in general account assets except for investments for unit-linked and with-profit business, which are presented in a separate line item on the face of the balance sheet.
Unit-linked and with-profit business are presented together as they are similar in nature. For unit-linked contracts, the investment risk is borne by the policyholder. For with-profit contracts, the majority of the investment risk is also borne by the policyholder, although there are certain guarantees that limit the down-side risk for the policyholder, and a certain proportion of the returns may be retained by Swiss Re Group (typically 10%). Additional disclosures are provided in Note 8.
On the liability side, funds held under reinsurance treaties’ consist mainly of amounts arising from the application of the deposit method of accounting to inward insurance and reinsurance contracts. In addition, amounts retained from ceded business written on a funds withheld basis are included.
Share-based payment transactions As of 31 December 2014, the Group has a leadership performance plan, a fixed option plan, a restricted share plan, an employee participation plan, and a global share participation plan. These plans are described in more detail in Note 15. The Group accounts for share-based payment transactions with employees using the fair value method. Under the fair value method, the fair value of the awards is recognised in earnings over the vesting period.
In June 2013, the FASB issued ASU 2013-08, “Amendments to the Scope, Measurement, and Disclosure Requirements”, an update to Topic 946, “Financial Services – Investment Companies”. ASU 2013-08 changes the approach to the investment company assessment in Topic 946, clarifies the characteristics of an investment company, and provides comprehensive guidance for assessing whether an entity is an investment company. The Group adopted ASU 2013-08 on 1 January 2014. The adoption did not have an effect on the Group’s financial statements.
Financial statements I Notes to the Group financial statements 2 Information on business segments
In the second quarter of 2014, the Reinsurance Business Unit revised the allocation of certain intra-group cost recharges between Property & Casualty and Life & Health. The comparative periods have been adjusted accordingly. The revision had no impact on net income and shareholders’ equity of the Group.
Corporate Solutions Corporate Solutions offers innovative insurance capacity to mid-sized and large multinational corporations across the globe. Offerings range from standard risk transfer covers and multi-line programmes, to customised solutions tailored to the needs of clients. Corporate Solutions serves customers from over 40 offices worldwide.
In the fourth quarter of 2014, the Group entered into an agreement to sell Aurora National Life Assurance Company (Aurora), a US subsidiary, to Reinsurance Group of America, Incorporated (RGA). For more details on the transaction and its impact on the Swiss Re Group financial statements, please refer to Note 7.
In the fourth quarter of 2014, the Group revised the allocation of certain project costs from the Reinsurance and Corporate Solutions Business Units to Group items. The comparative periods have not been adjusted as the costs relate primarily to projects launched in 2014. The revision had no impact on net income and shareholders’ equity of the Group.
Financial statements I Notes to the Group financial statements a) Business segments – income statement For the year ended 31 December 2013 USD millions
Income before income tax expense 3 492 503 391 395 44 0 4 825 Income tax expense/benefit –244 –35 –111 28 50 –312 Net income before attribution of non-controlling interests 3 248 468 280 423 94 0 4 513
Management expense ratio in % 7.6 Operating margin in % 5.8
Expenses Claims and claim adjustment expenses –8 493 –2 054 –32 2 –10 577 Life and health benefits –9 194 –1 415 –2 –10 611 Return credited to policyholders –99 –1 442 –1 541
Income/loss before income tax expense 4 137 –476 497 –18 87 0 4 227 Income tax expense/benefit –552 63 –179 52 –42 –658 Net income/loss before attribution of non-controlling interests 3 585 –413 318 34 45 0 3 569
Income attributable to non-controlling interests –1 1 0 Net income/loss after attribution of non-controlling interests 3 584 –413 319 34 45 0 3 569
Management expense ratio in % 6.9 Operating margin in % 2.6
Investments for unit-linked and with-profit business 894 24 431 25 325
Net investment income 1 098 Net realised investment gains/losses 184 Other revenues 61 Interest expenses –207 Income before income tax expenses 3 492
Financial statements I Notes to the Group financial statements c) Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2013 USD millions Life Health Total
Fee income from policyholders 56 56 Net investment income – non-participating 915 527 1 442 Net investment income – unit-linked and with-profit 39 39 Net realised investment gains/losses – unit-linked and with-profit 210 210 Net realised investment gains/losses – insurance-related derivatives –123 6 –117 Total revenues before non-participating realised gains/losses 7 775 3 822 11 597
Expenses Life and health benefits –5 216 –2 859 –8 075 Return credited to policyholders –286 –286 Acquisition costs –1 207 –491 –1 698 Other expenses –636 –241 –877 Total expenses before interest expenses –7 345 –3 591 –10 936
Fee income from policyholders 53 53 Net investment income – non-participating 944 600 1 544 Net investment income – unit-linked and with-profit 37 37 Net realised investment gains/losses – unit-linked and with-profit 38 38 Net realised investment gains/losses – insurance-related derivatives 121 –7 114 Total revenues before non-participating realised gains/losses 8 359 4 639 12 998
Management expense ratio in % 7.7 5.5 6.9 Operating margin1 in % –0.8 8.6 2.6 1 Operating margin is calculated as operating result divided by total operating revenues. Total operating revenues are total revenues excluding unit-linked and with-profit revenues.
Financial statements I Notes to the Group financial statements d) Net premiums earned and fee income from policyholders by geography Net premiums earned and fee income from policyholders by regions for the years ended 31 December
Premiums earned and fees assessed against policyholders For the year ended 31 December 2013 USD millions
Gross fee income before retrocession to external parties 54 453 507
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
Unpaid claims and claim adjustment expenses; life and health benefits before impact of retrocession to external parties 3 276 –361 –509 393 6 2 805
Change in unpaid claims and claim adjustment expenses; life and health benefits, thereof: Gross – with external parties 1 662 –967 –136 459 –22 996 Intra-group transactions (assumed and ceded) 395 8 –395 –8 0
Financial statements I Notes to the Group financial statements 5 Unpaid claims and claim adjustment expenses
Reinsurance recoverable –7 101 –6 029 Deferred expense on retroactive reinsurance –229 –56 Net balance as of 1 January 45 680 44 307
Foreign exchange 211 –2 224 Effect of acquisitions, disposals, new retroactive reinsurance and other items 239 199 Net balance as of 31 December 44 307 41 873
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 2014, the Group carried net reserves for US asbestos and environmental liabilities equal to USD 2 063 million. During 2014, the Group incurred net losses of USD 291 million and paid net against these liabilities USD 177 million.
Line of business: Property –441 –277 Casualty –455 –62 Specialty –475 –499
Financial statements I Notes to the Group financial statements 6 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
Opening balance as of 1 January 2013 1 103 2 713 219 2 2 4 039
Opening balance as of 1 January 2014 1 591 2 845 319 1 4 756
Opening balance as of 1 January 1 358 1 665 3 023 1 451 2 086 3 537 Effect of acquisitions/disposals and retrocessions 206 –30 176 165 165 Amortisation –151 –184 –335 –156 –261 –417 Interest accrued on unamortised PVFP 35 186 221 44 103 147 Effect of foreign currency translation 3 44 47 –45 –90 –135 Effect of change in unrealised gains/losses 405 405 0 Closing balance as of 31 December 1 451 2 086 3 537 1 294 2 003 3 297
In the fourth quarter of 2014, the Group entered into an agreement to sell Aurora National Life Assurance Company (Aurora), a US subsidiary, to Reinsurance Group of America, Incorporated (RGA).
The preliminary purchase price includes a cash payment of USD 183 million, subject to finalisation at closing. An expected pre-tax loss of USD 247 million (including the impact of net unrealised gains and shadow loss reserve that will be reclassified from equity into the income statement) on the disposition of the net assets was recognised in the fourth quarter of 2014. The sale will only be effective upon the receipt of all required regulatory approvals, which is expected in the second quarter of 2015. The definitive purchase price will be adjusted at closing of the transaction based upon the difference in yields of the transferred investments and a representative basket of investments.
Assets Fixed income securities available-for-sale 3 456 Policy loans, mortgages and other loans 157 Short-term investments 6 Cash and cash equivalents 23 Accrued investment income 37 Premiums and other receivables 6 Reinsurance recoverable on unpaid claims and policy benefits 7 Other assets held for sale 1 Total assets 3 693
Liabilities Unpaid claims and claim adjustment expenses 15 Liabilities for life and health policy benefits 1 494 Policyholder account balances 1 151 Accrued expenses and other liabilities held for sale 292 Total liabilities 2 952
Investment income Net investment income by source (excluding unit-linked and with-profit business) was as follows: Dividends received from investments accounted for using the equity method were USD 198 million and USD 277 million for 2013 and 2014, respectively.
Equity securities 143 100 Policy loans, mortgages and other loans 119 133 Investment real estate 139 144 Short-term investments 109 111 Other current investments 93 127 Share in earnings of equity-accounted investees 350 321 Cash and cash equivalents 48 42 Net result from deposit-accounted contracts 154 149 Deposits with ceding companies 595 571
Investment expenses –406 –358 Interest charged for funds held –23 –35 Net investment income – non-participating 3 947 4 103
Fixed income securities available-for-sale: Gross realised gains 1 215 814 Gross realised losses –689 –231
Investment result – unit-linked and with-profit business For unit-linked contracts, the investment risk is borne by the policyholder. For with-profit contracts, the majority of the investment risk is also borne by the policyholder, although there are certain guarantees that limit the down-side risk for the policyholder, and a certain proportion of the returns may be retained by the Group (typically 10%).
For securitised products, cash flow projection analysis is conducted by integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities, and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecasted economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and the present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.
Balance as of 1 January 310 228 Credit losses for which an other-than-temporary impairment was not previously recognised 1 9 Reductions for securities sold during the period –57 –78 Increase of credit losses for which an other-than-temporary impairment has been recognised previously, when the Group does not intend to sell, or more likely than not will not be required to sell before recovery 11 Impact of increase in cash flows expected to be collected –37 –23 Impact of foreign exchange movements 1
States of the United States and political subdivisions of the states 953 10 –48 915
Mortgage- and asset-backed securities 6 319 284 –74 –4 6 525 Fixed income securities available-for-sale 76 349 2 999 –1 579 –8 77 761 Equity securities available-for-sale 6 110 1 047 –81 7 076 2014 USD millions
As of 31 December 2013 and 2014, securities of USD 16 215 million and USD 16 915 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. Corresponding liabilities of USD 1 991 million and USD 1 951 million, respectively, were recognised in accrued expenses and other liabilities for the obligation to return collateral that the Group has the right to sell or repledge.
Collateral accepted which the Group has the right to sell or repledge As of 31 December 2013 and 2014, the fair value of the equity securities, the government and corporate debt securities received as collateral was USD 4 367 million and USD 3 907 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2013 and 2014 was USD 1 472 million and USD 494 million, respectively. The sources of the collateral are reverse repurchase agreements and derivative transactions.
Mortgage- and asset-backed securities with no fixed maturity 6 120 6 326 5 564 5 768 Total fixed income securities available-for-sale 76 349 77 761 77 867 84 450
Offsetting of derivatives, financial assets and financial liabilities Offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows: Collateral pledged or received between two counterparties with a master netting arrangement in place, but not subject to balance sheet netting is disclosed at fair value. The fair values represent the gross carrying value amounts at the reporting date for each financial instrument received or pledged by the Group. Management believes that master netting agreements provide for legally enforceable set-off in the event of default, which substantially reduces credit exposure. Upon occurrence of an event of default the non-defaulting party may set off the obligation against collateral received regardless if offset on balance sheet prior to the defaulting event. The net amounts of the financial assets and liabilities presented on the balance sheet were recognised in “Other Invested Assets”, and “Accrued Expenses and Other Liabilities”, respectively.
Related financial instruments not set off in the balance sheet Net amount 2014 USD millions
Derivative financial instruments – liabilities –3 877 2 969 –908 149 –759
Unrealised losses on securities available-for-sale The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position as of 31 December 2013 and 2014. As of 31 December 2013 and 2014, USD 77 million and USD 52 million, respectively, of the gross unrealised loss on equity securities available-for-sale relates to declines in value for less than 12 months and USD 4 million and USD 16 million, respectively, to declines in value for more than 12 months.
Less than 12 months 12 months or more Total 2013 USD millions Fair value
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 2 874 113 2 874 113
States of the United States and political subdivisions of the states 703 48 703 48
Less than 12 months 12 months or more Total 2014 USD millions Fair value
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 1 637 5 265 4 1 902 9
States of the United States and political subdivisions of the states 117 1 32 1 149 2
Depreciation expense related to income-producing properties was USD 25 million and USD 26 million for 2013 and 2014, respectively. Accumulated depreciation on investment real estate totalled USD 577 million and USD 539 million as of 31 December 2013 and 2014, respectively.
Substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies.
Certain financial instruments are classified within level 3 of the fair value hierarchy, because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity, less liquid corporate debt securities and certain asset-backed securities. Certain over-the-counter (OTC) derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy. Pursuant to the election of the fair value option, the Group classifies certain liabilities for life and health policy benefits in level 3 of the fair value hierarchy. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.
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.
The Group holds both exchange-traded and (OTC) interest rate, foreign exchange, credit and equity derivative contracts for hedging and trading purposes. The fair values of exchange-traded derivatives measured using observable exchange prices are classified in level 1. Long-dated contracts may require adjustments to the exchange-traded prices which would trigger reclassification to level 2 in the fair value hierarchy. OTC derivatives are generally valued by the Group based on the internal models, which are consistent with industry standards and practices, and use both observable (dealer, broker or market consensus prices, spot and forward rates, interest rate and credit curves and volatility indices) and unobservable inputs (adjustments for liquidity, inputs derived from the observable data based on the Group’s judgments and assumptions).
The Group’s OTC credit derivatives can 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.
Assets Fixed income securities held for proprietary investment purposes 5 454 73 180 662 79 296
Fixed income securities backing unit-linked and with-profit business 4 585 4 585
Equity securities backing unit-linked and with-profit business 21 169 11 21 180 Equity securities held for proprietary investment purposes 7 088 554 49 7 691
Debt securities issued by US government and government agencies 5 454 1 537 6 991 US Agency securitised products 3 946 3 946 Debt securities issued by non-US governments and government agencies 30 092 30 092
Total assets at fair value 35 218 82 103 3 472 –2 877 117 916
Liabilities for life and health policy benefits –187 –187 Accrued expenses and other liabilities –1 035 –864 –1 899 Total liabilities at fair value –1 048 –3 971 –944 2 969 –2 994 1 The netting of derivative receivables and derivative payables is permitted when a legally enforceable master netting agreement exists between two counterparties. A master netting agreement provides for the net settlement of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default or on the termination of any one contract.