In 2017, Swiss Re entered several new partnerships, including working with the World Bank to co-structure their pandemic risk bond – the first of its kind. We also strengthened our footprint in Asia by establishing a dedicated reinsurance regional legal entity in Singapore and we received a branch license to operate in India, as one of the first foreign reinsurers.
Throughout 2017, with the development of the Swiss Re Institute, we reaffirmed our commitment to investing in developing and publishing industryrelevant research from internal experts and external partners, in an effort to close the protection gap and make the world more resilient.
Business Units at a glance 2 Message from the Chairman 4 Statement from the Group CEO 8 Market review 14 How re/insurance works 16 Our strategy 18
Resilience in action Together, we apply fresh perspectives, knowledge and capital to anticipate and manage risk. That’s how we create smarter solutions for our clients, helping the world rebuild, renew, and move forward.
In fact, we are happy to experience an almost normal economic situation of this kind; but the road leading there will be painful for the insurance industry, because it implies a long and sustained bond bear market. This is a nightmare for a re/insurance company like Swiss Re that holds nearly 77% of its financial assets in bonds – and the reason why we are striving all the more to keep a check on the negative medium-term effects. Ultimately, I am convinced that the near future will see the establishment of a new reality in the financial markets, in which we will also be able to operate very successfully again.
Digitalisation, big data, robotics, artificial intelligence Forward-looking concepts in the fields of digitalisation and artificial intelligence are currently at the top of the agenda – and everyone is talking about these topics. People are either euphoric or concerned about them, depending on their standpoints and interests: some discussions suggest that business models run the risk of becoming obsolete sooner or later. Meanwhile, individuals are worried about their jobs and the world with which they are familiar. They wonder if their knowledge and skills, which they have worked hard to nurture, might cease to be needed from one day to the next.
Knowledge and experience sets us apart years 6 Swiss Re 2017 Business Report
Transformation of business models We are experiencing the emergence of new business models that create customer centric digital journeys extending beyond what end users could previously obtain. These developments trigger new re/insurance demand, or change customer expectations for example with regards to digital interaction. Newly transformed customer centric business models will trigger further demand for novel insurance products and distribution channels, while at the same time increasing requirements for innovative solutions and data privacy. However, existing regulatory frameworks that are not appropriately geared to technologydriven innovation could limit the ability of insurers to deploy technology-based solutions, at least in the long-term.
After 17 years as a member of the Board of Directors, Rajna Gibson Brandon has decided to step down. Mary Francis and C. Robert Henrikson, current members of the Board of Directors, also plan to retire at the next Annual General Meeting. I would like to thank Rajna Gibson Brandon, Mary Francis and C. Robert Henrikson for their great dedication and valuable contribution – not to mention the strategic advice and knowledge they have placed at our disposal over the years.
In such difficult times, we are here to help people and businesses get back on their feet. That has always been our purpose. And it’s what makes working here so rewarding for me personally. I’ll remember 2017 as another year of truth for Swiss Re: it was and remains our priority to support our clients and the people affected by severe natural catastrophes.
Our industry plays a major role in ensuring financial stability and, therefore, we need to keep working hard to close this protection gap. This will require more than traditional reinsurance solutions. It’s my ambition over the coming years to strongly position Swiss Re as a risk knowledge company. What do I mean by this? I mean that Swiss Re applies its 154 years of risk knowledge and partners with our clients so that, together, we can develop innovative insurance solutions that reach more people. In doing so, we are making the world more resilient.
Further challenges The integration of ESG considerations along the entire investment process makes economic sense, as it results in superior risk-adjusted returns over the long term. However, broader adoption of responsible investment approaches requires regulatory harmonisation, clear industry standards and consistent ESG integration in company analysis.
Moving the needle on investments Swiss Re is among the first in the re/insurance industry to systematically integrate environmental, social and governance (ESG) benchmarks into its investment decisions.
Solutions like this are only possible with the latest technology. And, in general, technology is having a big, mostly positive impact right across the insurance value chain. For example, Magnum – our underwriting software for life and health insurance products – enables our primary insurance clients to automate the risk assessment process, providing instant underwriting decisions. In 2017, Magnum processed more than 10 million applications globally. Furthermore, it provides our clients with meaningful data insights, so that they can better understand their customers and develop products that are even more tailored to their needs. At the same time, we gain insights into the drivers of profitability in the biometric risk business. In this way, we work together with our clients to extend insurance coverage.
Our financial performance in 2017 After several years with below average natural catastrophe activity and corresponding very strong returns for shareholders in our property and casualty (P&C) businesses, the events of 2017 – totalling USD 4.7 billion in expected claims – took a toll on our results: P&C Reinsurance reported a loss of
1 The 10% ENW per share growth target is calculated as follows: (current-year closing ENW per share + current-year dividends per share) / (prior-year closing ENW per share + current-year opening balance sheet adjustments per share). This new target applies from 1 January 2016. The reported figures for 2013, 2014 and 2015 have been adjusted for consistency with the new target definition and are provided for reference purposes only.
reported ROE 700 bps above US Gov 5-yr 12 Swiss Re 2017 Business Report
In contrast to our P&C businesses, our life and health businesses thrived in 2017. For the third year in a row, our Life & Health Reinsurance performance was strong and we increased our net income to USD 1.1 billion – a result we achieved through a strong investment performance and solid underwriting results. In Life Capital, our Business Unit which manages closed and open life and health insurance books, we generated gross cash of USD 998 million in 2017. We also achieved two important milestones in ReAssure, a UK subsidiary of Life Capital, through which we buy books of policies that are no longer sold by a life insurer but need to be actively managed until they close. I’m delighted that MS&AD, a Japanese insurance group that we’ve had a relationship with for 103 years, made a minority investment in ReAssure. This significantly boosts our capacity to finance closed books of business. And, you may have read that in late 2017 we purchased 1.1 million life insurance policies from Legal & General Group PLC, a UK financial service provider. We now protect 3.4 million people through ReAssure. At the same time, we generated significant growth in Life Capital’s individual and group life insurance businesses in 2017.
(Number of investments in InsurTech, first nine months of 2017, source: CB Insights)
Market review Continued global growth 2017 was a year of continued global growth amid large natural catastrophes
Primary life Global primary life insurance premiums are estimated to have risen by about 3% in 2017 in real terms, up from 2% in 2016. Emerging markets, in particular China, account for most of the recent acceleration. Life premiums growth in advanced markets was flat, which is at least an improvement from the 2% decline in 2016.
Life Capital Life Capital increases access to attractive and growing risk pools in open and closed life and health books. It aims to build a balanced portfolio, benefiting from the diversity of the risks and differentiating itself through leading underwriting and servicing capabilities.
Technology Our technology strategy is tightly embedded in the business strategy. Technological innovation gives us the opportunity to further differentiate and support our clients.
“ While many people understand how devastating actual typhoons can be, the economic effect of the warnings can also be severe. Resilience means identifying all risks, and addressing them head-on through new innovations.”
Paying claims In the first days after Harvey and Irma made landfall, Swiss Re Corporate Solutions received more than 200 loss notices. Each was assigned to a claims handler and acknowledged to our clients and brokers within one business day. In the meantime, we set up a command centre so our claims experts, natural catastrophe specialists, underwriters and risk engineers could work together to identify other potentially impacted areas and quickly assess our clients’ exposures.
The unprecedented levels of damage seen in Houston were influenced by many factors and may have been aggravated by global warming. “Extreme and record-breaking characteristics of hurricanes Harvey, Irma and Maria are ones we expect to see more of in a warmer future,” said Marla Schwartz, atmospheric perils specialist at Swiss Re. “Climate models suggest that there will be a shift in the risk landscape.” This draws attention to an important dimension of the protection gap – the difference between total economic losses and insured losses – in the US: one about floods. Although floods can occur in any US state, just 15% of American homeowners have a flood insurance policy.
The Saffir-Simpson hurricane intensity scale and lifetime storm maximums: CAT 1 Very dangerous winds will produce some damage.
CAT 4 Well-built framed homes can sustain severe damage with loss of most of the roof structure and/or some exterior walls. Most trees will be snapped or uprooted and power poles downed. Most of the area will be uninhabitable for weeks or months (Harvey).
Tackling risk everywhere At Swiss Re, we have one of the industry’s broadest risk knowledge. From emerging risks to natural catastrophes, our forward-looking approach has a global reach, assessing risks that threaten big metropolises and rural communities alike.
“ From volcanoes to storm surges, Swiss Re stretches the boundaries of the industry’s risk knowledge every day.” Martin Bertogg, Head Cat Perils, Swiss Re
Monitoring global volcano threats Our model, launched in 2017, is the first exposure-based, probabilistic one with a global scope in the industry, focusing on the property loss potentially stemming from volcanic ash fall. Today, Managua, the capital of Nicaragua, is leading the ranking of the world’s top 15 largest cities at risk of a substantial loss from volcanic ash fall. To check out the ranking, go to: www.swissre.com.
̤ Storm surges cause, on average, more than USD 10 billion of losses per year, of which the majority remains uninsured today.
“Typhoon warnings are a significant cause of economic loss in Hong Kong. With Insur8, businesses can quickly access liquidity and manage earnings volatility for non-damage interruption.” Dylan Bryant, CEO North Asia Swiss Re Corporate Solutions
Typhoon warning signal When a typhoon approaches, the Hong Kong Observatory (HKO) will consider issuing a typhoon warning signal, classified by numbers indicating risk severity levels. When a No. 1 signal is issued, it means a tropical cyclone is within about 800 kilometres of Hong Kong. When a No. 3 signal is issued, it means strong wind is expected in the city, and potentially results in the closing of businesses most directly affected by conditions. However, when the No. 8 signal is issued, gale force winds that may spike to very high speeds are expected, and the majority of businesses might be closed.
Insur8 for typhoon exposure Many property insurance policies cover physical damages related to typhoon loss, but a market gap existed to protect businesses against financial loss due to typhoon warnings. Insur8 is Swiss Re Corporate Solutions’ parametric insurance programme specifically designed to address this nondamage related risk. It protects the insured against lost earnings and operating costs related to level 8+ typhoon warning forced closures.
At the time of her diagnosis, Ade’s employer’s human resources department suggested that she join the programme provided by Swiss Re and Working Towards Wellbeing. While receiving treatment, Ade connected to a health coach and her journey to recovery began.
Partnering with Working Towards Wellbeing The side effects of cancer and associated treatments, even post-recovery, can have a significant impact on an individual’s ability to work. Many want to return to work and normal life, and indeed, the return to a pre-cancer daily routine can be extremely beneficial to recovery.
However, survivors often encounter obstacles, including exhaustion and residual feelings of being generally unwell following what are often multiple rounds of intensive treatments. Matters that may have been insignificant before treatment – for example, the commute to work – can become a source of anxiety, as a crowded train during rush hour may mean standing for more than an hour, a strain on a body that has been significantly taxed.
95% of programme participants report that they are satisfied with the service provided.
The Swiss Re Institute Research and long-term strategy is crucial to the company The Swiss Re Institute strengthens the company’s reputation as a thought leader, housing our insurance, economic and risk research.
Thought leadership Swiss Re is a thought leader in the insurance industry and is dedicated to making the world more resilient. The company’s focus on research is core to its business and essential for its clients. The Swiss Re Institute, launched in March 2017, is at the centre of this identity.
The Swiss Re Institute will create new opportunities to collect and curate novel data, including unstructured data such as text documents.
The Swiss Re Institute will also provide a path to longer-term experimentation and cultivation of new technology tools in the dataanalytics and machine-intelligence arenas.
+200 Events The Swiss Re Institute held 41 Zurich-based and regional events in 2017, including the Swiss Re Inaugural Symposia and the CRO Assembly.
Empowering employees, enabling teams Swiss Re universally adopts an agile work culture throughout its global footprint. Our new offices in Zurich, New York and Bratislava are designed around this concept.
Empowering teams, enabling employees At Swiss Re, we’re empowered to spend our time on what matters most, recognising the needs of our clients, our teams and our shareholders.
Tech-forward Our embrace of cutting-edge technology enables us to communicate across boundaries and work on various devices. We can easily collaborate long distance, from the office, from home and en route. No matter where the expertise is, we’ll connect.
Diverse tasks, diverse workspaces Different kinds of tasks are best accomplished in different kinds of workspaces. Flexible concepts support a truly collaborative environment where people can pick a workspace to match the task they’re performing and be more productive.
From left to right 1. C. Robert Henrikson 2. Sir Paul Tucker 3. Raymond K.F. Ch’ien 4. Jacques de Vaucleroy 5. Rajna Gibson Brandon 6. Joerg Reinhardt 7. Walter B. Kielholz 8. Renato Fassbind 9. Susan L. Wagner 10. Trevor Manuel 11. Mary Francis 12. Philip K. Ryan 13. Jay Ralph 42 Swiss Re 2017 Business Report
Combined ratio in % 93.5 111.5 Net operating margin in % 15.4 –1.3 Return on equity in %1 16.4 –3.5 Life & Health Reinsurance Net income attributable to common shareholders 807 1 092 35
Premiums earned and fee income 11 527 11 980 4 Net operating margin in % 10.4 13.1 Return on equity in %1 12.8 15.3 Corporate Solutions Net income/loss attributable to common shareholders 135 –741 —
For the years ended 31 December 44 Swiss Re 2017 Business Report
Forward-looking statements typically are identified by words or phrases such as “anticipate”, “assume”, “believe”, “continue”, “estimate”, “expect”, “foresee”, “intend”, “may increase”, “may fluctuate” and similar expressions, or by future or conditional verbs such as “will”, “should”, “would” and “could”. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Group’s actual results of operations, financial condition, solvency ratios, capital or liquidity positions or prospects to be materially different from any future results of operations, financial condition, solvency ratios, capital or liquidity positions or prospects expressed or implied by such statements or cause Swiss Re to not achieve its published targets. Such factors include, among others: ̤ the frequency, severity and development of insured claim events, particularly natural catastrophes, man-made disasters, pandemics, acts of terrorism and acts of war; ̤ mortality, morbidity and longevity experience; ̤ the cyclicality of the insurance and reinsurance sectors; ̤ instability affecting the global financial system; ̤ deterioration in global economic conditions; ̤ the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on the Group’s investment assets; ̤ changes in the Group’s investment result as a result of changes in the Group’s investment policy or the changed composition of the Group’s investment assets, and the impact of the timing of any such changes relative to changes in market conditions; ̤ the Group’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debt-like arrangements and collateral calls due to actual or perceived deterioration of the Group’s financial strength or otherwise; ̤ any inability to realise amounts on sales of securities on the Group’s balance sheet equivalent to their values recorded for accounting purposes; Cautionary note on forward-looking statements
Contacts Swiss Re has about 80 office locations in more than 30 countries. For a full list of our office locations and service offerings, please visit www.swissre.com.
Westlake Village 112 Lakeview Canyon Road, Suite 220 Westlake Village, CA 91362 Telephone +1 805 728 8300
Tokyo Otemachi First Square West Tower 9F 1–5–1 Otemachi Chiyoda-ku Tokyo 100-0004 Telephone +81 3 5219 7800
Mumbai A-701, 7th Floor, One BKC G Block, Bandra Kurla Complex Bandra (East) Mumbai 400 051 Telephone +91 22 6661 2121
Photography: Geri Krischker (p. 4, 39, 42, 43) Marc Wetli (p. 8) Joshua Woodbury (p. 22) Andy Lord (p. 34, 35, 36, 37) Stephan Birrer (p. 40, 41) Christian Richters (p. 40, 41) PDM international China Ltd. (p. 40, 41) Alamy (p. 28) Shutterstock (p. 7, 10) All other images provided by Getty Images
Premiums earned and fee income 33 231 33 705 1 Earnings per share in CHF 10.55 1.02 –90
Return on equity in %1 10.6 1.0 Return on investments in % 3.4 3.9 Net operating margin in % 13.0 2.8
The global economy and financial markets 18 Our strategy 26 Summary of financial statements 28 Group results 30 Group underwriting 32 Group investments 34 Reinsurance 36 Property & Casualty Reinsurance 38 Life & Health Reinsurance 40 Corporate Solutions 42 Life Capital 46 Share performance 50
EVM performance 54 EVM financial information 57 Independent Assurance Report 64
Overview 94 Group structure and shareholders 98 Capital structure 101 Board of Directors 104 Executive management 122 Shareholders’ participation rights 130 Changes of control and defence measures 131 Auditors 132 Information policy 134
Group financial statements 182 Notes to the Group financial statements 190 Report of the statutory auditor 290 Group financial years 2008–2017 296 Swiss Re Ltd 298
Glossary 316 Cautionary note on forward-looking statements 323 Note on risk factors 324 Contacts 332 Corporate calendar 333
Net premiums earned and fee income by region (Total USD 33.7 billion)
DIVERSIFIED AND GLOBALBUSINESS UNIT NET PREMIUMS EARNED AND FEE INCOME (USD BILLIONS) NET INCOME/LOSS (USD MILLIONS) OPERATING PERFORMANCE RETURN ON EQUITY
The high storm activity clearly illustrated the potential consequences of climate change. While the frequency of storms in 2017 was not actually extraordinary when viewed in a multi-year comparison, it did show us what could happen if major storms were really to occur more frequently on a lasting basis, year after year. No one can predict how the insurance industry would actually deal with such a trend. In any case, Swiss Re will help contribute to managing the implications of climate change – both through our insurance solutions and our investment strategy. Mind you, this is also something that major institutional investors increasingly and vigorously call for.
It will be interesting to see how the insurance markets will respond to a year like 2017. Prices for insurance cover normally begin to drop after a series of “good” years, or in other words, years without large claims. This has been the case for quite some time now. But prices are set to rise again in the wake of a year such as 2017 – and this has been the case since the start of 2018, although the increases in the overall market are somewhat more muted than we would have expected. I am intrigued to see how the market dynamics will continue to develop. What we already know is that 2017 didn’t particularly weaken insurance market capitalisation, which may indicate a more moderate correction in prices. This remains to be seen.
Please be assured that the management and the Board of Directors of Swiss Re take these geopolitical developments very seriously and continue to monitor them closely – we remain vigilant.
In conclusion, let me draw your attention to a few important personnel changes: In light of the ongoing renewal of the Board of Directors – a process that we launched some years ago – I am very pleased that we have attracted three outstanding individuals to stand for election to the Board. At the next Annual General Meeting on 20 April 2018, we will propose Karen Gavan, Eileen Rominger and Larry Zimpleman as new, non-executive and independent members.
Knowledge and experience sets us apart years 6 Swiss Re 2017 Financial Report
Monetary policy shift The US Federal Reserve (Fed) is expected to raise interest rates further. The central bank will need to walk a thin line between monetary policy normalisation and avoiding an unwarranted tightening in financial conditions. Inflation is the key risk that could force the Fed to hike rates more aggressively and trigger adverse financial market reactions. Re/insurance growth is often linked to GDP growth and strong global economic growth helps re/insurance make progress in bridging the protection gap.
Climate change Physical risks posed by climate change could potentially affect three areas of the re/insurance business: reduction/ disruption of insurers’ operations, modelling and pricing weather-related natural perils, and impact on the economic viability of re/insurance for risks exposed to extreme weather events. In the face of these risks, it becomes increasingly imperative that insurers are able to diversify risks globally. It is therefore important that governments work to remove remaining re/insurance market access barriers.
In addition, I would like to thank our approximately 14 500 employees around the world – also on behalf of the Board of Directors and the Group Executive Committee – for their impressive commitment in 2017. It was largely thanks to their efforts that we were able to successfully navigate a very demanding year. And, finally, I would also like to thank you, our shareholders, for your trust and ongoing support and I wish you a successful 2018.
Innovative solutions to make the world more resilient We made progress towards that goal in 2017. We co-led the World Bank’s Pandemic Emergency Financing Facility (PEF). In case of a disease outbreak, cash will be automatically paid to response agencies and national governments to finance emergency interventions. Payouts will be made when a set of pre-determined thresholds are met, such as number of deaths or infections within a given timeframe. PEF was developed in response to the Ebola crisis of 2014 where, as you may remember, response funds only became available months into the outbreak. PEF will allow funds to reach affected countries in as little as ten days. In that sense, we expect it to save lives and prevent an outbreak from becoming a larger international crisis.
Following such large re/insurance losses that affect the whole industry, the prices for re/insurance products tend to rise. In the January 2018 renewals, we saw a 2% increase in prices which was most pronounced in the property lines affected by natural catastrophe losses. This is positive for us, our industry and, in my view, is necessary. With the majority of loss affected property business in the US still to be renewed in July, we will keep steering pricing towards levels that are more appropriate for the risks we take on – also to ensure the long-term sustainability of the insurance value chain.
“ Our strategy and nearterm priorities set us up well to continue partnering with our clients and applying our knowledge to develop solutions that directly tackle the protection gap.“
reported ROE 700 bps above US Gov 5yrs 12 Swiss Re 2017 Financial Report
I’m also pleased that our investment performance for 2017 was very strong with an ROI of 3.9% and that we continued to pave the way in responsible investing. We are especially proud to be among the first in the industry to switch to benchmarks that systematically integrate environmental, social and governance (ESG) criteria. This helps generate sustainable long-term investment returns and reduces downside risks.
I am convinced that the outlook for our industry is now more positive than it has been in the last four years. I expect that changes in the market environment, such as adjusting price levels and increased interest rates, will be good for our business.
Our role and our mission We help insurance companies to manage their risks by absorbing some of their biggest losses, especially losses stemming from natural catastrophes that are among the largest and most complex risks that exist. Therefore, we play a major role in preparing people, businesses and governments to face new and old threats. We make constant capital allocation decisions, exercising disciplined underwriting and focusing on the most attractive risk pools. The premiums we receive in exchange for protection need to be invested smartly in various financial assets, which means our investments contribute to the real economy and to strengthening infrastructure. The capital remains invested until we need it to pay claims following a loss. As a knowledge company, we generate and share risk knowledge, helping society thrive and progress.
Swiss Re delivered a Group net income of USD 331 million, supported by a continued solid underwriting performance and a strong investment result.
The global economy and financial markets 18 Our strategy 26 Summary of financial statements 28 Group results 30 Reinsurance 36 Corporate Solutions 42 Life Capital 46 Share performance 50
Global growth improved in 2017, while inflation remained moderate. Long-term bond yields remained low despite a reduction of monetary stimulus by some of the major central banks. Stock markets performed well in this environment.
Economic performance in emerging markets varied. GDP growth in emerging Asia remained strong. China’s economy continued to grow at a rapid pace, despite increasing government efforts to de-risk the financial sector and reduce excess industrial capacity. Growth in India slowed in 2017, likely due to the government’s demonetisation programme initiated in November 2016. Growth in the Middle East also slowed, mainly driven by a contraction in Saudi Arabia and a slowdown in UAE and Iran. In Central and Eastern Europe (CEE), the economic expansion accelerated significantly in 2017, driven primarily by CEE EU-member countries, although the Russian economy also expanded after having contracted in the previous two years.
Overall, economic growth in Africa improved in 2017, but varied significantly by region. Growth in the commodityintensive countries in sub-Saharan Africa benefited from stronger commodity prices. While South Africa, Nigeria and Angola emerged from recession, economic recovery has been weak. Non-commodity intensive markets continued to deliver solid-to-strong growth based on infrastructure investments. Latin America’s aggregate real GDP growth also improved in 2017 as Brazil and Argentina returned to growth. The expansion in the region, however, remained modest overall.
The Bank of England raised interest rates for the first time in over a decade in November 2017, reversing the postBrexit vote emergency cut. In October,
Source: Datastream the European Central Bank (ECB) announced an extension of its monthly asset purchases until September 2018 or beyond, while stating that it planned to reduce the volume of monthly purchases in half as of January 2018. Despite these adjustments, central bank monetary policies in advanced markets remain very loose overall. Low levels of inflation provided scope for monetary policy easing in a number of emerging markets, including Brazil, Russia and India.
– United States (S&P 500) – United Kingdom (MSCI UK) – DJ Euro STOXX 50
Insurers play a central role in facilitating financial market resilience by providing risk transfer solutions, and by investing premiums into the real economy. Swiss Re engages with all stakeholders with the aim of creating an environment conducive to long-term investment and sustainable economic growth.
Since the global financial crisis in 2007/08, the combined balance sheet of the world's five largest central banks had increased from about USD 7 trillion to over USD 20 trillion by the end of 2017. In that time, central banks have become the dominant investors in financial markets, at the cost of the private sector. Among others, the private sector includes the insurance industry and pension funds, and therefore also the households investing their savings through insurance and pension products. It is key that capital markets are strengthened so that this private risk capital is put to its best use as financing for the real economy.
Market overview The global non-life industry generated around USD 2 200 billion of premium income in 2017, of which around 20% came from emerging markets. Non-life insurance ranges from standardised motor and household insurance to sophisticated tailor-made liability and property covers, including specialty commercial and industrial risk insurance.
Non-life premiums in the emerging markets have grown by an estimated 6% in 2017, up slightly from 2016 and 2015, but slower than the 8% annual average growth between 2010 and 2014. The deceleration has been due to continued economic stagnation, and positive but slow premium growth in Latin America and Africa. Meanwhile, premiums in emerging Asia are up almost 10% driven by double-digit growth in China and India, its largest markets. In Central and Eastern Europe (CEE), premiums have grown by less than 5% this year due to contraction in Russia.
Outlook The global economic outlook for 2018 and 2019 is positive and demand for non-life insurance is expected to increase. Premium growth momentum is expected to accelerate slightly in nominal terms, supported by economic activity and moderate price increases. Emerging markets are expected to be the main driver of growth, with premiums forecast to rise by 6% to 7% in real terms in 2018 and 2019.
Market performance Estimated global premium growth in 2017 1 The calculation of the industry average profitability is based on data for the following eight leading non-life insurance markets: Australia, Canada, France, Germany, Italy, Japan, the UK and the US.
Market overview Global non-life reinsurance premiums in 2017 totalled about USD 170 billion, around 27% of which was attributable to ceding companies in emerging markets. In general, reinsurance demand is a function of the size and capital resources of primary insurance companies, as well as of the risk profile of the insurance products provided.
After five quiet years with low natural catastrophe losses, the global non-life reinsurance industry is facing heavy losses from the hurricane season in the Caribbean and the US in 2017. The seasoń s three major storms – Harvey, Irma and Maria – alone are estimated to have caused significant insured losses. The combined ratio for 2017 is estimated to be around 110%, with most of the increase due to the hurricane losses, as well as a number of other natural catastrophes including Cyclone Debbie in Australia, earthquakes in Mexico, and wildfires in California and Southern Europe. Accordingly, overall global industry profitability as measured by return on equity (ROE) for the full-year is estimated to come in at around 1%. Apart from the unusually high burden from natural catastrophes, the reinsurance industry has also continued to suffer from the ongoing low interest rate environment and the overall softening of underwriting conditions. Consequently, the industry ROE declined from around 15% between 2012 and 2014 to 11% in 2016. For the first six months of 2017, the industry ROE further dropped to 9%, based on a combined ratio of 93% and a return on investment (ROI) of 2.5%.
The soft underwriting conditions of recent years partly reflected benign claims developments, but were mostly a direct consequence of excess capital in the market. Reinsurance capacity was abundant due to the considerable influx of alternative capacity (AC). Since 2010, the size of AC more than tripled and was estimated to be around USD 79 billion in the first half of 2017. A significant amount of AC has been absorbed by the third-quarter hurricane losses, especially collateralised capacity in the retrocession market, and therefore will not be available as active capacity in the upcoming renewals season. Most of this capacity, however, was re-loaded through the injection of new capital from investors.
Outlook The three major hurricane events of 2017 led to rate hardening for both for loss-affected accounts, and to a lesser extent for loss-free accounts at the January 2018 renewals. Capital abundance in traditional reinsurance has been reduced, and AC will require additional funds from investors to operate at the same level as before the hurricane losses.
Performance in the different regions has been mixed in 2017, reflecting underlying country drivers. In North America, premiums are estimated to have declined by 2%, driven mainly by lower premium income in the US particularly of individual annuity premiums due to uncertainty around the finalisation and implementation of new Department of Labor fiduciary rules.
In Canada, on the other hand, premium development has contributed positively to regional performance. For Western Europe, estimates indicate that after adjusting for inflation, life premium income stagnated in 2017. Based on partial-year data, real premiums are estimated to have remained flat in the UK while declining in France. In Germany, premiums fell slightly, due largely to weaker sales of single-premium business. In developed Asia-Pacific, life premium income is estimated to have risen modestly in 2017 (+1%), driven by a sharp pick-up in Japan following a decline in 2016, and strong growth in Hong Kong, Singapore and Taiwan. In Hong Kong, individual life policies, especially non-linked whole life and non-linked endowment products, remain popular with mainland China residents.
Life and health premiums in the emerging markets are estimated to have risen by around 17% in 2017, after a 19% gain in 2016. Sustained robust growth in emerging Asia has been the most important driver; for example, in China growth was supported by vigorous sales of ordinary life products (which received a boost from regulatory promotion of protection-type solutions). Growth of emerging markets was supplemented by a healthy recovery in CEE markets, while, on the other hand, growth has remained weak in Africa, and has decelerated sharply in Latin America and the Middle East.
The operating margin of the life reinsurance industry was a mere 7% of revenues in 2017, stable compared to 2015 and 2016. The contribution from investments further declined, due to the ongoing low interest rate environment.
Our strategy Meeting our financial targets and making the world more resilient.
High growth markets We intend to maintain our leading position in high growth markets, establishing a strong presence. These world regions continue to remain a key element of our strategy, even when they are temporarily challenged.
Research and development Building knowledge and competence through R&D has historically been our core focus. The creation of the Swiss Re Institute further strengthens our steering of R&D activities.
People and culture Our employees provide a wide range of technical expertise. Their wide range of backgrounds enables us to develop unique solutions and offer a deeper pool of talent to drive growth.
Operating expenses –3 358 –3 308 –1 Total expenses before interest expenses –38 808 –41 396 7
Income/loss attributable to non-controlling interests 3 5 67 Net income after attribution of non-controlling interests 3 626 398 –89
Interest on contingent capital instruments, net of tax –68 –67 –1 Net income attributable to common shareholders 3 558 331 –91
Return on equity for 2017 was 1.0%, down from 10.6% in the previous year. Common shareholders’ equity decreased to USD 33.4 billion as of 31 December 2017, a reduction of 3.4% compared to the end of 2016.
Reinsurance generated a net income of USD 679 million, compared to USD 2.9 billion in 2016. Property & Casualty Reinsurance reported a net loss of USD 413 million in 2017, down from a net income of USD 2.1 billion in 2016. This loss stemmed from estimated insurance claims in the aftermath of a string of large natural catastrophes, which amounted to USD 3.7 billion, net of
The Group’s net operating margin for 2017 was 2.8%, down from 13.0% in the prior year.
Swiss Re achieved a return on equity of 1.0% for 2017, compared to 10.6% for 2016. Earnings per share for 2017 were CHF 1.02 or USD 1.03, compared to CHF 10.55 (USD 10.72) for 2016.
Business performance Premiums earned and fee income for the Group amounted to USD 33.7 billion for 2017, an increase of 1.4% year-on-year. At constant exchange rates, premiums and fees rose by 1.6%. Gross premiums written decreased in the same period by 2.4% to USD 34.8 billion, driven by a reduction in deployed capacity in Property & Casualty Reinsurance.
Investment result and expenses Swiss Re’s return on investments for 2017 was very strong at 3.9%, compared to 3.4% in 2016. Non-participating net investment income remained broadly stable at USD 3.7 billion. The Group reported non-participating net realised investment gains of USD 1.7 billion in 2017 compared to USD 1.5 billion in 2016, supported by additional realised gains from sales of equity securities, which were partially offset by the absence of gains from derivatives.
The Group reported a tax charge of USD 132 million on a pre-tax income of USD 525 million for 2017, compared to a tax charge of USD 749 million on a pre-tax income of USD 4.4 billion for 2016. This translated into an effective tax rate in the current and prior-year reporting periods of 25.1% and 17.1%, respectively. The tax rate in 2017 was largely driven by profits earned in higher tax jurisdictions, tax charges from foreign currency translation differences between statutory and US GAAP accounts and expenses not allowed for local tax purposes, partially offset by tax benefits of USD 93 million from US tax law changes.
Total: USD 33.7 billion 49% P&C Reinsurance 36% L&H Reinsurance 11% Corporate Solutions 4% Life Capital
Risk selection is a capability honed at Swiss Re through more than 150 years of experience. We succeed by continually investing in our ability to align our interests with those of our clients, understand individual risks and their drivers, select good risks and accurately assess the costs of taking a particular one. At its core, this is a knowledge-based capability – combining the art of the underwriter with scientific rigour.
Edouard Schmid Group Chief Underwriting Officer 32 Swiss Re 2017 Financial Report
It is this investment in focused and targeted R&D that will maintain our market-leading ability to steer through allocating capital to risk pools, and distinctively underwrite risks.
The total life and health benefits increased from USD 9.0 billion in 2016 to USD 9.2 billion in 2017. The increase was mainly due to the earnings development of US Individual Life transactions that were closed in late 2016, a large transaction win in Europe starting in July 2017 and from Asia, where we experienced very strong organic growth in several business lines.
Market environment and outlook In recent years, new capital flowing into the industry has depressed prices and driven certain areas of risk pools to unsustainable levels of return. The significant natural catastrophe losses of 2017 have seen a reversal of this trend. We expect this increased pricing discipline to be maintained in the near term, supporting further profitable growth. Overall, we expect a further improvement in pricing, especially in lines directly affected by the 2017 natural catastrophe events.
The underlying pool of insurable risks will continue to grow in the context of the continuing cyclical upswing in the global economy. The small inflation rises of the past year will not significantly impact claims severity in our view, but we remain cautious about potential long-term effects.
Our outlook is more positive than in the last few years, and we see opportunities available to us through three distinctive abilities. Our ability to engage in large and tailored transactions has created a market in which few others are even able to operate. We continue to see growing demand for solutions and services that deploy our R&D to clients. Finally, we retain our ability to rapidly and flexibly deploy capital across industry-leading products and geographic franchises.
We anticipate that our very strong capitalisation will allow us to realise opportunities not available to others. However, we will only seek opportunities where prices meet our hurdle rates.
Financial markets overview Financial markets continued to centre on monetary policy and broader political developments in 2017. On the political front, while the French presidential election in April and May ultimately turned out as expected, uncertainty in the US and the UK remained high due to economic policy and Brexit, respectively.
The positive investor sentiment and benign market environment was supported by stronger-than-expected economic growth data, with the global recovery becoming more solid and broad-based across regions. At the same time, inflationary pressures remained subdued, which allowed central banks to slowly and carefully start to normalise monetary policy.
Investment result The Group’s investment portfolio, excluding unit-linked and with-profit investments, increased to USD 131.7 billion at the end of 2017, compared to USD 130.5 billion at the end of 2016. The increase was driven by positive returns from most asset classes and a weakening of the US dollar.
Outlook The focus in 2018 is set to remain on central bank policy, inflation and global political developments. In terms of economic outlook, global economic growth is expected to stay solid, both in developed and emerging market economies, while inflation is forecast to modestly increase globally. This, in turn, should allow the key central banks to continue their cautious policy normalisation path. The Federal Reserve is set to hike rates further (while slowly reducing the size of its balance sheet), and the European Central Bank is likely to fully wind down its asset purchase programmes by the end of the year. From a regional perspective, growth should stay solid in both the US and the Eurozone, but be more modest in the UK amid continued Brexit-related uncertainty. Meanwhile, economic growth in China next year is expected to moderately slow from current levels.
Risks to the outlook are seen as broadly balanced, with inflation and political developments (eg Brexit negotiations, Italian elections, the formation of a grand coalition in Germany) being the key factors to watch. Still, given the current stage of the economic cycle set against the backdrop of generally high asset valuations, we will maintain a well-diversified and high-quality investment portfolio.
Reinsurance – While our 2017 performance was clearly impacted by significant natural catastrophes, our role for our clients and in society has rarely been more evident.
Strategy and priorities The world experienced a number of severe natural catastrophes during 2017 that impacted our Property & Casualty segment, but they also helped us show the value that Swiss Re brings to our clients. It is at times such as these that our clients see the tangible benefits of having reinsurance coverage with Swiss Re.
Our Reinsurance Business Unit strategy remains focused on differentiation and profitable growth through allocation of capital to both existing and new risk pools. We believe that macro factors such as demographic changes and the expected rise in global GDP will continue to expand these risk pools in both Property & Casualty and Life & Health Reinsurance. The significant global protection gap, which exists today in both lines of business, is expected to continue to widen and will also contribute significantly to creating new risk pools in the future. As a result, we expect to see further business opportunities, particularly in high-growth markets, but also in countries with mature economies. The numerous natural catastrophes experienced in 2017 also highlight the gap that exists between insured losses and the much
Differentiation and client relationships We differentiate ourselves by understanding the specific needs of our clients. Client segmentation is a foundational element of our differentiation approach and is built on a deep understanding of our clients, facilitating delivery of tailored offerings.
Clients are always looking for solutions to solve their business challenges. In parallel with our engagement approach, we have established teams to marry our clients’ needs, which expand on traditional reinsurance, with our knowledge, risk bearing capacity and innovation. Taken together, such tailored transactions and solutions help clients to sustainably grow their business.
We leverage technology to understand risks better, improve underwriting and pricing and to increase efficiency. To help our clients improve their performance, we have developed new solutions such as an end-to-end telematics platform, predictive analytics to identify non-smokers or mobile underwriting platforms for life insurance.
The company is wholly-owned by its Zurich-based global parent, Swiss Re Ltd, and shares Swiss Re’s group credit rating. The company's operations in Asia is strongly capitalised in line with regulatory requirements and its local business is supported by the financial resources of the Swiss Re Group.
SWISS RE FURTHER STRENGTHENS ITS POSITION IN ASIA WITH THE LAUNCH OF ITS NEW REGIONAL HEADQUARTERS
The overall investment result was USD 1.6 billion in 2017 compared to USD 1.8 billion in 2016. Net investment income was USD 1.0 billion in 2017, reflecting higher income from alternative investments. Net realised gains of USD 613 million decreased compared to 2016 by USD 157 million, as the prior year included a favourable impact from foreign exchange remeasurement.
Premiums Net premiums earned were USD 16.7 billion in 2017 (–2.0%) compared to USD 17.0 billion in 2016. The decline in gross premiums written to USD 16.5 billion in 2017 (–8.8%) compared to USD 18.1 billion in 2016 was the result of a reduction in deployed capacity where prices did not meet Swiss Re’s profitability expectations.
Combined ratio Property & Casualty Reinsurance reported a combined ratio of 111.5% for 2017, compared to 93.5% in the prior year. The impact from natural catastrophes in 2017 was 14.8 percentage points above the expected level for 2017 of 7.1 percentage points. The favourable development of prior accident years improved the combined ratio by 3.3 percentage points in 2017, compared to a 3.0 percentage point improvement in 2016.
The Specialty combined ratio increased to 98.4% for 2017, compared to 77.8% in 2016, primarily due to large losses in the marine lines of business from hurricanes in the Americas and Cyclone Debbie in Australia.
Income/loss attributable to non-controlling interests 1 — Net income/loss after attribution of non-controlling interests 2 119 –394 —
Interest on contingent capital instruments, net of tax –19 –19 — Net income/loss attributable to common shareholders 2 100 –413 —
Investment result The return on investments was 3.5% for 2017, compared to 3.1% in 2016, reflecting an increase in the investment result of USD 155 million.
Net investment income increased by USD 30 million to USD 922 million for 2017, mainly due to additional income from alternative investments.
Shareholders’ equity Common shareholders’ equity decreased to USD 10.8 billion as of 31 December 2017 from USD 12.7 billion as of 31 December 2016, primarily driven by dividends paid to the Group of USD 1.95 billion and the net loss for the year. The return on equity for 2017 was –3.5% compared to 16.4% in 2016. The decrease was due to the net loss in 2017.
Pressure on general contract provisions also eased. Overall, trading conditions improved for most Property and Specialty lines.
Lastly, we continued to see some good opportunities for transactions and participated on those that met our requirements.
Net operating margin The net operating margin for 2017 was 13.1%, increasing significantly from 10.4% in 2016 mainly due to higher realised gains.
Management expense ratio The management expense ratio was 5.7%, a slight decrease from 6.0% in 2016.
Lines of business Income before interest and income tax expense (EBIT) for the Life segment increased to USD 935 million for 2017, from USD 867 million in the prior year. The results in 2017 reflected the new business wins and growth across markets, supported by a higher investment income allocation. In addition, the experience in the US individual life portfolio was less unfavourable in the current year.
EBIT for the Health segment increased to USD 345 million for 2017 from USD 268 million in the prior year. The current year reflected the significant growth in the health portfolio in Asia and net favourable valuation updates.
Net investment income increased slightly by USD 5 million to USD 1 105 million in 2017. The fixed income running yield for 2017 was 3.3%.
Operating expenses –763 –754 −1 Total expenses before interest expenses –11 708 –12 148 4
Income before interest and income tax expense 1 350 1 815 34 Interest expenses –301 –315 5 Income before income tax expense 1 049 1 500 43 Income tax expense –193 –360 87 Net income before attribution of non-controlling interests 856 1 140 33
Interest on contingent capital instruments, net of tax –49 –48 –2 Net income attributable to common shareholders 807 1 092 35
Net realised gains were USD 459 million in 2017, compared to USD 184 million for the prior year, reflecting additional gains from sales of equity securities and corporate bonds.
Shareholders’ equity Common shareholders’ equity increased to USD 7.5 billion as of 31 December 2017 from USD 6.8 billion as of 31 December 2016. The movement of USD 659 million in equity reflected the net income increase and changes in net unrealised gains, partly offset by dividends of USD 650 million paid to the Group.
Return on equity was strong at 15.3% in 2017, compared to 12.8% in 2016. The increase was due to a higher net income in 2017, partly offset by a higher average equity balance.
During 2017, the Business Unit opened offices in Kuala Lumpur, Malaysia and Manchester, United Kingdom, focusing on servicing large and mid-sized companies in these countries.
Performance Net loss was USD 741 million in 2017, compared to net income of USD 135 million in 2016, with a net operating margin of –23.5%, down from 4.2%. The 2017 result was significantly impacted by higher large natural catastrophe losses, which amounted to USD 1.0 billion, and continued pricing pressure throughout most of the year. The investment result was higher in 2017 compared to 2016, driven by net realised gains mainly from the sale of equity securities.
of internal fronting for the Reinsurance Business Unit, remained broadly unchanged at USD 4.1 billion in 2017. The expansion into Primary Lead compensated for declining rates in the excess layer segment.
Expenses Claims and claim adjustment expenses –2 263 –3 558 57 Acquisition costs –517 –554 7 Operating expenses –760 –759 — Total expenses before interest expenses –3 540 –4 871 38
Income/loss attributable to non-controlling interests 2 5 150 Net income/loss attributable to common shareholders 135 –741 —
Claims ratio in % 64.6 97.4 Expense ratio in % 36.5 36.0 Combined ratio in % 101.1 133.4
The Casualty combined ratio increased to 122.0% in 2017 compared to 115.9% in 2016. Both periods experienced large liability losses in North America. The majority of the large losses reported in the current period occurred in 2015/2016. The magnitude and responsibility for these losses were only established in 2017.
The Specialty combined ratio for 2017 decreased slightly by 0.6 percentage points to 101.6%. 2017 was impacted by higher marine and engineering losses due to the natural catastrophe events and a large aviation loss. The credit and surety portfolio returned to technical profitability.
Net investment income increased by USD 25 million to USD 183 million for 2017, mainly due to additional income from government bonds, partially driven by a higher asset volume.
Net realised gains were USD 118 million compared to USD 57 million in 2016, reflecting additional gains from sales of equity securities.
Corporate Solutions offers insurance protection against weather perils and other risks, which is accounted for as derivatives. Insurance in derivative form reported net realised gains of USD 12 million in 2017, compared to USD 16 million in 2016, reflecting the impact of the unseasonably mild winter in both periods and the extremely cold weather in the US at the end of 2017.
Being there when our customer needs us is a top priority. We value a personal connection, and are committed to: ̤ Contacting our client, or their representative, within one business day of receiving a loss notification when we lead the primary claim.
̤ Completing initial investigations on claims, in most instances, within 30 days. ̤ Paying covered claims within a period that meets our client’s business needs, in most instances, within five business days.
We believe that “how” a claim is handled is often as important as the outcome itself, and our clients and brokers tell us that they feel a difference. In the last few years, we have received top Claims ratings in several global broker and risk manager surveys, including a #1 global ranking in 2017 by one of the top brokers and #1 ranking in the 2017 Risk Manager Choice Awards, a national (US) survey conducted by Flaspöhler and commissioned by National Underwriter/Property Casualty 360.
Strategy and priorities During 2017, the open book businesses saw significant growth in the number of policies sold. For the closed book business, ReAssure continued to pursue selective growth.
In October 2017, Swiss Re reached an agreement with MS&AD Insurance Group Holdings Inc (MS&AD) for an investment of up to GBP 800 million in ReAssure, strengthening its ability to pursue growth. In December, ReAssure agreed to purchase 1.1 million Legal & General life policies for GBP 650 million, in line with its strategy to acquire closed life books in the UK and further strengthen its market position.
“In 2017, Life Capital continued to see strong growth, both organic and inorganic; delivering against our strategy and strengthening our market position.”
Expenses Life and health benefits –1 896 –1 872 −1 Return credited to policyholders –5 060 –3 179 −37 Acquisition costs –63 –106 68 Operating expenses –503 –514 2 Total expenses before interest expenses –7 522 –5 671 −25
The net operating margin in 2017 was 10.9% compared to 27.0% in the prior year, in line with movements in net income.
Life Capital generated significant gross cash of USD 998 million during 2017, compared to USD 721 million in the prior year. The gross cash generated in 2017 was driven by the strong underlying surplus on the ReAssure business. It further benefited from an update to mortality assumptions and the finalisation of the 2016 year-end Solvency II statutory valuation.
Premiums Gross premiums written increased by 18.3% to USD 1.8 billion during 2017, mainly driven by growth in the open book businesses, offsetting the run-off of the closed books, as well as foreign exchange rate movements. Net premiums earned increased from growth in the open book life and health insurance businesses.
Net realised gains decreased by USD 110 million to USD 111 million in 2017, reflecting the lower impact from interest rate derivatives.
Operating expenses Operating expenses were USD 514 million in 2017 compared to USD 503 million in 2016, including investment in 2017 for the open book expansion.
Outlook Life Capital continues to pursue selective acquisition opportunities within the closed book market in the UK and is focused on growing its individual and group life and health businesses in Europe and the US. The ambition is to build a leading primary life and health business, with attractive returns for shareholders.
Growth at Life Capital relies largely on the strategic exploration of new digital capabilities to access attractive primary life and health risk pools.
By forging strategic B2B partnerships using agile tech and smart data, iptiQ is tackling one of our key industry challenges: to provide simple, affordable and digital insurance solutions.
The digital revolution is here to stay. Through promising start-ups such as iptiQ, Life Capital will continue investing in technology to provide protection for as many families as possible.
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). Dividend payment is typically two working days after the ex-dividend date. The corresponding dates in 2018 are 24 and 26 April.
Dividends The Board of Directors proposes a regular dividend of CHF 5.00 per share for 2017. As the tax privileged legal reserves from capital contributions were exhausted with the payment of the 2014 dividend, the dividend paid for 2017 will be subject to 35% Swiss withholding tax.
Insurance indices STOXX Europe 600 Insurance 5.02 Bloomberg Europe 500 Insurance 4.73 FTSEurofirst 300 Insurance 5.77 Dow Jones Insurance Titans 30 2.22
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. Swiss Re is also a member of various sustainability indices, including the Dow Jones
Price per share year-end 82.05 83.65 98.15 96.50 91.25 Price per share year high (intra-day) 84.75 86.55 99.75 97.85 98.50 Price per share year low (intra-day) 66.10 69.25 74.95 79.00 81.65 Daily trading volume (in CHF millions) 78 95 134 120 129 Market capitalisation11 (in CHF millions) 30 417 31 010 36 385 34 747 31 888 ADR price at year-end (in USD) 92.38 84.57 24.5312 23.76 23.38 1 Nominal value of CHF 0.10 per share.
12 Since 15 June 2015 every Swiss Re ADR represents one quarter of a Swiss Re share. Prior to close of business on 12 June 2015, one ADR represented one Swiss Re share.
Swiss Re achieved its over-the-cycle economic net worth per share growth target with a growth rate of 10.8%.
EVM performance Underwriting losses in Property & Casualty Reinsurance and Corporate Solutions due to natural catastrophes, offset by strong new business contribution in Life & Health Reinsurance as well as a strong investment result.
Economic Value Management (EVM) is Swiss Re’s proprietary integrated economic valuation and steering framework, consistently measuring economic performance across all businesses.
Swiss Re reported a total contribution to economic net worth (ENW) of USD 1.9 billion in 2017 compared to USD 4.2 billion in 2016. On a risk-adjusted basis, Swiss Re reported an EVM loss of USD 9 million, implying that the required cost of capital was essentially covered in 2017. This result was in contrast to the reported EVM profit of USD 1.4 billion in 2016.
“ EVM allows Swiss Re to measure sustainable, long-term value creation.”
Group performance The EVM loss of USD 9 million in 2017 reflected the impact of Cyclone Debbie in Australia as well as hurricanes, earthquakes and wildfires in the Americas that adversely impacted the Property & Casualty Reinsurance and Corporate Solutions economic results. These losses were partially offset by a strong new business result in Life & Health Reinsurance, as well as a strong overall investment result, mainly due to tightening credit spreads.
The EVM loss from previous years’ business amounted to USD 148 million in 2017 compared to an EVM loss of USD 579 million in 2016. The result was primarily driven by large man-made and natural catastrophe loss development in Corporate Solutions, partially offset by favourable claims experience in Property & Casualty Reinsurance.
EVM profit 1 399 −9 − Total contribution to ENW 4 231 1 867 −56
Business segment performance Property & Casualty Reinsurance reported an EVM loss of USD 1.2 billion in 2017 compared to a profit of USD 562 million in 2016. The EVM loss on new business of USD 1.5 billion was driven by severe natural catastrophe events, which included hurricanes Harvey, Irma and Maria, two earthquakes in Mexico and the wildfires in California. EVM profit on previous years’ business was USD 120 million, driven by favourable experience in property and specialty, partially offset by losses from Cyclone Debbie and negative casualty development in the motor business in both the US and the UK. Investment activities generated an EVM profit of USD 212 million in 2017 compared to a loss of USD 29 million in 2016. The 2017 profit was driven by performance across equities and alternative investments, and from credit investments, while the prior year was impacted by a negative rates performance on a short duration position.
Life & Health Reinsurance reported an EVM profit of USD 1.6 billion in 2017 compared to USD 1.2 billion in 2016. The 2017 result included a strong new business profit of USD 987 million, driven by large transactions in EMEA and continued growth in Asia. The 2017 previous years’ business profit was USD 11 million. This was mainly driven by positive results from model
In 2017, an EVM loss of USD 128 million was reported in Group items compared to a loss of USD 364 million in 2016. The EVM loss from new business was USD 232 million in 2017, driven by capital costs on excess capital and expenses, partially offset by trademark licence fees charged to the business segments. The previous years’ business loss was USD 42 million, mainly driven by an increase in overhead expenses. Investment activities generated an EVM profit of USD 146 million in 2017 compared to a loss of USD 216 million in 2016, with the favourable variance reflecting an improved result from Principal Investments.
Premiums and fees retention rate, % 98.6 97.5 Premiums and fees growth rate, % 14.8 −12.4
Profit margin – new business, % 3.1 −4.1 Profit margin – previous years’ business, % −2.9 −0.8 Profit margin – investments, % 12.0 16.5
Provision for capital costs 9 260 9 034 Future income tax liabilities 4 606 4 914
Economic net worth as of 1 January 37 358 36 648 Change in EVM methodology −1 699 Adjusted economic net worth as of 1 January 35 659 36 648 Total contribution to ENW 4 231 1 867 Dividends and share buy-back −2 662 −2 629 Other, including foreign exchange on economic net worth −580 1 781 Economic net worth as of 31 December 36 648 37 667 Common shares outstanding as of 31 December 325 978 727 314 585 765 Economic net worth per share in USD as of 31 December 112.42 119.74
Taxes −124 −289 −36 −296 2 −743 Capital costs −423 −300 −55 −256 −210 −1 244
Cost of debt −212 −154 −14 −63 −18 −461 Release of current year capital costs 1 008 757 202 426 385 2 778
Profit margin – new business, % 1.9 11.0 −4.2 − 3.1 Profit margin – previous years’ business, %1 5.1 −4.7 −2.1 −17.8 −2.9 1 The overall previous years’ business profit margin for the Business Unit Reinsurance was –1.1%.
Gross underwriting result – new business 39 2 979 103 378 3 3 502
Net underwriting result – new business −1 281 2 070 −740 175 −112 112
Capital costs −384 −714 −128 −65 −184 −1 475 EVM profit – new business −1 493 987 −739 132 −232 −1 345 EVM profit – previous years’ business 120 11 −257 20 −42 −148
Profit margin – new business, % −10.2 8.6 −21.2 4.3 −4.1 Profit margin – previous years’ business, %1 1.9 0.1 −18.3 1.0 −0.8 1 The overall previous years’ business profit margin for the Business Unit Reinsurance was 0.8%.
̤ Goodwill and other intangibles: EVM excludes the recognition of potential future new business activities, including potential renewals. As a result, no goodwill or intangible assets are carried in the EVM balance sheet.
̤ Capital costs: EVM recognises opportunity costs for shareholders’ capital. The present value of capital costs allocated to existing contracts are recognised in the EVM balance sheet.
We have been engaged to perform a reasonable assurance engagement on the Economic Value Management (“EVM”) financial information of Swiss Re Ltd (the “Company”) for the year ended 31 December 2017 (the “EVM financial information”). The EVM financial information consists of the income statement, balance sheet, statement of economic net worth and information on business segments as set out on pages 57 to 63 in the Company’s 2017 Annual Report.
All other EVM information included in, or made available outside, the Company’s 2017 Annual Report was not subject to assurance procedures and, accordingly, we express no conclusion on this information.
Criteria The reporting criteria used by the Company are described in the summary of significant EVM principles (hereafter referred to as ‘EVM principles’) as published on the Company’s website (swissre.com/EVM_principles).
Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the EVM financial information in accordance with the Company’s EVM principles including data, valuation and accounting principles, assumptions and factors used and the related internal controls as determined necessary to enable the preparation of the EVM financial information that is free from material misstatement.
A reasonable assurance engagement involves performing procedures to obtain evidence about the execution of the valuation and accounting for the purpose of the EVM financial information in accordance with the Company’s EVM principles. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the EVM financial information, whether due to omissions, misrepresentation, fraud or error. In making those risk assessments, we consider internal controls relevant to the preparation of EVM financial information in order to design assurance procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls regarding the EVM financial information. A reasonable assurance engagement also includes evaluating the appropriateness of the policies used and reasonableness of significant estimates made, as well as evaluating the adequacy of the overall presentation of the EVM financial information in accordance with the Company’s EVM principles.
“ Our capital position is very strong and we continue to have ample financial flexibility.”
“ Our risk appetite framework forms the basis for controlled risk-taking and protects our financial strengths.”
Capitalisation Swiss Re maintained a very strong capital position during 2017 despite a challenging year. This allowed us to allocate capital to potential market opportunities while continuing to distribute excess capital to our shareholders. The Group’s Swiss Solvency Test ratio remains comfortably above Swiss Re’s respectability level of 220%. Rating agencies A.M. Best, Moody’s and Standard & Poor’s (S&P) rated Swiss Re’s financial strength ‘superior’, ‘excellent’ and ‘very strong’, respectively (see page 72).
Our overall goal for capital management is to maintain a capital structure that operates efficiently within constraints imposed by regulators and requirements from rating agencies as well as maximises our financial flexibility. Our underwriting and investment decisions are steered to make capital and liquidity fungible to the Group wherever possible, while complying with local regulations and client needs. Cash dividends paid to the Group’s parent holding company, Swiss Re Ltd, totalled USD 22.4 billion since 2012.
Based on the Group’s capital strength, the Board of Directors proposes a 2017 regular dividend of CHF 5.00 per share. In addition, the Board of Directors proposes a public share buy-back programme of up to CHF 1.0 billion purchase value, commencing at the discretion of the Board of Directors after the AGM's approval.
The amount of liquidity held is largely determined by internal liquidity stress tests, which estimate the potential funding requirements stemming from extreme loss events. Based on these internal liquidity stress tests, we estimate that the Swiss Reinsurance Company Ltd liquidity pool, the primary liquidity pool of the Group, currently holds significant surplus liquidity.
Swiss Re also provides FINMA with a yearly report on its liquidity position, in accordance with FINMA’s circular 13/5, “Liquidity — Insurers”.
Risk Management Group Risk Management is key to the controlled risk-taking that underpins our financial strength. Risk Management is mandated to ensure that the Group and the legal entities have the necessary expertise, frameworks and infrastructure to support good risk-taking. In addition, it monitors and ensures adherence to applicable frameworks and also performs reserving and reporting activities.
Risk Management is embedded throughout our business. We have dedicated Chief Risk Officers and risk teams for all major legal entities and regions. These are closely aligned to Swiss Re’s business structure, in order to ensure effective risk oversight, but remain part of our Risk Management function under the Group CRO, thus ensuring their independence as well as a consistent Group-wide approach to overseeing and controlling risks. They are supported in this by central risk teams that provide specialised risk expertise and oversight.
The Group’s risk-taking is steered by our Risk Appetite Framework, which consists of two interlinked components: risk appetite and risk tolerance. The risk appetite statement facilitates discussions about where and how Swiss Re should deploy its capital, liquidity and other resources under a risk-return view, while the risk tolerance sets clear boundaries to risk-taking.
The increase in life and health risk was driven in particular by the appreciation of major currencies against the US dollar and lower interest rates, as well as higher lethal pandemic and critical illness exposure.
LOC1 Senior debt2 Total hybrid incl. contingent capital3 Core capital4 Senior leverage plus LOC ratio5 (target range: 15–25%) Subordinated leverage ratio6 (target range: 15–20%)
5 Senior debt plus LOCs divided by total capital. 6 Subordinated debt divided by sum of subordinated debt and ENW.
Key achievements in 2017 In June 2017, Swiss Re Ltd established a USD 750 million truly perpetual pre-funded subordinated debt facility that has a fixed credit spread for life providing the Group with a permanent source of ‘on-demand’ non-dilutive capital irrespective of market conditions at the time. This is our fourth pre-funded subordinated debt facility, bringing the total amount of such facilities to USD 2.65 billion, further enhancing the Group’s financial flexibility while increasing its resilience.
The Group capital structure is comfortably within the senior leverage (15–25%) and subordinated leverage (15–20%) target ranges, providing further financial flexibility.
USD bn 1 Core capital of Swiss Re Group is defined as economic net worth (ENW) 2 Senior debt excluding non-recourse positions 3 Senior debt plus LOCs divided by total capital 4 Includes SRL’s pre-funded dated subordinated debt facilities and contingent capital instruments accounted for as equity 5 Unsecured LOC capacity and related instruments (usage is lower) 6 Subordinated debt divided by sum of subordinated debt and ENW
Unlike prior years, beyond the Board and regulatory approval and considering the capital management priorities, there will be no other preconditions to the commencement of the proposed share buy-back programme.
Swiss Re Group’s capital adequacy Regulatory capital requirements Swiss Re is supervised at the Group level and for its regulated legal entities domiciled in Switzerland by FINMA. FINMA supervision comprises minimum solvency requirements, along with a wide range of qualitative assessments and governance standards.
Life Capital 1 Reflects total external dividend and public share buy-back programmes between January 2012 and December 2017. 2 Principal Investments has paid to Group dividends of USD 0.5bn between January 2012 and December 2017. 3 Internal dividend flows from January 2012 to December 2017.
On 7 December 2017, A.M. Best upgraded Swiss Re’s long-term issuer credit rating to “aa” from “aa–” and affirmed the A+ (superior) financial strength of Swiss Re and its core subsidiaries. The rating outlook is “stable”. The rating is a result of Swiss Re’s balance sheet strength, which A.M. Best categorises as strongest, as well as strong operating performance, very favourable business profile and very strong enterprise risk management.
On 19 December 2017, Moody’s affirmed Swiss Re’s insurance financial strength rating and outlook at “Aa3” stable. The rating reflects Swiss Re’s excellent market position, very strong business and geographic diversification and strong balance sheet in terms of capital and financial flexibility.
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 under current conditions as well as adverse circumstances; ̤ funding is charged and credited at an appropriate market rate through our internal transfer pricing; ̤ diversified sources are used to meet our residual funding needs; and
In 2017, the amount of surplus liquidity reduced slightly. This reduction was largely due to a management decision to reduce external debt, as well as the impact of the exceptional natural catastrophe losses in the third quarter. These negative impacts were partially offset by foreign exchange rate movements, which increased surplus liquidity.
Risk management Our Risk Management provides independent oversight, continuously monitors changes in our risk landscape and ensures controlled risk-taking.
Swiss Re applies a differentiated governance approach at legal entity level, depending on the materiality of individual entities. SRZ, SRCS and SRLC, as well as major legal entities within the Group that are designated as so-called “Level I entities”, are subject to enhanced governance, which includes the following requirements: ̤ Develop and maintain corporate and risk governance documentation that governs the responsibilities of the legal entity Board, committees and management
̤ Establish an Audit Committee as well as a Finance and Risk Committee to support the legal entity Board in performing its oversight responsibility for risk and capital steering
Group risk governance documents are organised hierarchically across five levels, which are mirrored by equivalent documents at legal entity (LE) level: ̤ At the highest level, the Swiss Re Ltd
(SRL) Bylaws and the charter for the Group Finance and Risk Committee outline the ultimate authority for risk management, assigning responsibilities to the Group Board of Directors and the Group Executive Committee.
̤ Independent risk controlling – Dedicated units within Risk Management control all risk-taking activities. These are supported by Compliance and Group Internal Audit functions.
̤ Risk controller – is tasked by the risk owner with independent oversight of risk-taking activities to mitigate potential conflicts of interest between the risk owner and risk taker; risk controllers are responsible for escalating relevant concerns.
Risk culture Swiss Re fosters and maintains a strong risk culture to promote risk awareness, rigour and discipline across all its activities. This risk culture stands for the risk and control related values, knowledge and behaviour shared by all employees. Its principal components are summarised in a framework that builds on the Group Code of Conduct as well as on key risk management principles in the Group Risk Policy.
Key risk takers across Swiss Re are a particular focus in promoting good risk and control-related behaviours. The relevant positions are identified in a regular process, and those who hold them are subject to additional behavioural objectives and assessments.
Swiss Re’s compensation principles and framework are captured within the Swiss Re Group Compensation Policy. The Group’s Finance and Risk Committee conducts a regular risk assessment for all changes to this policy.
Group Executive Committee Develops and implements the risk management framework, sets and monitors risk capacity limits; some responsibilities are delegated to the Group CRO and major legal entities.
Group Internal Audit Performs independent, objective assessments of adequacy and effectiveness of internal control systems.
Legal entity management Responsible for managing underwriting decisions and operational risks in their area.
Compliance Oversees compliance with applicable laws and Code of Conduct and manages compliance risks.
Central Risk Management units Oversight of financial market and credit risk as well as liquidity risk; provide shared risk management expertise such as risk modelling, risk governance, political risks, sustainability and emerging risk; provide strategic control services such as operational and regulatory risk management.
̤ Investment Committee − reviews the financial risk analysis methodology and valuation related to each asset class, and ensures that the relevant management processes and controlling mechanisms are in place.
The Group Executive Committee is responsible for developing and implementing Swiss Re’s Group-wide risk management framework.
It also sets and monitors risk capacity limits, oversees the Economic Value Management framework (see page 54), determines product policy and underwriting standards, and manages regulatory interactions and legal obligations. The Group Executive Committee has delegated various risk management responsibilities to the Group Chief Risk Officer (Group CRO) as well as to certain legal entity CROs, in particular the CROs of the legal entities SRZ, SRCS and SRLC.
The Group CRO is appointed as the principal independent risk controller of Swiss Re. He is a member of the Group Executive Committee and reports directly to the Group CEO as well as to the Board’s Finance and Risk Committee. The Group CRO also advises the Group Executive Committee, the Chairman or the respective Group Board Committees, in particular the Finance and Risk Committee, on significant matters arising in his area of responsibility.
The Group CRO leads the independent Risk Management function, which is responsible for risk oversight and control across Swiss Re. It thus forms an integral part of Swiss Re’s business model and risk management framework. The Risk Management function comprises dedicated risk teams for legal entities and regions, as well as central teams that provide specialised risk expertise and oversight.
identification, assessment and control. They are supported by functional, regional and subsidiary CROs who are responsible for overseeing risk management issues that arise at regional or subsidiary level.
The central risk teams oversee Group liquidity and capital adequacy and maintain the Group frameworks for controlling these risks throughout Swiss Re. They also support CROs at Group and legal entity level in discharging their oversight responsibilities. They do so by providing services, such as: ̤ Financial risk management ̤ Specialised risk category expertise and accumulation control ̤ Risk modelling and analytics ̤ Regulatory relations management ̤ Maintaining the central risk governance framework
̤ The Compliance function oversees Swiss Re’s compliance with applicable laws, regulations, rules, and the Code of Conduct. It also assists the Group Board, Group Executive Committee and other management bodies in identifying, mitigating and managing compliance risks.
Risk control framework Swiss Re operates within a clearly defined risk control framework. This is set out in the Group Risk Management Standards and comprises a body of standards that establish an internal control system for taking and managing risk. These standards set responsibilities for risk takers and risk controllers. The risk control framework defines five key tasks, which are the core components of Swiss Re’s risk management cycle: ̤ Risk tolerance and appetite assessment of plan – ensures that the risk implications of plans are understood, and determines whether business and investment plans adhere to risk appetite framework (risk appetite and tolerance).
̤ Risk identification – ensures that all risks to which Swiss Re is exposed are transparent in order to make them controllable and manageable.
Find more information about the risk control framework in our interactive online report.
In the context of business strategy and planning, the risk appetite statement facilitates discussions about where and how Swiss Re should deploy its capital, liquidity and other resources under a risk-return view, while the risk tolerance sets clear boundaries to risk-taking.
During strategic planning and targetsetting, Risk Management provides an opinion on the proposed strategy and targets to the Group Executive Committee and ultimately the Group Board. The opinion focuses on the risk impact of the proposed strategy and the risks related to its implementation. The strategic plan, risk appetite and capital allocation ambition are expressed in a target portfolio for the Group’s assets and liabilities, which should ultimately deliver the Group’s targeted performance.
Risk appetite outlines the Group’s principles on acceptable risks and provides key directions for risk-taking and risk controlling as part of implementing Swiss Re’s strategy: achieving targeted performance, providing liquidity and financial flexibility, managing capital adequacy, and protecting and growing franchise value.
Swiss Re’s risk tolerance is based on three objectives: ̤ To protect the shareholders’ franchise by ensuring that the Group is able to continue operating the business following an extreme loss event.
̤ To avoid material operational risks that could subject the Group to large operational losses with corresponding consequences from an economic, reputational or regulatory perspective.
To meet the first objective, the Group Risk Policy defines an extreme loss absorption limit with conditions that must be fulfilled following the realisation of a loss corresponding to a 99% Group shortfall event. To meet the second objective, the Group’s risk tolerance criteria includes respectability limits, which need to be met under normal operating conditions. These limits ensure that Swiss Re has adequate capital and liquidity above minimum requirements to be considered a respectable counterparty by external stakeholders. To meet the third objective, the Group has established a Group-wide risk matrix methodology in which key operational risks are assessed against an acceptable level of expected losses.
The Group Board is responsible for approving the risk tolerance criteria, as well as for monitoring and reviewing risk tolerance through its Finance and Risk Committee. Breaches or anticipated breaches of limits established to control the risk tolerance criteria must be communicated to the Group Finance and Risk Committee.
O pt im is e ris k/ re tu rn p or tf ol io
C on tr ol ri sk e xp os ur es
̤ Financial market risk decreased by 3% to USD 11.9 billion; this was mainly driven by lower credit spread risk reflecting the minority investment of MS&AD Insurance Group Holdings Inc (MS&AD) into ReAssure.
in USD billions, as of 31 December 2016 2017 Change in % cross reference information
Our internal risk model takes account of the accumulation and diversification between individual risks. The effect of diversification at the category level is demonstrated in the table above, which represents the difference between the Group 99% tail VaR and the sum of standalone tail VaR amounts in the individual risk categories. The extent of diversification is largely determined by the selected level of aggregation – the higher the aggregation level, the lower the diversification effect.
in USD billions, as of 31 December 2016 2017 Change in %
Find more information about the internal risk model in our interactive online report.
Swiss Re’s risk landscape The risk categories shown in the table below are discussed on the following pages. Across these categories we identify and evaluate emerging threats and opportunities through a systematic framework that includes the assessment of potential surprise factors that could affect known loss potentials. Liquidity risk management is discussed on page 73.
Swiss Re is exposed to a broad landscape of risks. These include risks that are actively taken as part of insurance or asset management operations, and are calculated in the internal risk model as part of the Group’s economic capital requirement as well as to allocate risk-taking capacity: ̤ Property and Casualty (P&C) insurance risk arises from coverage provided for property, liability, motor, and accident risks, as well as for specialty risks such as engineering, agriculture, aviation and marine. It includes underlying risks inherent in the business Swiss Re underwrites, such as inflation or uncertainty in pricing and reserving.
̤ Financial market (FM) risk represents the potential impact on assets or liabilities that may arise from movements in financial market prices or rates, such as equity prices, interest rates, credit spreads, foreign exchange rates or real estate prices. Financial market risk originates from two main sources: investment activities and the sensitivity of the economic value of liabilities to financial market fluctuations.
̤ Strategic risk represents the possibility that poor strategic decision-making, execution or response to industry changes or competitor actions could harm Swiss Re’s competitive position and thus its franchise value.
̤ Across all risk categories, Swiss Re actively identifies emerging risks and threats as part of its risk identification process; this includes new risks as well as changes to previously known risks that could create new risk exposures, or increase the potential exposure or interdependency between existing risks.
Swiss Re also manages and mitigates insurance risk through external retrocession, insurance risk swaps or by transferring risk to capital markets. This provides protection against extreme catastrophic events, further diversifies risk, stabilises economic results and releases underwriting capacity.
These effects were partly offset by a reduction in natural catastrophe exposures in 2017 as a result of disciplined underwriting in a challenging market environment.
Management The CROs of SRZ, SRCS and their subsidiaries are responsible for overseeing all property and casualty exposures written in their areas. In addition, Group Risk Management monitors and controls accumulated exposures across Swiss Re to ensure that they remain within the defined risk tolerance level.
The first line of control for property and casualty risks lies within Swiss Re’s underwriting units. All transactions must be reviewed by at least two authorised individuals, and are subject to authority limits. Each underwriter is assigned an individual authority based on technical skills and experience. In addition, capacity limits are allocated to local teams; any business that exceeds this authority or is otherwise complex or unusual triggers an escalation process that extends up to the Group Executive Committee. As an exception, single risks and some renewed treaties with non-material changes can be authorised by an individual underwriter with the necessary authority − but these risks are subject to checks after acceptance.
Underwriters represent the first line of control for life and health risks. All transactions that could materially change risk at Group level or for key legal entities require independent review and sign-off by Risk Management before they can be authorised. This is part of a three signature principle, under which key transactions must be approved by Client Markets, Underwriting, and Risk Management. For transactions of defined types and within defined limits, this may be applied through the approval of underwriting or pricing guidelines. For other transactions, the signatures must be secured through a review of the individual transaction.
In addition to underwriting and capacity limits, Swiss Re’s limit framework includes aggregate Group limits for L&H risk as well as separate limits for mortality, longevity and lethal pandemic risk. At SRZ and SRLC level, acceptance of life and health risks is governed by aggregated limits. Market exposure limits are in place for catastrophe and stop loss business. Swiss Re pays particular attention to densely populated areas and applies limits for individual buildings to guard against risk exposure accumulations.
Natural catastrophes Atlantic hurricane −5.1 −4.5 −10 Californian earthquake −3.4 −3.2 −5 European windstorm −2.6 −2.5 −1 Japanese earthquake −3.1 −3.1 1
Life insurance Lethal pandemic −2.4 −2.8 15 1 Single event losses with a 200-year return period show for example that there is a 0.5% probability over the next year that the loss from a single Atlantic hurricane event could exceed USD 4.5 billion. The impact excludes earned premiums for the business written and reinstatement premiums that could be triggered as a result of the event.
The sensitivities on page 87 show the pre-tax impact of various market scenarios on Swiss Re’s economic capital. They differ from tail VaR, in particular as they do not take into account the historic volatility of the underlying assets.
The table above shows the pre-tax impact of various market scenarios on Swiss Re’s economic capital. The credit default stress is calculated as the change in expected loss of the credit exposure in a stress event.
The Group’s framework for mitigating operational risk is based on its three lines of control, assigning primary responsibility for identifying and managing risks to individual risk takers (first line of control), with independent oversight and control by the Risk Management and Compliance functions (second line of control) as well as Group Internal Audit (third line of control). This approach is designed to achieve a strong, coherent and Group-wide risk culture built on the principles of ownership and accountability.
Operational risk is inherent within Swiss Re’s business processes. As the company does not receive an explicit financial return for such risks, the approach to managing operational risk differs from the approach applied to other risk categories. The purpose of operational risk management is to identify and cost-effectively mitigate operational risks that approach or exceed Swiss Re’s tolerance.
Swiss Re’s operational risk tolerance limits are based on a combination of the quantitative and qualitative impact as well as the probability of loss. The residual risk – the risk after mitigation – is assessed and reported on a quarterly basis to executive management and Boards of Directors at Group and legal entity level.
All operational events and issues are recorded and managed in a central Operational Risk Management system in order to address the identified problems and avoid the recurrence of similar events.
In 2017, Swiss Re has evolved its operational risk framework and refined the Group’s integrated Internal Control System. As a result, a centrally governed global operational risk register with a global control catalogue provide a sound basis for the quarterly risk and control self-assessments and reporting. Throughout 2017, Swiss Re focused on further improvements on data analytics and visualisation as well as a software solution to better manage end-user applications.
Group Operational Risk Management actively participates in various research projects on topics such as risk boundaries, scenario analysis and cyber risk.
Strategic risk Overall responsibility for managing strategic risk lies with the Group Board, which establishes Swiss Re’s overall strategy. The Boards of legal entities are responsible for the strategic risk inherent in their specific strategy development and execution. Strategic risks are 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.
In 2017, Swiss Re was again not designated as Global Systemically Important Insurer (G-SII). The non-designation confirms that the international supervisory community continues to assess Swiss Re as neither causing nor amplifying systemic risk.
Political risk Political developments can threaten Swiss Re’s operating model but also open up opportunities for developing the business. The Group adopts a holistic view of political risk and analyses developments in individual markets and jurisdictions, as well as cross-border issues such as war, terrorism, energy-related issues and international trade controls.
A dedicated Political Risk team identifies, assesses and monitors political developments worldwide. Swiss Re’s political risk experts exercise oversight and control functions for named political risks, such as in the political risk insurance business; this includes monitoring political risk exposures, providing recommendations on particular transaction referrals and risk reporting. In addition, the Political Risk team provides specific country ratings that cover political, economic and security-related country risks; these ratings complement sovereign credit ratings and are used to support risk control activities and inform underwriting or other decision-making processes throughout the Group.
Swiss Re seeks to raise awareness of political risk within the insurance industry and the broader public, and actively engages in dialogue with clients, media and other stakeholders. We also build relationships that expand our access to information and intelligence, and allow us to further enhance our methodologies and standards. For example, we participate in specialist events hosted by institutions such as the International Institute of Strategic Studies, the Geneva Center for Security Policy, or the Risk Management Association, and maintain relationships with political risk specialists in other industries, think tanks and universities, as well as with governmental and non-governmental organisations.
Swiss Re’s model governance is based on Group-wide standards for model validation and model changes. These standards seek to ensure that each material model has a clear scope, is based on sound mathematical and scientific concepts, has been implemented correctly and produces appropriate results given the stated purpose. Furthermore, the calibration of model parameters (and the data on which calibration relies) must be trustworthy, while expert judgments are required to be sensible, documented and evidenced.
Swiss Re works closely with industry peers to develop and share best practices for assessing and managing model-related risks. In this context, we are actively participating in a CRO FORUM working group that provides a platform for such exchanges and is working on frameworks for model risk.
In June 2017, Swiss Re decided to develop a carbon risk steering mechanism that will help guide our business towards a low-carbon world and support our clients in their transition. The first part of the carbon steering mechanism will take form of a thermal coal policy, which will be integrated in the Sustainability Risk Framework by mid-2018. It will apply across all lines of business on direct, facultative and treaty side. This transition will take some time and constructive dialogue with clients.
Overview Measuring a company’s corporate governance based on environmental, social and governance (ESG) criteria gains in importance.
Reinsurance Company Ltd (SRZ), Swiss Re Corporate Solutions Ltd (SRCS) and Swiss Re Life Capital Ltd (SRLC), defining the legal and organisational framework of the Business Unit (BU) top-level companies SRZ, SRCS and SRLC; ̤ the SRZ, SRCS, SRLC Bylaws, defining the governance framework of the legal entities SRZ, SRCS and SRLC, their interactions with the respective BU Reinsurance, Corporate Solutions and Life Capital from a functional responsibility point of view, including the responsibilities and authorities of the SRZ, SRCS and SRLC Board of Directors, the SRZ, SRCS and SRLC Board Committees and the SRZ, SRCS and SRLC Executive Committees, as well as the relevant reporting procedures; and
Enhanced conflicts of interest framework Conflicts of interest may arise where personal interests or relationships might interfere with those of Swiss Re. They may improperly influence judgement, objectivity or loyalty and expose Swiss Re to material adverse reputational and financial risks. We are committed to conducting business in a manner that ensures that we act in the best interests of Swiss Re without actual or perceived influence by our personal interests or relationships. We act with integrity at all times and foster an open and fair environment by being transparent in disclosing our conflicts of interest. We define our conflicts of interest standards and procedures in a series of documents such as in our Group Code of Conduct as well as in the Bylaws. In the reporting year we have implemented the “Global Standard on Conflicts of Interest” (the Standard) throughout the Group with the aim to enhance the existing processes with respect to conflicts of interest across the Group. The improvements also address FINMA’s general requirements to have defined principles for a process and structure to identify and avoid and/or resolve conflicts of interest.
̤ Asset Liability Management (ALM) and Minimum Risk Benchmark (MRB) The Board members deepened their knowledge on the scope and objective of the ALM and on the processes and governance underlying the ALM and the MRB. The Board members were presented with the structure and the main components of the MRB and its limitations and challenges.
̤ Swiss Re’s internal risk model The Board of Directors appraises the internal risk model’s central role in core risk management activities. It is therefore key to understand the internal risk model and its outputs. During that training session, the Board members received a refresher on the basic principles of the techniques applied, generic modelling approaches as well as statistical measures that are being used. Furthermore, the Board members were provided with insights on the interpretation of the results, the linking of the business view to the risk view and the input of risk figures into other reports and processes (eg EVM).
Walter B. Kielholz for a further one-year term of office as Chairman of the Board of Directors.
̤ Raymond K.F. Ch’ien, Renato Fassbind, Mary Francis, Rajna Gibson Brandon, C. Robert Henrikson, Trevor Manuel, Philip K. Ryan, Sir Paul Tucker and Susan L. Wagner were individually re-elected by the Annual General Meeting 2017 for a further one-year term of office as members of the Board of Directors.
̤ The Annual General Meeting 2017 re-elected Raymond K.F. Ch’ien, Renato Fassbind and Robert Henrikson as members, and elected Joerg Reinhardt as a new member of the Compensation Committee for a one-year term of office.
̤ As of 1 April 2018, the Group EC will consist of 12 members as opposed to 13 members up to March 2018.
Technology transformation is a regular agenda item of the Group EC meetings. Amongst the topics discussed are the technology developments and its effects on Swiss Re or Swiss Re’s approach to technology across the Group.
Group companies is provided in Note 19 to the Group financial statements on pages 284–286.
* The Group CSO role will be merged with the Group CFO role effective 1 April 2018.
* According to Article 120 (1) FMIA anyone who directly or indirectly or acting in concert with third parties acquires or disposes shares or acquisition or sale rights relating to shares of a company with its registered office in Switzerland whose equity securities are listed in whole or in part in Switzerland, or of a company with its registered office abroad whose equity securities are mainly listed in whole or in part in Switzerland, and thereby reaches, falls below or exceeds the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 33⅓%, 50% or 66⅔% of the voting rights, whether exercisable or not, must notify this to the company and to the stock exchanges on which the equity securities are listed. According to Article 120 (3) FMIA, anyone who has the discretionary power to exercise the voting rights associated with equity securities in accordance with Article 120 (1) FMIA is also subject to the notification. The person or group is obliged to make a notification in writing to the company (issuer) and the stock exchange no later than four trading days after the creation of the obligation to notify (conclusion of a contract).
2 In compliance with Article 120 of the Financial Markets Infrastructure Act (FMIA), BlackRock, Inc., New York, U.S.A. (BlackRock), notified Swiss Re Ltd (Swiss Re) on 15 December 2017 following a disposal of collateral (acquisition and share position obligation) that it holds as of 14 December 2017 a total of 17 278 451 voting rights corresponding to 4.94% of the voting rights in Swiss Re. With recommendation of the Disclosure Office dated 15 July 2016, BlackRock was granted easing provisions from the obligation to disclose the direct shareholders according to Article 120 para. 1 FMIA in conjunction with Article 11 let. b and Article 22 para. 1 let. e and para. 3 FMIO-FINMA when disclosing holdings according to Article 18 para. 1 and 4 FMIO-FINMA. However, collective investment schemes within the meaning of Article 18 para. 2 let. a FMIO-FINMA that hold individually 3% or more of the voting rights of the relevant issuer will be mentioned in the relevant disclosure notification. Any person shall, at his/her request and without prove of interest, receive information about the direct shareholders within the meaning of Article 11 let. b and Article 22 para. 1 let. e and para. 3 FMIO-FINMA. Such request has to be addressed via email to the Disclosure Office: offenlegung@ six-group.com. The information will be provided within five trading days from receipt of the relevant request by BlackRock. The information will be provided in electronic format with a reference date not older than one month. The easing provisions are granted until 15 July 2019. The 17 278 451 voting rights result from (i) the holding of 14 449 273 registered shares of Swiss Re (corresponding to 4.13% of the voting rights), of which 308 219 voting rights (corresponding to 0.09% of the voting rights) are due to repos (on the purchaser side) and/or collateral received with the title transfer (non-repo), (ii) 2 728 435 voting rights (corresponding to 0.78% of the voting rights) delegated by a third party and which can be exercised at BlackRock’s own discretion and (iii) contracts for difference and one equity linked note (with expiry date of 9 February 2018) conferring a total of 100 743 voting rights (corresponding to 0.03% of the voting rights) in Swiss Re. In addition, BlackRock disclosed sales positions arising from contracts for difference amounting to 138 033 voting rights corresponding to 0.04% of the voting rights in Swiss Re.
As of 31 December 2017 Shareholders in % Shares in %
67.6% Institutional shareholders 28.3% Individual shareholders 4.1% Swiss Re employees 53.2% Switzerland 16.3% United Kingdom 14.4% USA
More information on the Swiss Re shares, such as the price performance and trading volume in 2017, Swiss Re’s dividend policy and dividends, the share buy-back programme and an overview on the key share statistics since 2013, is included in the section “Share performance” on pages 50–51 of the Financial Report 2017.
More information is provided in the sections “Conditional and authorised capital in particular” below and “Changes in capital” on page 102 of this Financial Report.
Such shares are issued through the voluntary or mandatory exercise of conversion and/or option rights granted by the company or Group companies in connection with bonds or similar instruments, including loans or other financial instruments (Equity-Linked Financing Instruments).
According to the Articles of Association, the Board of Directors is authorised to increase the share capital of the company at any time up to 21 April 2019 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
Joint provision for conditional capital for Equity-Linked Financing Instruments and for the abovementioned authorised capital The total of registered shares issued from (i) authorised capital, where the existing shareholders’ subscription rights were excluded and (ii) shares issued from conditional capital, where the existing shareholders’ advance subscription rights on the Equity-Linked Financing Instruments were excluded, may not exceed 70 000 000 registered shares up to 21 April 2019.
Changes in capital Changes in 2017 The Annual General Meeting 2017 approved the reduction of the ordinary share capital by CHF 1 062 028.00 from CHF 36 007 256.10 to CHF 34 945 228.10 by cancelling 10 620 280 shares with a nominal value of CHF 0.10 repurchased by Swiss Re Ltd on a second trading line on the SIX Swiss Exchange, via Cantonal Bank of Zurich as agent. The 10 620 280 shares were repurchased under the share buy-back programme lasting from 4 November 2016 until 9 February 2017. The purchase value of the repurchased own shares corresponded to CHF 999 999 942.06.
For further details on the share buy-back programmes, please visit: www.swissre. com/investors/shares/share_buyback/
The Annual General Meeting 2017 approved that the authority to issue registered shares from authorised capital as set forth in the Articles of Association be renewed to 21 April 2019. It approved that the limitation included in the provisions of the Articles of Association to issue registered shares from authorised capital where the existing shareholders’ subscription rights are excluded and to issue registered shares from conditional capital where the existing shareholders’ advance subscription rights on the Equity-Linked Financing Instruments are excluded be extended to 21 April 2019. The Annual General Meeting 2017 approved that the maximum number of registered shares that may be issued according to the above limitation be set at 70 000 000 from previously 74 000 000.
Board of Directors The Board of Directors is responsible for the overall direction, supervision and control of Swiss Re Ltd and the Swiss Re Group.
Mary Francis British 69 2013 Rajna Gibson Brandon Swiss 55 20001
Services Round Table ̤ Member of the Board of Trustees of Avenir Suisse ̤ Chairman of the Zurich Art Society
Mary Francis, CBE Member, non-executive and independent Born: 1948 Nationality: British
External appointments ̤ Board member of Barclays plc and Barclays Bank plc ̤ Board member of Ensco plc ̤ Member of the UK Takeover
Rajna Gibson Brandon Member, non-executive and independent Born: 1962 Nationality: Swiss
Rajna Gibson Brandon was elected to the Board of Directors of Swiss Reinsurance Company Ltd in 2000 and to the Board of Directors of Swiss Re Ltd in connection with its formation in 2011. She is a member of the Finance and Risk Committee and the Investment Committee.
C. Robert Henrikson Member, non-executive and independent Born: 1947 Nationality: American
External appointments ̤ Board member of Invesco Ltd ̤ Board member of AmeriCares ̤ Member of the Boards of Trustees of S.S. Huebner Foundation for Insurance Education and Indian Springs School
Professional experience Trevor Manuel served in the South African government for more than 20 years, including as Minister of Finance from 1996 to 2009 and as Minister in Presidency, responsible for the National Planning Commission, from 2009 to 2014. He held positions at international bodies, including the United Nations Commission for Trade and Development, the World Bank, the International Monetary Fund, the G20, the African Development Bank and the Southern African Development Community.
Old Mutual Group Holdings Ltd and board member of Old Mutual plc
Jay Ralph was elected to the Board of Directors of Swiss Re Ltd in 2017. He is a member of the Finance and Risk Committee.
External appointments ̤ Chairman of the Systemic Risk Council ̤ Fellow at the Harvard Kennedy School of Government ̤ Board member of the Financial
Professional experience Jacques de Vaucleroy was a member of the Management Committee of AXA Group from 2010 to 2016, serving as CEO of North, Central and Eastern Europe and CEO of Global Life & Savings. He also held a number of positions in boards of directors and supervisory boards of AXA companies. Before that, he spent 24 years at ING where he held senior roles in banking, asset management and insurance. He was a member of the Executive Board of ING Group from 2006 to 2009, in charge of insurance and asset management in Europe.
Professional experience Susan L. Wagner is a co-founder of BlackRock, where she served as Vice Chairman and a member of the Global Executive and Operating Committees before retiring in 2012. Over the course of her nearly 25 years at BlackRock, Susan L. Wagner served in several roles such as Chief Operating Officer, Head of Strategy, Corporate Development, Investor Relations, Marketing and Communications, Alternative Investments and International Client Businesses. Prior to founding BlackRock, Susan L. Wagner was a Vice President at Lehman Brothers supporting the investment banking and capital markets activities of mortgage and savings institutions.
Independence The SRL Bylaws stipulate that at least three-quarters of the members of the Board of Directors must be independent. Independence is defined in line with best practice corporate governance standards. To be considered independent a Board member may not be, and may not have been in the past three years, employed as a member of the Group EC, or by any subsidiary of the Swiss Re Group or may not have a material relationship with any part of the Swiss Re Group (either directly or as a partner, director or shareholder of an organisation that has a material relationship with the Swiss Re Group) other than serving as an independent board member in any subsidiary. In addition, the SRL Board agrees on other criteria that disqualify a Board member from being considered independent, taking into consideration provisions of applicable law, regulations and best practice. All the members of the Board of Directors meet our independence criteria with the exception of our Chairman. As a full-time Chairman he is not considered independent.
All Board members comply with the requirements on external mandates set out in the Articles of Association.
Any activities of Board members in governing and supervisory bodies of important Swiss and foreign organisations, institutions and foundations, as well as permanent management and consultancy functions for important Swiss and foreign interest groups and official functions and political posts, are stated in each of the directors’ biographies, which can be found on pages 105–109.
Changes in 2017 At the Annual General Meeting on 21 April 2017, Jay Ralph, Joerg Reinhardt and Jacques de Vaucleroy were elected as new non-executive and independent members of the Board of Directors for a one-year term of office. These elections are another step towards the Board of Directors’ aim to complete the generation change in its composition initialised a few years ago. At the same time, the shareholders re-elected Walter B. Kielholz (Chairman), Raymond K.F. Ch’ien, Renato Fassbind, Mary Francis, Rajna Gibson Brandon, C. Robert Henrikson, Trevor Manuel, Philip K. Ryan, Sir Paul Tucker and Susan L. Wagner for a one-year term of office as members of the Board of Directors. Carlos E. Represas did not stand for re-election.
Qualifications The Board of Directors needs to assemble the necessary qualifications, skills and diversity to perform all required responsibilities. It must assemble among its members the balance of managerial expertise and knowledge from different fields required for the fulfilment of the oversight responsibility as well as for sound independent decision-making in line with the needs of the business.
As determined by applicable law, a Board member may not have any management or executive function within the Swiss Re Group.
Nominations for re-election and election by the Annual General Meeting on 20 April 2018 On 1 January 2014 the Ordinance Against Excessive Compensation at Public Corporations entered into effect. It provides that, as of the Annual General Meeting 2014, the shareholders will annually elect the members of the Board of Directors, the Chairman of the Board of Directors and the members of the Compensation Committee, individually and separately, for one-year terms. The Board of Directors proposes that the following Board members be re-elected for a one-year term: ̤ Walter B. Kielholz ̤ Raymond K.F. Ch’ien ̤ Renato Fassbind ̤ Trevor Manuel ̤ Jay Ralph ̤ Joerg Reinhardt ̤ Philip K. Ryan ̤ Sir Paul Tucker ̤ Jacques de Vaucleroy ̤ Susan L. Wagner
Mary Francis, Rajna Gibson Brandon and C. Robert Henrikson will not stand for re-election.
During her leadership, the company also launched SONNET, Canada’s first fully digital insurer.
Since 2015, she has been a member of the Board of Swiss Re America Holding Corporation and she has been a Board member at Mackenzie Financial Corporation since 2007.
Since 2013, Eileen Rominger has held roles including being a senior advisor at CamberView Partners, a leading provider of advice to public companies on shareholder engagement, corporate governance and activism.
Eileen Rominger is a US citizen born in 1954. She graduated with a Bachelor of English from the Fairfield University, USA, and holds an MBA in Finance from The Wharton Graduate School of Business, USA.
The Board of Directors furthermore proposes that Raymond K.F. Ch’ien, Renato Fassbind and Joerg Reinhardt be re-elected as members and Jacques de Vaucleroy be elected as a new member of the Compensation Committee, succeeding C. Robert Henrikson, all for a one-year term.
Allocation of tasks within the Board of Directors Chairman of the Board of Directors The Chairman of the Board of Directors leads the Board of Directors, convenes the Board and committee meetings, establishes the agendas and presides over Board meetings. The Chairman coordinates the work of the Board committees together with the respective Chairpersons and ensures that the Board is kept informed about the committees’ activities and findings. In cases of doubt, the Chairman makes decisions about the authority of the Board or its committees and about interpreting and applying the SRL Bylaws.
He annually assesses the Group CEO’s performance and discusses with the Group CEO the annual performance assessment of the Group EC members.
Vice Chairman The Vice Chairman deputises, if the Chairman is prevented from performing his duties or in a potential conflict of interest situation. The Vice Chairman may prepare and execute Board resolutions on request of the Board and liaises between the Board and the Group EC in matters not reserved to the Chairman.
Lead Independent Director The Vice Chairman or another member of the Board of Directors may also assume the role of the Lead Independent Director. The Lead Independent Director acts as an intermediary between the Swiss Re Group and its shareholders and stakeholders in the absence of the Chairman or in particular when a senior independent member of the Board is required. He may convene and chair sessions where the Chairman is not present. He will communicate the outcome of these sessions to the Chairman.
Members ̤ Walter B. Kielholz, Chair ̤ Renato Fassbind ̤ C. Robert Henrikson ̤ Philip K. Ryan ̤ Susan L. Wagner
Finance and Risk Committee Responsibilities The Finance and Risk Committee annually reviews the Group Risk Policy and proposes it for approval to the Board of Directors, reviews risk and capacity limits approved by the Group EC as well as their usage across the Swiss Re Group and reviews the Risk Control Framework. It reviews the most important risk exposures in all major risk categories as well as new products or strategic expansions of the Swiss Re Group’s areas of business. It reviews the risk aspects of Control Transactions. In terms of risk and economic performance measurement it reviews critical principles used in internal risk measurement, valuation of assets and liabilities, capital adequacy assessment and economic performance management. It also reviews the capital adequacy and the Swiss Re Group’s treasury strategy.
Investment Committee Responsibilities The Investment Committee endorses the strategic asset allocation and reviews tactical asset allocation decisions. It reviews the performance of the financial assets of the Swiss Re Group and endorses or receives information on Participations and Principal Investments.
It reviews the risk analysis methodology as well as the valuation methodology related to each asset class and ensures that the relevant management processes and controlling mechanisms in asset management are in place.
Board of Directors 12 meetings Group EC members, Group CLO, Company Secretary 4 hours
Chairman’s and Governance Committee 5 meetings Group CEO, Company Secretary 2 hours
Compensation Committee 6 meetings1 Group CEO, Group COO, Chief Human Resource Officer, Head Reward, advisors23 hours
Group COO, Group Treasurer, CEO Reinsurance, CEO Corporate Solutions, CEO Life Capital, Company Secretary
1 In addition, two decisions by circular resolution. 2 The human resources consulting firm Mercer and the law firm Niederer Kraft & Frey Ltd (NKF) provided support and advice for compensation issues during the reporting year. Representatives of Mercer and NKF participated at all committee meetings in 2017.
Attendance in % Number of Board members (Total 14 members)2 95–99.9 2 90–94.9 –
INDIVIDUAL ATTENDANCE RATES OF BOARD MEMBERS:1 BOARD OF DIRECTORS AND BOARD COMMITTEE MEETINGS IN 2017
Board and committee meetings deal with the items on the agenda incorporating presentations by members of the Group EC and, where needed, by subject matter experts or external advisors. It is contemplated for every meeting that an executive session is held for discussions between the Board of Directors and the Group CEO.
The Board of Directors and its committees can also adopt resolutions by written agreement if no member of the Board of Directors requests a discussion of the motion. A circular resolution may be adopted only, if all the members sign the circular resolution or respond to the e-mail respectively. A circular resolution shall be passed if the majority of the total number of Board members (or Board committee members) express their agreement or disagreement with the resolution.
Each committee provides a report of its activities and recommendations following a committee meeting at the next Board of Directors meeting. If any significant topic comes up, the committees contact the Board of Directors immediately. It is the responsibility of each committee to keep the full Board of Directors informed on a timely basis as deemed appropriate.
The table on page 115 provides an overview of the meetings of the Board of Directors and its committees held in 2017.
Self-assessment An open, transparent and critical board room culture forms the basis for the Board of Directors’ annual review of its own performance and effectiveness. The Board of Directors evaluates its work on one hand and the performance of the Chairman on the other. It conducts the self-assessment on the basis of questionnaires which deal with the Board’s composition, organisation and processes, the Board’s responsibilities governed by the SRL Bylaws as well as with the focus areas and goals of the year under review. The topics are discussed and take-aways defined to be incorporated in the goals for the upcoming year. In addition, each Board committee annually reviews the adequacy of its composition, organisation and processes as well as the scope of its responsibilities, assesses their accomplishment and evaluates the achievement of the goals set and its performance.
Strategy and overall direction of the company ̤ defines the strategy of the Swiss Re
Governance and organisation ̤ determines the operating model of the Swiss Re Group and the organisational structure in line with this model and the strategy; ̤ issues and regularly reviews the SRL Bylaws, necessary policies and directives, including governance standards and the Group Code of Conduct; ̤ regulates and supervises internal control; and
members and the Company Secretary; reviews their performance and plans their succession; ̤ approves the People Strategy of the Group and, on an annual basis, reviews progress towards this strategy; and
Delegation of management The Board of Directors has delegated the management of Swiss Re Ltd and the Swiss Re Group to the Group EC (see section Executive Management, starting on page 122). Such delegated tasks are within the responsibility of the entire Group EC. The Group EC also supports the Board of Directors in fulfilling its duties and prepares proposals for consideration and decision-making by the Board of Directors related to the following key responsibilities with Group relevance: strategy, business plan, organisational structure, accounting principles, risk tolerance levels, share capital and any share repurchase programme, along with principles of financing through capital markets as well as for important strategic transactions. The tables on pages 117–118 provide a summary of the key responsibilities of the Board of Directors and delegations to the Group EC. They are not to be understood as exhaustive.
Capital management ̤ establishes principles on financing through capital markets and the allocation of financial resources within the Group; and
Group-wide compliance procedures and monitors remediation of any regulatory and compliance deficiencies.
Involvement of executive management in meetings of the Board of Directors As a matter of principle, all members of the Group EC are invited to attend the meetings of the Board of Directors. The Group EC members attend Board meetings as far as deemed appropriate by the Chairman and the other Board members. The Group EC members do not attend the constitutional meeting of the Board of Directors following the Annual General Meeting of shareholders and the Board self-assessment session.
Swiss Solvency Test Report The report provides the legally required update on the assessment of the solvency according to the Swiss Solvency Test (SST) of the Swiss Re Group, Swiss Reinsurance Company Ltd, Swiss Re Asia Ltd (former European Reinsurance Company of Zurich Ltd) and Swiss Re Corporate Solutions Ltd.
Duty to inform on extraordinary events As soon as the Group CEO or the Group EC becomes aware of any significant extraordinary business development or event, they are obliged to inform the Board of Directors immediately. The Board has specific reporting procedures in place.
Executive Management The Group Executive Committee has management responsibility for Swiss Re Ltd and the Swiss Re Group as delegated by the Board of Directors.
The Group Executive Committee (Group EC) consisted of the following members as of 31 December 2017: Name Nationality Age Function
Jean-Jacques Henchoz Swiss 53 CEO Reinsurance Europe, Middle East and Africa (EMEA)/ Regional President EMEA
David Cole Group Chief Financial Officer Born: 1961 Nationality: Dutch and American
David Cole joined Swiss Re in November 2010 as Deputy Chief Risk Officer and was appointed Group Chief Risk Officer and member of the Group Executive Committee in March 2011. He was appointed Group Chief Financial Officer as of May 2014.
Guido Fürer joined Swiss Re in 1997 as Managing Director at Swiss Re New Markets, focusing on alternative risk transfer. From 2001 to 2004, he worked for Swiss Re’s Private Equity unit with responsibility for the European strategic participations. In 2004, he joined Asset Management, first taking over responsibility for tactical asset allocation prior to assuming the role of Head of Swiss Re’s CIO Office with responsibility for strategic asset allocation and additionally Chief Investment Officer for the Business Units Reinsurance and Corporate Solutions. Guido Fürer has led Swiss Re Group Asset Management since his appointment as Group Chief Investment Officer and Member of the Group Executive Committee in November 2012.
Professional experience Moses Ojeisekhoba started his career in insurance as a registered representative and agent of The Prudential Insurance Company of America in 1990. From 1992 to 1996, he was a Risk and Underwriting Manager at Unico American Corporation. He then joined the Chubb Group of Insurance Companies as regional Underwriting Manager and in 1999 became Corporate Product Development Manager in New Jersey and thereafter moved to London as Strategic Marketing Manager for Chubb Europe. In 2002, he was appointed International Field Operations Officer for Chubb Personal Insurance before becoming Head Asia Pacific in 2009, a position he remained in until he joined Swiss Re.
Moses Ojeisekhoba joined Swiss Re in February 2012 and was appointed Chief Executive Officer Reinsurance Asia, Regional President Asia and member of the Group Executive Committee in March 2012. In July 2016, Moses Ojeisekhoba was appointed as Chief Executive Officer Reinsurance.
Patrick Raaflaub Group Chief Risk Officer Born: 1965 Nationality: Swiss and Italian
Educational background ̤ PhD in Political Science, University of St. Gallen, Switzerland
Edouard Schmid was appointed Group Chief Underwriting Officer and member of the Group Executive Committee as of 1 July 2017.
Group Chief Executive Officer The Group CEO is responsible for overseeing the operational management of the Group. This responsibility covers the Group Functions and the three Business Units Reinsurance, Corporate Solutions and Life Capital. He leads and manages the Group EC, its processes, including succession planning and costs, and is responsible for its performance. He oversees the work of the Group Function heads and the Business Unit CEOs and gives them guidance on the execution of their tasks. He develops the Group Strategy together with the Group EC and submits it to the Board of Directors for approval. Once approved he focuses on the Group Strategy’s implementation and its further development.
Group Chief Operating Officer The Group COO is responsible for the Group-wide Operations functions. This responsibility includes exercising governance in the functions under his responsibility, being a strategic partner to the Group and the Business Units in all operational matters, and providing a high quality, cost effective and differentiating operating platform for the whole Group.
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 103). Therefore, there are no procedures or conditions for cancelling restrictions and no rules on making exceptions to them. Accordingly, no such exceptions were made in 2017.
Registrations in the share register In 2017, Swiss Re Ltd recognised the voting rights of shares registered no later than four working days before the General Meeting of shareholders.
The Articles of Association provide that the Board of Directors (or to the extent delegated to it, the Compensation Committee) may decide on continuation, acceleration, amendment or removal of any vesting, blocking or exercise conditions for the payment or grant of deferred compensation. It may also decide to replace the award with shares of the entity assuming control.
Information tools pertaining to the external audit Responsibilities The external auditor is accountable to the Audit Committee, the Board of Directors and ultimately to the shareholders. The Board of Directors reviews the external auditor’s professional credentials and is assisted in its oversight by the Audit Committee.
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 advisors at all Audit Committee’s meetings. For more information, see page 115.
The Audit Committee reviews and approves in advance all planned audit services and any non-audit services provided by the external auditor. It discusses the results of annual audits with the external auditor, including reports on the financial statements, necessary changes to the audit plans and critical accounting issues.
Special Auditor Swiss Re Ltd’s Articles of Association foresee that the Annual General Meeting may elect a Special Auditor for a term of three years which would be responsible for the special audit reports that are required by Swiss law in connection with changes in capital. Currently there is no Special Auditor elected.
The official medium for publications of the company is the Swiss Official Gazette of Commerce (Schweizerisches Handelsamtsblatt).
The Chairman annually conducts a corporate governance roadshow to meet with large shareholders in Switzerland, the UK and the US. Throughout the year, our Investor Relations team holds regular meetings with institutional investors and analysts, including roadshows and conferences. At the Investors’ Day in Rueschlikon (Zurich) in December 2016, Swiss Re provided an update on the Group’s strategy, insights on the current most relevant topics related to the activities of Asset Management, Capital Management, Risk Management and Underwriting, and provided business updates for each of the three Business Units Reinsurance, Corporate Solutions and Life Capital. The presentations as well as the conference call recordings from this event are available on: www.swissre.com/investors/ presentations
Swiss Re observes strict close periods around the publications of the Group’s annual and half-year results and of the Q1 and 9M financial key data. The close periods apply throughout the preparation of the results or financial key data and provide for an appropriate cooling-off period after the release of the results or financial key data. During such close periods, employees of Swiss Re and members of the Board of Directors are prohibited from trading in Swiss Re securities.
News release, sigma study 13 April Swiss Re estimates its losses from Cyclone Debbie at approximately USD 350 million
News release, press conference 6 October Swiss Re agrees GBP 800 million minority investment into ReAssure by MS&AD
News release 2 November Swiss Re reports nine months 2017 loss of USD 468 million after large insurance claims from recent natural catastrophe events
News release, press conference 21 November Jerome Jean Haegeli to become Swiss Re’s Group Chief Economist as of January 2018
Starting from the premise that climate change creates physical, liability and transition risks, the TCFD’s aim is to offer consistent and effective financial disclosures that allow investors and other stakeholders to properly assess the climate risks faced by companies and to take appropriate action.
We began to implement the recommended TCFD disclosures in our 2016 Financial Report and are significantly expanding them in the present report, devoting the whole “corporate responsibility” chapter to this important topic. The table on the right provides an overview of the core elements of the disclosures, which are covered on the following pages.
Swiss Re has a long-standing commitment to being a responsible company. A key element in our understanding of what this means is the desire to contribute to sustainable, long-term value creation. Based on our values, doing business the Swiss Re way includes: “Taking the long-term view and playing our part in enabling sustainable progress – for stakeholders and society in general.”
Climate-related financial disclosures Among issues that may threaten sustainable progress, climate change represents a key concern for the re/insurance business. This is why we have recently played an active part in a task force set up by the Financial Stability Board to develop “climaterelated financial disclosures” (www.fsb-tcfd.org).
On average, insured losses due to natural catastrophes have increased steadily over the past 20 years. The key reasons have been economic development, population growth, urbanisation and a higher concentration of assets in exposed areas. At the same time, the “protection gap”, ie the difference between insured and total economic losses, has remained substantial in all regions (see graph on page 149).
Furthermore, climate change remains the focus of two of our Corporate Responsibility (CR) Topics: “Managing climate and natural disaster risk” and “Advancing sustainable energy solutions”. You can find out more about these and our other CR Topics in the 2017 Corporate Responsibility Report, pages 11–16. As our climate strategy shows, understanding the risks posed by climate change and spotting the potential to create suitable products and services have both been priorities for Swiss Re.
Regarding the long-term time horizon (2040), we expect a substantial need to adjust some of our weather risk models, based on current scientific knowledge. We are confident, however, that future research will give us sufficient guidance on the magnitude and direction of these adjustments.
Impact on the economic viability of re/insurance protection An increase in the frequency and severity of extreme weather events can restrict the affordability of re/insurance in certain regions, especially in coastal areas, by requiring a rise in premiums. While climate projections are associated with a large range of uncertainty, especially when it comes to storms making landfall, increases in the frequency and severity of tropical storms are likely. Natural variability is expected to remain the dominant factor in the short and medium time horizon (2025 and 2030). In the longer term (2040), though, sea level rise will lead to non-linear increases in the storm surge risk for coastal areas. Additionally, warmer temperatures will lead to more extreme rainfall events that may increase flood risk.
If rises in re/insurance premiums necessitated by increasing extreme weather risks remain modest, ie re/insurance protection remains economically viable for our clients, the overall premium volume will actually grow. Larger increases, however, will reverse this effect eventually by pushing re/insurance prices for certain exposed risks beyond the limits of economic viability. This is particularly relevant for areas with inadequate construction planning and development. In addition, timing is also of crucial importance: if measures to exclude a particular risk are taken too early and without broader market support, we can offer our clients less insurance protection and may lose significant market share; if measures are taken too late, we may end up with increased loss potential.
“Transition risks” may arise as a result of the extensive policy, legal, technology and market changes that are required to make the transition to a low-carbon economy. We have carefully assessed the two transition risks that may potentially affect our business: ̤ Climate-related litigation risks ̤ Risks from technological and market shifts
As a result, Swiss Re has not faced any claims from climate-related litigations in recent years and the results of the litigations, which were in favour of the defendants, suggest that this trend is likely to continue.
This transition does not automatically translate into a financial risk for Swiss Re, though. To illustrate, motor insurance is the most important business line of the re/insurance sector, globally: According to a recent study, it currently represents 42% of all non-life gross premium of the total property and casualty insurance market and is expected to grow by a further 6.8% until 2026.1
The initial part of this carbon risk steering mechanism will take the form of a thermal coal policy, to be integrated in our Sustainability Risk Framework by mid-2018. It will apply across all lines of business on the direct, facultative and treaty sides. This transition will take some time and constructive dialogue with our clients.
Industries and companies that are particularly exposed to changes in policy and legal as well as technological developments show elevated risk exposures either in the production process, in raw materials, in transportation/logistics or distribution and store operations due to high carbon footprints in these areas. Furthermore, the industries and companies may face increased costs due to higher or more volatile energy prices, compliance costs in the production and distribution process, and cost from product demand substitution. All these changes may cause increased price volatility of the underlying assets.
Based on Swiss Re’s commitment to support the transition to a low-carbon environment, we started to measure the weighted average carbon intensity2 of our listed equities and credit portfolio from the end of 2015. Measurement results are presented in the “Metrics and targets” section (pages 150–151). The assessment of the portfolio coincided with the decision to stop investing in companies that generate 30% or more of their revenues from thermal coal mining or that use at least 30% thermal coal for power generation. Furthermore, we divested from all related equity positions and the vast majority of our fixed income holdings.
In addition, we undertake special efforts to help expand re/insurance protection, by focusing on non-traditional clients (in particular from the public sector), underdeveloped markets and innovative risk transfer instruments. You can read about some innovative transactions we have recently completed in our 2017 Corporate Responsibility Report, pages 20–24.
Opportunities related to transition risks in our re/insurance business While Swiss Re is active in all types of renewable energy re/insurance, we have recently become recognised as a “lead market” for offshore wind risks. Swiss Re Corporate Solutions has continuously built up and refined the technical expertise required to understand and manage these risks and, in 2015, opened a Centre of Competence for Wind Power in Copenhagen. Over the next decade, we expect many new development opportunities to arise, which will create demand for re/insurance protection in numerous business lines (credit, engineering, property, liability, etc).
You can read about our involvement in two new offshore wind farm projects in our 2017 Corporate Responsibility Report, page 26.
In the US, our approach to sustainability includes some of the most recognised certificates and guidelines, such as “GreenGuide: Sustainable Property Operations”, a best practice guideline for sustainable and efficient real estate operations; and the LEED certification of the US Green Building Council (USGBC).
3 “Why We Think Green Bonds Will Continue to Grow: A Primer”, Morgan Stanley, September 21, 2017
The transition to a low-carbon economy also creates opportunities for specific asset classes: Green bonds Green bond proceeds are used to exclusively finance environmentally sustainable projects that address key areas of concern including climate change, but also natural resources depletion, loss of biodiversity and/or pollution control. With the movement towards a low-carbon economy, the green bond market saw an impressive increase from about USD 3 billion in 2010 to USD 81 billion in 20163. Currently, the market shows an annual growth rate of approx. 70%, with a growing variety of issuers besides supranationals, sovereigns and agencies (SSA). In the near term, we target a green bond portfolio worth at least USD 1.5 billion.
Moreover, the future AELs for Swiss Re’s weather-related re/insurance book can be seen as a compound assessment of the company’s future market share and scenario projections of overall future business volume and profitability. Independent studies have shown a wide uncertainty range for future market volumes, though (see eg Kunreuther et. al., 2012)4.
To summarise, we do not consider climate change to be a single factor posing a fundamental threat to the resilience of our business. It is one of many equally important factors we will need to take into account in shaping our future business strategy. A key precondition for our ability to continue acting as ultimate risk-taker is diversification, with regard to regions, business lines, sectors and clients. In a world of strong or unmitigated climate change, however, the proportion of weather-related risks we could re/insure would decline and the protection gap would likely increase further.
TCFD Risk management The processes we use to identify, assess and manage climate-related risks are integrated into our risk management, underwriting and asset management.
Natural catastrophes constitute one of the core risks modelled in Swiss Re’s risk landscape. Specifically, they are one of three categories in which we classify and model our P&C re/insurance risks (the other two being man-made and geopolitical risks). These risks arise from the coverage we provide to our clients for property, liability, motor, accident plus specialty risks.
We have an internal property risk modelling team of around 50 people that builds, maintains and updates sophisticated models for all relevant natural catastrophe risks (flood, tropical cyclones, wind storms, earthquakes). The models are based on current scientific knowledge and are regularly updated to include new scientific findings and to make use of advances in computing capabilities. Using statistical data spanning 100 years, our models are capable of simulating probabilistic “daughter” events that may have never occurred in reality but that may occur in the future.
As a further refinement of our approach to managing sustainability risks, we have recently started to develop a carbon risk steering mechanism. Its key component will be a carbon risk model designed to measure our carbon intensity and associated risks embedded in our re/insurance business.
The initial part of this carbon risk steering mechanism will take form of a thermal coal policy, to be integrated in the Sustainability Risk Framework by mid-2018. It will apply across all lines of business on the direct, facultative and treaty sides. This transition will take some time and constructive dialogue with our clients.
Swiss Re is committed to investing its assets responsibly via a controlled and structured investment process, integrating ESG criteria. As part of our continuous improvement, we switched to benchmarks composed of higher ESG rated companies for our active listed equity and credit portfolios.
TCFD Metrics and targets We use a number of metrics and targets to assess and manage relevant climate-related risks and opportunities.
We assess and manage climate-related risks and opportunities in our re/insurance business (the “liability” side), our own operations and our investments.
As per end of 2017, the four weatherrelated perils with the highest gross annual expected loss for our whole business were: Weather-related catastrophes: insured vs uninsured losses There is a substantial “protection gap” between total economic losses from weather-related catastrophes and insured losses in all regions. These data do not represent a company-specific metric but are an important overall risk indicator (see table on the upper right).
Aligning our carbon intensity We have recently started to develop a carbon business steering mechanism. This will help us to steer the overall carbon footprint embedded in our re/insurance business and align it to the Paris Climate Agreement and related Nationally Determined Contributions (NDCs), set with a view to limiting global warming to 1.5–2°C above pre-industrial levels.
Scope 1, 2 and 3 greenhouse gas emissions Reducing our carbon footprint is one of the four pillars of our climate strategy. As part of the Greenhouse Gas Programme, we have publicly reported on our Scope 1 and 2 greenhouse gas emissions plus a major source of Scope 3 emissions (business travel) since its launch in 2003. From 2013, we have expanded our reporting to include further Scope 3 emissions (see table below).
You can find out more about the Greenhouse Neutral Programme in our 2017 Corporate Responsibility Report, pages 51–55.
Number of (sub-)sovereigns advised 13 26 66 Amount of climate protection offered (in USD) 2.1 billion 3.9 billion 5.3 billion
At the index level, the UK benchmark experiences higher carbon intensity compared to the US benchmark given the larger weight to the typically carbon intense utility sector in the UK index. The reduction of companies with high exposure to coal helped to drive the portfolio’s carbon intensity well below its benchmark.
Listed equities in Swiss Re’s portfolio are much less carbon intense compared to their corresponding benchmark due to the active reduction of coal-related companies that exceeded the threshold of 30% and the single name selection of less carbon intense names across industries.
WEIGHTED AVERAGE CARBON INTENSITY COMPARISON OF CREDIT AND LISTED EQUITIES PORTFOLIOS SINCE MEASUREMENT INCEPTION
Report from the Compensation Committee 154 Compensation highlights in 2017 156 Compensation framework 157 Compensation governance 164 Performance outcomes 2017 168 Compensation disclosure and
Dear shareholders, I am pleased to share with you Swiss Re’s Compensation Report for the financial year ended 31 December 2017, which has been prepared in accordance with applicable laws, rules and regulations.
Swiss Re’s vision “we make the world more resilient” is supported by our mission – to create smarter solutions for our clients through new perspectives, knowledge and capital. The combination of these strengths makes Swiss Re a partner of choice for our clients. At the same time Swiss Re wants to be an employer of choice for our employees. Its compensation framework is therefore designed to attract, motivate and retain the qualified talent the Group needs to succeed globally while providing superior returns to our shareholders. During the past year, the Compensation Committee continued to monitor: ̤ the alignment of Swiss Re’s
Furthermore, the Compensation Committee also conducted a selfassessment of its own effectiveness.
Through discussions with key investors and proxy advisors, Swiss Re continued to identify potential areas of enhanced compensation disclosure. As a result, the 2017 Compensation Report contains additional information, particularly in the areas of variable compensation and committee fees paid to the members of the Board of Directors.
reported US GAAP and economic results reflected high insurance claims in the aftermath of a string of natural catastrophes in Australia, over the Atlantic Ocean, in Mexico and in California.
̤ Life & Health Reinsurance exceeded its return on equity target and reported strong economic results, demonstrating sustainability in its performance, driven by a good underwriting result and continued strong investment performance.
̤ The Corporate Solutions’ US GAAP and economic results were heavily impacted by the large natural catastrophes, resulting in a loss for the year.
There were no material changes to our compensation framework in 2017.
compensation for the members of the Board of Directors for the term of office from the AGM 2018 to the AGM 2019; ̤ maximum aggregate amount of fixed compensation and variable long-term compensation for the members of the Group EC for the financial year 2019; and
̤ aggregate amount of variable short-term compensation for the members of the Group EC for the financial year 2017.
1 Dividend payments are made in April of the following year. For 2017 an ordinary dividend of CHF 5.00 is proposed to the AGM 2018.
Income before tax and variable compensation 5 758 100% 4 773 100% 814 100%
of which paid out as dividend1 1 561 27% 1 559 33% 1 650 203% of which share buy-back 1 018 18% 1 006 21% 1 0162 125% of which added to retained earnings within 1 FY 2017 is estimated based on average year-to-date CHF/USD FX rates as of February 2018. The dividend is subject to AGM approval and the amount depends on the final number of dividend eligible shares and FX rates upon dividend payout.
performance with a focus on risk-adjusted financial results; ̤ ensuring alignment of compensation to business results, individual contribution and compliance; ̤ supporting Swiss Re’s commitment to attract, motivate and retain key talent; ̤ aligning the interests of employees with those of Swiss Re’s shareholders; and
Swiss Re has several incentive programmes that reflect the long-term nature of the business: both the Value Alignment Incentive (VAI) as the deferred part of the Annual Performance Incentive (API) and the Leadership Performance Plan (LPP) aim to reward sustained performance rather than short-term results. These programmes support closer alignment of the interests of shareholders and employees.
Compensation Policy Building on the overarching compensation principles included in Swiss Re‘s Articles of Association, the compensation framework is captured within the Swiss Re Group Compensation Policy (the Compensation Policy). The Compensation Policy governs the compensation structure and processes across all functions and locations at Swiss Re and is reviewed regularly.
Base salary Benefits Cash API VAI (deferred API) LPP GSPP ISP
matters, disability and death; ̤ be competitive in the markets where Swiss Re competes for talent; and ̤ connect with Swiss Re values and enhance engagement.
Swiss Re aims for total compensation that is competitive in the market. Swiss Re also seeks to ensure that total compensation is well-balanced in terms of fixed versus variable compensation and in terms of short- term versus long-term incentives.
The Business Units then allocate their pools following a similar assessment.
Settlement API is generally settled in cash. When the total API level for an employee exceeds a pre-defined amount, the award is split into two components: an immediate cash incentive payment (cash API) and a deferred API (VAI).
Includes assessment of the financial performance versus targets, a multi-year view and review of the quality of earnings that then impacts the overall assessment. KPIs include ROE, net operating margin, EVM profit (% of economic net worth) and economic net worth growth
Overall Group assessment and proposal from management to the Compensation Committee, which retains final decision on adjustment. Reviewed proposal recommended for approval to the full Board of Directors
Determine need for upward or downward adjustment based on all information available
Group CEO 50% of API Other Group EC members 45% of API Other key executives 40% of API All other employees 50% of the amount exceeding USD 100 000 with a
Performance measurement Starting with the 2015 award, the performance measurement calculation has been simplified to increase transparency. This was achieved by using fewer performance factors (at the Business Unit and Group level) and, where possible, published EVM information (ie EVM profit – previous years’ business).
The performance factors of the VAI are calculated based on the three-year average of the published EVM previous years’ business profit margin. EVM is Swiss Re’s proprietary integrated economic valuation and accounting framework for planning, pricing, reserving, and steering the business (please refer to the EVM section on pages 54–63 of this Financial Report). The EVM previous years’ business profit margin is the ratio of EVM previous years’ business profit to EVM capital allocated to previous years’ business in the current year.
A higher EVM previous years’ business profit margin (for all prior underwriting years) results in a higher performance factor. Conversely, a lower EVM previous years’ business profit margin results in a lower performance factor. The performance factor is a linear function whereby payout ranges from 50% to 150%.
Settlement At the end of the deferral period, VAI will be settled in cash. For the full three-year performance measurement period, forfeiture conditions apply.
For VAI performance outcomes over past years please refer to page 170.
Structure At the grant date, the award amount is split into two underlying components: Restricted Share Units (RSUs) and Performance Share Units (PSUs). A fair market value methodology executed by a third party determines the number of RSUs and PSUs granted.
Grant The amounts disclosed under LPP in the section “Compensation disclosure and shareholdings 2017” reflect the grants made in April 2017. The LPP 2017 will be measured over the period 2017 to 2019 and vests in 2020. Grant levels are determined based on multiple factors including the role being performed and market benchmarks.
Restricted Share Units The performance condition for RSUs is ROE with a linear vesting line. Vesting is at 0% for an ROE at the risk-free rate* and at 100% for an ROE at a predefined premium above the risk-free rate. The premium is set at the beginning of the plan period and for LPP 2017 this premium has been set at 900 basis points above the risk-free rate. At the end of each year, the performance against the ROE condition is assessed and one third of the RSUs are locked in within a range of 0% to 100%. At the end of the three-year period, the total number of units locked in at each measurement period will vest (capped at 100%**).
Performance Share Units The performance condition for PSUs is relative Total Shareholder Return (TSR) measured over three years. The PSUs vest within a range of 0% to 200%. Vesting starts at the 50th percentile of TSR relative to peers with 50% vesting and is capped at 200%** vesting at the 75th percentile relative to peers. In case of a negative TSR over three years, the Compensation Committee retains the discretion to reduce the level of vesting.
Employment conditions The Group EC including the Group CEO have employment contracts with notice periods of 12 months and no severance clauses. Information on “change of control” clauses is covered in the Corporate Governance section on page 131 of this Financial Report.
Stock Ownership Guidelines Swiss Re has stock ownership guidelines which articulate the levels of stock ownership expected of the Group EC including the Group CEO. The guidelines are designed to increase the alignment of the interests of senior management and shareholders.
The guidelines define target ownership by role and the ownership levels required are: ̤ Group CEO – 3 × annual base salary;
The determination whether a Group EC member has met the guidelines will include all vested shares that are owned directly or indirectly by the relevant member and related parties.
Swiss Re also makes it possible for all LPP participants to have shares sold or automatically settled on a net basis as applicable, to cover statutory tax and social security liabilities that may arise at vesting. For LPP performance outcomes over past years please refer to page 171.
The Chairman of the Board of Directors devotes himself full-time to his role. In defining the position of Chairman as a full-time role, Swiss Re applies best practice for regulated, complex financial institutions. The Chairman’s task is to make sure the Board of Directors can fulfil its responsibilities and authorities. In particular, he leads the Board of Directors, coordinates the work of the Board of Directors and its committees, convenes the Board and committee meetings, establishes the agendas and presides over Board meetings. The Chairman also leads the Chairman’s and Governance Committee, which develops and continually adapts Swiss Re’s governance to regulatory and corporate requirements. The Chairman represents, besides the Group CEO, its shareholders in industry associations and in the interaction with other stakeholders such as the media, political and regulatory authorities, government officials and the general public. The Chairman keeps regular contact with our Group regulator (FINMA).
Subsidiaries boards of directors The majority of the board members at subsidiary level are Swiss Re executives. They do not receive any additional fee for their services in these roles. The non-executive members of the subsidiary boards receive their fees 100% in cash. When a member of the Board of Directors of Swiss Re Ltd also serves on the board of a subsidiary, the aggregate compensation of the Board of Directors proposed to the AGM for approval also includes any subsidiary board fees.
Compensation governance Authority for decisions related to compensation at the Board and Group EC level are governed by the Articles of Association and the Bylaws of Swiss Re Ltd, including the Charter of the Compensation Committee (Charter). The main responsibilities of the Compensation Committee are summarised in the table on the right.
̤ the agreements with members of the Board of Directors and the Group EC, external mandates and credits and loans (Arts. 25 to 27).
̤ Establishes and periodically reviews Swiss Re’s compensation framework, including guidelines and performance criteria.
̤ Further details can be found in the Corporate Governance section on pages 104–121 of this Financial Report.
̤ Other members of senior management may attend as deemed appropriate by the Compensation Committee and upon invitation by the Chair of the Compensation Committee.
Compensation Committee, Chairman of the Board of Directors, Board of Directors (to the AGM)
Compensation for Group CEO Compensation Committee, Chairman of the Board of Directors
Short-term compensation pools and long-term incentive pools for the Group and Group EC (excl. Group CEO)
Group CEO Compensation Committee Board of Directors, Chairs of the Audit Committee and the Finance and Risk Committee 1 Other than the Chairman’s compensation.
The Compensation Committee has an annual agenda to ensure that important reviews take place at the appropriate times throughout the year. The Compensation Committee also commits time to executive sessions and
The table below shows the approval processes for key compensation decisions: compensation for the Group compensation framework and regulatory and performance of members sessions
̤ Approval of performance factors for deferred compensation awards February and April
̤ Review of the decisions made during the prior compensation cycle June
̤ Review and confirm reference companies for Group EC compensation benchmarking April
̤ Review and update of the VAI and LPP plan rules February
Compliance and regulatory The Compensation Committee spends time reviewing materials relating to regulatory or compliance requirements. In addition, the mandate of its advisors is reviewed on an ongoing basis.
̤ Review and endorsement of the Compensation Report December, January and February
2 Within the maximum aggregate amount of compensation approved by the AGM.
The role of the Control Functions in compensation The role of Swiss Re’s Control Functions (defined as Group Risk Management, Compliance and Group Internal Audit) in compensation matters is well established.
Risk and Control Related Behaviour assessment of Key Risk Takers 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’s Key Risk Takers are executives in core risk-taking positions, who decide on business and people strategies, approve budgets, and can materially influence financial results or expose Swiss Re to significant operational or reputational risks.
In 2017, Swiss Re identified 180 positions that qualify as Key Risk Takers. This group consists of the members of the Group EC, BU EC members, other key executives and roles with core risk-taking authority. The list of Key Risk Takers is reviewed on a regular basis by Risk Management and Human Resources.
The Control Functions assess the risk and control related behaviour of each Key Risk Taker and deliver a report to key executives, including the Group Chief Risk Officer and the Chief Human Resource Officer on an annual basis. This assessment serves as an additional factor when considering individual performance and compensation outcomes.
The outcomes of the financial, qualitative and overall assessment, all part of Swiss Re’s three-step funding process (as described on page 159 of this Financial Report), again determined the Group API pool for 2017.
US GAAP financial performance Property & Casualty Reinsurance reported a net loss in 2017, stemming from insurance claims in the aftermath of the large natural catastrophes during the year. Life & Health Reinsurance continued to report good US GAAP results, demonstrating sustainability in its performance, driven by a good underwriting result and continued strong investment performance. Premium growth reflects growth in the Americas and Asia.
The Corporate Solutions result was heavily impacted by the large natural catastrophes, resulting in a net loss for the year. Investment for long-term growth continues (organic and inorganic), despite the challenging market. The joint venture with Bradesco Seguros in Brazil began in July 2017. Corporate Solutions is now focused on the integration of Bradesco’s large-risk portfolio and the use of its established distribution network. Premiums earned increased slightly compared to 2016.
Life Capital delivered strong results, although large one-off gains on the investment portfolio reported in the prior- year period were not repeated in 2017. A strong investment result, mainly stemming from realised gains on sales of fixed income securities and favourable linked market movements, added to a solid underlying performance. The gross cash generation in the current year was driven by strong underlying surplus on the ReAssure business, and further benefited from an update to mortality assumptions and the finalisation of the 2016 year-end statutory valuation.
For further details on the US GAAP financial performance, refer to pages 182–297 of this Financial Report.
EVM financial performance The EVM underwriting result of Property & Casualty Reinsurance was driven by adverse large-loss experience, stemming from the large natural catastrophe events in 2017. This was partially offset by investment performance across equities and alternative investments as well as a positive impact from spread tightening on credit investments. The Life & Health Reinsurance underwriting profit was strong, mainly due to large transactions in EMEA, as well as continued growth in Asia. Investment activities further contributed to the positive result, primarily driven by credit spread tightening as well as performance from equity securities.
The focus on strengthening the franchise remained strong: we continued to demonstrate thought leadership externally and strengthened our recognised voice in long-term investing policy dialogue at major industry events such as the G20, World Economic Forum and Monte Carlo. A highlight was the nomination as industry leader in Responsible Investing for our sustainable approach to longterm value creation. We closely cooperated with our clients and public and private partners to create innovative solutions in the areas of climate, natural disaster and agricultural risks, sustainable energy and funding longer lives.
Our innovation capabilities were again recognised by the market resulting in numerous awards for various products.
The assurance functions continually assess our risk and control related behaviour, and concluded that our tone at the top continues to be clear and appropriate. They also confirmed that we promote an open and transparent risk culture, and appropriate priority and direction are given to the risks and controls in strategic decisions. Judgement around limits and risk tolerance remained effective.
We also fostered and supported an inclusive corporate culture and leadership climate that embraced diversity of thought and opinion. This is reflected in our global employee engagement survey scores, which have again increased: these are well over the industry benchmark and close to the high performance norm. Some improvements were made in gender diversity but much more can be achieved here and this remains a critical focus area for 2018. The focus on talent management across the Group continued to be strong.
The VAI 2013 performance factor of 100.3%, which applies to all Group functions, reflected the reserving accuracy for the underwriting year 2013, with small developments between 2014 and 2016 and a slightly positive contribution for the investment performance.
Q ua lit at iv e as se ss m en t
VAI plan year Performance period remaining as of 31 December 2017 Swiss Re Group performance factor 2014 (awarded 2015) – to be determined 2015 (awarded 2016) 1 year to be determined 2016 (awarded 2017) 2 years to be determined 170 Swiss Re 2017 Financial Report
The PSU component is based on relative TSR, measured against a pre-defined basket of peers, and vests within a range of 0% to 200%. For the LPP 2014 the performance factor for the PSUs was 81% for the three-year period.
2015 – to be determined to be determined 2016 1 year to be determined to be determined 2017 2 years to be determined to be determined
In 2017 and 2016, a reduction of expenses amounting to CHF 5 million and CHF 16 million respectively, was recognised for compensation in previous financial years.
Long-term variable compensation Leadership Performance Plan 347 50 377 50 Other payments Severance payments2 399 19 513 25 1 Regular staff. 2 Severance payments in the table above include (i) payments under standard severance packages, (ii) other payments that are over and above what is contractually or legally
required, and (iii) voluntary supplementary departure payments, but exclude similar legally permitted payments or garden leave which are aligned with local market practice for comparable positions in respect of amount, nature or duration. No severance payments were made to members of the Group EC.
Long-term variable compensation Leadership Performance Plan 187 43 152 37 Other payments Severance payments1 3 0 1 1 1 Severance payments in the table above include (i) payments under standard severance packages, (ii) other payments that are over and above what is contractually or legally required, and (iii) voluntary supplementary departure payments, but exclude similar legally permitted payments or garden leave which are aligned with local market practice for comparable positions in respect of amount, nature or duration. No severance payments were made to members of the Group EC.
̤ 33% Base salary̤ 18% Cash API̤ 15% VAI (paid after 3 years) ̤ 34% LPP (paid after 5 years)
̤ 29% Base salary ̤ 22% Cash API̤ 18% VAI (paid after 3 years) ̤ 31% LPP (paid after 5 years)
Total fixed and variable compensation5 50 521 42 438 Compensation due to members leaving6 909 721 1 Represents active members of the Group EC.
2 Benefits or allowances paid in cash. Consists of housing, schooling, lump sum expenses, relocation expenses/taxes, child and similar allowances.
in April 2016 and the 2017 value reflects the fair value of LPP awards granted in April 2017. 5 Covers payments reflecting the time in the role as Group EC members. 6 For Group EC members leaving during the reporting period, this covers only legally or contractually required
Compensation decisions for the highest paid member of the Group EC The table below shows the compensation paid to Christian Mumenthaler, Group CEO (in the role since 1 July 2016): Additional information on compensation decisions For US GAAP and statutory reporting purposes, VAI and LPP awards are accrued over the period during which they are earned. For the purpose of the disclosure required in this Compensation Report, the value of awards granted is included as compensation in the year of performance for the years 2016 and 2017 respectively.
Other payments to members of the Group EC During 2017, no payments (or waivers of claims) other than those set out in the section “compensation disclosure and shareholdings in 2017” were made to current members of the Group EC or persons closely related.
the LPP award granted in April 2017. 4 Amounts are gross and include social security contributions of the employee. Additionally and not included are company contributions to social security systems paid by
The following table reflects total mortgages and loans for members of the Group EC as of 31 December: Members of the Group EC 2016 2017
Christian Mumenthaler, Group CEO 75 458 108 779 Michel Liès, former Group CEO 64 125 n/a David Cole, Group Chief Financial Officer 49 426 57 825 John R. Dacey, Group Chief Strategy Officer 49 426 57 825 Guido Fürer, Group Chief Investment Officer 53 765 68 394 Agostino Galvagni, CEO Corporate Solutions 49 426 57 825 Jean-Jacques Henchoz, CEO Reinsurance EMEA 39 540 46 259 Thierry Léger, CEO Life Capital 43 011 54 715 Moses Ojeisekhoba, CEO Reinsurance 43 011 54 715 Jayne Plunkett, CEO Reinsurance Asia 33 130 43 149 Patrick Raaflaub, Group Chief Risk Officer 29 791 54 715 Edouard Schmid, Group Chief Underwriting Officer n/a 39 678 J. Eric Smith, CEO Reinsurance Americas 39 540 46 259 Matthias Weber, former Group Chief Underwriting Officer 49 426 n/a Thomas Wellauer, Group Chief Operating Officer 49 426 57 825
Compensation for members of the Board of Directors The following two tables illustrate (1) the individual compensation for the members of the Board of Directors for the reported financial years 2016 and 2017 and (2) the individual compensation for the members of the Board of Directors paid or payable for the term of office from AGM 2017 to AGM 2018.
Jay Ralph, Member4 n/a 111 73 184 Joerg Reinhardt, Member4 n/a 111 73 184
2 Term of office expired after the completion of the AGM of 22 April 2016 and did not stand for re-election. 3 Includes fees received for duties on the board of Luxembourg Group companies. 4 Elected to Swiss Re’s Board of Directors at the AGM of 21 April 2017. 5 Includes fees received for duties on the board of US Group companies.
6 Term of office expired after the completion of the AGM of 21 April 2017 and did not stand for re-election. 7 Elected to Swiss Re’s Board of Directors at the AGM of 22 April 2016.
by Swiss Re in line with applicable laws which amounted to CHF 410 271 in 2016 and CHF 706 811 in 2017. For Board members domiciled outside of Switzerland, company social security contributions are refunded, if bilateral social security agreements between Switzerland and the country of domicile apply and provide for such refund.
Rajna Gibson Brandon, Member 225 50 50 325 C. Robert Henrikson, Member
Total compensation for the term of office from AGM 2017 to AGM 2018 9 5123 1 Including Vice Chairman or subsidiary fees. 2 Excluding company contributions to social security systems paid by Swiss Re in line with applicable laws. 3 Including an amount of approximately CHF 17 000 for minimal benefits.
Shares held by members of the Board of Directors The number of shares held by members of the Board of Directors as of 31 December were: Loans to members of the Board of Directors No loans were granted to current or former members of the Board in 2017 and no loans were outstanding as of 31 December 2017.
Related parties transactions Disclosure on compensation decisions in 2017 covers members of the Board of Directors and the Group EC as indicated, and for both include related parties to the extent applicable. Such related parties cover spouses, partners, children and other dependents or closely linked persons. In 2017 no compensation was paid to any related party.
Shareholder compensation resolutions and awarded compensation The following explanations give an overview of the applicable framework of Swiss Re Ltd’s Articles of Association based on the Ordinance, the acceptance by the shareholders in the AGM 2017 of the respective motions by the Board of Directors and the reconciliation of the shareholders’ resolutions with the compensation awarded in the reporting year 2017.
financial year; and c) the aggregate amount of short-term compensation of the Group EC for the preceding completed financial year.
As shown on page 176, the compensation paid to the 13 members of the Board of Directors for their term of office from the AGM 2017 to the AGM 2018 was CHF 9.5 million and therefore within the approved amount.
Report of the statutory auditor to the General Meeting of Swiss Re Ltd on the Compensation Report 2017
We have audited the accompanying Compensation Report included in this 2017 Financial Report of Swiss Re Ltd (the Company) for the year ended 31 December 2017. The audit was limited to the information according to Articles 14 to 16 of the Ordinance against Excessive Compensation at Public Corporations (the Ordinance) contained in the tables on pages 173 to 178 of the Compensation Report.
Swiss Re Ltd 298 Annual Report 298 Income statement 299 Balance sheet 300 Notes 302 Proposal for allocation of disposable profit 310 Report of the statutory auditor 311
Income before income tax expense 4 372 525 Income tax expense 13 –749 –132
Earnings per share in CHF3 Basic 12 10.55 1.02 Diluted 12 9.66 1.01 1 Total impairments for the years ended 31 December of USD 66 million in 2016 and USD 46 million in 2017, respectively, were fully recognised in earnings. 2 Total impairments for the years ended 31 December of USD 88 million in 2016 and USD 57 million in 2017, respectively, were fully recognised in earnings. 3 The translation from USD to CHF is shown for informational purposes only and has been calculated using the Group’s average exchange rates.
Net income before attribution of non-controlling interests 3 623 393 Other comprehensive income, net of tax: Change in unrealised investment gains/losses 1 711 287 Change in other-than-temporary impairment 6 3 Change in cash flow hedges –7 –3 Change in foreign currency translation –387 526 Change in adjustment for pension benefits –119 315
Total comprehensive income before attribution of non-controlling interests 4 827 1 521
Total comprehensive income attributable to common shareholders 4 762 1 459
Balance as of 1 January 2 748 –11 0 –5 687 –1 016 –3 966 Change during the period 2 856 6 32 –267 –201 2 426 Amounts reclassified out of accumulated other comprehensive income –704 2 –39 61 –680 Tax –441 –2 –120 21 –542
USD millions gains/losses1 impairment1 Cash flow hedges1 translation1, 2 pension benefits3 income
Investments 7, 8, 9 Fixed income securities: Available-for-sale (including 10 036 in 2016 and 12 969 in 2017 subject to securities lending and repurchase agreements) (amortised cost: 2016: 85 171; 2017: 93 278) 90 581 99 248 Trading (including 1 871 in 2016 and 1 761 in 2017 subject to securities lending and repurchase agreements) 2 695 2 538
Policy loans, mortgages and other loans 3 682 4 110 Investment real estate 1 925 2 220 Short-term investments (including 2 960 in 2016 and 411 in 2017 subject to securities lending and repurchase agreements) 10 909 4 846 Other invested assets 9 611 9 904 Investments for unit-linked and with-profit business (including fixed income securities trading: 5 153 in 2016 and 5 209 in 2017, equity securities trading: 25 807 in 2016 and 28 783 in 2017) 32 178 35 166
Contingent capital instruments Balance as of 1 January 1 102 1 102 Changes during the period –352 Balance as of period end 1 102 750
Other-than-temporary impairment, net of tax Balance as of 1 January –11 –5 Changes during the period 6 3 Balance as of period end –5 –2
Cash flow hedges, net of tax Balance as of 1 January 0 –7 Changes during the period –7 –3 Balance as of period end –7 –10
Foreign currency translation, net of tax Balance as of 1 January –5 687 –6 074 Changes during the period –387 526 Balance as of period end –6 074 –5 548
Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January –1 016 –1 135 Changes during the period –119 315 Balance as of period end –1 135 –820
Cash flows from investing activities Fixed income securities: Sales 38 700 43 904 Maturities 4 218 5 537 Purchases –44 389 –52 696 Net purchases/sales/maturities of short-term investments –3 675 6 459
Interest paid was USD 674 million and USD 655 million (thereof USD 51 million and USD 49 million for letter of credit fees) for 2016 and 2017, respectively. Tax paid was USD 755 million and USD 720 million for 2016 and 2017, respectively.
190 Swiss Re 2017 Financial Report 1 Organisation and summary of significant accounting policies Nature of operations The Swiss Re Group, which is headquartered in Zurich, Switzerland, comprises Swiss Re Ltd (the parent company) and its subsidiaries (collectively, the “Swiss Re Group” or the ”Group”). The Swiss Re Group is a wholesale provider of reinsurance, insurance and other insurance-based forms of risk transfer. Working through brokers and a network of offices around the globe, the Group serves a client base made up of insurance companies, mid-to-large-sized corporations and public-sector clients.
Investments The Group’s investments in fixed income and equity securities are classified as available-for-sale (AFS) or trading. Fixed income securities AFS and equity securities AFS are carried at fair value, based on quoted market prices, with the difference between the applicable measure of cost and fair value being recognised in shareholders’ equity. Trading fixed income and equity securities are carried at fair value with unrealised gains and losses recognised in earnings. A trading classification is used for securities that are bought and held principally for the purpose of selling them in the near term.
For fixed income securities AFS that are other-than-temporary impaired and for which there is not an intention to sell, the impairment is separated into (i) the estimated amount relating to credit loss, and (ii) the amount relating to all other factors. The estimated credit loss amount is recognised in earnings, with the remainder of the loss amount recognised in other comprehensive income. In cases where there is an intention or requirement to sell, the accounting of the other-than-temporary impairment is the same as for equity securities AFS described above.
Policy loans, mortgages and other loans are carried at amortised cost. Interest income is recognised in accordance with the effective yield method.
Other invested assets include affiliated companies, equity accounted companies, derivative financial instruments, collateral receivables, securities purchased under agreement to resell, deposits and time deposits, and investments without readily determinable fair value (including limited partnership investments). Investments in limited partnerships where the Group’s interest equals or exceeds 3% are accounted for using the equity method. Investments in limited partnerships where the Group’s interest is below 3% and equity investments in corporate entities which are not publicly traded are accounted for at estimated fair value with changes in fair value recognised as unrealised gains/losses in shareholders’ equity.
Derivative financial instruments and hedge accounting The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange-traded financial futures for the Group’s trading and hedging strategy in line with the overall risk management strategy. Derivative financial instruments are primarily used as a means of managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or existing liabilities and also to lock in attractive investment conditions for funds which become available in the future. The Group recognises all of its derivative instruments on the balance sheet at fair value. Changes in fair value on derivatives that are not designated as hedging instruments are recorded in income.
Other assets Other assets include deferred expenses on retroactive reinsurance, prepaid reinsurance premiums, receivables related to investing activities, real estate for own use, other classes of property, plant and equipment, accrued income, certain intangible assets and prepaid assets.
Unpaid claims and claim adjustment expenses Liabilities for unpaid claims and claim adjustment expenses for property and casualty and life and health insurance and reinsurance contracts are accrued when insured events occur and are based on the estimated ultimate cost of settling the claims, using reports and individual case estimates received from ceding companies. A provision is also included for claims incurred but not reported, which is developed on the basis of past experience adjusted for current trends and other factors that modify past experience. The establishment of the appropriate level of reserves is an inherently uncertain process involving estimates and judgements made by management, and therefore there can be no assurance that ultimate claims and claim adjustment expenses will not exceed the loss reserves currently established. These estimates are regularly reviewed, and adjustments for differences between estimates and actual payments for claims and for changes in estimates are reflected in income in the period in which the estimates are changed or payments are made.
On the liability side, funds held under reinsurance treaties consist mainly of amounts arising from the application of the deposit method of accounting to inward insurance and reinsurance contracts. In addition, the account also includes amounts retained from ceded business written on a funds withheld basis.
The deposit method of accounting is applied 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.
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.
Recent accounting guidance In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers”, which creates topic 606, “Revenue from Contracts with Customers”. ASU 2014-09 outlines the principles that an entity should follow to provide useful information about the amount, timing and uncertainty of revenue and cash flows arising from contracts with its customers. The standard requires an entity to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Insurance contracts and financial instruments are not in the scope of the new standard. The Group will adopt ASU 2014-09 on 1 January 2018. It is expected that the adoption will not have a material impact on the Group’s financial statements.
In March 2016, the FASB issued ASU 2016-06, “Contingent Put and Call Options in Debt Instruments”, an update to topic 815, “Derivatives and Hedging”. This ASU clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call or put options solely in accordance with the four-step decision sequence as defined in the implementation guidance issued by the Derivatives Implementation Group (DIG). The Group adopted ASU 2016-06 on 1 January 2017. The adoption did not have an impact on the Group’s financial statements.
In October 2016, the FASB issued ASU 2016-17, “Interests Held through Related Parties That Are under Common Control”, an update to topic 810, “Consolidation”. This ASU amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. The Group adopted ASU 2016-17 on 1 January 2017. The adoption did not have an impact on the Group’s financial statements.
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business”, an update to topic 805, “Business Combinations”. The amendments in this update clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments stipulate that when substantially all of the fair value of an integrated set of assets and activities ("set") acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Group early adopted ASU 2017-01 on 1 July 2017. The adoption did not have an impact on the Group’s financial statements.
198 Swiss Re 2017 Financial Report goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognised assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its regular goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognise an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognised should not exceed the total amount of goodwill allocated to that reporting unit. The new requirements are effective for goodwill impairment tests in annual and interim periods beginning after 15 December 2020. Early application of the ASU is permitted. The Group is currently assessing the impact of the new requirements.
200 Swiss Re 2017 Financial Report a) Business segments – income statement For the year ended 31 December 2016 Property & Casualty Reinsurance
Net premiums written 17 768 11 459 3 662 681 33 570 Change in unearned premiums –760 27 –159 13 –879
Expenses Claims and claim adjustment expenses –10 301 –2 263 –12 564 Life and health benefits –8 963 –1 896 –10 859 Return credited to policyholders –39 –5 060 –5 099 Acquisition costs –4 405 –1 943 –517 –63 –6 928 Operating expenses –1 204 –763 –760 –503 –473 345 –3 358
Total expenses before interest expenses –15 910 –11 708 –3 540 –7 522 –473 345 –38 808
Income/loss before income tax expense/benefit 2 597 1 049 134 769 –177 0 4 372 Income tax expense/benefit –479 –193 –1 –131 55 –749
Interest on contingent capital instruments, net of tax –19 –49 –68
Net income/loss attributable to common shareholders 2 100 807 135 638 –122 0 3 558
Premiums earned 16 667 11 851 3 651 950 33 119 Fee income from policyholders 129 457 586 Net investment income – non-participating business 1 017 1 308 161 1 193 184 –155 3 708 Net realised investment gains – non-participating business 613 591 128 133 262 1 727 Net investment result – unit-linked and with-profit business 81 3 234 3 315 Other revenues 48 3 5 2 359 –385 32
Income/loss before interest and income tax expense/benefit –239 1 815 –926 298 331 –188 1 091 Interest expenses –280 –315 –23 –35 –101 188 –566
Assets Fixed income securities 34 189 32 642 8 356 26 528 71 101 786 Equity securities 1 893 945 455 32 540 3 865 Other investments 14 460 3 212 191 2 697 5 530 –9 856 16 234 Short-term investments 1 608 996 482 1 711 49 4 846 Investments for unit-linked and with-profit business 585 34 581 35 166 Cash and cash equivalents 1 334 1 595 654 2 959 264 6 806 Deferred acquisition costs 2 146 4 234 454 37 6 871 Acquired present value of future profits 921 1 068 1 989 Reinsurance recoverable 2 541 4 638 5 737 5 200 –10 174 7 942 Other reinsurance assets 10 293 10 669 2 477 7 666 2 –8 118 22 989 Goodwill 1 944 1 873 213 142 4 172 Other 10 067 2 249 1 717 2 100 1 819 –8 092 9 860
Premiums earned 6 652 8 003 2 353 17 008 Net investment income 985 985 Net realised investment gains/losses 770 770 Other revenues 37 37
Total expenses before interest expenses –5 761 –8 319 –1 830 0 –15 910
Income/loss before interest and income tax expense 891 –316 523 1 792 2 890 Interest expenses –293 –293
Income/loss before income tax expense 891 –316 523 1 499 2 597
Claims ratio in % 56.3 68.3 46.4 60.5 Expense ratio in % 30.3 35.6 31.4 33.0 Combined ratio in % 86.6 103.9 77.8 93.5
Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2017 Property Casualty Specialty Unallocated Total USD millions
Expenses Claims and claim adjustment expenses –5 635 –6 041 –1 496 –13 172 Acquisition costs –1 228 –2 414 –611 –4 253 Operating expenses –636 –356 –167 –1 159
Income/loss before income tax expense –1 244 –711 38 1 398 –519
Claims ratio in % 90.1 74.6 64.7 79.0 Expense ratio in % 29.8 34.2 33.7 32.5 Combined ratio in % 119.9 108.8 98.4 111.5
206 Swiss Re 2017 Financial Report c) Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2016 Life Health Unallocated Total USD millions
Premiums earned 7 778 3 708 11 486 Fee income from policyholders 41 41 Net investment income – non-participating business1 912 367 1 279 Net realised investment gains/losses – non-participating business 21 –4 215 232 Net investment result – unit-linked and with-profit business 15 15 Other revenues 5 5
Expenses Life and health benefits –6 093 –2 870 –8 963 Return credited to policyholders –39 –39 Acquisition costs –1 237 –706 –1 943 Operating expenses –536 –227 –763
Total expenses before interest expenses –7 905 –3 803 0 –11 708
Income before interest and income tax expense 867 268 215 1 350 Interest expenses –301 –301
Americas 15 102 16 101 Europe (including Middle East and Africa) 10 928 10 546 Asia-Pacific 7 201 7 058
3 Insurance information Premiums earned and fees assessed against policyholders For the years ended 31 December 2016 Property & Casualty Reinsurance
Retrocession to external parties 1 1 2017 Property & Casualty Reinsurance
Premiums earned before retrocession to external parties 17 038 13 199 3 954 1 278 35 469
Claims paid, thereof: Gross claims paid to external parties –8 546 –10 032 –2 563 –3 384 –24 525 Intra-group transactions (assumed and ceded) –502 –477 502 477 0
Net unpaid claims and claim adjustment expenses; life and health benefits –1 595 341 –425 784 –895
Acquisition costs For the year ended 31 December 2016 Property & Casualty Reinsurance
Acquisition costs, thereof: Gross acquisition costs with external parties –4 458 –2 094 –589 –137 –7 278 Intra-group transactions (assumed and ceded) –16 –59 16 59 0
Acquisition costs For the year ended 31 December 2017 Property & Casualty Reinsurance
Acquisition costs before impact of retrocession to external parties –4 316 –2 289 –602 –143 –7 350
214 Swiss Re 2017 Financial Report 4 Premiums written For the years ended 31 December 2016 Property & Casualty Reinsurance
Gross premiums written 18 149 12 801 4 155 1 489 –972 35 622 Intra-group transactions (ceded) –139 –287 –546 972 0
5 Unpaid claims and claim adjustment expenses A reconciliation of the opening and closing reserve balances for unpaid claims and claim adjustment expenses for the years ended 31 December is presented as follows: Balance as of 1 January 55 518 57 355 Reinsurance recoverable −4 265 −4 044 Deferred expense on retroactive reinsurance −340 −211
Incurred related to: Amortisation of deferred expense on retroactive reinsurance and impact of commutations −26 −5
Paid related to: Foreign exchange −1 317 2 653 Effect of acquisitions, disposals, new retroactive reinsurance and other items 1 043 1 178
Reinsurance recoverable 4 044 4 458 Deferred expense on retroactive reinsurance 211 240
A summary of prior-year net claims and claim adjustment expenses development by lines of business for the years ended 31 December is shown below: Line of business: Property –335 –555 Casualty –249 –67 Specialty –357 –178 Life and health 131 170
At the end of 2017, the Group carried net reserves for US asbestos and environmental liabilities equal to USD 1 830 million. During 2017, the Group incurred net losses of USD 45 million and paid net against these liabilities of USD 192 million.
Short duration contract unpaid claims and claim adjustment expenses Basis of presentation for claims development information This section of the note provides claims development information on an accident year basis.
In the Life & Health Reinsurance segment, contracts classified as short duration include group life business, certain types of disability and long-term care contracts, group accident, health coverage including critical illness and medical expenses. The Group provides claims development information for Life & Health Reinsurance where reported accident year information is available and there is potential for claims development. This primarily applies to the Group‘s disability lines classified as short duration. This business is generally considered to have relatively higher claims estimation uncertainty than other life and health lines such as group life, due to longer claims development periods.
The Corporate Solutions business segment was created in 2012. Therefore, six accident years and reporting periods are shown for this business unit. All but an immaterial portion of claims arising from accident years prior to 2012 relate to accident years which are over ten years ago and therefore out of the required range of disclosure. Business ceded to Property & Casualty Reinsurance prior to 2012 is included in the net claims development information reported by this segment.
Some of the information provided in the following tables, is Required Supplementary Information (RSI) under US GAAP. Therefore it does not form part of these consolidated audited financial statements. Claims development information for all periods except the current reporting period and any information derived from it – including average annual percentage payout of claims incurred – is considered RSI and is identified as RSI in the tables presented.