Expenses Claims and claim adjustment expenses 3 –1 955 –2 263 Acquisition costs 3 –459 –517 Operating expenses –658 –698 Total expenses before interest expenses –3 072 –3 478
Income before interest and income tax expense 584 203 Interest expenses –24 –23 Income before income tax expense 560 180 Income tax expense2 11 –149 –10 Net income before attribution of non-controlling interests 411 170
Comprehensive income attributable to non-controlling interests –2 2 Total comprehensive income attributable to common shareholder 197 219 2015 USD millions
Liabilities Unpaid claims and claim adjustment expenses 4 10 619 10 271
Net unrealised investment gains/losses, net of tax Balance as of 1 January 116 –28 Changes during the period –144 40 Balance as of period end –28 12
Balance as of 1 January 89 66 Change during the period –25 –4 Income attributable to non-controlling interests 2 –2 Balance as of period end 66 60
Nature of operations The Swiss Re Corporate Solutions Group, which is headquartered in Zurich, Switzerland, comprises Swiss Re Corporate Solutions Ltd (the parent company, referred to as “SRCS”) and its subsidiaries (collectively, the “Group”). The Group provides a wide range of traditional and non-traditional commercial insurance products and risk transfer solutions through a network of offices around the globe.
For assets or derivative structures at fair value, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Although management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and judgement over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. As of 31 December 2016, the Group had not provided any collateral on financial instruments in excess of its own market value estimates.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, an update to subtopic 205-40, “Presentation of Financial Statements – Going Concern”. The ASU requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are available to be issued. When management identifies such conditions or events, footnote disclosures need to be provided on the relevant conditions and events identified and on whether management’s plans to mitigate those conditions or events will alleviate the substantial doubt. The Group adopted ASU 2014-15 as of year-end 2016. The adoption did not have an impact on the Group’s financial statements.
In January 2015, the FASB issued ASU 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”, an update to subtopic 225-20, “Income Statement–Extraordinary and Unusual Items”. The ASU eliminates the separate presentation of extraordinary items, net of tax and the related earnings per share. Extraordinary items were events and transactions that were distinguished by their unusual nature and by the infrequency of their occurrence. The ASU does not affect the requirement to disclose material items that are unusual in nature or infrequently occurring. The Group adopted ASU 2015-01 on 1 January 2016 on a prospective basis. The adoption did not have a material effect on the Group’s financial statements.
In May 2015, the FASB issued ASU 2015-07, “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”, an amendment to topic 820, “Fair Value Measurement”. ASU 2015-07 removes the requirement to categorise within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The Group adopted ASU 2015-07 on 1 January 2016 and removed investments for which fair values are measured using the net asset value per share practical expedient from the fair value hierarchy as of the adoption date. The amended disclosures are provided in Note 7 Fair value disclosures.
In May 2015, the FASB issued ASU 2015-09, “Disclosures about Short-Duration Contracts”, an update to topic 944, “Financial Services — Insurance”. ASU 2015-09 requires an insurance entity to provide additional information about insurance liabilities, including information on the nature, amount, timing, and uncertainty of future cash flows related to insurance liabilities and the effect of those cash flows on the statement of comprehensive income. Requirements include disaggregated incurred and paid claims development information by accident year, on a net basis after risk mitigation, for at least the most recent 10 years with the periods preceding the current period considered required supplementary information. In addition, for each accident year presented in the claims development tables, an insurer has to provide disaggregated information about claim frequency (unless impracticable) and the amounts of incurred but not reported (IBNR) liabilities plus the expected development on reported claims. Required disclosures also include a description of the methods for determining both IBNR and expected development on reported claims as well as information about any significant changes in methods and assumptions used in the computation of the liability for unpaid claims and claim adjustment expenses, including reasons for the changes and the impact of the changes on the most recent reporting period in the financial statements. All aforementioned disclosures have to be provided on an annual basis. In addition, insurance entities must disclose the roll-forward of the liability for unpaid claims and claim adjustment expenses in both interim and annual periods. The Group adopted the annual disclosure requirements as of year-end 2016. Please refer to Note 4 for further details. The Group will adopt the interim disclosure requirements for the half-year ending on 30 June 2017.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities“, an update to subtopic 825-10, “Financial Instruments – Overall“. The ASU requires an entity to carry investments in equity securities, including other ownership interests and limited liability companies at fair value through net income, with the exception of equity method investments, investments that result in consolidation or investments for which the entity has elected the practicability exception to fair value measurement. The practicability exception can only be applied by certain entities and only to equity investments without a readily determinable fair value. Investments under the practicability exception will be subject to an indicator-based impairment test. For financial liabilities to which the fair value option has been applied, the ASU also requires an entity to separately present the change in fair value attributable to instrument-specific credit risk in other comprehensive income rather than in net income. Specific exceptions apply to this requirement. In addition, the ASU requires an entity to assess whether a valuation allowance is needed on a deferred tax asset (DTA) related to fixed income securities AFS in combination with the entity‘s other DTAs rather than separately from other DTAs. The ASU also introduces changes to disclosure requirements for financial instruments not measured at fair value and introduces new requirements for equity instruments where the practicability exception to fair value measurement is applied. The new requirements are effective for annual and interim periods beginning after 15 December 2017 with early adoption permitted for requirements relating to the presentation of the impact of instrumentspecific credit risk on qualifying financial liabilities in other comprehensive income. The Group is currently assessing the impact of the new requirements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses”, an update to topic 326, “ Financial Instruments – Credit Losses”. ASU 2016-13 replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses. The standard requires for financial instruments that are measured at amortised cost and available-for-sale debt securities that an entity recognises as an allowance its estimate of expected credit losses. This standard is effective for the Group for annual and interim periods beginning after 15 December 2020. Early adoption for interim and annual periods after 15 December 2018 is permitted. The Group is currently assessing the impact of the new requirements.
Financial Statements I Notes to the Group financial statements 2 Information on business segments
The Group does not track and manage its investment portfolio by operating segment, and therefore separate balance sheets are not maintained. Accordingly, the Group does not review and evaluate the financial results of its operating segments based upon balance sheet data.
Expenses Claims and claim adjustment expenses –541 –1 099 –422 –201 –2 263 Acquisition costs –168 –134 –111 –104 –517 Operating expenses –268 –205 –120 –105 –698 Total expenses before interest expenses –977 –1 438 –653 –410 –3 478
Net investment income 124 Net realised investment gains/losses 49 Other revenues 5 Interest expenses –23 Income before income tax expense 180
Gross premiums earned are allocated by country based on the underlying contract.
Premium receivables invoiced 402 551 Receivables invoiced from ceded re/insurance business 189 109 Recognised allowance –20 –24
Financial Statements I Notes to the Group financial statements 4 Unpaid claims and claim adjustment expenses
Prior-year development In 2016, property claims development on prior years was driven by favourable experience related to lower than expected claims occurrence. Casualty, specialty and credit & surety claims development on prior years was driven by adverse experience related to large losses.
Reinsurance recoverable –7 434 –6 182 Net balance as of 1 January 4 287 4 437
Foreign exchange –114 –20 Effect of acquisitions, disposals, new retroactive reinsurance and other items 39 18 Net balance as of 31 December 4 437 4 842
At the end of 2016, the Business Unit Corporate Solutions carried net reserves for US asbestos and environmental liabilities equal to USD 219 million. During 2016, Corporate Solutions incurred net losses of USD 32 million and paid net against these liabilities of USD 4 million.
SRCS was incorporated in 2011 and started operations in 2012. Corporate Solutions as a separately managed business unit likewise started operations in 2012 after the transfer of Swiss Reinsurance Company Ltd’s investment in SRCS in 2012 to the Swiss Re Group holding company, Swiss Re Ltd. Therefore, five accident years and reporting periods are shown for the Group. Claims arising from older accident years prior to 2012 are shown as a reconciling item in ”All liabilities before 2012” in the claims development tables. All but an immaterial portion of these claims arise from accident years older than 10 years and therefore are out of the required range of disclosure.
Generally, claims reserves acquired in business combinations are presented on a retrospective basis in the claims development tables, as if the Group had always owned the business acquired, to the extent the underlying information can be produced without undue effort and acquired reserves are considered material. Acquired businesses are shown in the existing disaggregation categories. Disposals will be treated similarly. Facts and circumstances may indicate a different presentation for specific transactions, in which case they will be addressed specifically in these notes.
Change in claim counts in property for accident years 2013 and 2014 relate mostly to an agriculture programme written in 2013, leading to high claim counts in those years.
All liabilities before 2012 15 Liabilities for claims and claim adjustment expenses, net of reinsurance 811
Casualty Incurred claims and allocated claim adjustment expenses, net of reinsurance
Cumulative paid claim and allocated claim adjustment expenses, net of reinsurance
The 2015 accident year claims development in casualty is mostly driven by several large losses. Older accident years saw either favourable or no development. The liabilities before 2012 relate mainly to accident years 2006 and prior. The increase in reserves in 2016 is due to the acquisition of IHC Risk Solutions.
Casualty business may have a significant reporting lag between the accident date and the date reported to the Group. The reported claim counts have been trending up for 2012 to 2014, which is similar to the incurred losses. For all recent years, there will be significant increases in reported claim counts over time, which will narrow the gap of claim counts.
All liabilities before 2012 681 Liabilities for claims and claim adjustment expenses, net of reinsurance 3021
All liabilities before 2012 11 Liabilities for claims and claim adjustment expenses, net of reinsurance 721
Credit volume has been increasing since 2012. Credit business tends to have an initial payout and subsequent recovery from the insured. Therefore, payments can exceed incurred amounts. The accident year 2015 claims development is mostly driven by large losses.
All liabilities before 2012 9 Liabilities for claims and claim adjustment expenses, net of reinsurance 45
Unallocated claim adjustment expenses 271 Total unpaid claims and claim adjustment expenses 10271
Fixed income securities available-for-sale: Gross realised gains 31 27 Gross realised losses –15 –14
Other-than-temporary impairments –3 –10 Net realised investment gains/losses on trading securities 1 1 Net realised/unrealised gains/losses on other investments –1 1 Net realised/unrealised gains/losses on insurance-related activities 33 15 Foreign exchange gains/losses 2 –23 Net realised investment gains/losses 141 49
Impairment on fixed income securities related to credit losses Other-than-temporary impairments for debt securities are bifurcated between credit and non-credit components, with the credit component recognised through earnings and the non-credit component recognised in other comprehensive income. The credit component of other-than-temporary impairments is defined as the difference between a security’s amortised cost basis and the present value of expected cash flows. Methodologies for measuring the credit component of impairment are aligned to market observer forecasts of credit performance drivers. Management believes that these forecasts are representative of median market expectations.
Assets pledged As of 31 December 2016, investments with a carrying value of USD 1 008 million were on deposit with regulatory agencies in accordance with local requirements, and investments with a carrying value of USD 211 million were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries.
As of 31 December 2015 and 2016, securities of USD 1 723 million and USD 1 458 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. There were no associated liabilities.
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 it has been 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.
Derivative financial instruments - liabilities –114 –114 25 –89 2016 USD millions
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 1 346 11 1 346 11 US Agency securitised products 105 1 105 1 States of the United States and political subdivisions of the states 195 7 195 7
Level 2 inputs are market based inputs that are directly or indirectly observable, but not considered level 1 quoted prices. Level 2 inputs consist of (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical assets or liabilities in non-active markets (e.g. markets which have few transactions and where prices are not current or price quotations vary substantially); (iii) inputs other than quoted prices that are observable (e.g. interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates); and (iv) inputs derived from, or corroborated by, observable market data.
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. 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.
Valuation techniques US government securities typically have quoted market prices in active markets and are categorised as level 1 instruments in the fair value hierarchy. Non-US government holdings are generally classified as level 2 instruments and are valued on the basis of the quotes provided by pricing services, which are subject to the Swiss Re Group’s pricing validation reviews and pricing vendor challenge process. Valuations provided by pricing vendors are generally based on the actual trade information as substantially all of the Group’s non-US government holdings are traded in transparent and liquid markets.
Debt securities issued by US government and government agencies 1 741 422 2 163 US Agency securitised products 116 116 Debt securities issued by non-US governments and government agencies 527 527
Equity securities held for proprietary investment purposes 379 5 384 Short-term investments held for proprietary investment purposes 697 549 1 246 Derivative financial instruments 9 13 22 Other invested assets 8 8 Total assets at fair value 2 817 3 749 13 8 6 587
Settlements –1 –1 –2 –2 Transfers into level 32 0 0 Transfers out of level 32 0 0 Impact of foreign exchange movements 0 0
The significant unobservable input used in the fair value measurement of the Group’s industry loss warrants is the market implied probability of a natural catastrophe event. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement.
Private equity funds generally have limitations on the amount of redemptions from a fund during the redemption period due to illiquidity of the underlying investments. Fees may apply for redemptions or transferring of interest to other parties. Distributions are expected to be received from these funds as the underlying assets are liquidated over the life of the fund, which is generally from 10 to 12 years.
Assets and liabilities not measured at fair value but for which the fair value is disclosed As of 31 December 2015 and 2016, the subordinated financial debt issued by the Group was valued at USD 491 million and USD 490 million, respectively. The debt position is fair valued based on executable broker quotes and is classified as a level 2 measurement.
The Group enters into various financial contracts covering risks such as weather, weather-contingent price risks, outage contingent power price risks and industry loss warrants, that are accounted for as derivative financial instruments (also referred to as Environmental Commodity Markets and Weather business, or “ECM/Weather contracts/ILW”). The Group also uses derivatives to manage exposure to foreign currency risks. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models, with changes in fair value recorded in the income statement. The Group currently does not apply hedge accounting.
Fair values and notional amounts of derivative financial instruments As of 31 December, the fair values and notional amounts of the derivatives outstanding were as follows: The notional amounts of derivative financial instruments give an indication of the Group’s volume of derivative activity and are presented without set-off. The fair value assets are included in “Other invested assets” and the fair value liabilities are included in “Accrued expenses and other liabilities”.
Derivative financial instruments Foreign exchange contracts –43 –1 –1 ECM/Weather contracts/ILW 1 078 8 –113 –105 Total derivative financial instruments 1 035 8 –114 –106 2016 USD millions
Derivative financial instruments Foreign exchange contracts 87 3 –1 2 ECM/Weather contracts/ILW 1 078 19 –79 –60 Total derivative financial instruments 1 165 22 –80 –58
The total fair value of derivative financial instruments containing credit risk-related contingent features amounted to USD 55 million and USD 28 million as of 31 December 2015 and 2016, respectively. For derivative financial instruments containing credit risk-related contingent features, the Group posted collateral of nil as of 31 December 2015 and 2016, respectively. In the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD 28 million additional collateral would have had to be posted as of 31 December 2016. The total equals the amount needed to settle the instruments immediately as of 31 December 2016.
Qualifying purchased intangible assets, including distribution/customer relationships and goodwill, have been established.
Distribution / customer relationship 6 years 67 Other intangibles 1 year 16
The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: Tax rate reconciliation The following table reconciles the expected tax expense at the Swiss statutory tax rate to the actual tax expense in the accompanying income statement: The Group reported a tax charge of USD 10 million on a pre-tax income of USD 180 million for 2016, compared to a charge of USD 149 million on a pre-tax income of USD 560 million for 2015. This translates into an effective tax rate in the current and prior year reporting periods of 5.6% and 26.6%, respectively.
The lower tax rate in the current year is mainly driven by the ability to benefit from foreign tax credits in the Swiss Re Corporate Solutions U.S. Group.
Current taxes 126 27 Deferred taxes 23 –17 Income tax expense 149 10
There were no net operating losses and no net capital losses utilised during the period ended 31 December 2016.
Gross deferred tax assets 244 256 Valuation allowance –2 –7 Unrecognised tax benefits offsetting benefits on loss carryforwards 0 –1 Total deferred tax assets 242 248
Deferred tax liabilities Deferred acquisition costs –46 –53 Present value of future profits –66 –70 Property amortisation –18 –8 Income accrued/deferred –28 –33 Technical provisions –76 –84 Unrealised gains on investments –18 –15 Foreign exchange provision –27 –27 Currency translation adjustments –56 –53 Other –31 –27 Total deferred tax liabilities –366 –370
Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. The balance of gross unrecognised tax benefits as of 31 December 2016 presented in the table above excludes accrued interest and penalties (USD 1 million).
The Group assumes and cedes certain re/insurance contracts from/to affiliated companies within the Swiss Re Group, but outside the Group. The Group also conducts various investing activities, including derivatives, with affiliated companies in the Swiss Re Group. In addition, the Group enters into various arrangements with affiliated companies in the Swiss Re Group for the provision of services. These activities result in the following related party transactions on the income statement and balance sheet: USD millions 2015 2016
Claims and claim adjustment expenses –198 –201 Acquisition costs 6 16 Operating expenses –498 –318 Total expenses –690 –503
Other invested assets 1 4 Premiums and other receivables 204 196 Reinsurance recoverable on unpaid claims 4 730 3 943 Funds held by ceding companies 1 32 Deferred acquisition costs –3 –2 Other assets 225 235
Financial Statements I Notes to the Group financial statements 14 Variable interest entities
When analysing whether the entity is a VIE, the Group mainly assesses if (1) the equity is sufficient to finance the entity‘s activities without additional subordinated financial support, (2) the equity holders have the right to make significant decisions affecting the entity‘s operations and (3) the holders of the voting rights substantively participate in the gains and losses of the entity.
The Group monitors changes to the facts and circumstances of the existing involvement with legal entities to determine whether they require reconsideration of the entity‘s designation as a VIE or voting interest entity. For VIEs, the Group reassesses regularly the primary beneficiary determination.
Investment vehicles The Group‘s variable interests in investment partnerships arise through ownership of the limited partner interests. Many investment partnerships are VIEs under ASU 2015-02 because the limited partners as a group lack kick-out or participating rights. The Group does not hold the general partner interest in the limited partnerships and therefore does not direct investment activities of the entity. Therefore, the Group lacks power over the relevant activities of the vehicles and, consequently, does not qualify as the primary beneficiary. The Group is exposed to losses when the values of the investments held by the investment vehicles decrease. The Group‘s maximum exposure to loss equals the Group‘s share of the investment.
The Group did not provide financial or other support to any VIEs during 2016 that it was not previously contractually required to provide.
Non-consolidated VIEs The following table shows the Group’s assets related to the VIEs in which the Group held a variable interest but was not the primary beneficiary as of 31 December: The following table shows the Group’s assets and maximum exposure to loss related to the VIEs in which the Group held a variable interest but was not the primary beneficiary as of 31 December: USD millions 2015 2016
Report of the statutory auditor on the consolidated financial statements As statutory auditor, we have audited the consolidated financial statements of Swiss Re Corporate Solutions Ltd and its subsidiaries (the ‘Company’), which comprise the consolidated balance sheet as of 31 December 2016, and the related consolidated income statement, statement of comprehensive income, statement of shareholder’s equity, statement of cash flow and notes (pages 2 to 53) for the year ended 31 December 2016.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control system. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Other matter Accounting principles generally accepted in the United States of America require that the supplementary information based on the requirements of ASU 2015-09, Disclosures about Short-Duration Contracts, on pages 24 to 27 be presented to supplement the consolidated financial statements. Such information, although not part of the consolidated financial statements, is required by the Financial Accounting Standards Board, which considers it an essential part of financial reporting for placing the consolidated financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the consolidated financial statements and other knowledge we obtained during our audit of the consolidated financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
̤ Engaging our own valuation experts to perform independent valuations, where applicable.
In particular, ‘long tail’ lines of business (for example, Liability, US Asbestos and Environmental, Motor Liability and Workers’ Compensation) are generally more difficult to project. This is due to the protracted period over which claims can be reported as well as the fact that claims settlements are often less frequent but of higher impact. They are also subject to greater uncertainties than claims relating to ‘short-tail’ business. Long-tailed lines of business generally rely on many assumptions based on experts’ judgement.
̤ Performing sensitivity testing and evaluating the appropriateness of any significant adjustments made by management to P&C loss reserve estimates.
Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence.
Net income for the financial year 2016 amounted to CHF 176 million, compared to CHF 178 million in the prior year.
The financial year under review was marked by a 42% decrease in reinsurance result. This reduction was offset by higher dividend income from subsidiaries.
In 2016, the Company left the equalisation provision unchanged, compared to an increase of CHF 44 million in 2015.
The increase in investment income in 2016 was driven by higher dividend income from a subsidiary, partly offset by lower realised gains on the sale of investments compared to prior year.
Assets Total assets increased by 10% to CHF 7 906 million at 31 December 2016 (31 December 2015: CHF 7 200 million). Excluding the effects of foreign exchange movements, total assets increased by 9%.
Liabilities Total liabilities increased by 14% to CHF 6 202 million at 31 December 2016 (31 December 2015: CHF 5 432 million). Excluding the effects of foreign exchange movements, total liabilities increased by 13%.
Technical provisions gross increased from CHF 4 818 million at 31 December 2015 to CHF 5 481 million at 31 December 2016, mainly reflecting the acquisition of IHC Risk Solutions business and increase in business volume.
The nominal share capital of the Company remained unchanged at CHF 100 million at 31 December 2016.
The Company plans to establish a locally licensed and regulated direct insurance company, and a service company in Mexico in 2017.
Investments Strategy and priorities Financial investments are managed in accordance with Swiss Re‘s asset management policy and the Company‘s investment guidelines, which are intended to ensure compliance with regulatory requirements. The general principle governing investment management in the Company is the creation of economic value on the basis of returns relative to the liability benchmark, while adhering to the investment guidelines and the general prudence principle. The liability benchmark is determined by approximating an investable benchmark from projected liability cash flows. A cash benchmark is used for the economic surplus.
The Company’s Board of Directors has issued a mandate to establish a Risk Management function to provide independent risk taking oversight within the Business Unit Corporate Solutions. In executing this task, Corporate Solutions’ Risk Management function is supported by the Swiss Re Group Risk Management organisation. Significant parts of risk exposure identification, assessment, control and reporting for Swiss Re Corporate Solutions Ltd on a stand-alone basis are integrated in Group Risk Management processes.
The Board of Directors of Swiss Re Corporate Solutions Ltd sets the Company’s risk tolerance. In this role, it is advised by the Board of Directors of the Swiss Re Group, which defines the Group’s basic risk management principles and risk appetite framework including the Group risk tolerance. The Board of Directors of the Swiss Re Group mainly performs risk oversight and governance through three committees: ̤ The Finance and Risk Committee defines the Group Risk Policy, reviews risk capacity limits, monitors adherence to risk tolerance, and reviews top risk issues and exposures of the Company’s assets and liabilities.
The Business Unit Corporate Solutions Risk Management teams are led by a dedicated Chief Risk Officer who reports directly to the Group CRO, with a secondary reporting line to the CEO Corporate Solutions. The Business Unit Corporate Solutions CRO is responsible for risk oversight within the Business Unit Corporate Solutions, as well as for establishing the proper risk governance to ensure efficient risk identification, assessment and control. The CRO Corporate Solutions is supported by functional, regional and legal entity CROs who are responsible for overseeing risk management issues that arise at regional or legal entity level.
While the risk management organisation is closely aligned to Swiss Re’s business structure in order to ensure effective risk oversight, all embedded teams and functional CROs remain part of the central 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.
Business Unit Corporate Solutions Risk Management is also in charge of actuarial reserving and monitoring of reserve holdings.
Claims paid and claim adjustment expenses gross –994 –1 103 Claims paid and claim adjustment expenses retroceded –5 2 Claims paid and claim adjustment expenses net –999 –1 101 Change in unpaid claims gross –437 –539 Change in unpaid claims retroceded 14 18 Change in unpaid claims net –423 –521 Claims and claim adjustment expenses –1 422 –1 622 Change in equalisation provision –44 – Claims incurred –1 466 –1 622 Acquisition costs gross –644 –791 Acquisition costs retroceded – 5 Acquisition costs net –644 –786 Operating costs –191 –199 Acquisition and operating costs –835 –985 Other reinsurance expenses 0 0 Total expenses from reinsurance business –2 301 –2 607
Interest expenses on subordinated liabilities –22 –23 Other income 32 13 Other expenses –7 –22 Income before income tax expense 222 191 Income tax expense –44 –15 Net income 178 176
Liabilities from derivative financial instruments 1 0 Reinsurance balances payable 3 34 62 Other liabilities 6 41 Accrued expenses 11 13 Subordinated liabilities 500 508
Shareholder’s equity 4 Share capital 100 100 Legal reserves from capital contributions 1 342 1 342 Other legal capital reserves 52 52
Time period The financial year 2016 comprises the accounting period from 1 January 2016 to 31 December 2016.
Reinsurance balances payable Reinsurance balances payable are held at redemption value. The position mainly consists of payables to insurance companies and brokers.
Income statement classification Interest expenses on debt were reclassified from other financial expenses to interest expenses on debt and subordinated liabilities. Therefore, the previously reported 2015 figures of other financial expenses and interest expenses on debt and subordinated liabilities with a respective amount of CHF 22 million have been changed accordingly.
Investment management expenses –15 – – –15 Investment expenses –15 –3 –2 –20
Investment expenses Investments in subsidiaries and affiliated companies – – – – Fixed income securities – –8 –2 –10 Loans – – – – Shares in investment funds – –17 – –17 Short-term investments – – 0 0 Other investments – –17 0 –17 Investment management expenses –29 – – –29 Investment expenses –29 –25 –2 –56
3 Assets and liabilities from reinsurance 4 Change in shareholder’s equity 5 Share capital and major shareholder
The nominal share capital of the Company amounted to CHF 100 million. It is divided into 100 000 shares, each with a nominal value of CHF 1 000. The shares were fully paid-in and held directly by Swiss Re Ltd. As of 31 December 2016 and 2015, the Company was a fully owned subsidiary of Swiss Re Ltd.
Premiums and other receivables from reinsurance 1 217 0 1 217 1 163 1 1 164
CHF millions Share Capital Legal capital reserves Other reserves Voluntary profit reserves Retained earnings brought forward Net income for the financial year Total Shareholder’s equity
Allocation to voluntary profit reserves – – – 210 – –210 – Allocation to retained earnings – – – – 78 –78 – Dividend for the financial year 2014 – – – –194 – – –194 Net income for the year – – – – – 178 178
As of 31 December 2016, other liabilities included CHF 2 million payable to the employee pension fund. There was no payable to the employee pension fund in 2015.
Other reinsurance revenues 2 2 Premiums and other receivables from reinsurance 2 2 Reinsurance balances payable 2 2
As of 31 December 2016 and 2015, Swiss Re Corporate Solutions Ltd held the following direct and indirect investments in subsidiaries and affiliated companies: As of 31 December 2016 Country City
Swiss Re Corporate Solutions Insurance China Ltd China Shanghai 100% 100% SR Corporate Solutions America Holding Corporation United States Wilmington 100% 100%
First Specialty Insurance Corporation United States Jefferson City 100% 100% North American Capacity Insurance Company United States Manchester 100% 100% North American Elite Insurance Company United States Manchester 100% 100% North American Specialty Insurance Company United States Manchester 100% 100% Washington International Insurance Company United States Manchester 100% 100% Swiss Re Frankona Maria-Theresia-Straße GbR Germany München 6% 6% Westport serviços e participações Ltda Brazil São Paulo 100% 100%
Swiss Re Corporate Solutions Brasil Seguros S.A. Brazil São Paulo 100% 100% Compania Aseguradora de Fianzas S.A. Confianza Colombia Bogotá 51% 51% Swiss Re Corporate Solutions Advisors South Africa (Pty) Ltd South Africa Johannesburg 100% 100% Swiss Re Corporate Solutions Investment Holding Company Ltd Switzerland Zurich 100% 100% Swiss Re Corporate Solutions Services Ltd United Kingdom London 100% 100% Swiss Re Serviços de Consultoria em Seguros e Resseguros Ltda Brazil São Paulo 100% 100%
First Specialty Insurance Corporation United States Jefferson City 100% 100% North American Capacity Insurance Company United States Manchester 100% 100% North American Elite Insurance Company United States Manchester 100% 100% North American Specialty Insurance Company United States Manchester 100% 100% Washington International Insurance Company United States Manchester 100% 100% Swiss Re Frankona Maria-Theresia-Straße GbR Germany München 6% 6%
In 2016, the Swiss Re Group incurred total auditor‘s fees of CHF 33 million (2015: CHF 35 million) and additional fees of CHF 4 million (2015: CHF 5 million), of which CHF 0.6 million (2015: CHF 0.5 million) incurred for the Company solely relating to auditor’s fees.
Voluntary profit reserves brought forward 16 26 Allocation from retained earnings 250 170 Voluntary profit reserves before proposed allocation of legal reserves from capital contributions and cash dividend 266 196 Proposed cash dividend (maximal amount in CHF of the proposed dividend in USD translated into CHF) –2402 -1701
Retained earnings brought forward 80 8 Net income for the financial year 178 176 Disposable profit 258 184 Allocation to voluntary profit reserves –250 –170 Retained earnings after allocation 8 14
The Board of Directors proposes to the Annual General Meeting of the Company, to be held on 24 March 2017, to approve the following allocations and payment of cash dividend of USD 150 million, which must not exceed CHF 170 million, translated into CHF at spot rate on the settlement date. The cash dividend is paid to its sole shareholder, Swiss Re Ltd, out of voluntary profit reserves on 29 March 2017.
In order to comply with the Swiss Code of Obligations, dividends paid in foreign currencies must meet the capital protection requirements in CHF. In addition, maximum amounts in CHF must be approved by the Annual General Meeting. The Board of Directors proposes to set this maximum amount to CHF 170 million, which shall be funded from the disposable profit as in the tables below.
As such, the effective cash dividend amount translated into CHF at spot rate on the settlement date, must not exceed CHF 170 million. This threshold of CHF 170 million is presented in the below table and reflects the maximum amount in CHF to be paid.
Board of Directors’ Responsibility The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the Company’s Articles of Association. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls of the valuation models for certain investments, including the Company’s independent price verification process.
In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Evaluating the methodology and assumptions, in particular, the yield curves, discounted cash flows, perpetual growth rates and liquidity premiums used in the valuation models.
On the basis of the work performed, we consider the assumptions used by management to be appropriate and that investments are properly valued as of 31 December 2016.
Report on a key audit matter based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matter The valuation of actuarially determined P&C loss reserves involves a high degree of subjectivity and complexity. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses at a given date. The Company uses a range of actuarial methodologies and methods to estimate these provisions. Actuarially determined P&C loss reserves require significant judgement relating to certain factors and assumptions. Among the most significant reserving assumptions are the A-priori loss ratios, which typically drive the estimates of P&C loss reserves for the most recent contract years. Other assumptions include, but are not limited to, interest rates, inflation trends, claims trends, regulatory decisions, historical claims information and the growth of exposure.
̤ Involving PwC’s internal actuarial specialists to test independently management’s estimates of P&C loss reserves, and evaluating the reasonableness of the methodology and assumptions used by comparing them with recognised actuarial practices and by applying our industry knowledge and experience.
On the basis of the work performed, we consider the methods and assumption used by management to be reasonable. We agree with their conclusion that the book value for all investments in subsidiaries are recoverable.
Market sentiment is dominated in large part by concerns over the trends exemplified by the outcome of the US presidential election and the UK referendum on European Union (EU) membership. Growth forecasts among the principal global economies remain uneven and uncertain in an environment of elevated political uncertainty. Stable, but uneven growth, in the Eurozone could suffer as a result of the potential impact of populism and anti-globalisation sentiments on upcoming elections in the Netherlands, France and Germany, and potentially Italy, during 2017. The planned withdrawal of the United Kingdom from the EU has created uncertainty not only for the United Kingdom but for the rest of the EU, and negotiations over withdrawal will likely continue to contribute to volatility and pose significant challenges for the EU, while also calling into question the ability of the EU to address significant ongoing structural challenges. The long-term effects of a withdrawal of the United Kingdom from the EU will depend in part on any agreements the United Kingdom makes to retain access to the single market within the European Economic Area (EEA) following such withdrawal, the scope and nature of which currently remain highly uncertain. As China’s economy undergoes structural changes, recent near-term growth stabilisation may be reversed. Growth in China remains heavily dependent on government stimulus and credit expansion; it continues to face significant capital outflows, reflecting concerns over foreign currency, and its banking sector could be adversely impacted by rising interest rates. The foregoing may be exacerbated by geopolitical tensions, fears over security and migration, and uncertainty created generally by the policy pronouncements that have been, and may in the coming months be, announced by the new US administration on a range of trade, security, foreign policy, environmental protection and other issues having global implications, as well as by the consequences of the implementation of such policy pronouncements.
With fewer options available to policymakers and concerns generally over the absence of realistic confidence-building measures, and with heightened risk that volatility or depressed conditions in one sector, one market, one country or one region could have far broader implications, volatility can be expected to continue. Further adverse developments or the continuation of adverse trends that in turn have a negative impact on financial markets and economic conditions could limit the Group’s ability to access the capital markets and bank funding markets, could adversely affect the ability of counterparties to meet their obligations to the Group and could adversely affect the confidence of the ultimate buyers of insurance.
While some regulation is national in scope, the global nature of the Group’s business means that its operations are subject in effect to a patchwork of global, national and regional standards. Swiss Re and its subsidiaries are subject to group supervision and Swiss Re’s subsidiaries are also subject to applicable regulation in each of the jurisdictions in which they conduct business, particularly Switzerland, the United States, the United Kingdom, countries in the European Union (including Luxembourg), Australia, Japan, Canada, Singapore and Dubai. In addition, the Group could be affected by regulatory changes or developments affecting the overall Swiss Re group, comprising Swiss Re Ltd (“SRL”) and its consolidated subsidiaries, of which the Group is a part (the “Swiss Re Group”).
In addition, regulators in jurisdictions beyond those where the Group has core operations increasingly are playing a far greater oversight role, requiring more localised resources and, despite a predominantly local focus, also raise issues of a cross-border nature. Furthermore, evolving regulatory schemes and requirements may be inconsistent or may conflict with each other, thereby subjecting the Group, particularly in light of the increasing focus on legal entities in isolation, to higher compliance and legal costs, as well as the possibility of higher operational, capital and liquidity costs. The effect of these trends could be exacerbated to the extent that the current political environment results in a return to more bilateral, and less harmonised, cross-border regulatory efforts.
As claims paying and financial strength ratings are key factors in establishing the competitive position of insurers, a decline in ratings alone could make insurance provided by the Group less attractive to clients relative to insurance from competitors with similar or stronger ratings. A decline in ratings could also cause the loss of clients who are required by policy or regulation to purchase insurance only from insurers with certain ratings. Moreover, a decline in ratings could impact the availability and terms of unsecured financing and obligate the Group to provide collateral or other guarantees in the course of its insurance business or trigger early termination of funding arrangements, potentially resulting in a need for additional liquidity. As a ratings decline could also have a material adverse impact on the Group’s costs of borrowing or ability to access the capital markets, the adverse implications of a downgrade could be more severe.
Risks related to the Swiss Re corporate structure Corporate Solutions is a wholly owned subsidiary of SRL, and the Group represents one of the four operating business segments of the Swiss Re Group. While a significant portion of the Corporate Solutions business was transferred to the Group as part of the formation of the Group as a separate business unit, for regulatory reasons certain of the Group’s operations are conducted by legal entities that continue to be owned by other members of the Swiss Re Group. In addition, a substantial portion of the Group’s historical loss reserves remain with other members of the Swiss Re Group.
Capital, funding, reserve and cost allocations are made at the Swiss Re Group level across the four operating segments based principally on business plans as measured against US GAAP and economic value management metrics. Decisions at the Swiss Re Group level in respect of the broader Swiss Re Group could have an adverse impact on the Group’s financial condition, including its capital and liquidity levels, as well as on its SST ratio. As part of the Swiss Re Group’s focus on efficient capital allocation, the Group expects to be paying dividends to SRL. Decisions on dividends payable by each of the operating segments, including the Group, are made at the Swiss Re Group level based on legal entity, regulatory, capital and liquidity considerations. The Swiss Re Group expects that, over time, its structure will continue to evolve, and while to date all of the Swiss Re Group’s principal operations, including the Group, remain wholly owned, in the future the Swiss Re Group may elect to partner with minority investors in or within one or more of the Swiss Re Group’s business units or sub-groups within its business units, which could alter historical approaches taken in respect of capital, liquidity, funding and/or dividends, as well as other governance matters, including strategy for such business unit or sub-group.