Life & Health Reinsurance Net income attributable to common shareholders 1 664 739 –56 Premiums earned and fee income 8 404 9 122 9 Benefit ratio in % 74.5 75.5 Return on equity1 in % 21.2 8.9
Admin Re® Net income attributable to common shareholders 329 183 –44 Premiums earned and fee income 1 686 1 705 1 Return on equity1 in % 5.0 2.6 1 Return on equity is calculated by dividing net income attributable to common shareholders by average common shareholders’ equity. 2 Regular staff * Swiss withholding tax exempt distribution out of legal reserves from capital contributions
Building long-term value 32 Global Partnerships 34 Corporate responsibility 38 Our people
The 2012 Financial Report describes the Group in financial terms and gives a picture of its compensation, corporate governance, and risk and capital management policies and approaches.
Telephone +41 43 285 2121 Fax +41 43 285 2999 www.swissre.com 2012 Business Report Working together, achieving the best
Admin Re® Admin Re® provides risk and capital management solutions by which Swiss Re assumes 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 to divest non-core blocks of business, thus reducing administrative costs and freeing up capital.
Achieving the 2011–2015 financial targets is our top priority — at both Business Unit and Group level. To date we are well on track, ahead of schedule on our return on equity and earnings per share targets, and just slightly behind on our economic net worth per share target.
With these measures we aim to move toward higher returns and achieve our 2011–2015 financial targets.
1 Average US gov 5 years from 31 December 2011 until 31 December 2012: 0.75% 2 EPS CAGR of 10% has been adjusted to 5% for 2013 to account for the distribution of excess capital through a proposed special dividend of approx. USD 1.5 billion.
Message from the Chairman Excellent results earned in a difficult environment
However the economic and financial market environment — particularly in Europe — remains fragile. The risks are often political: the decisions taken over the last year must now be implemented and further reforms will be necessary. Any delay increases the risk that the crisis will flare up again. We expect interest rates to rise slightly this year and next, but to remain quite low by historical standards.
3.50 Proposed dividend in CHF for 2012* (CHF 3.00 in 2011)
* Swiss withholding tax exempt distribution out of legal reserves from capital contributions 4 Swiss Re 2012 Business Report
In 2012, the Swiss Re Foundation began its activities. The non-profit foundation aims to increase society’s resilience toward natural hazards, climate change, population growth, water scarcity and pandemics, along with other challenges to security, health and prosperity. The Swiss Re Foundation will also support community projects and employee volunteering in locations where Swiss Re has offices.
Dear shareholders I am very proud to report on the performance and growth of our Group in 2012, demonstrated convincingly by our net income of USD 4.2 billion. All Business Units contributed to this excellent result, including a strong return on Group investments of 4.0%.
Swiss Re at a glance | Message from the Group CEO
For examples of how we have helped clients meet their changing needs, read the stories from the Reinsurance and Corporate Solutions Business Units beginning on page 16 of the Business Report.
To see how our businesses have performed in 2012 read the summary performance reviews on page 14. For full details, see pages 20–35 of the Financial Report.
To read about our Group and BU investment results, see pages 20–35 of the Financial Report.
We cover the reinsurance needs for non-life and life insurers through the Property & Casualty and Life & Health segments.
Board of Directors 10 Malcolm D. Knight 11 Hans Ulrich Maerki 12 Carlos E. Represas 13 Jean-Pierre Roth 1 Walter B. Kielholz 2 Mathis Cabiallavetta 3 Renato Fassbind 4 Jakob Baer 5 Raymund Breu 6 Raymond K. F. Ch’ien 7 John R. Coomber 8 Rajna Gibson Brandon 9 C. Robert Henrikson
Board changes in 2012 / 2013 The General Meeting of Shareholders 2012 elected C. Robert Henrikson as new member to the Board of Directors. Swiss Re’s Board of Directors proposes Mary Francis, a UK citizen, for election as new member to the Board of Directors at the next Annual General Meeting. Among other roles and honours, Ms. Francis was on the boards of directors of the Bank of England and Aviva plc and remains a Senior Independent Director of Centrica plc and a Senior Advisor to Chatham House. From 1999 to 2005, she was Director General of the Association of British Insurers.
Group EC changes in 2012 Jean-Jacques Henchoz, Martyn Parker and J. Eric Smith were appointed Regional Presidents EMEA, Asia and Americas respectively and joined the Group EC on 1 January 2012. Moses Ojeisekhoba was appointed Regional President Asia and member of the Group EC as of 15 March 2012 succeeding Martyn Parker who was appointed Chairman Global Partnerships. John R. Dacey joined the Group EC as of 1 November 2012 as the Group Chief Strategy Officer and also became Chairman of Swiss Re’s Admin Re® business. Guido Fürer was appointed Group Chief Investment Officer and member of the Group EC as of 1 November 2012, succeeding David Blumer who left the company.
For full biographies of GEC members see the 2012 Financial Report 7 Christian Mumenthaler CEO Reinsurance 8 Moses Ojeisekhoba CEO Reinsurance Asia 9 George Quinn Group CFO
One Group, three businesses The three distinct Business Units of the Swiss Re Group correspond to Swiss Re’s core activities in reinsurance, insurance and risk transfer solutions.
For examples of how our two Reinsurance segments lived up to that reputation in South Korea and the United States, see page 16.
Property & Casualty performance P&C Re had a particularly strong performance in 2012. Premiums increased by 21.6% and margins increased as well. The result also benefited by realised gains on investments and the release of reserves that had been set aside in previous years. The P&C Re combined ratio, a measure that captures both profitability and underwriting quality, was significantly better than the year before, at 80.7%. This takes into account the estimated USD 756 million loss from Hurricane Sandy.
To read about Admin Re®’s ongoing transformation, turn to page 24.
Performance In 2012 Admin Re® sold its US business in order to focus on growth opportunities in Europe, especially the UK. The proceeds can be channelled to profitable opportunities either within Admin Re® or within the Swiss Re Group. The closed life book market shows positive medium-term prospects. Based on the achievements of 2012, we believe that Admin Re® is in great position to take advantage of this opportunity.
Backed by nearly 150 years of collective experience, significant capacity and the financial strength of the Swiss Re Group, Corporate Solutions offers innovative, high-quality insurance capacity to large and mid-sized multinational corporations across the globe.
Performance Corporate Solutions demonstrated profitable growth in 2012. Gross written premium net of intra-group transactions grew 38% to USD 3.5 billion, compared to USD 2.5 billion in 2011.
Net income increased 142% to USD 196 million. The Business Unit opened new offices in Amsterdam, Dubai and Genoa, increasing its footprint to over 40 offices in 17 countries.
Private insurers work to bridge the gaps, but eligibility issues can leave whole sections of the population without cover. Small wonder, then, that many South Koreans worry about funding their inevitable medical costs.
For example, it used to be impossible for people over 60 to take out insurance to pay for future cancer care; such policies simply did not exist. That is, until now.
Foundations for the future Life & Health Reinsurance helps South Koreans face the consequences of living longer
> Swiss Re Korea had also spotted this dilemma and in July 2011 assembled a team of experts from across Asia – actuaries, underwriters, medical doctors and client managers – to explore solutions. “We saw the demand,” explains YongSuk Kwon, Swiss Re’s Head of Client Market Life & Health Korea, “but to meet it we had to draw on our global reserves of knowledge and experience.”
Within a month of that first meeting, the Swiss Re team had an answer. Using demographic information from Japan (an otherwise similar population but with even greater life expectancy than South Korea’s), Swiss Re Korea designed a cancer care product that could be taken out after age 60 and renewed up to age 100. While the National Health Care system covers some medical costs, the new product would provide wider coverage. The application
Nevertheless the logic of the partnership was so compelling that Swiss Re Korea reached out to LINA to earn their trust. Actuarial and underwriting teams made sure that the product’s risk profile was fully aligned with LINA’s own risk management structure. Swiss Re then closely partnered with LINA through the negotiations to secure approval from Korea’s insurance regulators. “I was deeply impressed by Swiss Re’s professionalism and commitment,“ says Benjamin Hong, CEO of LINA Korea, “I hope that we can continue to grow together.”
01 YongSuk Kwon in Hong Kong 02 Food vendor at Gwangjang market, Seoul, South Korea 18 Swiss Re 2012 Business Report
In the spring of 2011 the US suffered some of the worst tornado activity in history. Coming into 2012, long-time client American Agricultural Insurance Company asked Swiss Re to assist two of its farm bureau insurance company partners, COUNTRY Mutual Insurance Company® (COUNTRY) and the North Carolina Farm Bureau (NCFB). Both were looking for aggregate indemnity protection from similar weather events, but both had found capacity scarce in the traditional reinsurance market.
Suddenly the Swiss Re team was faced with a unique opportunity. Given that these were two farm bureaus with a history of working together, could Swiss Re help them leverage their relationship to find an innovative solution?
After weeks of brainstorming and numbercrunching, a ground-breaking solution was created: COUNTRY and NCFB would be combined into one cat bond.
Over the next four months, a broad Swiss Re team structured an innovative transaction: Combine Re. It was the first cat bond to combine two unrelated companies and the first cat bond to achieve an investment grade rating since 2007. Through Combine Re, both COUNTRY and NCFB have three years of protection from a range of severe weather events, with significant cost savings for each.
“We don’t rest until we’ve found the best solutions for our customers,” says Steven Carroll, Executive Vice President at NCFB. “We were pleased to work with a company that looked at things the same way.”
Right Aerial view of a tractor mowing a large field of grass in North Carolina
Further reading: More on how the LINA/Swiss Re agreement reflects our larger approach to longevity, beginning on page 29
“ We don’t want to wait for opportunities to come to us: we want to create those opportunities and find partners who share our vision to bring them to the market.”
E ach summer millions of people enjoy blockbuster films, concerts and sporting events. Some of those people may be surprised to learn that the support staff contains more than coaches, film crews and make-up artists.
Corporate Solutions provides contingency coverage for some of the most renowned entertainment and sporting events in the world. “We’re particularly well-known for deploying large net capacity for global sporting events,” says Tom Phillipson, Head of Contingency for Corporate Solutions.
Drawing on more than twenty years of experience in handling the insurance needs of world sport and entertainment events, Corporate Solutions has built up the capacity, product design skills, and underwriting expertise to cope with challenges ranging from a multi-site sporting festival taking place in one city or country over just a few weeks, to a months-long tour covering the world’s biggest cities by some of today’s most famous musical acts.
For sporting events, potential clients extend beyond the organisers, who would typically have to meet the costs of any interruption, curtailment, relocation, or boycott. Broadcasters also require cover for revenue lost if they fail to televise the event, while caterers, hotels and merchandisers have their own financial interests at stake. For Corporate Solutions, the range of potential business extends beyond the event itself to include surety and engineering cover for facilities construction and infrastructure projects.
As Tom explains, “With so many separate risks and insured parties, it’s not just a question of having enough capacity — although that’s essential. It’s also having the ability to create custom coverage to fit the exposure. Our covers are entirely custom made.”>
Movies present a different set of risks. With production companies continually pushing the envelope further in terms of stunts and special effects, injuries and set damage can put a production’s completion in danger. Here too, Corporate Solutions helps to make sure that the show goes on.
“When we look at a film, we begin by considering where it lies on the danger spectrum. At one end you have romantic comedies (so called “walk and talk” movies). At the other end of the scale, you’ve got the full-blown action films,” Tom says.
In fact, Farmsecure is looking to go one step further: by creating sustainable and profitable agricultural enterprises, its ultimate goal is to help secure the world’s food supply. The company works with farmers to manage their entire value chain. It applies precision farming techniques for increased yield, supplies working capital, seed and fertilizer, and helps with processing, logistics, and marketing – reducing uncertainty and securing production at every step.
“We start with our own statistical models from our worldwide agri business,” Bernard continues, “then adapt them to a tailor-made solution using the client’s own field-by-field data. That sounds simple, but in order to work, the cover needs to fit the client’s situation precisely. With its commitment to precision farming, Farmsecure is a highly numbers-driven company. We made a very good fit.”
Further reading: our experts reflect on the larger themes underlying this business, beginning on page 28
“ With so many separate risks and insured parties, it’s not just a question of having enough capacity – although that’s essential. It’s also having the ability to create custom coverage to fit the exposure.”
“ the deal involves 80,000 hectares, which would be expected to produce around 400,000 tonnes of grain in a normal year. We provide yield index cover: if production falls below a given level, for whatever reason, we pay out.”
Admin Re is in the final year of a three-year transformation programme: it has restructured its balance sheet to report as a standalone Business Unit and to facilitate potential third-party investment. This transformation has provided increased transparency about financial performance, clarity about the business model, and efficiency and robustness of operating processes. As a substantively self-standing Business Unit within Swiss Re Group, Admin Re® is now ready for further growth in Europe, especially in the UK.
Since becoming a separate Business Unit in 2011, Admin Re® has conducted an in-depth review of its global portfolio and underlying actuarial models with the aim to increase capital productivity and maximise gross cash generation (excess capital available compared with the target capital position) through a more active approach to portfolio management. The decision to undertake the portfolio review was based on management’s need for a comprehensive view of both the assets and liabilities of the Admin Re portfolio in order to inform decisions about investment in new
Left Liverpool Street station, London, UK. The UK is a targeted growth market for Admin Re®.
01 Admin Re® CEO Bob Ratcliffe at his offices in London opportunities and divestment of underperforming blocks of business. The global portfolio review revealed that elements of the US portfolio in particular tied up significant amounts of capital and no longer met internal return criteria. At the same time, Jackson National Life Insurance Company (Jackson) had approached Admin Re® about acquiring parts of its US business.
Admin Re® has also created a UK-based service company. Providing high-quality customer service to each individual policyholder in a portfolio of acquired businesses, while at the same time complying with regulation and achieving the cost efficiency of large-scale integration, can present significant operational challenges to life insurers. A dedicated service company with clear evaluation procedures will help ensure that all these critical targets are fully met and that Admin Re is able to generate long-term value from the integration and management of acquired life insurance portfolios.
Having returned a substantial dividend to the Swiss Re Group, Admin Re® is now focusing on growth through selective acquisitions in Europe, especially the UK. The sector offers significant opportunities over the medium term as banks and insurers seek to refocus on core business lines and to prepare for the new European insurance and banking regulatory regimes, Solvency II and Basel III. Admin Re® management has already identified a number of opportunities that meet its strict internal criteria.
Right Meeting long-term pension obligations requires finding assets that match, as much as possible, in value and duration.
Further reading: Our experts reflect on the fundamental drivers of the closed life business, beginning on page 28
Asset-liability management (ALM) is a method for anticipating and addressing the financial market sensitivities that arise from potential mismatches in duration between assets and liabilities; ALM, along with sound capital management, is therefore essential to Admin Re’s investment process. ALM measures investment risk and performance relative to a benchmark defined by the financial market sensitivities of the best-estimate economic liabilities. Such sensitivities can arise, among other sources, from using market interest rates to gauge the current discounted value of future cash flows. This has particular impact on long-term business lines such as life and pensions: the further cash flows are projected into the future, the higher their sensitivity to changes in interest rates.
Under current regulations, the actual yield of the asset book is used to discount liability cash flows, having adjusted for credit events. This mutual dependency means that any planned changes to the investment portfolio must also take account of the potential impact on the liability valuation.
It is therefore essential that the asset management team work closely with the actuaries responsible for each specific block of liabilities to understand the impact of proposed actions. This close working relationship allows for a consistent assetliability management approach focused on both the financial and statutory balance sheets. This is an important consideration for Admin Re® when optimising existing in-force business lines, but it is of equal importance when assessing the effect of acquiring new portfolios.
“ Average lifespan has increased dramatically over the past four decades — indeed, at a rate consistently underestimated by actuarial forecasts.”
Promoting constructive engagement of the re /insurance industry Financial regulations are changing, observes Philippe Brahin — and hopefully in a way that favours efficient risk management.
Philippe Brahin: Swiss Re’s coverage of major sport and entertainment events is of course a commercial endeavour, but this work often supports the host government’s own aims. Re /insurance operates in many of the same areas that governments do: maintaining people’s financial, social, and personal security. The relations between our industry and political institutions will therefore always be complex.
Although the re /insurance industry has demonstrated its capacity to absorb, rather than amplify, financial shocks, it has been caught up in the rush to reform the banking sector — despite its fundamentally different business model. Tougher capital adequacy requirements, combined with a persistently low interest-rate environment, have made financial strength even more critical and prompted primary insurers to seek risk mitigation and risk transfer solutions.
Moreover, emerging markets are increasingly moving to rebalance their economies away from an over-reliance on exports toward greater internal consumption driven by a rising middle class. The growth implications of this for re /insurance are substantial: we expect emerging market premiums to grow annually by 6%–7% over the next decade, enlarging their share of global premiums from around 16% in 2012 to approximately 24% in 2022. Here we aim to get ahead of the curve by generating 20%–25% of our premiums from high growth markets by 2015 — and in these markets, just as elsewhere, we look forward to working with peers, regulators and other relevant bodies to make sure that regulations evolve in a way that favours efficient risk management.
Philippe Brahin is Head Governmental Affairs & Sustainability and a Member of Swiss Re’s Risk Management Executive Team. He is responsible for the global monitoring of regulatory developments and the engagement of Swiss Re in sustainability risk management initiatives. He is Swiss Re’s delegate to the Institute of International Finance, the Geneva Association and the European Financial Roundtable. He is also the vice-chairman of the Economic & Finance Committee of Insurance Europe. Philippe joined Swiss Re in 2000.
Daniel Ryan joined Swiss Re in 2010 as Head Life & Health R&D. Dan leads a multi-disciplinary group that is focused on the development and evaluation of forward-looking scenarios based on prior history of disease or good health. He is a keen advocate of closer links between the actuarial and medical profession, and is a member of World Economic Forum’s Global Agenda Council for Ageing. He is also the Chair of the Technical Committee for the Life and Longevity Market Association, a non-profit venture to promote a liquid traded market in longevity and mortality risk.
Just to keep up with our growing population, world agricultural production will have to rise by as much as 60% between now and 2050 — a period in which a changing climate will bring ever more frequent and severe weather events.
This year saw severe drought in the main grain-producing regions of the US and Russia — in the case of the US, the worst in fifty years. Global food prices have risen by 74% since 2005, reflecting the insecurity of supply. Emerging markets, increasingly seen as the main drivers of global economic growth, are particularly vulnerable to inadequate food resources. Re /insurance can make a vital contribution to addressing this global problem. Insurance helps to promote investment, stabilise farm income, and manage risks in the agricultural value chain. All these things are fundamental to sustaining a healthy world food system.
Clarence Wong: When you see Swiss Re helping farmers in India, or providing area yield cover for agribusiness in South Africa, Thailand, and Vietnam — or originating catastrophe bonds on behalf of US farm bureau insurers — this isn’t just a side business. Food security is a critical issue for the future. And re /insurance has a central role to play.
The global population has doubled to seven billion people in the last fifty years and is projected to reach nine billion by 2050. Most of this growth will be in emerging markets. Improved agricultural techniques have brought ever more people out of hunger, but the challenge remains.
For more on Swiss Re’s global perspective see swissre.com /rethinking 01 Philippe Brahin at his office in Zurich 02 Fans cheer at a racing event. See page 20 03 Large-scale maize production in South Africa. See page 23 04 Clarence Wong photographed at his office in Hong Kong
Nevertheless policies are selling briskly and the scheme is already enjoying one of the indisputable signs of success: imitation. Private insurers as well as non-governmental organisations are now offering similar products in the 14 provinces (of Vietnam’s 58) where the programme has been piloted to date.
By 2009 Swiss Re and FONDEN had expanded the programme to which, in addition to earthquake protection, they added coverage of catastrophic Atlantic and Pacific hurricane risk — hence its name, MultiCat. In April 2012, the MultiCat programme was extended again, tapping capital markets for USD 315 million of cover for another three years.
Luis Videgaray Caso, Mexico’s Minister of Finance, comments: “The Mexican government is very committed to its disaster risk financing strategy, of which MultiCat is a very important element. These financial instruments are essential to managing the fiscal contingencies that stem from natural disasters.”
Swiss Re was the first reinsurance company to create a dedicated team – Global Partnerships – to work with governments on their risk-transfer needs.
Swiss Re is reaching out to governments to help them manage natural disaster risk. In 2012 Swiss Re teamed up with the Swiss State Secretariat for Economic Cooperation (SECO ) to develop a training course for representatives from developing country governments that focuses on ways to prevent and prepare for disasters. Officials from ten countries took part in the first course held at Swiss Re’s Centre for Global Dialogue alongside representatives from SECO, the World Bank, the Inter-American Development Bank and other organisations.
With its emphasis on practical risk mitigation, the eight-day course looked at how both traditional and innovative risk management strategies could be applied in participants’ own countries. The case studies, presented in part by fellow government officials, ranged from funding
The future looks bright Swiss Re is working toward a sustainable energy future — in thought, word and deed.
Swiss Re is not only shining a light on these questions — it leads by example toward a sustainable energy future.
Envisioning the future The International Energy Agency estimates that between now and 2035, world energy demand will increase by 40%. Ninety per cent of the ‘new’ demand is expected to come from emerging markets, notably China and India. Meeting these needs will require global investment of around USD 38 trillion. The question then becomes how to channel that investment in a way that promotes a more sustainable energy system.
Left Solar Impulse in flight. The solarpowered aircraft has the wingspan of an Airbus A340 and the weight of a family car.
Getting to the 92% scenario will require enormous start-up investments, and success will depend by definition on less mature technologies. It will also require favourable conditions across a variety of systems over time, ranging from weather to government regulation. In other words, there is a unique risk management dimension to building a sustainable energy future, and here Swiss Re’s expertise can play a central role.
Swiss aviators Bertrand Piccard and André Borschberg built Solar Impulse with the goal of flying around the world using only solar energy. Through
Corporate Solutions we are proud to be their official insurance provider. The partnership is a sign of our support for innovation and an encouragement to everyone engaged in the search for clean, safe and forward-looking sources of energy. In 2012 Solar Impulse travelled more than 6,000 kilometres on solar power alone and achieved the world’s first solar-powered intercontinental flight, showing what we can already achieve without fossil fuels — and that a clean energy future is not as distant as it may seem.
Leading by example Solar Impulse is one inspiring example. Getting from our current situation to a sustainable energy future will require countless more. In our policies and in our business, we are trying to move both the supply and demand sides of the equation in the right direction. Twenty-one Swiss Re locations in Asia, Europe, North America and Oceania now use renewable power, fully or partially. Our goal is to use 100% renewable power by the end of 2013. In our Zurich headquarters we only buy “naturmade star” electricity (www.naturmade.ch), which meets tough ecological quality criteria. In Munich we purchase our electricity from NaturEnergie (www.naturenergie.de), one of Germany’s premier suppliers of renewable energy.
Launched in 2003, our Greenhouse Neutral Programme combines two commitments: to reduce our CO2 emissions per employee and to offset the remainder. We have achieved cuts in CO2 emissions by switching to renewable power at many of our locations, by reducing the amount of energy consumed per employee at our facilities and by minimising business travel.
The Greenhouse Neutral Programme helped us achieve a total reduction in CO2 emissions per employee of 55.6% against the baseline of 2003. All remaining emissions since 2003 have been offset.
We watch vigilantly over our own portfolio, and stay on top of market and technological developments to remain a steady, deliberate and proactive force in creating a sustainable energy future.
WOTR is helping villagers collect and harvest rain water, learn and apply sustainable agricultural practices, and conserve soil and water.
This work will enhance food and income security, especially for the poor. The project is also designed to empower women and combat child malnutrition, demonstrating how environmental and social sustainability can work hand in hand.
The Swiss Re Foundation is a non-profit organisation founded in 2012. It supports efforts to improve conditions for communities affected by natural disasters,
Agricultural communities in the hot, semi-arid state of Maharashtra in Western India face challenging conditions: more than 90% of the 16 million hectares of arable land available to them have suffered ecological degradation. Climate change will make these conditions even more difficult by making rainfall more variable, temperatures more extreme, and pest attacks harder to predict and repel.
The Swiss Re Foundation supports the Watershed Organisation Trust (WOTR), a local not-for-profit organisation, in its efforts to help communities in Maharashtra cope and adapt. Among other measures,
Left: Women planting rice using a crop intensification system developed by the Watershed Organisation Trust
Q Tell us about your background and what brought you to Swiss Re. A Sameet Shah: I was born in Kenya, trained in the UK, and worked for more than eight years at a large, traditional insurance company: a good employer, but it felt very lethargic… I couldn’t see a way forward. I knew people at Swiss Re who said it was an energetic place, with young teams and a clear purpose to your role, where you could create change. I was enticed to apply — and it has lived up to all my expectations.
Christina Ulardic: I trained as a geologist in Germany and worked on climate change programmes for governments and NGOs — but I wanted to be more hands-on. To see concrete fruits of my training: real projects carried through with the commitment that comes from having a commercial stake in them. In my view Swiss Re is simply more innovative in this area than its competitors. Its people — and data, and expertise, and publications — are really impressive.
Neil Sprackling: I came here on a sixmonth fill-in job in London between school and university, but when I was about to leave to continue my studies, my managers called me in and laid out a whole career plan for me. It was attractive, it was appropriate for me… so I stayed on. What they promised, they delivered: I’ve now been with Swiss Re since 1997.
Sameet: You take ownership of your destiny. I wanted to move on from Marketing to Risk Management — from hunter to gamekeeper, you might say. The role wasn’t there at the time, but I discussed it with my manager and it became possible. So now I have a position with a global outlook, but 01 Christina Ulardic in Zurich 02 Sameet Shah in London 03 Neil Sprackling in New York 38 Swiss Re 2012 Business Report
Neil Sprackling is President of Swiss Re’s Life & Health US Business. Neil has more than 27 years of reinsurance experience spanning the UK, Spain, Latin America, Australia and New Zealand. His professional experience includes client management, underwriting, and marketing. He has led various business and industry programmes on behalf of Swiss Re and currently serves on committees at the American Council of Life Insurers Financial Services Steering Committee and the Task Force on the Future of Regulation. Neil joined Swiss Re in 1997.
Neil: For me, it’s a whole series of experiences — moving to Spain to set up a new office (and meet the woman who’s now my wife). Going from there to Australia to help turn around a whole line of business. Then, this year, coming to this new position and new opportunities in New York. I’m a committed kind of person; I put everything into it. These new challenges and new cultures keep me learning and keep me energised.
Q Is there a quality that sets Swiss Re apart? A Neil: We’ve hired people who worked for competitors, and they say what sets Swiss Re apart is the focus on career development. If you’re clear about what you want, you’re supported by training, evelopment, mentoring at an executive level. There are so many roles here: each one is an opportunity to grow as a person.
Sameet: I was very struck by the effort put in to articulate Swiss Re’s values, setting out how we work, not just what we do. It’s encouraging that management has embraced the values so clearly. It’s not just the bottom line; people support each other to do a good job. That’s unusual in my experience.
Christina: There’s a commitment to sustainability — which also means commercial sustainability. We are trying to do good, not in a purely ethical or philanthropic way, but to sustain our long-standing commercial reputation. Business and social agendas converge: if people don’t think we are offering a good service for a good price, they won’t buy. That’s as true for subsistence farmers in Rwanda as it is in Zurich.
Q How would you describe Swiss Re to someone thinking of working here? A Christina: Work is two-way: what you bring and what you get. The doors are open here; the opportunities are there for creative people. Be true to yourself. Work with people you respect. Try to be entrepreneurial. Don’t be passive.
Sameet: Learn the brand, its values and commitments, because you will become part of it. It’s not an easy ride, but you will enjoy it. Expect to be stretched, challenged, and have fun — because that’s exactly what will happen.
claims̤for̤purposes̤of̤financial̤ reporting,̤particularly̤with̤respect̤to̤ large̤natural̤catastrophes,̤as̤ significant̤uncertainties̤may̤be̤ involved̤in̤estimating̤losses̤from̤such̤ events̤and̤preliminary̤estimates̤may̤ be̤subject̤to̤change̤as̤new̤ information̤becomes̤available; ̤̤ the̤frequency,̤severity̤and̤ development̤of̤insured̤claim̤events; ̤̤ acts̤of̤terrorism̤and̤acts̤of̤war; ̤̤ mortality,̤morbidity̤and̤longevity̤
Photography:̤̤ Katharine̤Andriotis̤Photography̤(pgs̤39/03)̤ Geri̤Krischker̤(pgs̤5,̤7,̤12–13,̤30/02)̤ Andy̤Wilson̤(pgs̤1/04,̤22/01,̤26/01,̤̤ 28/02,̤38/01,̤39/02)̤ ̤ Farmsecure̤(pg̤23)̤ Getty̤Images̤(cover,̤1/02,̤03,̤14–16,̤18/02,̤19,̤ 20,̤22/02,̤24,̤27,̤32)̤̤ ©̤Solar̤Impulse̤|̤Jean̤Revillard̤(pg̤34)̤̤ WOTR̤(pg̤37)̤ ̤̤ Printing:̤̤ Multicolor̤Print̤AG,̤Baar
Property & Casualty Reinsurance Net income attributable to common shareholders 1 099 2 990 172
Combined ratio in % 104.0 80.7 Return on equity1 in % 11.0 26.7
Corporate Solutions Net income attributable to common shareholders 81 196 142
General information 248 Glossary 254 Cautionary note on forward-looking statements 256 Note on risk factors 262 Business contact details 263 Corporate calendar
Risk and capital management 40 Overview 41 Capital management 43 Economic Value Management 45 Liquidity management 46 Risk management 48 Risk assessment
The 2012 Business Report uses concrete examples to show how Swiss Re is making progress against its strategy, as well as some of the steps it has taken in 2012 to maintain and build long-term value.
Our emphasis In 2011 we announced the reorganisation of our business into the three Business Units shown at right. Since then Swiss Re has made good on its goal of becoming a more agile and flexible company. The new structure has also simplified performance assessment and, most importantly, positioned the Group to deliver shareholder value over the long term.
Dear shareholders Two years ago I wrote to you of our plans to establish a new organisational structure. The structure would allow us to be more flexible, transparent, accountable and client-focused. I can now report that the Group has successfully executed on these plans, delivering an excellent business performance in 2012 while making a seamless transition to a new Group Chief Executive Officer.
Indeed this is an appropriate time for taking the long view, as we will be celebrating our 150th anniversary beginning in 2013. Our company was founded after the 1861 fire in Glarus, Switzerland. Two Swiss insurance companies and one bank — themselves almost still start-ups — pooled their resources to develop a reinsurance solution as had been done in other countries after similar city fires. Since then we have been in the business of protecting society against major risk events and nurturing the growth of a private sector approach to managing risks. Our outlook was global almost from the start, with the San Francisco earthquake of 1906 representing an early major international test, which we passed as with so many disasters since — hurricanes, earthquakes, winterstorms and others. We were also there when society had to cope with man-made tragedies and outrages, such as 9/11.
These examples of partnership and collaboration are equally powerful as examples of our commitment to building value over the long term — appropriate for 2013, as we celebrate Swiss Re’s 150th anniversary at a number of events around the globe.
“ With these excellent results behind us we are moving in the right direction on our 2011–2015 financial targets. They remain our top priority and we are working hard to deliver on them.”
Shifting client needs The set of risks – social, economic, political and environmental – is growing and changing ever more quickly.
A structure for success Our realigned corporate structure enables capital to move more efficiently among our businesses, allowing us to be agile in meeting Group-wide financial targets — no matter where we are in the cycle.
Asset-liability management We apply a top-down, Group-wide investment strategy consistently across all Business Units’ (BUs) investments. Each BU’s characteristics and objectives are reflected in its strategic asset allocations.
To see some of the measures we have taken to maintain and build long-term value, see pages 32–39 of the Business Report.
Net premiums earned in 2012 by segment 48% P & C Re 36% L & H Re 9% Corporate Solutions 7% Admin Re
14 Market environment 20 Group results 24 Summary of financial statements 26 Reinsurance 32 Corporate Solutions 34 Admin Re® 36 Share performance
Market environment The global economy and financial markets Global growth remained moderate in 2012, restrained by the ongoing recession in many European economies, while the eurozone debt crisis dominated financial market developments. Benchmark government bond yields rose during the first quarter, but dropped subsequently as the eurozone debt crisis intensified. After the peak of the debt crisis in July, equity markets rallied and bond yields increased slightly. Credit spreads narrowed for most of the year as investors sought higher yields.
The eurozone debt crisis dominated financial market developments. High uncertainty and sluggish growth further lowered benchmark government bond yields.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
The spreads of Spanish, Irish and Italian sovereign bond yields initially narrowed against the German benchmark, then widened sharply on increased euro exit or break-up fears, to narrow again in the second half of the year (see bond spread chart). Yield spreads between investment grade corporate bonds and government bonds followed a similar pattern, narrowing significantly over the course of the year.
Per 100 units of foreign currency, as of 31.12.2012 1 Yearly average 2 Year-end Source: Swiss Re Economic Research & Consulting, Datastream, CEIC
– United States (S & P 500) – United Kingdom (FTSE 100) – DJ Euro STOXX 50
Stock market performance The eurozone debt crisis continued to drive stock market performance in 2012. Early in the year, stock markets profited from several positive developments: the March agreement on the second Greek bailout averted any imminent risk of a disorderly Greek sovereign default and euro exit or break-up. The accompanying debt restructuring left private investors less exposed to Greece, mitigating contagion risk from potential future Greek defaults. The ECB's unlimited liquidity provision to European banks also averted the risk of a liquidity-driven bank failure. This, plus increasing evidence that the US economy would avoid recession, helped boost stock market performance (see stock markets chart).
Currency movements During the first few months of the year, the US dollar weakened slightly against the euro, the British pound, and the Swiss franc, before strengthening significantly as the escalating debt crisis weighed on these currencies (see currency section of economic indicators table). Towards yearend, the US dollar weakened again reflecting rising market confidence to end the year slightly weaker versus the euro (–2%), the Swiss franc (–3%) and the British pound (–5%). On the other hand the dollar gained 11% against the Japanese yen on expectations of significant monetary easing by the Bank of Japan.
The main generator of growth in non-life insurance is the pace of general economic development: when wealth increases, so does insurance demand. As described in Swiss Re’s sigma (issue 5/2012, “Insuring ever-evolving commercial risks”), commercial insurance premiums are growing about three times faster in emerging markets than in advanced markets.
This growth stems not only from an expanding economy, but also from increasing market penetration, as expanding multinationals seek to protect themselves against more complex risks and smaller companies enhance their risk awareness.
In the past three decades, emerging markets in Asia, particularly China and India, have transformed their agriculture-based economies, establishing and expanding manufacturing capacities, and developing domestic and export-led service sectors. Each development stage increases insurance demand.
Underwriting results recovered from record catastrophe losses in 20111. Nevertheless, adjusting for catastrophe losses and positive reserve developments from earlier accident years, underlying underwriting profitability continued to erode due to rising claims and several years of softening rates. The gradual improvement in premium rates in some key markets has not yet been able to change the general soft market picture.
The industry also saw weak investment returns, partly due to record low interest rates and feeble capital gains or capital losses. The eurozone debt crisis also lowered the mark-to-market valuations of some fixed income securities. Squeezed from all sides, the average profitability for the industry was low, with a return on equity for 2012 of only 5%.
Outlook Global economic forecasts for 2013 are more positive and the demand for non-life insurance should increase. Strong premium growth is expected to continue in emerging markets, although growth will slow due to weaker macroeconomic conditions in Latin America and Asia.
Market size in USD billions Estimated global premium income in 2012
Primary non-life 1 See Swiss Re’s 02/13 sigma on natural catastrophes and man-made disasters in 2012; available April 2013.
Market performance Aside from the financial crisis and the soft underwriting cycle, natural catastrophes are leaving the most substantial mark on earnings for the reinsurance sector. In the first three quarters of 2012, the global reinsurance industry enjoyed a good, though not strong, performance. The fourth quarter, however, saw multi-billion-dollar claims from Hurricane Sandy. Based on currently available information, we estimate a combined ratio of below 95% for the reinsurance industry in 2012, an improvement over 2011 with 110%, but in the same range as the 96% combined ratio in 2010.
Like primary insurers, reinsurers have suffered from the eurozone debt crisis, low interest rates and weak equity markets. Their investment income is down this year. Squeezed from underwriting and investment, their overall profitability was also down: most expect a return on equity of above 10% for the full year, up from 4% in 2011.
The reinsurers’ capital base remains strong, but capital requirements have increased due to hikes in risk charges associated with reserves, higher modelled exposures to natural catastrophes, and riskier assets. Additional uncertainties relate to Solvency II requirements which are also likely to raise capital requirements further.
Outlook 2013 renewals are expected to be stable to slightly firmer. Significant hardening is expected to be limited to lines and segments that have recently experienced high losses.
Insurers have limited room to respond to low interest rates for in-force business because policy terms cannot be changed. However, new life insurance products need to be adapted to the current investment environment. Appropriate pricing and guarantee levels should be supplemented by product redesign that aids hedging against interest rate risks, so that all parties are better prepared for any future interest rate scenario.
Market overview Global life insurance premiums totalled about USD 2 600 billion in 2012, of which around 15% was generated in emerging markets. About 85% of premium income derives from savings and retirement products. Protection products, which cover mortality and morbidity risks, have a declining share in premium income.
Despite its recovery after the financial crisis, profitability has declined steadily since the end of 2009. Average return on equity is now close to 10%, down from 12% in 2010 and 2011.
Outlook The future of the life insurance industry depends principally on the macroeconomic environment, financial markets and interest rates. In the short term, the outlook is clearly challenging: premium income is expected to recover only slowly and profitability is not expected to improve soon, not only because of low interest rates and weak sales, but also because of high hedging costs and more onerous capital requirements.
The market for longevity risk transfer continues to show strong momentum, as reinsurers develop new solutions for private and public pension plans as well as for primary companies with annuity business.
Longevity reinsurance activity is expected to grow in other markets as well, including the Netherlands, Switzerland and the US, where there is significant potential demand, particularly from pension funds.
Market performance Unlike the stagnating primary life insurance industry, the life reinsurance industry saw an increase in premium income of 4%. Although life reinsurance is mostly linked to the relatively stable protection business, business volume was boosted by increasing demand for non-traditional reinsurance transactions, such as block deals, longevity risk transfer and capital relief solutions.
Block transactions help primary insurers to unwind those parts of their portfolios that they no longer sell. The market for longevity risk transfer continues to show strong growth, albeit from low volumes. There is also substantial demand for reinsurance solutions as a means to manage the capital strain put on primary life and health insurers by the macroeconomic environment.
Nevertheless results are suffering from adverse capital market conditions, with dwindling investment income eroding overall profitability. In 2012, the industry average life reinsurance pre-tax operating result declined to about 8% of net premiums earned, compared to 10% in 2011 and 9% in 2010.
Outlook On fundamentals, the outlook for 2013 is unchanged from 2012. A volatile macroeconomic environment will make it difficult to improve life reinsurance profitability. On the other hand, increasing pressure on a number of primary life insurers is expected to generate a steady demand for capital solutions and other forms of non-traditional reinsurance.
The Group results in 2012 reflect a strong underlying performance together with prior-year reserve releases and significant realised gains on investments.
Corporate Solutions delivered net income of USD 196 million reflecting profitable business growth.
Shareholders’ equity increased USD 4.4 billion to USD 34.0 billion compared to 31 December 2011, driven by net income partially offset by the Group’s dividend. Furthermore, during the year the Group issued two contingent capital instruments with an aggregate face value of USD 1.1 billion that are reported as components of shareholders’ equity.
Book value per common share was USD 95.87 or CHF 87.76 at the end of December 2012, compared to USD 86.35 or CHF 80.74 at the end of 2011. Book value per common share is based on common shareholders’ equity and excludes non-controlling interests and the impact of contingent capital instruments.
For information on segment shareholders’ equity, please see pages 202 to 203.
The Corporate Solutions claims and claim adjustment expenses were stable year on year. 2012 reflects higher business volumes and fewer large losses compared to 2011. Loss occurrence was in line with expectations compared to a higher than average burden in 2011.
Administrative expenses increased 7% to USD 2.9 billion, driven by higher variable compensation reflecting the strong underlying performance of the Group, various initiatives related to the implementation of the new Group structure and strategic growth initiatives. Other expenses decreased USD 21 million to USD 300 million.
Strategy Swiss Re maintained a balanced investment management approach throughout the year, taking into account each Business Unit’s risk appetite and strategy. At the same time, the key longer-term risk factors were monitored such as the eurozone debt crisis, growth sustainability in the US as well as China “hard landing” concerns, while the Group’s and Business Units’ investments have been steered within the Group’s asset-liability management (ALM) framework.
Investment result The Group’s investment portfolio decreased to USD 137.4 billion at the end of December 2012, excluding unit-linked and with-profit businesses, compared to USD 150.6 billion at the end of December 2011. This was primarily due to the reduction in investments from the sale of the Admin Re® US business, being partially offset by mark-to-market and foreign exchange gains. The Group engaged in moderate re-risking during the year, increasing its exposure to spreadrelated products by approximately USD 5.0 billion and to equity products by USD 0.8 billion.
Operating income for investments, including the impact of foreign exchange, decreased to USD 5.2 billion in 2012 from USD 5.7 billion in 2011. This was driven by realised gains, reduced hedging costs and lower impairments during the year, which more than offset the lower net investment income from decreasing yields and a lower asset base from the sale of Admin Re® US completed in the third quarter of 2012. The return on investments declined 0.4 percentage points in 2012 to 4.0% from 4.4% in 2011. Excluding the impact of foreign exchange, return on investments was 4.2% in 2012, compared to 3.7% in 2011.
Net realised gains from investments, including the impact of foreign exchange, were USD 1.5 billion for 2012, compared to USD 1.7 billion for 2011. For 2012, net realised gains on sales of USD 2.1 billion were partially offset by losses on hedges of
Including mark-to-market gains, which increased shareholders’ equity by USD 1.7 billion, primarily from the impact of lower interest rates on government bonds and credit spread tightening, the total return on investments reached 5.4% in 2012.
Outlook Looking ahead, credit risk is expected to remain attractive in risk-adjusted terms within the current global low growth and low interest rate environment. The fiscal and debt outlook in advanced economies continues to be challenging, with the political economy dimension likely to remain a key driver for financial markets in 2013, warranting a continued disciplined “top-down” investment strategy.
Among the many factors underlying the HGM investment case are stronger economic growth than in developed markets (DM); lower government and household indebtedness; sounder fiscal policies (with many countries in surplus); and more favourable demographics. The latest International Monetary Fund (IMF) forecasts expect the growth gap between HGM and DM gross domestic product (GDP) to remain at over 3% for the next five years. Meanwhile, government debt/ GDP ratio in HGM is set to fall to below 30% over the same period, whereas the ratio in DM is expected to remain above 100% (see figure). These macro trends have enhanced institutional investors’ interest in HGM countries, which has been reinforced by the numerous country rating upgrades over the last 5–10 years. As the institutional credibility of HGM develops, the longer-term outlook becomes ever more positive. Last but not least, investing in HGM also makes sense from an underlying business perspective.
Asset markets in HGM countries could benefit from structural changes. These assets, with a total market capitalisation estimated at approximately USD 16 trillion (around 20% of the size of world equity and debt markets), are under-represented in the global context, given that HGM countries account for around 38% of global GDP and about 70% of global GDP growth in 2012. Credit ratings are also improving, as the average rating of HGM debt in various market indices has improved to “BBB” today from an average rating of “BB” in 2002, as several HGM sovereigns have been upgraded to investment grade over the past few years. The markets for HGM assets should therefore grow in terms of depth and breadth.
The investment case is especially strong for the re/insurance sector. According to Swiss Re’s sigma study from October 2012, growth in commercial insurance (with annual premiums of USD 600 billion globally) is becoming more concentrated in HGM: over the past decade, premiums from HGM have grown by an average of 14% per year, or two to three times faster than in DM (5.4%)1. This means that investments in HGM will be increasingly important to the entire re/insurance sector, and especially 1 Swiss Re sigma No 5/2012, Insuring ever-evolving commercial risks.
Expenses Claims and claim adjustment expenses –8 810 –7 763 –12 Life and health benefits –8 414 –8 878 6 Return credited to policyholders –61 –2 959 –
Income attributable to non-controlling interests –172 –141 –18 Net income after attribution of non-controlling inter-
Interest on contingent capital instruments 0 –56 – Net income attributable to common shareholders 2 626 4 201 60
Liabilities and equity Unpaid claims and claim adjustment expenses 64 878 63 670 –2 Liabilities for life and health policy benefits 39 044 36 117 –7
Reinsurance Strategy and priorities Our Reinsurance strategy is based on excellence in our core business and smart expansion in selected pockets of growth. By continuously striving to improve the value of our products and services for our clients we make ‘client centricity’ our overarching theme.
We see growth opportunities in longevity and health as well as high growth markets such as China, India, Indonesia, Brazil and Mexico, where we are pursuing opportunities with tailored approaches and dedicated resources.
Property & Casualty Active cycle management and portfolio steering remain Swiss Re strengths. In 2012, we continued to deploy capacity to those segments where we expect to achieve the most attractive return on our shareholders’ capital. We continued to invest substantially into research & development as a value driver for underwriting to maintain our competitive advantage.
Life & Health In 2012 the environment for Life & Health was more difficult than for Property & Casualty, with challenges stemming from low interest rates and declining premium volumes. Upcoming regulatory changes will encourage large primary insurers in Europe and Canada to retain more mortality risk, driving increased competition for the reinsured portion.
Several major demographic and socioeconomic trends are intensifying demand for commercial health insurance solutions, including: the greater healthcare needs of ageing societies; rising healthcare expectations of the new middle class, especially in growth markets; and healthcare finance reform, particularly in mature markets. Swiss Re offers a variety of health reinsurance solutions to meet these needs, from short-term protection against the risk of volatility in medical expenses for insurers or employers, to very long-term protection against the financial impact of disability or critical illness.
Outlook We believe we are well positioned to capture the market opportunities ahead of us. Our excellent capitalisation allows for business growth and continued dividends to the holding company.
Performance Net income increased 172.1% to USD 3.0 billion in 2012 from USD 1.1 billion in 2011 driven by strong underwriting performance, reflected in significant premium growth and continued very strong underlying margins. Both years benefited from favourable prior accident years development.
Net premiums earned Net premiums earned increased 21.6% to USD 12.3 billion in 2012, compared to USD 10.1 billion in 2011. Growth was driven by large capital relief quota shares, successful renewals in 2012 following the extraordinary natural catastrophe experience of 2011, and continued premium earnings from large transactions written in 2011. As a consequence, the composition of gross premiums earned by region changed so that Asia and EMEA had higher shares in 2012 than in 2011.
Expense ratio The administrative expense ratio improved to 10.7% in 2012, compared to 13.0% in 2011, mainly driven by the increased premium volume.
Investment result Return on investment increased slightly to 3.2% in 2012, compared to 3.1% in 2011.
Investment income increased by USD 144 million year on year as lower yields were more than offset by favourable mark-to-market valuations on private equity investments and lower expenses.
The casualty combined ratio for 2012 was 94.0%, compared to 102.7% in 2011. The improvement was mainly due to more positive prior accident year development in 2012 compared to 2011.
Expenses Claims and claim adjustment expenses –7 381 –6 306 –15
Claims ratio in % 72.8 51.2 Expense ratio in % 31.2 29.5 Combined ratio in % 104.0 80.7 28 Swiss Re 2012 Financial Report
Return on equity The return on equity for 2012 was 26.7%, compared to 11.0% in 2011. The improvement was mainly due to the lower impact from natural catastrophes.
A growing world population and the increasing share of wealth in Asia and Latin America are driving increases in both agricultural production and infrastructure investment in these countries. These trends present opportunities for the re/insurance industry. Swiss Re has built up the capabilities to provide tailored reinsurance solutions.
Our Engineering solutions address the risk of damages and financial losses from construction projects and the breakdown of technical installations. We provide reinsurance of Inherent Defects Insurance for new buildings and completed infrastructures. We expect strong growth in construction reinsurance in Asia and Latin America.
Performance Net income decreased to USD 739 million in 2012 from USD 1.7 billion in 2011. The decrease was primarily the result of lower investment income driven by significantly lower realised gains on investments and lower yields, a continuation of the negative performance of business written in the US prior to 2004, tax benefits realised in 2011 not repeated in 2012 and higher administrative expenses.
Benefit ratio The benefit ratio increased slightly to 75.5% in 2012, compared to 74.5% in 2011, mainly due to higher claims and continued lapses from the pre-2004 US business.
Expense ratio The management expense ratio increased to 7.9% in 2012 from 7.2% in 2011. The increase was primarily due to higher costs related to strategic initiatives and an increase in central expenses being charged to the business segment.
Investment result The return on investments was 4.7% in 2012, compared to 6.8% in 2011. Realised investment gains were USD 709 million in 2012, compared to USD 1.2 billion in 2011. The decrease was primarily due to less favourable foreign exchange movements in the current year. Net investment income was USD 1.4 billion in 2012, compared to USD 1.5 billion in 2011. The decrease is primarily due to lower yields.
experience from pre-2004 US business, and unfavourable variable annuities results, partly offset by favourable mortality experience and favourable market movements relating to the embedded B36 derivatives.
Operating income for the traditional health business decreased to USD 470 million in 2012, compared to USD 633 million in 2011. The decrease was driven by lower investment income, unfavourable morbidity experience, and higher administrative expenses, partly offset by positive recapture experience.
Expenses Life and health benefits –6 280 –6 787 8 Return credited to policyholders –34 –271 697
Outlook Life and health primary markets are expected to continue to face the dual challenges of weak economic growth and very low interest rates that limit the attractiveness of some products. In addition, clients may seek to retain more mortality risk. Flow business will therefore continue to be under pressure; however, there are opportunities for large transactions to support clients, such as those with solvency issues or those undertaking mergers and acquisitions. In the medium term we aim to generate an increased contribution from high growth markets, particularly in health. We will also continue to diversify into longevity risk.
We see strong longer-term growth prospects for life and health protection markets and we estimate that there is a protection gap of approximately USD 80 trillion worldwide. We will continue to work with clients and distributors to develop consumer-friendly products and processes (eg, using our in-house predictive underwriting analytics) to address this gap.
The role for private re/insurance in the overall financing of healthcare and disability costs varies markedly between countries. We always seek to understand the local context for healthcare financing and delivery to provide the most appropriate advice and solutions.
Strategy and priorities Corporate Solutions’ strategy is to serve large corporations as a lean global player. The product offerings range from traditional property and casualty insurance to customised solutions in innovative areas such as weather risk management. By executing this strategy, Corporate Solutions aims to increase its gross written premium net of intra-group transactions from USD 2.4 billion in 2010 to USD 4–5 billion by 2015.
Corporate Solutions regards talent management as a core growth enabler. Since early 2011 the Business Unit has been recruiting top local talent, providing customised training and job rotations. This investment, combined with strong customer centricity and a results orientation, is significantly contributing to Corporate Solutions’ competitive edge. Corporate Solutions is building a global office network to access risks which are placed locally while continuing to service business placed in wholesale centres such as London and Singapore. In 2012, Corporate Solutions opened offices in Amsterdam and Genoa and established a local office in Dubai to reach the Middle East and North Africa. By the end of 2012 Corporate Solutions had more than 40 offices in 17 countries.
Corporate Solutions’ annual survey with 1500+ responses from clients and broker partners revealed continuously improving satisfaction. In particular clients and brokers appreciate Corporate Solutions for its financial stability, client relationship and underwriting expertise.
Combined ratio The combined ratio improved by 11.7 percentage points to 96.2% in 2012 from 107.9% in 2011. The quality of the book remained consistently high year on year and the large loss burden for 2012 was in line with expectations, compared to a higher than normal amount of large losses experienced in 2011. The expense ratio was largely flat at 32.8% in 2012, compared to 32.2% in 2011. Set-up costs related to business expansion neutralised the positive effect on the cost ratio from higher premium volumes.
The casualty combined ratio improved 12.6 percentage points to 91.7% in 2012, mainly due to the absence of large losses in 2012.
Performance Net income was USD 196 million in 2012, an increase of 142% compared to net income of USD 81 million in 2011. The result was primarily driven by profitable business growth. Hurricane Sandy had an estimated cost of USD 144 million for Corporate Solutions. In 2011, by comparison, there were more large losses in the year, most notably the Japan and New Zealand earthquakes, floods in Thailand and Australia, and a number of large fire losses. An increase in the tax rate also had a negative impact on the result.
Premiums Gross written premium net of intra- group transactions increased 38% to USD 3.5 billion in 2012, compared to USD 2.5 billion in 2011. The exceptional growth experienced in 2012 is not expected to repeat in 2013, though the ambition to attain USD 4–5 billion of gross written premium by 2015 is clearly on track. Net premiums earned increased 18% to USD 2.3 billion in 2012, compared to USD 1.9 billion in 2011. The increase in premiums was driven by organic growth across all major lines of business.
Corporate Solutions Corporate Solutions results USD millions 2011 2012 Change in %
In other specialty, the combined ratio decreased slightly to 102.0% in 2012, compared to 103.3% in 2011. Both periods were impacted by satellite and marine losses.
Investment result Return on investments decreased to 3.2% in 2012 from 4.5% in 2011. While net investment income was up slightly year on year primarily due to mark-to-market gains on indirect private equity positions, this was more than offset by lower realised gains on asset sales and the impact of lower yields. Realised insurance derivative gains (not included in return on investments) were down slightly at USD 55 million in 2012, compared to USD 60 million in 2011. These contracts offer protection against weather perils and other risks related to insurance, but are accounted for as derivatives.
Outlook Corporate Solutions will continue its expansion in 2013 consistent with its strategy. The global upward trend in property lines is likely to be sustained, though differences in rate adequacy between geographies and segments will persist. Corporate Solutions is well positioned to capture opportunities thanks to its value proposition, strong balance sheet and expanding geographic reach.
The ability to develop innovative solutions tailored to the needs of its clients is a key pillar of Corporate Solutions’ value proposition. In 2012, insurance industry experts awarded Corporate Solutions for its innovation capabilities in the areas of weather and credit risk management where the company is a recognised leader.
Insurance industry experts award Corporate Solutions for its innovation capabilities in the areas of weather and credit risk management
Performance Admin Re® generated gross cash of USD 1 196 million for 2012, significantly higher than the USD 302 million in 2011. The increase was mainly due to the cash proceeds and release of capital from the sale of the Admin Re® US holding company, including Reassure America Life Insurance Co., to Jackson National Life Insurance Company. The sale closed on 4 September 2012 with the Group receiving total cash proceeds of
Operating revenues Premiums and fee income were USD 1 705 million in 2012, compared to USD 1 686 million in the prior year. The increase was mainly due to the recognition of accelerated premiums for a retained block of business in the US, offset by an increase in claims reserves. Excluding the impact of the acceleration, premiums and fees were lower compared to the prior year primarily due to the impact of the Admin Re® US sale.
Investment result The return on investment was 4.9% for 2012, slightly lower than the prior-year return, with this excluding the effects from the sale of the Admin Re® US business. Proprietary net investment income was USD 1 548 million in 2012, compared to USD 1 611 million in 2011.
Excluding the impact of the sale gross cash generation was USD 432 million, an increase of USD 130 million over the prior year. The increase was driven by Admin Re®’s UK business, which included benefits from statutory valuation updates and the completion of the legal transfer of the Alico UK business acquired in 2011.
Net income in 2012 amounted to USD 183 million, including the USD 399 million loss related to the sale of the Admin Re® US business in the reporting year. Excluding this loss, net income was USD 582 million, compared to USD 329 million in the prior-year period, an increase of 76.9%. The rise in underlying net income was driven by an improvement in investment performance, including higher realised gains, and management actions mainly related to business transformation and efficiency initiatives which provided one-off benefits to the result.
Admin Re® Admin Re® results USD millions 2011 2012 Change in %
Expenses Life and health benefits –2 119 –2 086 –2 Return credited to policyholders –27 –2 688 – Acquisition costs –233 –142 –39 Other expenses –466 –457 –2 Interest expenses –61 –53 –13
Expenses Administrative expenses were USD 457 million in 2012, a marginal decrease from USD 466 million for 2011. The costs remained relatively flat with the impact from the sale of Admin Re® US and lower expenses associated with corporate realignment being offset by new businessrelated costs and continued investment in Admin Re®.
Return on equity The return on equity was 2.6% for 2012, compared to 5.0% in 2011, with the reduction driven by the loss recognised in the year related to the sale of the Admin Re® US business. Excluding the loss on disposal, the return on equity was 7.7% for the year, 2.7 percentage points higher than the prior year.
Gross Cash Generation (“GCG”) is defined as the change in excess capital available over and above the target capital position, with the target capital being the minimum statutory capital plus the additional capital required by Admin Re®’s capital management policy. GCG can be utilised by management for reinvestment in the business, to service existing debt obligations and dividend payments, and is restricted to cash generated by the business only, excluding any capital contributions made.
Admin Re® believes it will produce substantial cumulative GCG over a five-year period, with management actions targeted to deliver additional cash during this time. Admin Re® actively manages the in-force book to optimise capital utilisation and returns, pursuing opportunities to increase capital efficiency including the release of capital by divestment of inefficient or capital-intensive products or books of business where that would be beneficial.
Delivering gross cash to reinvest in the business, repay debt and pay dividends to the Group
Outlook Admin Re® seeks to grow through selective acquisitions that offer predictable, longterm and consistent returns. The closed life market remains active with recent activity centred in the UK and Continental Europe where Admin Re® is looking to continue building on its strong market position. As part of its growth plans Admin Re® is also focused on potentially raising third-party capital to fund future growth.
Share performance Swiss Re shares Swiss Re had a market capitalisation of CHF 24.4 billion on 31 December 2012, with 370.7 million shares outstanding, of which 343.2 million are entitled to dividends. Swiss Re shares are listed in accordance with the main standard on the SIX Swiss Exchange (SIX) and are traded under the ticker symbol SREN. The shares are also traded over the counter in the form of an American Depositary Receipt (ADR) level I programme (OTC symbol SSREY).
Swiss Re’s dividend policy Swiss Re updated its dividend policy on 21 February 2013. Under this policy Swiss Re’s highest priority is to grow the regular dividend with long-term earnings. At a minimum Swiss Re aims to maintain the regular dividend. Then Swiss Re will deploy capital for business growth where it meets its profitability requirements. Dividends are typically paid out of current earnings and Swiss Re pays its dividend annually. Shares are ex-dividend two working days after the Annual General Meeting (AGM, 12 April 2013), with payment made five working days after the AGM (17 April 2013).
Dividends The Board of Directors proposes a regular dividend of CHF 3.50 per share and an additional special dividend of CHF 4.00 per share for 2012. Both dividends will be in the form of Swiss withholding tax exempt distributions out of legal reserves from capital contributions.
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 usually 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.
Information for investors More information on Swiss Re’s shares is available in the Investor Relations section on Swiss Re’s website at: www.swissre.com/investors
Insurance indices STOXX Europe 600 Insurance 5.66 Bloomberg Europe 500 Insurance 7.07 FTSEurofirst 300 Insurance 6.49 Dow Jones Insurance Titans 30 2.94
Sustainability indices Dow Jones Sustainability Europe 0.67 Dow Jones Sustainability World 0.29 FTSE4Good Global 0.20 MSCI Global Climate 0.95
Shares outstanding2 363 516 036 370 701 168 370 704 153 370 706 931 370 706 931 of which Treasury shares and shares reserved for corporate purposes 27 850 261 27 994 167 28 083 630 27 970 432 27 537 673
Risk and capital management In 2012, Swiss Re maintained its strong capitalisation – demonstrating its ability to efficiently manage risks and optimise capital within the Group.
Swiss Re’s internal risk model provides a meaningful assessment of the risks to which the company is exposed and is an important tool for managing our business. It determines our capital requirements for internal purposes and forms the basis for regulatory reporting under the SST. The model also provides the basis for Swiss Re’s capital cost allocation in its Economic Value Management (EVM) framework, which is used for pricing, profitability evaluation and compensation decisions (see pages 43–44 for further information on EVM). We continuously refine and update our model and its parameters to reflect our experience, changes in the risk environment and advances in best practice.
In 2012 Swiss Re maintained its strong capitalisation and demonstrated its ability to upstream capital flows from subsidiaries and to optimise capital on a Group level. These activities allow Swiss Re to return capital to its shareholders by proposing a regular dividend of CHF 3.50 per share and an additional special dividend of CHF 4.00 per share for 2012.
Swiss Re’s level of capitalisation and its capital structure are determined by regulatory capital requirements (both for the Group and its individual legal entities), rating agency requirements, as well as management’s view of risks and opportunities arising both from our business operations and from capital markets. We optimise all these constraints to increase the return to our shareholders while meeting or exceeding regulatory and rating agencies’ requirements.
Swiss Re’s capital adequacy Regulatory capital requirements Swiss Re is supervised by the Swiss Financial Market Supervisory Authority (FINMA), at Group level and for its regulated legal entities domiciled in Switzerland. The supervision comprises minimum solvency requirements, a wide range of qualitative assessments and governance standards.
At Group level and for regulated legal entities domiciled in Switzerland, Swiss Re provides regulatory solvency reporting to FINMA under the rules of Solvency I and the Swiss Solvency Test (SST). The SST is based on an economic view. We calculate available and required capital under SST based on our Economic Value Management (EVM) framework and internal risk model, respectively (see pages 43–44 for further information on EVM). The minimum requirement for Solvency I and SST is a ratio of 100%. Swiss Re’s Solvency I and SST ratios both materially exceed the minimum requirement.
We continuously strive to simplify our legal entity structure and to optimise local capital levels. We will extend these efforts to further enhance our efficiency and to respond to regulatory developments and client needs.
A.M. Best, Moody’s and S&P rate Swiss Re’s financial strength based upon interactive relationships. The insurance financial strength ratings are shown in the table above.
On 20 December 2012, Moody’s affirmed Swiss Re’s insurance financial strength rating at A1. The outlook remains “positive”. The affirmation reflects Swiss Re’s excellent market position, very strong business diversification and excellent capital adequacy.
Standard & Poor’s Solvency I Swiss Solvency Test (SST) > USD 10 billion excess of AA requirement > 200% 207%1 1 SST 2/2012, as filed with FINMA at the end of October 2012, based on a projection from mid-2012 to mid-2013.
Performance split of insurance underwriting and investment activities EVM values 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.
EVM results for 2012 The 2012 EVM Report, showing Swiss Re’s results for the full year 2012, is available on swissre.com/ investors/financial_ information
Liquidity management As a re/insurance group, our core business generates liquidity primarily through premium income. Our exposure to liquidity risk stems mainly from two sources: the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group.
To manage these risks, we have a range of liquidity policies and measures in place. In particular, we aim to ensure that: ̤ sufficient liquidity is held to meet funding requirements even under adverse circumstances; ̤ funding is charged at an appropriate market rate through our internal transfer pricing; ̤ diversified sources are used to meet Swiss Re’s residual funding needs; and
The amount of liquidity held is largely determined by internal liquidity stress tests, which estimate the potential funding requirements stemming from extreme loss events. These funding requirements under stress would include: ̤ cash and collateral outflows, as well as potential capital and funding support required by subsidiaries as a result of loss events; ̤ repayment or loss of all maturing unsecured debt and credit facilities; ̤ additional collateral requirements associated with a potential ratings downgrade; ̤ further contingent funding requirements related to asset downgrades; and
The stress tests also assume that funding from assets is subject to conservative haircuts, that intra-Group funding is not available if it is subject to regulatory approval, that no new unsecured funding is available, and that funding from new reinsurance business is reduced.
Risk management ensures an integrated approach to managing current and emerging threats. Embedded throughout the business, our Risk Management function ensures that our strategic planning and limit setting conform to Swiss Re’s Group-wide risk tolerance. It is also deeply involved in capital cost assessment, large transaction approvals, portfolio monitoring and performance measurement. Its objective is to enable controlled risk-taking and the efficient, risk-adjusted allocation of capital.
̤ Independent risk controlling: Dedicated specialised units within Risk Management monitor our risk-taking activities.
Risk management organisation The Board of Directors is ultimately responsible for the Group’s governance principles and policies, including the Group Risk Policy, which establishes both the guiding principles of risk management as well as the overall risk tolerance of the Group.
All of these departments have dedicated Chief Risk Officers who report directly to the Group CRO, with a secondary reporting line to their respective Business Unit CEOs. They are responsible for risk oversight in their respective Business Unit, including identifying, assessing and controlling risks as well as establishing the proper risk governance to assure proper execution of these activities.
Senior managers of business and corporate units are responsible for managing operational risks in their areas of activity, based on a centrally coordinated methodology. Their self-assessments are reviewed and challenged by operational risk specialists in partnership with the dedicated risk management units. Risk management experts also review Swiss Re’s underwriting decision processes.
The Group’s risk management activities are also integrally supported by Group Internal Audit and Compliance. The Group Internal Audit department carries out independent, objective assessments of the adequacy and effectiveness of internal control systems. It evaluates the execution of processes within Swiss Re, including those within Risk Management.
The Compliance function is principally responsible for overseeing Swiss Re’s compliance with applicable laws, regulations, rules, and the Code of Conduct, as well as managing compliance risk. It serves to assist the Board of Directors, the Group EC and management in discharging their respective duties to effectively identify, mitigate and manage compliance risks.
The Group Executive Committee (Group EC) implements the risk management framework via the following subcommittees: ̤ The Group Risk and Capital Committee has responsibility for allocating capital and insurance risk capacity, approving investment and counterparty credit risk limits, and determining changes to the internal risk and capital methodology.
In 2012, Swiss Re’s overall risk slightly decreased by 1%, reflecting lower financial market risk, mainly due to the sale of the Admin Re® US business.
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 54). According to the internal risk model, Swiss Re’s overall risk exposure based on 99% Tail VaR decreased to USD 16.6 billion in 2012, down 1% from USD 16.7 billion in 2011. Alternative risk measures are 99% and 99.5% VaR. On this basis our risk decreased 9% to USD 12.1 billion and 4% to USD 14.4 billion, respectively.
USD 7.8 billion, representing a minor increase of 1%; ̤ Life and health risk increased by 4% to USD 7.3 billion; ̤ Financial market risk fell by 2% to USD 10.5 billion, because of the sale of the Admin Re® US business as well as reduced interest rate and foreign exchange risk. These decreases were largely offset by the impacts of the new financial market risk model (see page 54) and additional equity investments.
Risk assessment A slight increase in insurance risk due to business growth was compensated by lower financial market risk.
Diversification effect –10.5 –10.9 Swiss Re Group 16.7 16.6 –1 1 Credit comprises credit default and credit migration risk.
Swiss Re’s overall property and casualty risk increased slightly in 2012 (see table on page 49). Business growth in most natural catastrophe risks was largely offset by a reduction in costing and reserving exposure as well as decreases in large US catastrophe risks.
The table on page 51 shows Swiss Re’s exposure to a set of major natural catastrophe scenarios, net of retrocession and securitisation. These risk exposures take into account the fact that such a scenario will trigger claims in other lines of business in addition to the most affected property line.
Swiss Re writes property and casualty business using the four-eye principle across all Business Units: 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 that extends up to the Group Products and Limits Committee.
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 three-signature approval process (involving Swiss Re’s Underwriting, Client Markets, and Risk Management functions) that establishes the accountability of each of the parties for significant transactions. We monitor accumulated exposure to single risks or to an underlying risk factor (such as Californian earthquake) on a Group-wide basis.
Insurance risk management includes overseeing risk-taking activities, as well as ensuring that an appropriate risk governance framework is defined and operated.
Swiss Re’s life and health insurance risk arises from the business we take on when providing mortality (death), longevity (annuity), and morbidity (illness and disability) coverage through both the Reinsurance Business Unit, and when acquiring run-off business through the Admin Re® Business Unit. In addition to potential shock events, such as a severe pandemic, we monitor and manage underlying risks inherent in life and health contracts (such as pricing and reserving risks) that arise when mortality, morbidity, or lapse experience deviates from expectations. The investment risk that is part of some life and health business is monitored and managed as financial market risk.
Our life and health risk increased by 4% in 2012 (see table on page 49) mainly due to higher mortality trend risk. Business growth was partially offset by the sale of the Admin Re® US business. Longevity risk increased through new deals (see example on page 27) but as it is negatively correlated with mortality trend risk it reduced the overall life and health risk.
exposure limits are in place for catastrophe and stop-loss business. We pay particular attention to accumulation risk in densely populated areas and apply limits for individual buildings. Following a process similar to the one in property and casualty, all large, complex, or unusual transactions are reviewed and require individual approval from Products Underwriting, Client Management, and Risk Management. We manage the risk exposure of Swiss Re’s life and health book by external retrocession. In addition, insurance-linked securities are used to reduce peak exposures.
Natural catastrophes Atlantic hurricane –3.5 –2.8 –18 Californian earthquake –2.9 –2.4 –17 European windstorm –2.6 –2.6 – Japanese earthquake –2.5 –2.9 13
Financial Risk Management regularly reviews and updates the risk framework. The unit is also responsible for monitoring financial market risk in accordance with our risk
Group-wide financial market and credit risk management involves identifying, assessing and controlling risks inherent in the financial and credit markets; it includes the monitoring of compliance with our risk management standards. Both risk categories are managed by our Financial Risk Management team.
Committee, where the Head of Financial Risk Management is a voting member. Financial Risk Management is responsible for both internally managed assets and Swiss Re’s external investment mandates.
In 2012 Swiss Re’s credit risk increased 7% mainly due to a change in the financial market risk model (see box on page 54). The increase was partly offset by the sale of the Admin Re® US business. Exposure to a defined credit default stress situation decreased in 2012 (see table above), predominantly driven by the sale of the Admin Re® US business. This stress test is based on 20 years of historical corporate default data from Moody’s and assumes that a combination of the worst default frequencies observed over a 12-month period for all credit rating categories occurs in the same year.
Risk Management monitors and reports credit exposure and limits on a weekly basis for the Group and its Business Units. The reporting process is supported by a Groupwide credit exposure information system that contains all relevant data, including corporate counterparty details, ratings, credit risk exposures, credit limits and watch lists. All key credit practitioners in the Group and Business Units have access to this system, thus providing the necessary transparency to implement specific exposure management 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 decisionmaking process and cover political, economic and security-related country risks.
counterparty exposure in a direct contractual relationship, such as retrocession or over-the-counter (OTC) derivatives, and risk assumed by Swiss Re through reinsurance contracts, such as Trade Credit and Surety reinsurance business. Credit risk is viewed separately from credit spread risk, which is included under financial market risk.
In April 2012, a new financial market risk model was introduced, which comprises a new fat tail approach to better reflect extreme market movements as well as a new calibration framework, a refined treatment for credit risk of asset-backed securities and an improved risk factor mapping for indirect private equity.
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 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% value at risk (VaR), which measures the loss likely to be exceeded in only one year out of one hundred. 99.5% value at risk (VaR) measures the loss likely to be exceeded in only one year out of two hundred.
Operational risk The Basel II framework defines operational risk as the expected and unexpected economic impact of inadequate or failed internal processes, people or systems risks or external events, including compliance risks. The definition also includes financial reporting risk, where a material misstatement by the Group causes significant reputational damage.
Swiss Re mitigates these risks based on a three lines of defence principle, beginning with the day-to-day risk management activities of the individual risk takers in the business units, corporate and enabling functions. The second line of defence comprises the independent oversight functions of Risk Management, Compliance and the Group Security Office. The third line of defence performs independent audits of processes and procedures carried out by Group Internal Audit.
The purpose at every stage is to identify and manage cost-effectively those operational events with the potential to cause large financial loss or significant reputational damage.
The responsibility for managing strategic risk lies with the Board of Directors. It is addressed by examining multi-year scenarios, considering the related risks, as well as monitoring the implementation of the chosen strategy year-by-year in terms of the annual business plan. The operational risks of implementing the strategy are reviewed through our integrated assurance framework comprising business management, risk management and independent internal audits.
Regulatory risk Regulatory risk includes the potential impact of changes in the regulatory and supervisory regimes of the countries in which we operate. In 2012, reinsurers were confronted with an increasing number of regulatory reforms, particularly in the US and Europe.
The first list of globally systemically important insurers is expected to be released in early 2013. To the degree to which this list introduces policy measures governing large global reinsurance groups, Swiss Re will aim to improve the recognition of risk mitigating solutions (eg, reinsurance under risk-based solvency regimes), gain clarity in supervisory behaviour (eg, Supervisory Colleges and crisis management measures), and remove discriminatory requirements.
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. We support these values with processes that enable us to identify potential problems early.
We have a formal framework to manage environmental, socio-economic, and related ethical risks that may be inherent in some of our business transactions. Currently, this framework contains eight policies for sectors or issues, each with pre-defined exclusions, criteria and quality standards. Transactions that could potentially compromise these standards need to be submitted to our Sensitive Business Risks process for review by our sustainability experts. We also consider the potential impact on Swiss Re’s reputation when assessing and controlling operational risk.
Emerging risks Anticipating possible developments in Swiss Re’s risk landscape is an important element of our integrated approach to enterprise risk management. We encourage pre-emptive thinking on risk in all areas of our business, combining our broad claims experience and risk expertise with a structured horizon-scanning process. The key objectives are to reduce uncertainty and help diminish the volatility of the Group’s results, but also to identify new business opportunities and raise awareness both within the Group and across the industry.
Our internal SONAR system gives Swiss Re employees a forum to raise ideas on emerging risks and report early signals using an interactive platform. This information is complemented with insights from collaboration with think tanks, academic networks and international organisations and institutions. Findings are reported at semi-annual intervals to senior management and other internal stakeholders, providing them with a prioritised overview of newly identified emerging risks and an estimate of their potential impact on Swiss Re’s business.
58 Overview 60 Group structure and shareholders 63 Capital structure 66 Board of Directors 80 Executive management 86 Shareholders’ participation rights 87 Changes of control and defence measures 88 Auditors 90 Information policy
Overview Swiss Re’s corporate governance adheres to the SIX Swiss Exchange’s Directive on Information Relating to Corporate Governance, including its annex, as issued in 2002 and amended in 2009. It is also in line with the principles of the Swiss Code of Best Practice for Corporate Governance (Swiss Code) issued in 2002 by economiesuisse, the Swiss business federation. An additional appendix was issued in 2007 which deals with compensation principles. Swiss Re, moreover, conforms to the Swiss Financial Market Supervisory Authority (FINMA) provisions on corporate governance, risk management and internal control systems, which came into effect on 1 January 2009. Finally, Swiss Re’s corporate governance complies with applicable local rules and regulations in all jurisdictions where it conducts business.
Swiss Re’s corporate governance framework Swiss Re has a dual Board structure: the Board of Directors is responsible for oversight, while the Group EC is responsible for managing operations. This structure maintains effective mutual checks and balances between the top corporate bodies. Our corporate governance principles and procedures are defined in a series of documents governing the organisation and management of the company. These include on a Group level: ̤ the Code of Conduct, outlining our compliance framework and setting out the basic legal and ethical principles and policies we apply globally; ̤ the Corporate Governance Guidelines (the 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; ̤ the Group Bylaws, defining the governance structure within the Group as well as the responsibilities of the Board of Directors, Chairman, Board committees, Group CEO, Regional Presidents and Group EC and the relevant reporting procedures; ̤ the Board Committee Charters, outlining the duties and responsibilities of the Board committees; ̤ the Group committee charters, outlining the duties and responsibilities of the committees at the Group EC level; ̤ the instructions and guidelines describing working methods, governance processes and timetables of the Board of Directors and Board committees.
Furthermore they include on a Business Unit level: ̤ Business Unit Regulations, defining the governance structure and principles within the Business Units Reinsurance, Corporate Solutions and Admin Re® in line with the Group Bylaws.
2012 Focus areas Corporate Governance Guidelines The Group’s new Guidelines harmonise our governance principles and procedures across the Group. The Guidelines explain the classification levels of the legal entities, with their applicable governance requirements and processes. In so doing, the Guidelines take into account the nature, size and complexity of the Group’s legal entities.
Revision of Bylaws In 2012 the Board of Directors reviewed and revised the Group Bylaws and the Business Unit Regulations. The revisions reflect experience gained under the new corporate structure.
̤ The shareholders elected C. Robert Henrikson to the Board of Directors at the AGM on 13 April 2012 for a three-year term.
̤ Michel M. Liès was appointed Group Chief Executive Officer and member of the Group Executive Committee as of February 2012, succeeding Stefan Lippe.
̤ Jean-Jacques Henchoz was appointed Regional President EMEA, Martyn Parker was appointed Regional President Asia and J. Eric Smith was appointed Regional President Americas; they took up these positions and joined the Group Executive Committee as of 1 January 2012.
̤ John R. Dacey was appointed Group Chief Strategy Officer, member of the Group Executive Committee, and Chairman Admin Re® as of 1 November 2012.
̤ Guido Fürer was appointed Group Chief Investment Officer and member of the Group Executive Committee as of 1 November 2012, succeeding David Blumer.
̤ Reflecting the new Group structure, the Group Executive Committee was strengthened by appointing additional members for the newly created positions of Regional Presidents for the Americas, Asia and EMEA, along with a Group Chief Strategy Officer.
Legal structure – listed and non-listed 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. No further Group companies have shares listed. More information is provided in Note 18 to the Group financial statements on page 210.
the voting rights entered 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. The following table provides a summary of the current disclosure notifications. In line with the SESTA requirements, the percentages indicated were calculated in relation to the share capital reflected in the commercial register at the time of the respective notification.
In addition, Swiss Re Ltd and Group companies held, as of 31 December 2012, directly and indirectly, 27 560 372 shares, representing 7.4% of voting rights and share capital. Neither the company nor the Group companies can exercise the voting rights of the own shares they hold themselves. All notifications received in 2012 are published at swissre.com/ investors/shares/disclosure_of_shareholdings and at www.six-exchange-regulation.com/ obligations/disclosure/major_shareholders_en.html.
Shareholder1 Number of shares % of voting rights and share capital Creation of the obligation to notify
Dodge & Cox 12 639 368 3.48 10 June 2011 MFS Investment Management 11 485 890 3.16 10 June 2011 Berkshire Hathaway Inc. 11 262 000 3.10 10 June 2011 BlackRock, Inc. 11 134 246 3.09 26 September 2011 1 In the context of Swiss Reinsurance Company Ltd’s issuance of Perpetual Subordinated Capital Instruments 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 the Federal Act on Stock Exchanges and Securities Trading 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.
Shares held by Swiss Re 27 560 372 7.4 1 Without shares held by Swiss Re Ltd and Group companies
As of 31 December 2012 Shareholders in % Shares in %
The table below provides an overview of the issued, conditional and authorised capital of Swiss Re Ltd as of 31 December 2012, compared with the issued, conditional and authorised capital as of 31 December 2011.
Conditional and authorised capital in particular Conditional capital As of 31 December 2012, the conditional capital of Swiss Re Ltd consisted of the following category: Conditional capital for Equity-Linked Financing Instruments The share capital of the company may be increased up to CHF 5 000 000 by issuing a maximum of 50 000 000 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).
Existing shareholders’ subscription rights are excluded. The then current holders of the conversion and/or option rights granted in connection with Equity-Linked Financing Instruments shall be entitled to subscribe for the new registered shares. Subject to the Articles of Association, the Board of Directors may decide to restrict or exclude existing shareholders’ advance subscription rights with regard to these Equity-Linked Financing Instruments. Such decision may be made in order to issue Equity-Linked Financing Instruments on national and/or international capital markets (including private placements to selected strategic investors), and/or to finance or re-finance the acquisition of companies, parts of companies, participations or new investments planned by the company and/or Group companies.
If advance subscription rights are excluded, then the Equity-Linked Financing Instruments are to be placed at market conditions, the exercise period is not to exceed ten years for option rights and twenty years for conversion rights, and the conversion or exercise price for the new registered shares is to be set at least in line with the market conditions prevailing at the date on which the Equity-Linked Financing Instruments are issued.
Changes in 2011 The Annual General Meeting of shareholders of the former parent company, Swiss Reinsurance Company Ltd, approved the cancellation of the conditional capital which had been created for employee participation in the maximum nominal amount of CHF 1 695 280.70, which corresponds to 16 952 807 registered shares, each with a nominal value of CHF 0.10.
The Annual General Meeting of shareholders of Swiss Reinsurance Company Ltd also approved the cancellation of the conditional capital which had been created in favour of Berkshire Hathaway Inc. in the maximum nominal amount of CHF 16 000 000, which corresponds to 160 000 000 registered shares, each with a nominal value of CHF 0.10.
The Annual General Meeting of shareholders of Swiss Reinsurance Company Ltd also approved the reduction of the existing authorised capital from CHF 18 000 000 to CHF 8 500 000 and authorised the Board of Directors to increase the share capital by a maximum nominal amount of CHF 8 500 000, which corresponds to 85 000 000 registered shares, each with a nominal value of CHF 0.10, until 15 April 2013. In line with this increase, the Extraordinary General Meeting of shareholders of Swiss Re Ltd approved at its meeting on 20 May 2011 the creation of authorised capital by an amount not exceeding CHF 8 500 000 through the issue of up to 85 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10.
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. The company cannot exercise the voting rights of treasury shares. As of 31 December 2012, shareholders had registered 199 866 789 shares for the purpose of exercising their voting rights, out of a total of 370 706 931 shares issued. As of 31 December 2012, 343 169 258 shares were entitled to dividend payment.
For details on stock options granted to Swiss Re employees, see Note 14 to the Group financial statements on pages 193.
Jean-Pierre Roth Swiss 66 2010 2013 * The members were initially elected to the Board of Directors of Swiss Reinsurance Company Ltd, the Group’s former parent company; all members were subsequently elected to the Board of Directors of the Group’s new holding company, Swiss Re Ltd, on 17 February 2011 with the exception of the following two members who joined later; Renato Fassbind was elected to the Board of Directors of Swiss Re Ltd on 15 April 2011 and C. Robert Henrikson was elected to the Board of Directors of Swiss Re Ltd on 13 April 2012.
External appointments ̤ Board member of Credit Suisse Group AG ̤ Chairman of the European Financial
Services Round Table, where the Chairman and CEOs of the largest European financial institutions meet regularly
̤ Member of the Board of Trustees of Avenir Suisse, the liberal Swiss think tank
Career Jakob Baer began his career with the Swiss Federal Finance Administration. He joined Fides Trust Company in 1975, then following a buyout became a member of KPMG Switzerland’s Management Board in 1992. He was appointed Chief Executive Officer of KPMG Switzerland in 1994 and became a member of KPMG’s European and international Management Boards. He retired from KPMG in 2004. Jakob Baer was elected to Swiss Re’s Board of Directors in 2005. He chairs the Audit Committee and is a member of the Chairman’s and Governance Committee and the Finance and Risk Committee.
Educational background ̤ Attorney-at-Law, Bern, Switzerland ̤ PhD in Law, University of Bern,
Career John R. Coomber has been the Chief Executive Officer of Pension Insurance Corporation Limited since 2008.
He joined Swiss Re in the UK in 1973. From 1987, he led the Life Division and, in 1993, was made Head of the UK operations. He was appointed a member of the Group Executive Board in 1995, responsible for the Life & Health division. He became a member of the Executive Committee in 2000 and was Swiss Re’s Chief Executive Officer from 2003 to 2005. He was elected to the Group’s Board of Directors in 2006. He is a member of the Chairman’s and Governance Committee, the Audit Committee and the Finance and Risk Committee.
Career Rajna Gibson Brandon is a Professor of Finance at the University of Geneva and Director of the Geneva Finance Research Institute.
She held professorships at the University of Lausanne from 1991 to 2000 and the University of Zurich from 2000 to 2008. She was a member of the Swiss Federal Banking Commission from 1997 to 2004. She was elected to Swiss Re’s Board of Directors in 2000 and is a member of the Finance and Risk Committee and the Investment Committee.
External appointments ̤ Board member of Banque Privée Edmond de Rothschild S.A. ̤ Deputy Director of the Swiss National
Career C. Robert Henrikson was Chairman and Chief Executive Officer of MetLife, Inc. from 2006 to 2011. Before, he held senior positions in MetLife’s individual, group and pension businesses and became Chief Operating Officer of the company in 2004. He is a former Chairman of the American Council of Life Insurers, a former Chairman of the Financial Services Forum, Director Emeritus of the American Benefits Council and a former member of the President’s Export Council. He was elected to Swiss Re’s Board of Directors in 2012 and chairs the Compensation Committee. In addition, he is a member of the Chairman’s and Governance Committee and the Finance and Risk Committee.
Economics, University of Toronto, Canada ̤ M.Sc. and PhD in Economics, the London School of Economics, United Kingdom
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 today’s business needs. Potential new candidates are assessed against Board approved selection criteria, which include: integrity, selected skills and qualifications, experience, communication ability and community standing. Swiss Re’s Board members represent a wide range of backgrounds and capabilities in such key areas as insurance and reinsurance, finance, accounting, capital markets, risk management and regulatory topics. The company aims to constantly develop further the abilities of its Board members. Newly elected Board members receive a comprehensive introduction in order to gain a sound understanding of the Group’s organisation and business, allowing them to perform their duties effectively. All Board members update and enhance their knowledge of emerging business trends and risks through regular meetings with internal and external experts throughout the year.
Term of office The regular term of a directorship is three years. It begins with the date of election and ends at the third subsequent Annual General Meeting.
External appointments ̤ Chairman of the Board of Directors of Geneva Cantonal Bank ̤ Board member of Nestlé S.A. and
The Chairman convenes meetings of the Board and its committees and makes preparations for, and presides over, Board meetings. He coordinates the activities of Board committees and ensures that the Board is kept informed about the committees’ activities and findings. In cases of doubt, he makes decisions about the authority of the Board or its committees and about interpreting and applying the Group Bylaws.
He presides at General Meetings of Shareholders and represents the Group vis-à-vis shareholders and other stakeholders such as regulatory and political authorities, industry associations, or the media.
If the Chairman of the Board is prevented from performing any of these duties, one of the Vice Chairmen or another member of the Board will assume them.
Each committee consists of a chairperson and at least two other members elected from among the Board of Directors. The term of office of a Board committee member is one year, beginning with the appointment at the Board meeting following an Annual General Meeting and ending at the Board meeting following the subsequent Annual General Meeting.
Each committee is governed by a Charter which defines the committee’s responsibilities. The committees operate in line with the Group Bylaws and according to their respective Charters. The committees have the following overall responsibilities: 72 Swiss Re 2012 Financial Report
Chairman’s and Governance Committee Responsibilities The Chairman’s and Governance Committee’s primary function is to act as adviser to the Chairman and to address corporate governance issues affecting the Group. It is in charge of the succession planning process at the Board of Directors level and oversees the annual performance assessment and self-assessment at both the Board of Directors and Group EC level.
Members The Chairman’s and Governance Committee is headed by the Chairman of the Board. ̤ Walter B. Kielholz, Chair ̤ Mathis Cabiallavetta ̤ Renato Fassbind (as of 13 April 2012) ̤ Jakob Baer ̤ John R. Coomber ̤ C. Robert Henrikson (as of 13 April 2012) ̤ Robert A. Scott (until 13 April 2012)
Members ̤ Jakob Baer, Chair ̤ Renato Fassbind ̤ Raymund Breu ̤ Raymond K. F. Ch’ien ̤ John R. Coomber ̤ Malcolm D. Knight (as of 13 April 2012)
Jakob Baer (chair) Raymund Breu Raymond K. F. Ch’ien John R. Coomber Rajna Gibson Brandon C. Robert Henrikson (chair) Malcolm D. Knight Hans Ulrich Maerki Carlos E. Represas Jean-Pierre Roth
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 for other committee memberships, members of the Audit Committee may not accept any consulting, advisory, or other compensation fee from the Swiss Re Group, and will be 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 by the Board of Directors. Members of the Audit Committee should not serve on audit committees of more than two listed companies outside the Swiss Re Group. Audit Committee members have to advise the Chairman before accepting any further invitation to serve on an audit committee of another listed company outside the Group.
Finance and Risk Committee Responsibilities The Finance and Risk Committee annually reviews the Group Risk Policy and proposes it for approval to the Board of Directors, reviews the Risk Control Framework and important risk exposures, including new products, strategic expansions, and compensation related risks. It reviews critical underwriting standards as well as principles used in internal risk measurement, asset and liability valuation, capital and liquidity adequacy assessment, and economic performance management. In addition, it reviews the Group’s funding structure, as well as capital and liquidity management activities.
(Chair until 13 April 2012) ̤ Jakob Baer ̤ Rajna Gibson Brandon ̤ C. Robert Henrikson (as of 13 April 2012) ̤ Malcolm D. Knight ̤ Hans Ulrich Maerki
Members ̤ Mathis Cabiallavetta, Chair ̤ Raymund Breu ̤ Raymond K. F. Ch’ien ̤ Rajna Gibson Brandon ̤ Jean-Pierre Roth
Compensation Committee Responsibilities The Compensation Committee’s primary function is to propose to the Board for approval compensation principles in line with the Swiss Re Group’s legal and regulatory requirements and, within those approved principles, to determine the establishment of new (and amendments to existing) compensation plans, and determine, or propose as appropriate, individual compensation as outlined in its Charter. The Compensation Committee will also ensure 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.
(until 13 April 2012) ̤ Renato Fassbind ̤ Hans Ulrich Maerki ̤ Carlos E. Represas 74 Swiss Re 2012 Financial Report
its committees can also adopt resolutions by written agreement if no member of the Board of Directors requests a discussion of the topic. Each committee provides a report of its activities and recommendations following a committee meeting at the next Board of Directors meeting. If any significant topic comes up, the committees contact the Board of Directors immediately. It is the responsibility of each committee to keep the full Board of Directors informed on a timely basis as deemed appropriate.
* The human resources consulting firm Mercer and the law firm Niederer Kraft & Frey AG (NKF) provided support and advice for compensation issues during the 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 7 committee meetings each in 2012. During 2012 the Compensation Committee also received independent advice from Hostettler, Kramarsch & Partner AG relating to the compensation framework review.
Each committee annually reviews the adequacy of the scope of its responsibilities, including processes and membership requirements, and also evaluates its performance.
Governance ̤ Supervises the Swiss Re Group ̤ Retains overall responsibility for corporate governance ̤ Prepares for and convenes General
Strategy and structure ̤ Approves the Group’s strategy and the strategies of the Business Units ̤ Determines the basic organisational structure of the Group
Planning ̤ Approves the Group’s consolidated short- and medium-term business plan and endorses the business plans of the Business Units
Group-wide compliance procedures and monitors remediation of any regulatory and compliance deficiencies
Human resources ̤ Has responsibility for the Group’s talent management subject to the authority of the Board of Directors
̤ Proposes individual compensation of Group Management Board members (other than Group EC) to Group CEO for discussion and decision
Board supervision of executive management Swiss Re’s Board of Directors maintains effective and consistent oversight and monitors the execution of responsibilities it has delegated to executive management through the following control and information instruments.
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 as deemed appropriate.
Any member of the Board of Directors may demand at Board meetings to obtain information on any aspect of the Group’s business. Any member may, in such meetings, request that books and records be produced for timely inspection. Outside Board meetings, any member can direct a request for production of information and business records to the Chairman.
Group Internal Audit Group Internal Audit (GIA) is an independent assurance function, evaluating the adequacy and effectiveness of the Group’s internal control environment. It helps the Group accomplish its objectives by applying a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.
̤ Board member of Geneva Association ̤ Board member of Global Risk Forum ̤ Board member of Insurance Europe’s
John R. Dacey (1960), American Group Chief Strategy Officer, Chairman Admin Re®
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 in November 2012.
Professional experience Agostino Galvagni joined Bavarian Re, a former Swiss Re subsidiary, in 1985 as a trainee in the fields of underwriting and marketing. He joined Swiss Re New Markets in New York in 1998. Agostino returned to Bavarian Re in 1999 as a member of the Management Board. In 2001, he joined Swiss Re in Zurich as Head of the Globals Business, and in 2005 was appointed to the Executive Board to head the Globals & Large Risks Division within Client Markets. In 2009, Agostino was appointed Chief Operating Officer and member of the Group Executive Committee. He was made CEO Corporate Solutions in October 2010.
Professional experience George Quinn started his career as an adviser and consultant to insurance and reinsurance companies with KPMG in London. He joined Swiss Re in 1999 as Chief Accounting Officer. Between 2003 and 2005, he served as Chief Financial Officer for the Financial Services business group, then was named Regional Chief Financial Officer for Swiss Re Americas in New York in 2005. He has been Group Chief Financial Officer and member of the Group Executive Committee since March 2007.
J. Eric Smith (1957), American Chief Executive Officer Swiss Re Americas /Regional President Americas
Professional experience J. Eric Smith worked in various roles in property and casualty insurance with Country Financial for more than 20 years, then joined Allstate in 2003 where he rose to the rank of President, Financial Services. He then moved to USAA Life Insurance Co. where he was named President in 2010. Eric joined Swiss Re in July 2011 as Chief Executive Officer of Swiss Re Americas and as a member of the Group Management Board. Eric was appointed Regional President Americas and member of the Group Executive Committee in January 2012.
Professional experience Matthias Weber started his career at Swiss Re in Zurich in 1992 as an expert for natural perils. He moved to the Swiss Re Americas Division in 1998 and in 2000 became Regional Executive for the Western Region of the United States located in San Francisco. From 2001, he was responsible for property underwriting in the US Direct Business Unit, and in 2005 was named Head of the Americas Property Hub in Armonk. From 2008, Matthias served as Division Head of Property & Specialty. Matthias was appointed Group Chief Underwriting Officer and member of the Group Executive Committee in April 2012.
̤ MBA, University of Zurich, Switzerland 84 Swiss Re 2012 Financial Report
Matthias Weber, Head Property & Specialty, was appointed Group Chief Underwriting Officer and member of the Group EC as of 1 April 2012, succeeding Brian Gray who has chosen to retire from this position.
Shareholders’ participation rights Voting right restrictions, statutory group clauses and exception rules There are no voting right restrictions and no statutory group clauses (other than the limitations on nominee registrations, page 65). Therefore, there are no procedures or conditions for cancelling restrictions and no rules on making exceptions to them. No such exceptions were made in 2012.
Swiss Re’s legal provisions allow any shareholder with voting rights to have his shares represented at any General Meeting of shareholders by another person authorised in writing, or by corporate bodies, independent proxies or proxies for deposited shares. Such representatives need not be 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, except where the law requires otherwise. The Chairman does not have a casting vote.
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 by a show of hands. The voting will only be carried out by written ballot if more than 50 of the shareholders present demand so by a show of hands.
Convocation of the General Meeting of shareholders In accordance with Swiss Re’s Articles of Association, the Board of Directors convenes the General Meeting of shareholders through a notice published in the Swiss Official Gazette of Commerce at least 20 days before the date of the meeting. The notice must state the day, time and place of the General Meeting of shareholders, along with the agenda and proposals, which will be submitted by the Board of Directors.
Agenda The Board of Directors announces the agenda for the General Meeting of shareholders. Shareholders with voting power whose combined holdings represent shares with a nominal value of at least CHF 100 000 may, no later than 45 days before the date of the meeting, request that further matters be included in the agenda. Such requests must be in writing and must specify the items and the proposals to be submitted.
The mandates and employment contracts of the members of the Board of Directors, Group EC, Group Management Board and other members of senior management 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 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 of 22 November 1991 and had been reelected annually since then. The Annual General Meeting of 13 April 2012, 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 Swiss Re Ltd’s auditor.
Auditing fees PwC fees (excluding VAT) for professional services during the year ended 31 December 2012 were: ̤ Audit fees: USD 26.8 million ̤ Audit-related fees: USD 5.0 million
Audit-related fees include, among other tasks, review of the Economic Value Management report, Solvency II model validation, comfort letters, accounting advice and regulatory reports.
Additional fees In addition to the auditing fees, PwC billed an aggregate amount of USD 6.6 million during the year ended 31 December 2012, primarily relating to: ̤ Income tax compliance and related tax services: USD 2.3 million ̤ Other fees: USD 4.3 million
Cooperation and flow of information between the auditor and the Audit Committee The Audit Committee liaises closely with the external auditor; the lead auditors participate as advisers at all the Audit Committee’s meetings. For more information on these, see page 75. The external auditor provides the Audit Committee with regular updates on the audit work and related issues as well as with reports on topics requested by the Audit Committee.
In accordance with the Swiss Federal Act on the Licensing and Oversight of Auditors, and to foster external auditor independence, the lead audit partner rotates out from his or her role after seven years.
Special Auditor The Extraordinary General Meeting of shareholders of Swiss Re Ltd, held on 20 May 2011, elected OBT AG, Zurich, as special auditor for a term of three years. According to the Articles of Association, the special auditor is responsible for conducting special audits as required by law in connection with changes in capital. In line with best practice in ensuring the independence of external auditors, special audit reports are prepared by an auditor different from the external auditor responsible for the conduct of the statutory audits and the audit of the consolidated financial statements.
OBT AG had been elected the first time as special auditor by the Annual General Meeting of shareholders of the former parent company, Swiss Reinsurance Company Ltd, on 7 April 2010.
Our Investor Relations unit holds regular meetings with institutional investors and analysts. Private investors, too, can follow these meetings by telephone conference or through the Swiss Re website. In 2012, Swiss Re held a special Investors’ Day to discuss the Group’s strategy, targets and its new financial segments as well as its Underwriting, Risk Management and Asset Management functions and the business of the three Business Units: Reinsurance,
Corporate Solutions and Admin Re®. The presentations and conference call recordings from this event are also available on our website investors/presentations/?year=2012.
Date News Method of dissemination 19 January Board of Directors appoints Michel M. Liès as Group CEO News release, press conference 23 February Swiss Re reports net income of USD 2.6 billion for 2011 News release, press conference 16 March Swiss Re announces proposals for shareholder approval, including dividend of CHF 3.00 News release 23 March Nairobi project wins international resource award 2012 News release 26 March Swiss Re issues first catastrophe bond combining risks of two insurers News release 28 March Swiss Re releases sigma on natural catastrophes and man-made disasters in 2011 News release, sigma study 5 April Swiss Re places USD 240 million in ILS on behalf of Allianz SE News release 13 April Shareholders approve proposed measures at AGM News release, meeting in Zurich 17 April Swiss Re reiterates Group targets at London Investors’ Day News release, analyst event 3 May Farmers Exchanges announces USD 500 million surplus facility News release 4 May Swiss Re reports Q1 net income of USD 1.1 billion News release, press conference 7 May Swiss Re obtains USD 400 million in natural catastrophe cover News release 24 May Swiss Re announces USD 1.4 billion in longevity cover News release 31 May Swiss Re sells US Admin Re® company (REALIC) to Jackson National Life News release 27 June Swiss Re releases sigma study on world insurance in 2011 News release, sigma study 31 July Swiss Re obtains USD 275 million of extreme mortality protection News release 9 August Swiss Re reports Q2 net income of USD 83 million News release, press conference 15 August Philip K. Ryan appointed Chairman of SR America Holding Corp News release 5 September Swiss Re completes sale of Admin Re® US business News release 10 September Swiss Re releases sigma study on how insurance rates affect insurers News release, sigma study 10 September Swiss Re expects moderate price rise News release, press conference 19 September Swiss Re Corporate Solutions official insurance provider to Solar Impulse News release 28 September Swiss Re proposes election of Mary Francis to its Board of Directors News release 5 October Swiss Re CIO David Blumer decides to leave company News release 17 October Swiss Re releases sigma study on ever-evolving commercial risks News release, sigma study 19 October Swiss Re appoints two new members to Group Executive Committee News release 6 November Swiss Re places first bonds to combine nat cat and mortality risks News release 8 November Swiss Re reports Q3 net income of USD 2.2 billion News release, press conference 21 November Swiss Re releases sigma study on insurance accounting practices News release, sigma study 26 November Swiss Re estimates its claims burden from Hurricane Sandy News release 10 December Swiss Re announces GBP 800 million longevity insurance cover for LV= News release 19 December Swiss Re issues preliminary catastrophe estimates for 2012 News release
Date Event 21 February 2012 annual results 15 March Publication of 2012 Annual Report 10 April 149th Annual General Meeting 2 May First quarter 2013 results 24 June Investors’ Day 8 August Second quarter 2013 results 7 November Third quarter 2013 results
Swiss Re’s compensat﻿ion framework is designed t﻿o promot﻿e long-t﻿erm sust﻿ainable performance for t﻿he Group and it﻿s shareholders t﻿hrough a mix of fixed and variable element﻿s. It﻿ comprises core component﻿s such as base salary, pensions and ot﻿her benefit﻿s, as well as a combinat﻿ion of short﻿- and long-t﻿erm incent﻿ives. Swiss Re is commit﻿t﻿ed t﻿o performance-orient﻿ed, balanced compensat﻿ion t﻿hat﻿ aligns t﻿he int﻿erest﻿s of employees and shareholders.
Dear shareholders I am pleased t﻿o present﻿ t﻿he Report﻿ of t﻿he Compensat﻿ion Commit﻿t﻿ee and would like t﻿o t﻿ake t﻿his opport﻿unit﻿y t﻿o recognise my predecessor, Robert﻿ A. Scot﻿t﻿, for his valued cont﻿ribut﻿ion t﻿o t﻿he Commit﻿t﻿ee’s work over t﻿he past﻿ years.
The Compensat﻿ion Commit﻿t﻿ee cont﻿inues t﻿o review and monit﻿or t﻿he compensat﻿ion framework at﻿ Swiss Re in light﻿ of business needs, regulat﻿ory requirement﻿s and market﻿ development﻿s. There were no mat﻿erial changes during t﻿his report﻿ing year t﻿o compensat﻿ion governance and principles, which were largely maint﻿ained as described in previous years and are out﻿lined in t﻿he following pages.
The compensat﻿ion st﻿ruct﻿ure t﻿oo, has not﻿ changed. In addit﻿ion t﻿o market﻿ compet﻿it﻿ive base salaries, pensions and benefit﻿s, Swiss Re cont﻿inues t﻿o reward employee performance t﻿hrough proven incent﻿ives: variable cash compensat﻿ion t﻿hat﻿ rewards result﻿s achieved in t﻿he previous performance year, wit﻿h performance over a t﻿hree-year period reflect﻿ed in a deferred cash component﻿. As in t﻿he past﻿, a select﻿ number of key senior employees are also grant﻿ed a forward-looking long-t﻿erm award, t﻿hat﻿ provides incent﻿ive for sust﻿ainable and successful performance.
US GAAP and Economic Value Management﻿ (EVM) based business result﻿s cont﻿inue t﻿o be t﻿he main drivers for variable compensat﻿ion. While t﻿he 2011 business result﻿s based on EVM led t﻿o a downward adjust﻿ment﻿ t﻿o incent﻿ive pools and execut﻿ive management﻿ compensat﻿ion, t﻿he st﻿rong 2012 business performance posit﻿ively influences incent﻿ive compensat﻿ion for 2012.
The Compensat﻿ion Commit﻿t﻿ee is sat﻿isfied t﻿hat﻿ t﻿his Compensat﻿ion Report﻿ provides a comprehensive view of t﻿he compensat﻿ion framework at﻿ Swiss Re. In addit﻿ion, t﻿he Compensat﻿ion Report﻿ provides compensat﻿ion disclosure for 2012. The Report﻿ is divided int﻿o four sect﻿ions: ̤ Compensat﻿ion cont﻿ext﻿ and highlight﻿s in 2012 ̤ Compensat﻿ion governance ̤ Compensat﻿ion framework ̤ Compensat﻿ion decisions in 2012
compensat﻿ion is performance relat﻿ed and deferred, as shown in t﻿he chart﻿ below. For t﻿he members of t﻿he Group Execut﻿ive Commit﻿t﻿ee (Group EC), more t﻿han 70% of t﻿heir compensat﻿ion is variable.
Dist﻿ribut﻿ions made in t﻿he form of Swiss wit﻿holding t﻿ax exempt﻿ dist﻿ribut﻿ions out﻿ of legal reserves from capit﻿al cont﻿ribut﻿ions 3 Represent﻿s incumbent﻿s and not﻿ posit﻿ions; four new Group EC posit﻿ions were creat﻿ed in 2012 (see page 110 for more informat﻿ion)
In 2012, Swiss Re generat﻿ed a US GAAP net﻿ income of USD 4.2 billion and an Economic Value Management﻿ (EVM) profit﻿ of USD 4.2 billion.
Activities in 2012 Changes in the Compensation Framework ̤ We cont﻿inued t﻿he compensat﻿ion framework review init﻿iat﻿ed in 2011 t﻿hrough 2012 and int﻿o 2013, as out﻿lined in t﻿he 2011 report﻿.
̤ We reviewed and updat﻿ed how we fund and allocat﻿e t﻿he API pools as described on page 103.
̤ The Compensat﻿ion Commit﻿t﻿ee st﻿rengt﻿hened t﻿he benefit﻿s governance and conduct﻿ed a review of t﻿he benefit﻿s framework.
Specific Compensation Plans ̤ While t﻿he Asset﻿ Management﻿ VAI is based in t﻿he first﻿ inst﻿ance on EVM result﻿s, addit﻿ional t﻿arget﻿s and non-financial performance fact﻿ors are also t﻿aken int﻿o considerat﻿ion. The payout﻿ fact﻿or is st﻿ill a linear funct﻿ion t﻿hat﻿ ranges from 50% t﻿o 150%.
̤ We have monit﻿ored development﻿s in Solvency II regulat﻿ion and have complet﻿ed t﻿he alignment﻿ of our compensat﻿ion framework wit﻿h it﻿s current﻿ draft﻿ requirement﻿s.
Report﻿ 2011 was subject﻿ t﻿o a consult﻿at﻿ive vot﻿e. At﻿ t﻿he Annual General Meet﻿ing on 13 April 2012, t﻿he report﻿ was approved by 81% of shareholder vot﻿es (up from 76% in 2011).
̤ At﻿ t﻿he Annual General Meet﻿ing on 13 April 2012, C. Robert﻿ Henrikson was elect﻿ed t﻿o t﻿he Board of Direct﻿ors and became Chairman of t﻿he Compensat﻿ion Commit﻿t﻿ee.
̤ Aut﻿horised t﻿o endorse for approval, propose or approve compensat﻿ion changes as defined in it﻿s chart﻿er and working inst﻿ruct﻿ions
̤ Responsible for making recommendat﻿ions and overseeing t﻿he design and implement﻿at﻿ion of compensat﻿ion principles, policy, framework, disclosure and plans
̤ Ot﻿her members of senior management﻿ may at﻿t﻿end as deemed appropriat﻿e by t﻿he Compensat﻿ion Commit﻿t﻿ee
Secret﻿ary ̤ The Head of Compensat﻿ion, Benefit﻿s & Int﻿ernat﻿ional Mobilit﻿y serves as t﻿he Secret﻿ary t﻿o t﻿he Compensat﻿ion Commit﻿t﻿ee and at﻿t﻿ends it﻿s meet﻿ings (apart﻿ from t﻿he Execut﻿ive Sessions)
̤ Niederer Kraft﻿ & Frey AG – provide legal advice, mainly about﻿ specific aspect﻿s of compliance and on disclosure mat﻿t﻿ers
Compensation Committee’s time allocation to key topics in 2012 25% Variable compensation for the Group 19% Review of compensation framework 17% Compliance and Regulatory 12% Compensation and performance of
Variable compensation for the Group At﻿ Swiss Re, t﻿he compensat﻿ion cycle begins in December, wit﻿h payment﻿s made in March /April of each year. The Compensat﻿ion Commit﻿t﻿ee oversees each st﻿age of t﻿he process, st﻿art﻿ing wit﻿h deciding on t﻿he variable compensat﻿ion for t﻿he prior performance year, reviewing t﻿hese decisions, and set﻿t﻿ing t﻿arget﻿s for t﻿he upcoming year.
̤ Review of t﻿he decisions made during t﻿he prior compensat﻿ion cycle June
̤ Review and recommendat﻿ion of t﻿he Leadership Performance Plan pool for t﻿he upcoming year February
̤ Set﻿t﻿ing of t﻿he performance t﻿arget﻿s for variable and long-t﻿erm compensat﻿ion for t﻿he upcoming year February
Compliance and Regulatory The Compensat﻿ion Commit﻿t﻿ee spends a considerable amount﻿ of t﻿ime reviewing mat﻿erials relat﻿ing t﻿o regulat﻿ory or st﻿at﻿ut﻿ory report﻿ing. In addit﻿ion, t﻿he st﻿ruct﻿ure of t﻿he Compensat﻿ion Commit﻿t﻿ee and it﻿s advisors is reviewed on an ongoing basis.
̤ Review and proposal of t﻿he Compensat﻿ion Report﻿ January and February
Review of compensation framework In light﻿ of ongoing invest﻿or and regulat﻿or feedback as well as t﻿he organisat﻿ional rest﻿ruct﻿uring, a full review of t﻿he compensat﻿ion framework was init﻿iat﻿ed during t﻿he second half of 2011. The implement﻿at﻿ion cont﻿inued in 2012 rolling int﻿o 2013. At﻿ t﻿he various meet﻿ings proposals were reviewed and approved by t﻿he Compensat﻿ion Commit﻿t﻿ee.
Control assessment of Group and business functions The Compensat﻿ion Commit﻿t﻿ee cont﻿inues t﻿o st﻿rengt﻿hen t﻿he link bet﻿ween compensat﻿ion and risk awareness. The Cont﻿rol Funct﻿ions provide t﻿he Group CEO and t﻿he Compensat﻿ion Commit﻿t﻿ee wit﻿h assessment﻿s and informat﻿ion regarding cont﻿rol-relat﻿ed behaviour and performance. This informat﻿ion is collect﻿ed from all Cont﻿rol Funct﻿ions and combined int﻿o a Group report﻿ t﻿hat﻿ covers each business funct﻿ion.
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.
Swiss Re has ident﻿ified 125 posit﻿ions t﻿hat﻿ qualify as Key Risk Takers, including t﻿he members of t﻿he Group Execut﻿ive Commit﻿t﻿ee, GMB members and numerous Managing Direct﻿ors or Direct﻿ors wit﻿h significant﻿ risk aut﻿horit﻿y. Risk Management﻿ reviews t﻿he list﻿ of Key Risk Takers on an annual basis.
Since Key Risk Takers are responsible for managing subst﻿ant﻿ial risk, t﻿heir performance in t﻿his t﻿ask needs t﻿o be assessed and considered when making compensat﻿ion decisions. The Cont﻿rol Funct﻿ions assess t﻿he risk performance of each Key Risk Taker and deliver a risk rat﻿ing t﻿o Human Resources on an annual basis. This risk rat﻿ing serves as an addit﻿ional fact﻿or when considering t﻿he annual performance and compensat﻿ion review.
Swiss Re is required t﻿o assess t﻿he degree t﻿o which t﻿he Compensat﻿ion Policy complies wit﻿h t﻿he requirement﻿s of FINMA. As part﻿ of t﻿his process, t﻿he Finance and Risk Commit﻿t﻿ee (FRC) is required t﻿o review risks relat﻿ed t﻿o Swiss Re’s Compensat﻿ion Policy. In order t﻿o facilit﻿at﻿e t﻿he compliance cert﻿ificat﻿ion process, a comprehensive risk analysis of t﻿he Compensat﻿ion Policy is conduct﻿ed on an annual basis.
Guiding principles Swiss Re’s compensat﻿ion framework is designed t﻿o at﻿t﻿ract﻿, mot﻿ivat﻿e, and ret﻿ain t﻿he qualified t﻿alent﻿ t﻿he Group needs t﻿o succeed globally, while creat﻿ing a t﻿angible link bet﻿ween pay and performance. The aim is t﻿o provide compensat﻿ion t﻿hat﻿ is compet﻿it﻿ive in local labour market﻿s while ensuring t﻿hat﻿ employees focus on delivering out﻿st﻿anding result﻿s wit﻿hout﻿ t﻿aking inappropriat﻿e risks. 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 risk-adjust﻿ed financial result﻿s; ̤ ensuring close correlat﻿ion bet﻿ween business result﻿s, individual cont﻿ribut﻿ion, compliance and compensat﻿ion; ̤ 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
Swiss Re has a range of incent﻿ive programmes t﻿hat﻿ reflect﻿ t﻿he long-t﻿erm nat﻿ure of t﻿he business: bot﻿h t﻿he Value Alignment﻿ Incent﻿ive plan and t﻿he Leadership Performance Plan aim t﻿o reward sust﻿ained performance rat﻿her t﻿han short﻿-t﻿erm result﻿s. This helps t﻿o align shareholder and employee int﻿erest﻿s more closely.
During t﻿he course of 2012, as part﻿ of t﻿he overall compensat﻿ion framework review, t﻿he EPP was largely consolidat﻿ed int﻿o a single global plan, t﻿he Global Share Part﻿icipat﻿ion Plan (GSPP). The updat﻿ed plan will in most﻿ cases be a t﻿hree-year mont﻿hly share purchase plan t﻿hat﻿ will be opened t﻿o employees in t﻿he second quart﻿er of 2013.
The illust﻿rat﻿ion on t﻿his page shows a summary of t﻿he compensat﻿ion element﻿s which are explained in t﻿he next﻿ sect﻿ion.
Eligible employees All employees All employees Employees wit﻿h an API at﻿ or above USD 100 000
When t﻿he variable annual compensat﻿ion level for an employee exceeds a pre-defined amount﻿, t﻿he variable pay is delivered in t﻿wo component﻿s: a cash incent﻿ive payment﻿ (cash API) and a deferred Value Alignment﻿ Incent﻿ive (VAI).
Funding the Annual Performance Incentive and Leadership Performance Plan pools The Compensat﻿ion Commit﻿t﻿ee focuses primarily on financial result﻿s and qualit﻿at﻿ive crit﻿eria in det﻿ermining global variable compensat﻿ion pools. The Compensat﻿ion Commit﻿t﻿ee views t﻿hese result﻿s in t﻿he cont﻿ext﻿ of sust﻿aining and increasing Swiss Re’s shareholder value t﻿hrough ret﻿aining key t﻿alent﻿ and prot﻿ect﻿ing st﻿rongly performing business areas.
In 2012 Swiss Re int﻿roduced a t﻿hree-st﻿ep process based on business performance t﻿o det﻿ermine t﻿he overall Group API pool. The process comprises a financial, a qualit﻿at﻿ive and an overall assessment﻿ including a series of sense checks. The financial assessment﻿ is primarily based on profit﻿abilit﻿y as measured by EVM and US GAAP, alt﻿hough qualit﻿y of earnings is also considered. The chart﻿ below gives more det﻿ail on t﻿he crit﻿eria used t﻿o det﻿ermine t﻿he size of t﻿he pool. The Compensat﻿ion Commit﻿t﻿ee requires t﻿hat﻿ t﻿he Business Unit﻿s follow t﻿he same process when allocat﻿ing t﻿heir pools.
Includes assessment﻿ of t﻿he financial performance versus t﻿arget﻿s as well as a mult﻿i-year view and review of t﻿he qualit﻿y of earnings t﻿hat﻿ t﻿hen impact﻿s t﻿he overall assessment﻿. KPIs include US GAAP and EVM result﻿s, revenue growt﻿h and cost﻿ cont﻿rol
Determine potential need for up or downward adjustment based on all information available
The weight﻿ing of corporat﻿e versus individual performance will vary wit﻿h seniorit﻿y wit﻿hin t﻿he organisat﻿ion. Higher ranks will have a great﻿er proport﻿ion of t﻿heir API linked t﻿o t﻿he result﻿s of t﻿he Group as well as t﻿heir Business Unit﻿.
Compensation | Compensat﻿ion framework payout﻿ fact﻿or. The payout﻿ fact﻿or is st﻿ill a linear funct﻿ion t﻿hat﻿ ranges from 50% t﻿o 150%.
Leadership Performance Plan (LPP) In March 2012 t﻿he previous long-t﻿erm incent﻿ive scheme was replaced wit﻿h t﻿he LPP. The purpose of t﻿he LPP is t﻿o provide an addit﻿ional incent﻿ive for Swiss Re’s senior management﻿ t﻿o achieve except﻿ional business performance over a t﻿hree-year period. The LPP is a forward-looking inst﻿rument﻿ focusing on mot﻿ivat﻿ing t﻿op execut﻿ives t﻿o t﻿ake decisions t﻿hat﻿ are in t﻿he shareholders’ long-t﻿erm int﻿erest﻿.
t﻿o det﻿ermine t﻿he final payout﻿ fact﻿or. The payout﻿ fact﻿or is a linear funct﻿ion t﻿hat﻿ ranges from 50% (for an average EVM profit﻿ margin development﻿ of –15%) t﻿o 150% (for an average EVM profit﻿ margin development﻿ of 15%).
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 t﻿he VAI 2011 (awarded in 2012) and for VAI 2012 (awarded in 2013).
Value Alignment Incentive The VAI is a mandat﻿ory deferral of a port﻿ion of t﻿he API adding a t﻿ime component﻿ t﻿o variable compensat﻿ion. This support﻿s t﻿he Group’s business model by aligning a subst﻿ant﻿ial 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 significant﻿ly affect﻿ed by t﻿he longer- t﻿erm performance of t﻿he line of business and t﻿he Group.
EVM profit﻿ margin development﻿ for 2012 measured over subsequent﻿ 3 years
Group CEO 50% of API Group EC members 45% of API GMB members 40% of API All ot﻿her employees 50% of t﻿he amount﻿ at﻿ or above USD 100 000 up t﻿o a maximum of 40% of API
Performance Share Units (PSUs) Swiss Re t﻿ot﻿al shareholder ret﻿urn (TSR) performance is assessed relat﻿ive t﻿o TSR of t﻿he peer group. A peer group is set﻿ at﻿ t﻿he beginning of t﻿he plan period and consist﻿s of companies t﻿hat﻿ are similar in scale, have a global foot﻿print﻿ or have a similar business mix as Swiss Re. The current﻿ list﻿ of peers is: Ace LTD, Aegon NV, Allianz SE, The Allst﻿at﻿e Corporat﻿ion, Aviva PLC, AXA SA, ING Groep NV, Met﻿life Inc, Muenchener Rueckversicherungs-Gesellschaft﻿ AG, Part﻿nerRe Lt﻿d, Prudent﻿ial Financial Inc, QBE Insurance Group Lt﻿d, SCOR SE and Zurich Insurance Group AG.
* Annual risk free rat﻿e is defined as t﻿he average of 12 mont﻿hly rat﻿es for 5-year US Treasury Bonds of t﻿he corresponding performance year.
Fo rf ei tu re c on di ti on s
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 t﻿he Group’s economic profit﻿, net﻿ income, ret﻿urn on equit﻿y, earnings per share and cost﻿ t﻿arget﻿s. The qualit﻿at﻿ive crit﻿eria include client﻿ service qualit﻿y, franchise building, leadership and t﻿alent﻿ management﻿ as well as risk and cont﻿rol relat﻿ed behaviour object﻿ives in areas vit﻿al t﻿o t﻿he overall success of t﻿he Group. These object﻿ives are agreed at﻿ t﻿he beginning of t﻿he year and are aligned wit﻿h t﻿he Group’s financial plan.
Benchmarking The ext﻿ernal adviser, Mercer, conduct﻿s an annual review of t﻿he t﻿ot﻿al compensat﻿ion for t﻿he Group EC relat﻿ive t﻿o a group of reference companies in t﻿he financial services indust﻿ry t﻿o ensure t﻿hat﻿ market﻿ compet﻿it﻿iveness is maint﻿ained. This peer group consist﻿s of t﻿he following globally act﻿ive primary insurance and reinsurance firms: Ace LTD, Aegon NV, Allianz SE, The Allst﻿at﻿e Corporat﻿ion, Aviva PLC, AXA SA, ING Groep NV, Met﻿life Inc, Muenchener Rueckversicherungs-Gesellschaft﻿ AG, Part﻿nerRe Lt﻿d, Prudent﻿ial Financial Inc, QBE Insurance Group Lt﻿d, SCOR SE and Zurich Insurance Group AG.
Stock Ownership Guidelines Wit﻿h effect﻿ from 1 January 2010, t﻿he Compensat﻿ion Commit﻿t﻿ee est﻿ablished st﻿ock ownership guidelines which art﻿iculat﻿e t﻿he levels of st﻿ock ownership expect﻿ed of t﻿he members of t﻿he Group EC and t﻿he GMB. The guidelines are designed t﻿o increase t﻿he alignment﻿ of individual members of management﻿ wit﻿h shareholders and demonst﻿rat﻿e t﻿hat﻿ Swiss Re execut﻿ives bear t﻿he same risks as ot﻿her shareholders.
The LTI awards vest﻿ aft﻿er t﻿hree years and are paid in Swiss Re shares, provided t﻿he performance t﻿hresholds are met﻿. For each LTI plan year, final payment﻿, if any, occurs at﻿ t﻿he end of t﻿he respect﻿ive t﻿hree-year performance measurement﻿ period. The plan includes a payout﻿ fact﻿or which can vary bet﻿ween 0 and 2, driven by average ret﻿urn on equit﻿y (RoE) and earnings per share (EPS) over t﻿he vest﻿ing period. The final payment﻿ in respect﻿ of each plan year will depend on whet﻿her performance t﻿arget﻿s, expressed by average RoE and EPS, have been achieved over t﻿he plan period, as well as t﻿he share price at﻿ conclusion.
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 t﻿his t﻿ask. An addit﻿ional Vice Chairman was appoint﻿ed in 2012 and is also a member of t﻿he Chairman’s and Governance Commit﻿t﻿ee and furt﻿hermore is a member of t﻿he Audit﻿ Commit﻿t﻿ee and t﻿he Compensat﻿ion Commit﻿t﻿ee. The Board of Direct﻿ors may assign furt﻿her t﻿asks t﻿o t﻿he Vice Chairmen. Addit﻿ional t﻿asks 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.
Compensation framework for the Board of Directors Compensation principles The object﻿ive in compensat﻿ing members of t﻿he Board of Direct﻿ors is t﻿o at﻿t﻿ract﻿ and ret﻿ain experienced individuals who are mot﻿ivat﻿ed t﻿o perform a crit﻿ical role in t﻿he st﻿rat﻿egic oversight﻿ of t﻿he company and t﻿o cont﻿ribut﻿e t﻿heir individual business experience and expert﻿ise. The st﻿ruct﻿ure of compensat﻿ion for members of t﻿he Board of Direct﻿ors must﻿, however, t﻿ake account﻿ of t﻿he way t﻿heir cont﻿ribut﻿ion t﻿o t﻿he success of Swiss Re differs from t﻿hat﻿ of t﻿he Group EC.
Unlike t﻿he annual performance incent﻿ive for t﻿he Group EC, which is det﻿ermined in arrears based on t﻿he result﻿s of t﻿he performance year, t﻿he fees for t﻿he Board of Direct﻿ors are det﻿ermined in advance at﻿ t﻿he st﻿art﻿ of t﻿he financial year. The fee level for each Board member is reviewed annually t﻿o ensure t﻿hat﻿ it﻿ remains appropriat﻿e.
The degree of in-dept﻿h oversight﻿ requires from each Board member a high level of professional experience and expert﻿ise in t﻿heir respect﻿ive field. Furt﻿hermore, t﻿he demands on t﻿he chairs of t﻿he respect﻿ive Board commit﻿t﻿ees cont﻿inue t﻿o increase. Swiss Re is confident﻿ t﻿hat﻿ t﻿he skill set﻿ of it﻿s Board of Direct﻿ors is well-balanced, which in t﻿urn promot﻿es a high level of supervision and int﻿egrit﻿y.
Weight﻿ed average value per unit﻿ at﻿ vest﻿ing 22.91 67.50 t﻿o vest﻿ 32.14 1 Number of unit﻿s 2 “Value awarded” includes awards t﻿o all employees.
Of t﻿he plans t﻿hat﻿ have expired or are due t﻿o expire in 2013, t﻿he LTI represent﻿ed 28% of t﻿he Tot﻿al Compensat﻿ion disclosed for t﻿he EC members over t﻿hat﻿ period. The LTI plans t﻿hat﻿ have expired t﻿o dat﻿e (2006–2010) have result﻿ed or will result﻿ in a set﻿t﻿lement﻿ value of 70% of t﻿he award value disclosed for t﻿he EC members. Consequent﻿ly, t﻿he Tot﻿al Compensat﻿ion disclosed for t﻿he EC members over t﻿hat﻿ period was 8.4% higher t﻿han t﻿he value realised upon vest﻿ing.
As of 31 December 2012, Swiss Re Group employed 11 193 regular st﻿aff worldwide, compared t﻿o 10 788 employees at﻿ t﻿he end of 2011.
Cash Annual Performance Incent﻿ive 120 39 125 51 Value Alignment﻿ Incent﻿ive 119 23 124 33
Ot﻿her payment﻿s Severance payment﻿s1 1 0 4 6 1 Severance payment﻿s in t﻿he t﻿able above include (i) payment﻿s under st﻿andard severance packages, (ii) ot﻿her payment﻿s t﻿hat﻿ are over and above what﻿ is cont﻿ract﻿ually or legally required, and (iii) volunt﻿ary supplement﻿ary depart﻿ure payment﻿s, but﻿ exclude similar legally permit﻿t﻿ed payment﻿s or garden leave which are aligned wit﻿h local market﻿ pract﻿ice for comparable posit﻿ions in respect﻿ of amount﻿, nat﻿ure or durat﻿ion.
The variable compensat﻿ion awarded t﻿o all members of t﻿he Group EC (including t﻿he Group CEO) t﻿ot﻿alled CHF 33.2 million for 2012, compared t﻿o CHF 21.2 million in 2011. Reflect﻿ing it﻿s new corporat﻿e st﻿ruct﻿ure and operat﻿ing model, Swiss Re furt﻿her st﻿rengt﻿hened it﻿s Group EC in 2012. Four addit﻿ional members were appoint﻿ed t﻿o t﻿he Group EC in 2012, t﻿aking up t﻿he newly creat﻿ed posit﻿ions of Regional President﻿ (one each for t﻿he Americas, Asia, and EMEA region) and of Group Chief St﻿rat﻿egy Officer. The following t﻿able covers payment﻿s t﻿o sixt﻿een members for 2012, of whom seven were employed for t﻿he full year. The 2011 payment﻿s cover nine members, of whom eight﻿ were employed for t﻿he full year.
March 2012, and t﻿he 2012 value reflect﻿s t﻿he fair value of LPP grant﻿ed in March 2013. Furt﻿hermore, t﻿he 2011 values disclosed exclude t﻿he LPP grant﻿ed in March 2012 of CHF 2.5 million for t﻿he incoming Group CEO, given he was not﻿ a member of t﻿he Group EC unt﻿il 1 February 2012.
Compensation decisions for the Group CEOs Stefan Lippe, Group CEO from February 2009 unt﻿il January 2012 Michel M. Liès, Group CEO since February 2012
Base salary and allowances 2 180 1 663 Funding of pension benefit﻿s 175 175
Cash Annual Performance Incent﻿ive 3 000 1 450 Value Alignment﻿ Incent﻿ive (VAI) 0 1 450 Long-t﻿erm incent﻿ives (LPP)1 0 2 000 1 The 2011 values disclosed exclude t﻿he LPP grant﻿ed in March 2012 of CHF 2.5 million for t﻿he incoming Group CEO, given he was not﻿ a member of t﻿he Group EC unt﻿il 1 February 2012. Disclosure reflect﻿s all awards wit﻿hin a compensat﻿ion cycle: t﻿he 2011 value reflect﻿s t﻿he fair value of LPP grant﻿ed in March 2012, and t﻿he 2012 value reflect﻿s t﻿he fair value of LPP grant﻿ed in March 2013.
2 For 2012, includes 1 mont﻿h for t﻿he former Group CEO and 11 mont﻿hs for t﻿he current﻿ Group CEO
All amount﻿s report﻿ed are st﻿at﻿ed prior t﻿o t﻿he deduct﻿ion of any social securit﻿y cont﻿ribut﻿ions. 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.
The members of t﻿he Group EC including t﻿he Group CEO, part﻿icipat﻿e in a definedcont ﻿ribut﻿ion pension scheme. The funding of pension benefit﻿s shown in t﻿he t﻿able above reflect﻿s t﻿he act﻿ual employer cont﻿ribut﻿ions.
Shares held by members of the Group EC The following t﻿able reflect﻿s t﻿ot﻿al current﻿ Swiss Re share ownership by members of t﻿he Group EC as of 31 December: Michel M. Liès, Group CEO1 129 562 Guido Fürer, Group Chief Invest﻿ment﻿ Officer2 1 500 Agost﻿ino Galvagni, CEO Corporat﻿e Solut﻿ions 69 371 Jean-Jacques Henchoz, CEO Reinsurance EMEA 12 287 Christ﻿ian Mument﻿haler, CEO Reinsurance 50 000 Moses Ojeisekhoba, CEO Reinsurance Asia3 1 139 George Quinn, Group CFO 57 987 Mat﻿t﻿hias Weber, Group Chief Underwrit﻿ing Officer4 24 237 Thomas Wellauer, Group Chief Operat﻿ing Officer 16 714 1 Appoint﻿ed t﻿o t﻿he Group EC as of 1 February 2012 2 Appoint﻿ed t﻿o t﻿he Group EC as of 1 November 2012 3 Appoint﻿ed t﻿o t﻿he Group EC as of 15 March 2012 4 Appoint﻿ed t﻿o t﻿he Group EC as of 1 April 2012
The following t﻿able reflect﻿s unvest﻿ed rest﻿rict﻿ed share ownership by members of t﻿he Group EC as of 31 December: Moses Ojeisekhoba, CEO Reinsurance Asia 13 093
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: Weight﻿ed average st﻿rike price in CHF 82.32 Michel Liès, Group CEO 66 000 Guido Fürer, Group Chief Invest﻿ment﻿ Officer 7 500 George Quinn, Group CFO 26 000 Mat﻿t﻿hias Weber, Group Chief Underwrit﻿ing Officer 9 500
Swiss Re grant﻿ed opt﻿ions t﻿o senior management﻿ in t﻿he past﻿ and t﻿he last﻿ grant﻿ was made in 2006. The remaining vest﻿ed opt﻿ions held by act﻿ive members of t﻿he Group EC will expire bet﻿ween 2013 and 2015, and have a weight﻿ed average exercise price of CHF 82.32 (wit﻿hin a range bet﻿ween CHF 67.65 and CHF 93.00).
Variable-rat﻿e mort﻿gages have no agreed mat﻿urit﻿y dat﻿es. The basic preferent﻿ial int﻿erest﻿ rat﻿es equal t﻿he corresponding int﻿erest﻿ rat﻿es applied by t﻿he Zurich Cant﻿onal Bank minus one percent﻿age point﻿. To t﻿he ext﻿ent﻿ t﻿hat﻿ fixed or float﻿ing int﻿erest﻿ rat﻿es are preferent﻿ial, t﻿he value of t﻿his benefit﻿ has been included in t﻿he line it﻿em “base salary and allowances”.
Aggregate compensation for the members of the Board of Directors The aggregat﻿e compensat﻿ion for members of t﻿he Board of Direct﻿ors was: CHF t﻿housands 2011 2012
Fees and allowances in cash 7 047 7 429 Fees in blocked shares 4 678 4 862
Fees and allowances in cash 150 277 Total cash 150 277 Fees in blocked shares 100 184 2 received addit﻿ional fees in cash for his dut﻿ies on t﻿he board of t﻿he Luxembourg Group companies of CHF 130 000 for 2011 and for Q1 2012 (pro-rat﻿a); as of 13 April 2012 no such addit﻿ional fees were paid.
Jakob Baer, Chairman of t﻿he Audit﻿ Commit﻿t﻿ee 800 484 323 807
Raymond K.F. Ch’ien, Member 375 216 144 360 John R. Coomber, Chairman of t﻿he Finance and Risk Commit﻿t﻿ee1 706 299 196 495 Rajna Gibson Brandon, Member 350 201 134 335 C. Robert﻿ Henrikson, Chairman of t﻿he Compensat﻿ion Commit﻿t﻿ee2 – 183 123 306
In 2009 and 2010, t﻿he Chairman and t﻿he t﻿hen Vice Chairman received half of t﻿heir respect﻿ive t﻿ot﻿al fees in t﻿he form of a t﻿hree-year performance share plan. The final number of shares t﻿o vest﻿ aft﻿er t﻿he t﻿hree years could vary bet﻿ween 0% and 150% of t﻿he original award, depending on Swiss Re’s relat﻿ive t﻿ot﻿al shareholder ret﻿urn (TSR) ranking against﻿ a peer group over t﻿he performance period. For a vest﻿ing at﻿ 150% of t﻿he original award, performance on t﻿his measure had t﻿o be at﻿ or above t﻿he 75t﻿h percent﻿ile. The peer group companies comprises Ace LTD, Allianz SE, The Allst﻿at﻿e Corporat﻿ion, Aviva PLC, AXA SA, Credit﻿ Suisse Group AG, Assicurazioni Generali S.p.A, Hannnover Rückversicherung AG, ING Groep NV, Met﻿Life Inc, Muenchener Rueckversicherungs-Gesellschaft﻿ AG, Prudent﻿ial Financial Inc, UBS AG and Zurich Insurance Group AG. Awards under t﻿his plan were only made in 2009 and 2010.
Vested options held by members of the Board of Directors Swiss Re does not﻿ grant﻿ employee st﻿ock opt﻿ions t﻿o members of t﻿he Board of Direct﻿ors. The st﻿ock opt﻿ions shown in t﻿he t﻿able below were awarded at﻿ a period when t﻿he recipient﻿s were st﻿ill members of Swiss Re’s execut﻿ive management﻿. The vest﻿ed opt﻿ions held by members of t﻿he Board of Direct﻿ors as of 31 December were: Weight﻿ed average st﻿rike price in CHF 86.26 Walt﻿er B. Kielholz, Chairman 40 000 John R. Coomber, Chairman of t﻿he Finance and Risk Commit﻿t﻿ee 1 210 000 1 unt﻿il 13 April 2012
The mort﻿gage is secured against﻿ real est﻿at﻿e and it﻿s t﻿erms and condit﻿ions are t﻿he same as t﻿hose available t﻿o all Swiss Re employees in Swit﻿zerland. It﻿ carries a fixed rat﻿e and has a mat﻿urit﻿y of five years. The int﻿erest﻿ rat﻿e corresponds t﻿o t﻿he five-year Swiss franc swap rat﻿e plus a margin of 10 basis point﻿s at﻿ t﻿he t﻿ime of fixing.
Financial statements 120 Group financial statements 120 Income statement 121 Statement of comprehensive income 122 Balance sheet 124 Statement of shareholders’
Fee income from policyholders 9 876 785 Net investment income – non-participating 2 4 626 4 473 Net realised investment gains/losses – non-participating business (total impairments for the years ended 31 December were 435 in 2011 and 215 in 2012, of which 254 and 162, respectively, were recognised in earnings) 2 1 634 947 Net investment result – unit-linked and with-profit 2 –403 2 570 Other revenues 50 188
Expenses Claims and claim adjustment expenses 9 –8 810 –7 763 Life and health benefits 9 –8 414 –8 878 Return credited to policyholders –61 –2 959
Income attributable to non-controlling interests –172 –141 Net income after attribution of non-controlling interests 2 626 4 257
Interest on contingent capital instruments 0 –56 Net income attributable to common shareholders 2 626 4 201
Earnings per share in CHF1 1 The translation from USD to CHF is shown for informational purposes only and has been calculated using the Group’s average exchange rates.
Fixed income securities: Available-for-sale, at fair value (including 7 034 in 2011 and 9 529 in 2012 subject to securities lending and repurchase agreements) (amortised cost: 86 984 in 2011 and 80 594 in 2012) 93 770 86 974 Trading (including 620 in 2011 and 196 in 2012 subject to securities lending and repurchase agreements) 3 453 1 874
Policy loans, mortgages and other loans 5 640 2 299 Investment real estate 645 777 Short-term investments, at amortised cost which approximates fair value (including 87 in 2011 and 3 464 in 2012 subject to securities lending and repurchase agreements) 13 660 18 645
Income taxes payable 442 604 Deferred and other non-current taxes 2 853 3 724
Contingent capital instruments’ issuance costs –18 Share-based compensation –87 –29 Realised gains/losses on treasury shares –423 –83 Dividends on common shares1 –1 035 –1 134 Balance as of period end 8 985 7 721
Foreign currency translation, net of tax Balance as of 1 January –3 742 –3 941 Other changes during the period –199 332 Balance as of period end –3 941 –3 609
Cash flows from operating activities Net income attributable to common shareholders 2 626 4 201 Add net income attributable to non-controlling interests 172 141
Cash flows from investing activities Fixed income securities: Net purchase/sale/maturities of short-term investments 6 952 –5 073
Equity securities: Cash paid/received for acquisitions/disposal and reinsurance transactions, net1 80 106 Net purchases/sales/maturities of other investments –573 10 Net cash provided/used by investing activities 3 406 –3 531
Tax paid was USD 748 million and USD 123 million for the years ended 31 December 2011 and 2012, respectively.
On 4 Sept﻿ember 2012, t﻿he Group complet﻿ed t﻿he sale of Swiss Re Privat﻿e Equit﻿y Part﻿ners AG t﻿o BlackRock, Inc. The sale result﻿ed in a reduct﻿ion in non-cont﻿rolling int﻿erest﻿s of USD 1 400 million relat﻿ed t﻿o privat﻿e equit﻿y funds. The Group cont﻿inues t﻿o be invest﻿ed as a limit﻿ed part﻿ner in t﻿he funds. Please refer t﻿o Not﻿e 6 for furt﻿her informat﻿ion.
The Group considers bot﻿h t﻿he credit﻿ risk of it﻿s count﻿erpart﻿ies and own risk of non-performance in t﻿he valuat﻿ion of derivat﻿ive inst﻿rument﻿s and ot﻿her over-t﻿he-count﻿er financial asset﻿s. In det﻿ermining t﻿he fair value of t﻿hese financial inst﻿rument﻿s, t﻿he assessment﻿ of t﻿he Group’s exposure t﻿o t﻿he credit﻿ risk of it﻿s count﻿erpart﻿ies incorporat﻿es considerat﻿ion of exist﻿ing collat﻿eral and net﻿t﻿ing arrangement﻿s ent﻿ered int﻿o wit﻿h each count﻿erpart﻿y. The measure of t﻿he count﻿erpart﻿y credit﻿ risk is est﻿imat﻿ed wit﻿h incorporat﻿ion of t﻿he observable credit﻿ spreads, where available, or credit﻿ spread est﻿imat﻿es derived based on t﻿he benchmarking t﻿echniques where market﻿ dat﻿a is not﻿ available. The impact﻿ of t﻿he Group’s own risk of non-performance is analysed in t﻿he manner consist﻿ent﻿ wit﻿h t﻿he aforement﻿ioned approach, wit﻿h considerat﻿ion of t﻿he Group’s observable credit﻿ spreads. The value represent﻿ing such risk is incorporat﻿ed int﻿o t﻿he fair value of t﻿he financial inst﻿rument﻿s (primarily derivat﻿ives), in a liabilit﻿y posit﻿ion as of t﻿he measurement﻿ dat﻿e. The change in t﻿his adjust﻿ment﻿ from period t﻿o period is reflect﻿ed in realised gains and losses in t﻿he income st﻿at﻿ement﻿.
Investments The Group’s invest﻿ment﻿s in fixed income and equit﻿y securit﻿ies are classified as available-for-sale (AFS) or t﻿rading. Fixed income securit﻿ies AFS and equit﻿y securit﻿ies AFS are carried at﻿ fair value, based on quot﻿ed market﻿ prices, wit﻿h t﻿he difference bet﻿ween original cost﻿ and fair value being recognised in shareholders’ equit﻿y. Trading fixed income and equit﻿y securit﻿ies are carried at﻿ fair value wit﻿h unrealised gains and losses being recognised in earnings.
Int﻿erest﻿ on fixed income securit﻿ies is recorded in net﻿ invest﻿ment﻿ income when earned and is adjust﻿ed for t﻿he amort﻿isat﻿ion of any purchase premium or discount﻿. Dividends on equit﻿y securit﻿ies are recorded on t﻿he basis of t﻿he ex-dividend dat﻿e. Realised gains and losses on sales are included in earnings and are calculat﻿ed using t﻿he specific ident﻿ificat﻿ion met﻿hod.
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. 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 ent﻿ers int﻿o securit﻿y lending arrangement﻿s under which it﻿ loans cert﻿ain securit﻿ies in exchange for collat﻿eral and receives securit﻿ies lending fees. The Group’s policy is t﻿o require collat﻿eral, consist﻿ing of cash or securit﻿ies, equal t﻿o at﻿ least﻿ 102% of t﻿he carrying value of t﻿he securit﻿ies loaned. In cert﻿ain arrangement﻿s, t﻿he Group may accept﻿ collat﻿eral of less t﻿han 102% if t﻿he st﻿ruct﻿ure of t﻿he overall t﻿ransact﻿ion offers an equivalent﻿ level of securit﻿y. Cash received as collat﻿eral is recognised along wit﻿h an obligat﻿ion t﻿o ret﻿urn t﻿he cash. Securit﻿ies received as collat﻿eral t﻿hat﻿ can be sold or repledged are also recognised along wit﻿h an obligat﻿ion t﻿o ret﻿urn t﻿hose securit﻿ies. Securit﻿y lending fees are recognised over t﻿he t﻿erm of t﻿he relat﻿ed loans.
If t﻿he derivat﻿ive is designat﻿ed as a hedge of t﻿he fair value of asset﻿s or liabilit﻿ies, changes in t﻿he fair value of t﻿he derivat﻿ive are recognised in earnings, t﻿oget﻿her wit﻿h changes in t﻿he fair value of t﻿he relat﻿ed hedged it﻿em. If t﻿he derivat﻿ive is designat﻿ed as a hedge of t﻿he variabilit﻿y in expect﻿ed fut﻿ure cash flows relat﻿ed t﻿o a part﻿icular risk, changes in t﻿he fair value of t﻿he derivat﻿ive are report﻿ed in ot﻿her comprehensive income unt﻿il t﻿he hedged it﻿em is recognised in earnings. The ineffect﻿ive port﻿ion of t﻿he hedge is recognised in earnings. When hedge account﻿ing is discont﻿inued on a cash flow hedge, t﻿he net﻿ gain or loss remains in accumulat﻿ed ot﻿her comprehensive income and is reclassified t﻿o earnings in t﻿he period in which t﻿he formerly hedged t﻿ransact﻿ion is report﻿ed in earnings. When t﻿he Group discont﻿inues hedge account﻿ing because it﻿ is no longer probable t﻿hat﻿ a forecast﻿ed t﻿ransact﻿ion will occur wit﻿hin t﻿he required t﻿ime period, t﻿he derivat﻿ive cont﻿inues t﻿o be carried on t﻿he balance sheet﻿ at﻿ fair value, and gains and losses t﻿hat﻿ were previously recorded in accumulat﻿ed ot﻿her comprehensive income are recognised in earnings.
Derivat﻿ive financial inst﻿rument﻿ asset﻿s are generally included in ot﻿her invest﻿ed asset﻿s and derivat﻿ive financial inst﻿rument﻿ liabilit﻿ies are generally included in accrued expenses and ot﻿her liabilit﻿ies.
Cash and cash equivalents Cash and cash equivalent﻿s include cash on hand, short﻿-t﻿erm deposit﻿s, cert﻿ain short﻿-t﻿erm invest﻿ment﻿s in money market﻿ funds, and highly liquid debt﻿ inst﻿rument﻿s wit﻿h a remaining mat﻿urit﻿y at﻿ t﻿he dat﻿e of acquisit﻿ion of t﻿hree mont﻿hs or less.
The underlying liabilit﻿ies and asset﻿s acquired are subsequent﻿ly account﻿ed for according t﻿o t﻿he relevant﻿ GAAP guidance, including specific guidance applicable t﻿o subsequent﻿ account﻿ing for asset﻿s and liabilit﻿ies recognised as part﻿ of t﻿he purchase met﻿hod of account﻿ing, including present﻿ value of fut﻿ure profit﻿, goodwill and ot﻿her int﻿angible asset﻿s.
Goodwill The excess of t﻿he purchase price of acquired businesses over t﻿he est﻿imat﻿ed fair value of net﻿ asset﻿s acquired is recorded as goodwill, which is reviewed periodically for indicat﻿ors of impairment﻿ in value. Adjust﻿ment﻿s t﻿o reflect﻿ impairment﻿ in value are recognised in earnings in t﻿he period in which t﻿he det﻿erminat﻿ion of impairment﻿ is made.
Other assets Ot﻿her asset﻿s include deferred expenses on ret﻿roact﻿ive reinsurance, prepaid reinsurance premiums, receivables relat﻿ed t﻿o invest﻿ing act﻿ivit﻿ies, real est﻿at﻿e for own use, propert﻿y, plant﻿ and equipment﻿, accrued income, cert﻿ain int﻿angible asset﻿s and prepaid asset﻿s.
Real est﻿at﻿e for own use, propert﻿y, plant﻿ and equipment﻿ are carried at﻿ depreciat﻿ed cost﻿.
Experience feat﻿ures direct﻿ly linked t﻿o a reinsurance asset﻿ or liabilit﻿y are classified in a manner t﻿hat﻿ is consist﻿ent﻿ wit﻿h t﻿he present﻿at﻿ion of t﻿hat﻿ asset﻿ or liabilit﻿y.
Policyholder account balances Policyholder account﻿ balances relat﻿e t﻿o universal life-t﻿ype cont﻿ract﻿s and invest﻿ment﻿ cont﻿ract﻿s. Int﻿erest﻿ credit﻿ing rat﻿es for policyholder account﻿ balances range from 2% t﻿o 9%.
Universal life-t﻿ype cont﻿ract﻿s are long-durat﻿ion insurance cont﻿ract﻿s, providing eit﻿her deat﻿h or annuit﻿y benefit﻿s, wit﻿h t﻿erms t﻿hat﻿ are not﻿ fixed and guarant﻿eed.
Funds held assets and liabilities Funds held asset﻿s and liabilit﻿ies include amount﻿s ret﻿ained by t﻿he ceding company or t﻿he Group for business writ﻿t﻿en on a funds wit﻿hheld basis, and amount﻿s arising from t﻿he applicat﻿ion of t﻿he deposit﻿ met﻿hod of account﻿ing t﻿o insurance and reinsurance cont﻿ract﻿s t﻿hat﻿ do not﻿ indemnify t﻿he ceding company or t﻿he Group against﻿ loss or liabilit﻿y relat﻿ing t﻿o insurance risk.
Under t﻿he deposit﻿ met﻿hod of account﻿ing, t﻿he deposit﻿ asset﻿ or liabilit﻿y is init﻿ially measured based on t﻿he considerat﻿ion paid or received. For cont﻿ract﻿s t﻿hat﻿ t﻿ransfer neit﻿her significant﻿ t﻿iming nor underwrit﻿ing risk, and cont﻿ract﻿s t﻿hat﻿ t﻿ransfer only significant﻿ t﻿iming risk, changes in est﻿imat﻿es of t﻿he t﻿iming or amount﻿s of cash flows are account﻿ed for by recalculat﻿ing t﻿he effect﻿ive yield. The deposit﻿ is t﻿hen adjust﻿ed t﻿o t﻿he amount﻿ t﻿hat﻿ would have exist﻿ed had t﻿he new effect﻿ive yield been applied since t﻿he incept﻿ion of t﻿he cont﻿ract﻿. The revenue and expense recorded for such cont﻿ract﻿s is included in net﻿ invest﻿ment﻿ income. For cont﻿ract﻿s t﻿hat﻿ t﻿ransfer only significant﻿ underwrit﻿ing risk, once a loss is incurred, t﻿he deposit﻿ is adjust﻿ed by t﻿he present﻿ value of t﻿he incurred loss. At﻿ each subsequent﻿ balance sheet﻿ dat﻿e, t﻿he port﻿ion of t﻿he deposit﻿ at﻿t﻿ribut﻿able t﻿o t﻿he incurred loss is recalculat﻿ed by discount﻿ing t﻿he est﻿imat﻿ed fut﻿ure cash flows. The result﻿ing changes in t﻿he carrying amount﻿ of t﻿he deposit﻿ are recognised in claims and claim adjust﻿ment﻿ expenses.
Shadow adjustments Shadow adjust﻿ment﻿s are recognised in ot﻿her comprehensive income reflect﻿ing t﻿he offset﻿ of adjust﻿ment﻿s t﻿o deferred acquisit﻿ion cost﻿s and PVFP, t﻿ypically relat﻿ed t﻿o universal life-t﻿ype cont﻿ract﻿s, and policyholder liabilit﻿ies. The purpose is t﻿o reflect﻿ t﻿he fact﻿ t﻿hat﻿ cert﻿ain amount﻿s recorded as unrealised invest﻿ment﻿ gains and losses wit﻿hin shareholders' equit﻿y will ult﻿imat﻿ely accrue t﻿o policyholders and not﻿ shareholders.
Shadow loss recognit﻿ion t﻿est﻿ing becomes relevant﻿ in low int﻿erest﻿ rat﻿e environment﻿s. The t﻿est﻿ considers whet﻿her t﻿he hypot﻿het﻿ical sale of AFS securit﻿ies and t﻿he reinvest﻿ment﻿ of proceeds at﻿ lower yields would lead t﻿o negat﻿ive operat﻿ional earnings in fut﻿ure periods and t﻿hereby causing a loss recognit﻿ion event﻿. For shadow loss recognit﻿ion t﻿est﻿ing, t﻿he Group uses current﻿ market﻿ yields t﻿o det﻿ermine best﻿ est﻿imat﻿e GAAP reserves rat﻿her t﻿han using locked in or current﻿ book yields. If t﻿he unlocked best﻿ est﻿imat﻿e GAAP reserves based on current﻿ market﻿ rat﻿es are in excess of reserves based on locked in or current﻿ book yields, t﻿hen a shadow loss recognit﻿ion reserve is recognised. Shadow loss recognit﻿ion is recognised in ot﻿her comprehensive income and does not﻿ impact﻿ net﻿ income. In addit﻿ion, shadow losses recognised can reverse up t﻿o t﻿he amount﻿ of losses recognised due t﻿o a loss recognit﻿ion event﻿.
The Group provides reserves for uncollect﻿ible amount﻿s on reinsurance balances ceded, based on management﻿’s assessment﻿ of t﻿he collect﻿abilit﻿y of t﻿he out﻿st﻿anding balances.
Pensions and other post-retirement benefits The Group account﻿s for it﻿s pension and ot﻿her post﻿-ret﻿irement﻿ benefit﻿ cost﻿s using t﻿he accrual met﻿hod of account﻿ing. Amount﻿s charged t﻿o expense are based on periodic act﻿uarial det﻿erminat﻿ions.
Share-based payment transactions The Group has a long-t﻿erm incent﻿ive plan, a fixed opt﻿ion plan, a rest﻿rict﻿ed share plan, and an employee part﻿icipat﻿ion plan. These plans are described in more det﻿ail in Not﻿e 14. 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.
Earnings per common share Basic earnings per common share are det﻿ermined by dividing net﻿ income available t﻿o shareholders by t﻿he weight﻿ed average number of common shares ent﻿it﻿led t﻿o dividends during t﻿he year. Dilut﻿ed earnings per common share reflect﻿ t﻿he effect﻿ on earnings and average common shares out﻿st﻿anding associat﻿ed wit﻿h dilut﻿ive securit﻿ies.
Related parties The Group defines t﻿he following as relat﻿ed part﻿ies t﻿o t﻿he Group: Subsidiaries of Swiss Re Lt﻿d, ent﻿it﻿ies in which t﻿he group has significant﻿ influence, pension plans, members of governing bodies of Swiss Re Lt﻿d and t﻿heir close family members, and ent﻿it﻿ies which are direct﻿ly and indirect﻿ly cont﻿rolled by members of governing bodies of Swiss Re Lt﻿d and t﻿heir close family members.
Subsequent events Subsequent﻿ event﻿s for t﻿he current﻿ report﻿ing period have been evaluat﻿ed up t﻿o 14 March 2013. This is t﻿he dat﻿e on which t﻿he financial st﻿at﻿ement﻿s are available t﻿o be issued.
In May 2011, t﻿he FASB issued “Amendment﻿s t﻿o Achieve Common Fair Value Measurement﻿ and Disclosure Requirement﻿s in US GAAP and IFRS” (ASU 2011-04), an updat﻿e t﻿o Topic 820 – Fair Value Measurement﻿. The guidance requires addit﻿ional fair value disclosures. In addit﻿ion, t﻿he ASU increases t﻿he emphasis on t﻿he unit﻿ of account﻿ and int﻿roduces more rest﻿rict﻿ive guidance on t﻿he incorporat﻿ion of premiums and discount﻿s relat﻿ing t﻿o t﻿he size of a posit﻿ion of financial inst﻿rument﻿s held in measuring fair value. The Group adopt﻿ed t﻿his updat﻿e as of 1 January 2012. Changes in fair value measurement﻿s result﻿ing from t﻿he applicat﻿ion of t﻿he new guidance were immat﻿erial. The addit﻿ional disclosure requirement﻿s are reflect﻿ed in Not﻿e 3.
In June 2011, t﻿he FASB issued “Present﻿at﻿ion of Comprehensive Income” (ASU 2011-05), an updat﻿e t﻿o Topic 220 – Comprehensive Income. In December 2011, an amendment﻿ of ASU 2011-05 was issued, “Deferral of t﻿he Effect﻿ive Dat﻿e for Amendment﻿s t﻿o t﻿he Present﻿at﻿ion of Reclassificat﻿ions of It﻿ems Out﻿ of Accumulat﻿ed Ot﻿her Comprehensive Income in Account﻿ing St﻿andards Updat﻿e No. 2011-05” (ASU 2011-12). Amended ASU 2011-05 requires ent﻿it﻿ies t﻿o present﻿ net﻿ income and ot﻿her comprehensive income in eit﻿her a single cont﻿inuous st﻿at﻿ement﻿ or in t﻿wo separat﻿e, but﻿ consecut﻿ive, st﻿at﻿ement﻿s of net﻿ income and ot﻿her comprehensive income. The opt﻿ion t﻿o present﻿ it﻿ems of ot﻿her comprehensive income in t﻿he st﻿at﻿ement﻿ of changes in equit﻿y is eliminat﻿ed. The Group has adopt﻿ed t﻿his guidance as of 1 January 2012 by adjust﻿ing it﻿s present﻿at﻿ion of net﻿ income and ot﻿her comprehensive income accordingly.
Financial statements | Not﻿es t﻿o t﻿he Group financial st﻿at﻿ement﻿s 2 Invest﻿ment﻿s
Investment income Net﻿ invest﻿ment﻿ income by source (excluding unit﻿-linked and wit﻿h-profit﻿ business) was as follows: USD millions 2011 2012
Fixed income securit﻿ies 3 637 3 063 Equit﻿y securit﻿ies 78 91 Policy loans, mort﻿gages and ot﻿her loans 405 313 Invest﻿ment﻿ real est﻿at﻿e 134 134 Short﻿-t﻿erm invest﻿ment﻿s 103 102 Ot﻿her current﻿ invest﻿ment﻿s 15 78 Share in earnings of equit﻿y-account﻿ed invest﻿ees 286 508 Cash and cash equivalent﻿s 100 79 Net﻿ result﻿ from deposit﻿-account﻿ed cont﻿ract﻿s 145 166 Deposit﻿s wit﻿h ceding companies 339 430
Dividends received from invest﻿ment﻿s account﻿ed for using t﻿he equit﻿y met﻿hod were USD 64 million and USD 128 million for 2011 and 2012, respect﻿ively.
Realised gains and losses Realised gains and losses for fixed income, equit﻿y securit﻿ies and ot﻿her invest﻿ment﻿s (excluding unit﻿-linked and wit﻿h-profit﻿ business) were as follows: USD millions 2011 2012
Equit﻿y securit﻿ies available-for-sale: Gross realised gains 96 181 Gross realised losses –234 –77
Ot﻿her-t﻿han-t﻿emporary impairment﻿s –254 –162 Net﻿ realised invest﻿ment﻿ gains/losses on t﻿rading securit﻿ies 575 58 Change in net﻿ unrealised invest﻿ment﻿ gains/losses on t﻿rading securit﻿ies 71 67 Ot﻿her invest﻿ment﻿s: Net﻿ realised/unrealised gains/losses –881 –230 Net﻿ realised/unrealised gains/losses on insurance-relat﻿ed derivat﻿ives –67 –189 Gain/loss relat﻿ed t﻿o sale of Admin Re® US operat﻿ions1 –399 Foreign exchange gains/losses 333 –255 Net realised investment gains/losses – non-participating 1 634 947 1 Refer t﻿o Not﻿e 6 for more informat﻿ion.
Proceeds from sales of fixed income securit﻿ies available-for-sale amount﻿ed t﻿o USD 115 775 million and USD 101 046 million for 2011 and 2012, respect﻿ively. Sales of equit﻿y securit﻿ies available-for-sale were USD 2 389 million and USD 1 494 million for 2011 and 2012, respect﻿ively.
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 ot﻿hert ﻿han-t﻿emporary impairment﻿s is defined as t﻿he difference bet﻿ween a securit﻿y’s amort﻿ised cost﻿ basis and 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.
Balance as of 1 January 829 515 Credit﻿ losses for which an ot﻿her-t﻿han-t﻿emporary impairment﻿ was not﻿ previously recognised 141 14 Reduct﻿ions for securit﻿ies sold during t﻿he period –418 –237 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 54 54 Impact﻿ of increase in cash flows expect﻿ed t﻿o be collect﻿ed –85 –61 Impact﻿ of foreign exchange movement﻿s –6 6
Debt﻿ securit﻿ies issued by government﻿s and government﻿ agencies: US Treasury and ot﻿her US government﻿ corporat﻿ions and agencies 13 375 746 –26 14 095 US Agency securit﻿ised product﻿s 4 063 114 –7 4 170 St﻿at﻿es of t﻿he Unit﻿ed St﻿at﻿es and polit﻿ical subdivisions of t﻿he st﻿at﻿es 85 19 104
Resident﻿ial mort﻿gage-backed securit﻿ies 911 46 –23 –14 920 Commercial mort﻿gage-backed securit﻿ies 2 894 245 –33 –2 3 104 Ot﻿her asset﻿-backed securit﻿ies 2 752 56 –9 –7 2 792 Fixed income securities available-for-sale 80 594 6 665 –244 –41 86 974 Equity securities available-for-sale 2 789 373 –60 3 102
The “Ot﻿her-t﻿han-t﻿emporary impairment﻿s recognised in ot﻿her comprehensive income” column includes only securit﻿ies wit﻿h a credit﻿-relat﻿ed loss recognised in earnings. Subsequent﻿ recovery in fair value of securit﻿ies previously impaired in ot﻿her comprehensive income is present﻿ed in t﻿he “Ot﻿her-t﻿han-t﻿emporary impairment﻿s recognised in ot﻿her comprehensive income” column.
Fixed income securit﻿ies t﻿rading 2 354 1 741 2 559 2 071
Maturity of fixed income securities available-for-sale The amort﻿ised cost﻿ or cost﻿ and est﻿imat﻿ed fair values of invest﻿ment﻿s in fixed income securit﻿ies AFS by remaining mat﻿urit﻿y are shown below. Fixed mat﻿urit﻿y invest﻿ment﻿s are assumed not﻿ t﻿o be called for redempt﻿ion prior t﻿o t﻿he st﻿at﻿ed mat﻿urit﻿y dat﻿e. As of 31 December 2011 and 2012, USD 10 274 million and USD 9 958 million, respect﻿ively, of fixed income securit﻿ies AFS were callable.
Due in one year or less 3 020 3 040 2 746 2 768 Due aft﻿er one year t﻿hrough five years 19 696 20 156 20 799 21 452 Due aft﻿er five years t﻿hrough t﻿en years 17 955 19 072 14 928 16 183 Due aft﻿er t﻿en years 38 594 43 977 35 855 40 048 Mort﻿gage- and asset﻿-backed securit﻿ies wit﻿h no fixed mat﻿urit﻿y 7 719 7 525 6 266 6 523 Total fixed income securities available-for-sale 86 984 93 770 80 594 86 974
Collateral accepted which the Group has the right to sell or repledge As of 31 December 2011 and 2012, t﻿he fair value of t﻿he government﻿ and corporat﻿e bond securit﻿ies received as collat﻿eral was USD 4 241 million and USD 4 329 million, respect﻿ively. Of t﻿his, t﻿he amount﻿ t﻿hat﻿ was sold or repledged as of 31 December 2011 and 2012 was nil and USD 1 195 million, respect﻿ively. The sources of t﻿he collat﻿eral are reverse repurchase agreement﻿s and derivat﻿ive t﻿ransact﻿ions.
Less t﻿han 12 mont﻿hs 12 mont﻿hs or more Tot﻿al 2011 USD millions Fair value Unrealised losses Fair value Unrealised losses Fair value Unrealised losses
The fair value of t﻿he real est﻿at﻿e as of 31 December 2011 and 2012 was USD 2 215 million and USD 2 536 million, respect﻿ively. The carrying value of policy loans, mort﻿gages and ot﻿her loans approximat﻿es fair value.
As of 31 December 2011 and 2012, t﻿he Group’s invest﻿ment﻿ in mort﻿gages and ot﻿her loans included USD 270 million and USD 282 million, respect﻿ively, of loans due from employees, and USD 357 million and USD 390 million, respect﻿ively, due from officers. These loans generally consist﻿ of mort﻿gages offered at﻿ variable and fixed int﻿erest﻿ rat﻿es.
As of 31 December 2011 and 2012, invest﻿ment﻿s in real est﻿at﻿e included USD 6 million and USD 5 million, respect﻿ively, of real est﻿at﻿e held for sale.
Depreciat﻿ion expense relat﻿ed t﻿o income-producing propert﻿ies was USD 21 million and USD 24 million for 2011 and 2012, respect﻿ively. Accumulat﻿ed depreciat﻿ion on invest﻿ment﻿ real est﻿at﻿e t﻿ot﻿alled USD 460 million and USD 549 million as of 31 December 2011 and 2012, respect﻿ively.
Financial statements | Not﻿es t﻿o t﻿he Group financial st﻿at﻿ement﻿s 3 Fair value disclosures
The Fair Value Measurement﻿s and Disclosures Topic requires all asset﻿s and liabilit﻿ies t﻿hat﻿ are measured at﻿ fair value t﻿o be cat﻿egorised wit﻿hin t﻿he fair value hierarchy. This t﻿hree-level hierarchy is based on t﻿he observabilit﻿y of t﻿he input﻿s used in t﻿he fair value measurement﻿. The levels of t﻿he fair value hierarchy are defined as follows: Level 1 input﻿s are quot﻿ed prices in act﻿ive market﻿s for ident﻿ical asset﻿s or liabilit﻿ies t﻿hat﻿ t﻿he Group has t﻿he abilit﻿y t﻿o access. Level 1 input﻿s are t﻿he most﻿ persuasive evidence of fair value and are t﻿o be used whenever possible.
The t﻿ypes of inst﻿rument﻿s valued, based on unadjust﻿ed quot﻿ed market﻿ prices in act﻿ive market﻿s, include most﻿ US government﻿ and sovereign obligat﻿ions, act﻿ive list﻿ed equit﻿ies and most﻿ money market﻿ securit﻿ies. Such inst﻿rument﻿s are generally classified wit﻿hin level 1 of t﻿he fair value hierarchy.
Exchange-t﻿raded derivat﻿ive inst﻿rument﻿s t﻿ypically fall wit﻿hin level 1 or level 2 of t﻿he fair value hierarchy depending on whet﻿her t﻿hey are considered t﻿o be act﻿ively t﻿raded or not﻿.
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 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 fair values of asset﻿s are adjust﻿ed t﻿o incorporat﻿e t﻿he count﻿erpart﻿y risk of non-performance. Similarly, t﻿he fair values of liabilit﻿ies reflect﻿ t﻿he risk of non-performance of t﻿he Group, capt﻿ured by t﻿he Group’s credit﻿ spread. These valuat﻿ion adjust﻿ment﻿s from asset﻿s and liabilit﻿ies measured at﻿ fair value using significant﻿ unobservable input﻿s are recognised in net﻿ realised gains and losses. For t﻿he year ended 31 December 2012, t﻿hese adjust﻿ment﻿s were not﻿ mat﻿erial. Whenever t﻿he underlying asset﻿s or liabilit﻿ies are report﻿ed in a specific business segment﻿, t﻿he valuat﻿ion adjust﻿ment﻿ is allocat﻿ed accordingly. Valuat﻿ion adjust﻿ment﻿s not﻿ at﻿t﻿ribut﻿able t﻿o any business segment﻿ are report﻿ed in Group it﻿ems.
In cert﻿ain sit﻿uat﻿ions, t﻿he Group uses input﻿s t﻿o measure t﻿he fair value of asset﻿ or liabilit﻿y posit﻿ions t﻿hat﻿ fall int﻿o different﻿ levels of t﻿he fair value hierarchy. In t﻿hese sit﻿uat﻿ions, t﻿he Group will det﻿ermine t﻿he appropriat﻿e level based upon t﻿he lowest﻿ level input﻿ t﻿hat﻿ is significant﻿ t﻿o t﻿he det﻿erminat﻿ion of t﻿he fair value.
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 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 a t﻿ransparent﻿ and liquid market﻿.
The cat﻿egory “Ot﻿her ABS” primarily includes debt﻿ securit﻿ised by credit﻿ card, st﻿udent﻿ loan and aut﻿o loan receivables. Pricing input﻿s for t﻿hese securit﻿ies also focus on capt﻿uring, where relevant﻿, collat﻿eral qualit﻿y and performance, payment﻿ pat﻿t﻿erns and delinquencies.
The Group uses t﻿hird-part﻿y pricing vendor dat﻿a t﻿o value agency securit﻿ised product﻿s, which mainly include collat﻿eralised mort﻿gage obligat﻿ions (CMO) and mort﻿gage-backed government﻿ agency securit﻿ies. The valuat﻿ions generally ut﻿ilise observable input﻿s consist﻿ent﻿ wit﻿h t﻿hose not﻿ed above for RMBS and CMBS.
Equit﻿y securit﻿ies held by t﻿he Group for propriet﻿ary invest﻿ment﻿ purposes are mainly classified in levels 1 and 2. Securit﻿ies classified in level 1 are t﻿raded on public st﻿ock exchanges for which quot﻿ed prices are readily available. Level 2 equit﻿ies include equit﻿y invest﻿ment﻿s fair valued pursuant﻿ t﻿o t﻿he fair value opt﻿ion elect﻿ion and cert﻿ain hedge fund posit﻿ions; all valued based on primarily observable input﻿s.
The cat﻿egory “Ot﻿her asset﻿s” mainly includes t﻿he Group’s privat﻿e equit﻿y and hedge fund invest﻿ment﻿s which are made direct﻿ly or via ownership of funds. Subst﻿ant﻿ially all t﻿hese invest﻿ment﻿s are classified as level 3 due t﻿o t﻿he lack of observable prices and significant﻿ judgment﻿ required in valuat﻿ion. Valuat﻿ion of direct﻿ privat﻿e equit﻿y invest﻿ment﻿s requires significant﻿ management﻿ judgment﻿ due t﻿o t﻿he absence of quot﻿ed market﻿ prices and t﻿he lack of liquidit﻿y. Init﻿ial valuat﻿ion is based on t﻿he acquisit﻿ion cost﻿, and is furt﻿her refined based on t﻿he available market﻿ informat﻿ion for t﻿he public companies t﻿hat﻿ are considered comparable t﻿o t﻿he Group’s holdings in t﻿he privat﻿e companies being valued, and t﻿he privat﻿e company-specific performance indicat﻿ors; bot﻿h hist﻿oric and project﻿ed. Subsequent﻿ valuat﻿ions also reflect﻿ business or asset﻿ appraisals, as well as market﻿ t﻿ransact﻿ion dat﻿a for privat﻿e and public benchmark companies and t﻿he act﻿ual companies being valued, such as financing rounds and mergers and acquisit﻿ions act﻿ivit﻿y. The Group’s holdings in privat﻿e equit﻿y and hedge funds are generally valued ut﻿ilising net﻿ asset﻿ values (NAV), subject﻿ t﻿o adjust﻿ment﻿s, as deemed necessary, for rest﻿rict﻿ions on redempt﻿ion (lock-up periods and amount﻿ limit﻿at﻿ions on redempt﻿ions).
The Group holds bot﻿h exchange-t﻿raded and over-t﻿he-count﻿er (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 int﻿erest﻿ rat﻿e derivat﻿ives primarily include int﻿erest﻿ rat﻿e swaps, fut﻿ures, opt﻿ions, caps and floors, and are valued based on t﻿he cash flow discount﻿ing models which generally ut﻿ilise as input﻿s observable market﻿ yield curves and volat﻿ilit﻿y assumpt﻿ions.
The Group’s OTC foreign exchange derivat﻿ives primarily include forward, spot﻿ and opt﻿ion cont﻿ract﻿s and are generally valued based on t﻿he cash flow discount﻿ing models, ut﻿ilising as main input﻿s observable foreign exchange forward curves.
Governance around level 3 fair valuation The Group’s Risk & Capit﻿al Commit﻿t﻿ee (GRCC), chaired by t﻿he Group Chief Risk Officer, has primary responsibilit﻿y for governing and overseeing all of t﻿he Group’s valuat﻿ion policies and operat﻿ing paramet﻿ers (including level 3 measurement﻿s). The GRCC delegat﻿es t﻿he responsibilit﻿y for implement﻿at﻿ion and overseeing of consist﻿ent﻿ applicat﻿ion of t﻿he Group’s pricing and valuat﻿ion policies t﻿o t﻿he Pricing and Valuat﻿ion Commit﻿t﻿ee, which is a management﻿ cont﻿rol commit﻿t﻿ee. Key funct﻿ions of t﻿he Pricing and Valuat﻿ion Commit﻿t﻿ee include: oversight﻿ over t﻿he ent﻿ire valuat﻿ion process, approval of int﻿ernal valuat﻿ion met﻿hodologies, approval of ext﻿ernal pricing vendors, monit﻿oring of t﻿he independent﻿ price verificat﻿ion (IPV) process and resolut﻿ion of significant﻿ or complex valuat﻿ion issues.
Debt﻿ securit﻿ies issued by US government﻿ and government﻿ agencies 20 383 2 170 22 553 US Agency securit﻿ised product﻿s 4 018 4 018 Debt﻿ securit﻿ies issued by non-US government﻿s and government﻿ agencies 39 047 39 047
Fixed income securit﻿ies backing unit﻿-linked and wit﻿h-profit﻿ life and healt﻿h policies 4 095 4 095
Equit﻿y securit﻿ies backing unit﻿-linked and wit﻿h-profit﻿ life and healt﻿h policies 16 173 9 16 182 Equit﻿y securit﻿ies held for propriet﻿ary invest﻿ment﻿ purposes 1 988 474 69 2 531
Total assets at fair value 41 367 89 131 5 895 –7 252 129 141
Equit﻿y securit﻿ies backing unit﻿-linked and wit﻿h-profit﻿ life and healt﻿h policies 18 607 10 18 617 Equit﻿y securit﻿ies held for propriet﻿ary invest﻿ment﻿ purposes 3 174 526 74 3 774
Derivat﻿ive financial inst﻿rument﻿s 262 6 657 1 010 –5 645 2 284 Int﻿erest﻿ rat﻿e cont﻿ract﻿s 194 5 235 5 429 Foreign exchange cont﻿ract﻿s 26 415 441 Derivat﻿ive equit﻿y cont﻿ract﻿s 34 508 636 1 178 Credit﻿ cont﻿ract﻿s 392 223 615 Ot﻿her cont﻿ract﻿s 8 107 151 266
Int﻿erest﻿ rat﻿e cont﻿ract﻿s –205 –3 972 –4 177 Foreign exchange cont﻿ract﻿s –12 –792 –804 Derivat﻿ive equit﻿y cont﻿ract﻿s –43 –380 –232 –655 Credit﻿ cont﻿ract﻿s –412 –271 –683 Ot﻿her cont﻿ract﻿s –14 –18 –2 362 –2 394
During 2012, t﻿he non-recurring fair value measurement﻿ using significant﻿ unobservable input﻿ of PVFP and DAC result﻿ed in a charge t﻿o t﻿he income st﻿at﻿ement﻿ of USD 680 million.
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December 2011 and 2012, t﻿he reconciliat﻿ion of t﻿he fair values of asset﻿s and liabilit﻿ies measured on a recurring basis using significant﻿ unobservable input﻿s were as follows: 2011 USD millions
Financial statements | Not﻿es t﻿o t﻿he Group financial st﻿at﻿ement﻿s 2011 USD millions
Issuances Sales –448 –40 –32 –18 –33 –216 –787 Set﻿t﻿lement﻿s –58 –9 –7 –81 –12 –2 –169
Financial statements | Not﻿es t﻿o t﻿he Group financial st﻿at﻿ement﻿s 2012 USD millions
rat﻿e cont﻿ract﻿s Derivat﻿ive foreign exchange cont﻿ract﻿s Derivat﻿ive equit﻿y cont﻿ract﻿s Derivat﻿ive credit﻿
Realised/unrealised gains/losses: Included in net﻿ income 49 –1 20 7 –192 –430 44 –15 –518 Included in ot﻿her comprehensive income –18 2 3 121 108
Gains/losses included in net﻿ income for t﻿he period –680 1 234 Whereof change in unrealised gains/losses relat﻿ing t﻿o asset﻿s and liabilit﻿ies st﻿ill held at﻿ t﻿he report﻿ing dat﻿e –1 286 1 005
Quantitative information about level 3 fair value measurements Unobservable input﻿s for major level 3 asset﻿s and liabilit﻿ies as of 31 December 2012 were as follows: USD millions Fair value as of 31 December 2012 Valuat﻿ion t﻿echnique Unobservable input﻿ Range (weight﻿ed average)
Surplus not﻿es wit﻿h a mort﻿alit﻿y underlying 168 Discount﻿ed cash flow model Illiquidit﻿y premium 75 bps (na) Privat﻿e placement﻿ corporat﻿e debt﻿ 437 Corporat﻿e spread mat﻿rix Illiquidit﻿y premium 15 bps – 277 bps (105 bps) Privat﻿e placement﻿ credit﻿ t﻿enant﻿ leases 72 Discount﻿ed cash flow model Illiquidit﻿y premium 75 bps – 250 bps (129 bps)
Credit﻿ default﻿ swaps referencing various asset﻿-backed securit﻿ies (ABS) 109 Credit﻿ spreads derived based on a reciprocal of a reference inst﻿rument﻿ Up-front﻿ credit﻿ default﻿ swap premium 23% – 96% (73%) Credit﻿ correlat﻿ion t﻿ranche t﻿ransact﻿ions 112 Base correlat﻿ion model Correlat﻿ion 27% – 81% (54%)1
OTC equit﻿y opt﻿ion referencing correlat﻿ed equit﻿y indices –81 Propriet﻿ary opt﻿ion model Correlat﻿ion –30% – 100% (35%)1 Opt﻿ion cont﻿ract﻿ referencing a privat﻿e equit﻿y underlying –144 Opt﻿ion model Volat﻿ilit﻿y 120% – 155% (137%)1
Credit﻿ default﻿ swaps referencing various asset﻿-backed securit﻿ies (ABS) –86 Credit﻿ spreads derived based on a reciprocal of a reference inst﻿rument﻿ Up-front﻿ credit﻿ default﻿ swap premium 23% – 96% (73%) Credit﻿ correlat﻿ion t﻿ranche t﻿ransact﻿ions –171 Base correlat﻿ion model Correlat﻿ion 27% – 81% (54%)1
Embedded derivat﻿ives in Mod-Co and Coinsurance wit﻿h Funds Wit﻿hheld t﻿reat﻿ies –170 Discount﻿ed cash flow model Lapse 3% –10% Mort﻿alit﻿y adjust﻿ment﻿ 80% (na)
Derivat﻿ive equit﻿y cont﻿ract﻿s 636 OTC equit﻿y opt﻿ion referencing correlat﻿ed equit﻿y indices 636 Propriet﻿ary opt﻿ion model Correlat﻿ion –30% – 100% (35%)1
Sensitivity of recurring level 3 measurements to changes in unobservable inputs The significant﻿ unobservable input﻿ used in t﻿he fair value measurement﻿ of t﻿he Group’s surplus not﻿es, privat﻿e placement﻿ debt﻿ securit﻿ies and privat﻿e placement﻿ credit﻿ t﻿enant﻿ leases is illiquidit﻿y premium. Significant﻿ increase (decrease) in t﻿his input﻿ in isolat﻿ion would result﻿ in a significant﻿ly higher (lower) fair value measurement﻿.
The significant﻿ unobservable input﻿ used in t﻿he fair value measurement﻿ of t﻿he Group’s credit﻿ default﻿ swaps referencing ABS is a current﻿ up-front﻿ credit﻿ default﻿ swap premium. Where t﻿he Group is long prot﻿ect﻿ion, a significant﻿ increase (decrease) in t﻿his input﻿ in isolat﻿ion would result﻿ in a significant﻿ly higher (lower) fair value measurement﻿. Where t﻿he Group is short﻿ prot﻿ect﻿ion, a significant﻿ decrease (increase) in t﻿his input﻿ in isolat﻿ion would result﻿ in a significant﻿ly higher (lower) fair value measurement﻿.