equity 08 Statement of comprehensive income 09 Statement of cash flow 88 Swiss Reinsurance Company Ltd 88 Annual Report 91 Income statement 92 Balance sheet 94 Notes 103 Proposal for allocation of disposable profit 104 Report of the statutory auditor 106 General information 106 Cautionary note on forward-looking statements 108 Note on risk factors 113 Corporate calendar and contact information 10 Notes to the Group financial statements 10 Note 1 Organisation and summary of significant accounting policies 18 Note 2 Investments 25 Note 3 Fair value disclosures 36 Note 4 Derivative financial instruments 42 Note 5 Deferred acquisition costs
Expenses Claims and claim adjustment expenses 8, 13 –7 254 –8 810 Life and health benefits 8, 13 –8 236 –8 414 Return credited to policyholders 13 –3 371 –61
Interest expenses 13 –1 094 –851 Total expenses –26 160 –25 272
Income before income tax expense 2 675 2 833 Income tax expense 9 –541 –83 Net income before attribution of non-controlling interests 2 134 2 750
Income attributable to non-controlling interests –154 –172 Net income after attribution of non-controlling interests 1 980 2 578
Convertible perpetual capital instrument –1 117 0 Net income attributable to common shareholders 863 2 578
Fixed income securities: Available-for-sale, at fair value (including 5 157 in 2010 and 7 034 in 2011 subject to securities lending and repurchase agreements) (amortised cost: 2010: 79 443; 2011: 86 984) 80 950 93 770 Trading (including 2 187 in 2010 and 620 in 2011 subject to securities lending and repurchase agreements) 11 252 7 548
Short-term investments, at amortised cost which approximates fair value (including 1 319 in 2010 and 87 in 2011 subject to securities lending and repurchase agreements) 21 446 14 394
Acquired present value of future profits 5 4 565 4 226
Income taxes payable 708 440 Deferred and other non-current taxes 1 716 2 853
Share-based compensation 48 –87 Realised gains/losses on treasury shares 10 –421 Sale of Swiss Re Specialised Investments Holdings (UK) Ltd2 –29 Dividends on common shares4 –1 035 Balance as of period end 10 530 8 958
Net unrealised gains/losses, net of tax Balance as of 1 January –993 1 042 Other changes during the period 2 070 3 181 Cumulative effect of adoption of ASU No. 2009-173 –35 Balance as of period end 1 042 4 223
Foreign currency translation, net of tax Balance as of 1 January –3 560 –3 742 Other changes during the period –182 –182 Balance as of period end –3 742 –3 924
Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January –453 –522 Change during the period –69 –253 Balance as of period end –522 –775
1 The CPCI was reclassified from equity to short-term debt upon termination on 4 November 2010. The final cash settlement was made in January 2011. 2 On 3 May 2011, Swiss Reinsurance Company Ltd sold its subsidiary Swiss Re Specialised Investments Holdings (UK) Limited to Swiss Re Ltd. As the transaction has been accounted for in a manner similar to a transaction between entities under common control, the difference between the proceeds received and the book value was accounted for as a capital transaction.
3 The Group adopted a new accounting pronouncement, ASU No. 2009-17 (FAS167), an update to Topic 810 – Consolidation, as of 1 January 2010, which resulted in the full consolidation of certain VIEs. This resulted in a transition impact to retained earnings of USD 60 million and to net unrealised gains/losses of USD –35 million.
4 In 2011, dividends to shareholders were paid in the form of a withholding tax exempt repayment of legal reserves from capital contributions.
Total comprehensive income before attribution of non-controlling interests 3 029 5 547
Comprehensive income attributable to non-controlling interests –154 –172 Total comprehensive income attributable to common shareholders 2 875 5 375 1 After interest on convertible perpetual capital instrument.
Cash flows from operating activities Net income attributable to common shareholders 863 2 578 Add net income attributable to non-controlling interests 154 172
Cash flows from investing activities Fixed income securities: Net purchase/sale/maturities of short-term investments –10 621 6 952
Cash flows from financing activities Issuance/repayment of long-term debt 1 052 –181 Issuance/repayment of short-term debt
Effective 20 May 2011, SRZ became a subsidiary of Swiss Re Ltd, a new holding company formed through an exchange offer in which SRZ shareholders were offered the opportunity to exchange their SRZ shares for shares of Swiss Re Ltd. On 8 December 2011, SRZ shares were delisted from the SIX Swiss Exchange and effective 13 December 2011, SRZ became a wholly owned subsidiary of Swiss Re Ltd. Consequently, in accordance with the relevant US GAAP guidance, no earnings per share disclosures were included in these financial statements.
During the second quarter but prior to 20 May 2011, Swiss Re Specialised Investments Holdings (UK) Ltd (“SRSIH”) was transferred from SRZ to Swiss Re Ltd and became a related party of the Swiss Reinsurance Company Group. As a result of the transfer, contractual relationships between the Swiss Reinsurance Company Group and SRSIH (consisting mainly of other loans granted to SRSIH of USD 2 686 million and accrued expenses and other liabilities in respect of SRSIH of USD 2 331 million as of 31 December 2011) are presented as external party transactions in these financial statements.
The new Group reporting structure will be reflected in the Group financial statements from the first quarter of 2012. It will consist of the Property & Casualty, the Life & Health and the Other segment. The Other segment will include mainly certain costs not allocated to the Reinsurance business segments, certain Treasury activities as well as the remaining non-core activities which have been in run-off since November 2007.
Principles of consolidation The Group’s financial statements include the consolidated financial statements of Swiss Reinsurance Company Ltd and its subsidiaries. Voting entities which Swiss Re Reinsurance Company directly or indirectly controls through holding a majority of the voting rights are consolidated in the Group’s accounts. Variable interest entities (VIEs) are consolidated when the Group is the primary beneficiary. The Group is the primary beneficiary when it has power over the activities that impact the VIE’s economic performance and at the same time has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Companies which the Group does not control, but over which the Group directly or indirectly exercises significant influence, are accounted for using the equity method and are included in other invested assets. The Group’s share of net profit or loss in investments accounted for under the equity method is included in net investment income. Equity and net income of these companies are adjusted as necessary to be in line with the Group’s accounting policies. The results of consolidated subsidiaries and investments accounted for using the equity method are included in the financial statements for the period commencing from the date of acquisition.
Foreign currency remeasurements and translation Transactions denominated in foreign currencies are remeasured to the respective subsidiary’s functional currency at average quarterly exchange rates. Monetary assets and liabilities are remeasured to the functional currency at closing exchange rates, whereas non-monetary assets and liabilities are remeasured to the functional currency at historical rates. Remeasurement gains and losses on monetary assets and liabilities and trading securities are reported in earnings. Remeasurement gains and losses on available-for-sale securities, investments in consolidated subsidiaries and investments accounted for using the equity method are reported in shareholders’ equity.
For assets or derivative structures at fair value, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Whilst management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and judgment over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. As of 31 December 2011, the Group had not provided any collateral on financial instruments in excess of its own market value estimates.
For debt securities AFS which are other-than-temporary impaired and 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.
Financial statements | Notes to the Group financial statements discontinued on a cash flow hedge, the net gain or loss remains in accumulated other comprehensive income and is reclassified to earnings in the period in which the formerly hedged transaction is reported in earnings. When the Group discontinues hedge accounting because it is no longer probable that a forecasted transaction will occur within the required time period, the derivative continues to be carried on the balance sheet at fair value, and gains and losses that were previously recorded in accumulated other comprehensive income are recognised in earnings.
Derivative financial instrument assets are generally included in other invested assets, and derivative financial instrument liabilities are generally included in accrued expenses and other liabilities.
Admin Re® blocks of business can be acquired in different legal forms, either through an acquisition of an entity’s share capital or through a reinsurance transaction. The Group’s policy is to treat these transactions consistently regardless of the form of acquisition. Accordingly, the Group records the acquired assets and liabilities directly to the balance sheet. Premiums, life and health benefits and other income statement items are not recorded in the income statement on the date of the acquisition.
Unpaid claims and claim adjustment expenses Liabilities for unpaid claims and claim adjustment expenses for property and casualty 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 judgments 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.
Liabilities for life and health policy benefits Liabilities for life and health policy benefits from reinsurance business are generally calculated using the net level premium method, based on assumptions as to investment yields, mortality, withdrawals, lapses and policyholder dividends. Assumptions are set at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. The assumptions are based on projections from past experience, making allowance for possible adverse deviation. Interest assumptions for life and health reinsurance benefits liabilities range from 1% to 11%. Assumed mortality rates are generally based on experience multiples applied to the actuarial select and ultimate tables based on industry experience. Liabilities for policy benefits are increased if it is determined that future cash flows, including investment income, are insufficient to cover future benefits and expenses.
Policyholder account balances Policyholder account balances relate to universal life-type contracts and investment contracts. Interest crediting rates for policyholder account balances range from 2% to 9%.
Funds held assets and liabilities Funds held assets and liabilities include amounts retained by the ceding company or the Group for business written on a funds withheld basis, and amounts arising from the application of the deposit method of accounting to insurance and reinsurance contracts that do not indemnify the ceding company or the Group against loss or liability relating to insurance risk.
Receivables Premium and claims receivables which have been invoiced are accounted for at face value. Together with assets arising from the application of the deposit method of accounting that meet the definition of financing receivables they are regularly assessed for impairment. Evidence of impairment is ageing and financial difficulties of the counterparty. Allowances are set up on the net balance, meaning all balances related to the same counterparty are considered. The amount of the allowance is set up in relation to the time a receivable has been due and financial difficulties of the debtor, and can be as high as the outstanding net balance.
Share-based payment transactions The Group has a long-term incentive plan, a fixed option plan, a restricted share plan, and an employee participation plan. These plans are described in more detail in Note 11. The Group accounts for share-based payment transactions with employees using the fair value method. Under the fair value method, the fair value of the awards is recognised in earnings over the vesting period.
Subsequent events Subsequent events for the current reporting period have been evaluated up to 15 March 2012. This is the date on which the financial statements are available to be issued.
Financial statements | Notes to the Group financial statements 2 Investments
Investment income Net investment income by source (including unit-linked and with-profit business) was as follows: Dividends received from investments accounted for using the equity method were USD 86 million and USD 51 million for 2010 and 2011, respectively.
Investment expenses –591 –551 Interest charged for funds held –165 –99
Equity securities available-for-sale: Gross realised gains 22 96 Gross realised losses –1 –234
Proceeds from sales of fixed income securities available-for-sale amounted to USD 118 947 million and USD 115 775 million for 2010 and 2011, respectively. Sales of equity securities available-for-sale were USD 105 million and USD 2 389 million for 2010 and 2011, respectively.
Net realised investment gains/losses include net realised gains/losses on unit-linked and with-profit business, which are credited to policyholders.
Unit-linked realised gains/losses 2 034 –1 272 With-profit realised gains/losses 196 26
Investments available-for-sale Amortised cost or cost, estimated fair values and other-than-temporary impairments of fixed income securities classified as available-for-sale as of 31 December were as follows: The “Other-than-temporary impairments recognised in other comprehensive income” column only includes securities with a credit-related loss recognised in earnings. Subsequent recovery in fair value of securities previously impaired in other comprehensive income is presented in the “Other-than-temporary impairments recognised in other comprehensive income” column.
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 18 868 337 –539 18 666
States of the United States and political subdivisions of the states 172 1 –7 166
Fixed income securities available-for-sale 79 443 3 285 –1 524 –254 80 950 Equity securities available-for-sale 1 241 258 –25 1 474 2011 USD millions
States of the United States and political subdivisions of the states 245 24 –6 263
Assets pledged As of 31 December 2010 and 2011, investments with the carrying value of USD 1 769 million and USD 1 961 million, respectively, were on deposit with regulatory agencies in accordance with local requirements.
A real estate portfolio with a carrying amount of USD 266 million serves as collateral for short-term senior operational debt of USD 695 million.
Collateral accepted which the Group has the right to sell or repledge As of 31 December 2010 and 2011, the fair value of the government and corporate bond securities received as collateral was USD 6 539 million and USD 4 241 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2010 and 2011 was USD nil million and USD nil million, respectively. The sources of the collateral are typically highly rated banking market counterparties.
Mortgage- and asset-backed securities 431 282 Fixed income securities trading 11 252 7 548
Due in one year or less 2 342 2 379 3 020 3 040 Due after one year through five years 16 601 16 891 19 696 20 156 Due after five years through ten years 14 628 15 189 17 955 19 072
Unrealised losses on securities available-for-sale The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position as of 31 December 2010 and 2011. As of 31 December 2010 and 2011, USD 25 million and USD 144 million, respectively, of the gross unrealised loss on equity securities available-for-sale relates to declines in value for less than 12 months and USD nil million and USD 4 million, respectively, to declines in value for more than 12 months.
Less than 12 months 12 months or more Total 2010 USD millions Fair value Unrealised losses Fair value Unrealised losses Fair value Unrealised losses
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 10 100 454 283 85 10 383 539
States of the United States and political subdivisions of the states 117 5 11 2 128 7
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 337 1 337 1 US Agency securitised products 500 3 500 3 States of the United States and political subdivisions of the states 37 1 40 5 77 6
During the second quarter of 2011 the Group reviewed the categorisation of fixed income securities available-for-sale between those securities that are in an unrealised loss position for less than 12 months and more than 12 months. Based on the review, the Group determined that the split, as presented in prior-period financial statements starting in the second quarter 2010, had to be revised. The split for the 2010 year-end comparative numbers is re-presented accordingly. As a result, additional fixed income securities with a fair value of USD 4 619 million and unrealised losses of USD 788 million are now shown in the unrealised loss position for more than 12 months as of 31 December 2010. These securities were presented in the unrealised loss position for less than 12 months in prior-period financial statements. The revision has no impact on net income, net equity or the balance sheet classification of the Group.
Mortgages, loans and real estate As of 31 December, the carrying values of investments in mortgages, policy and other loans, and real estate were as follows: The fair value of the real estate as of 31 December 2010 and 2011 was USD 3 306 million and USD 3 324 million, respectively. The carrying value of policy loans, mortgages and other loans approximates fair value.
Financial statements | Notes to the Group financial statements 3 Fair value disclosures
Level 2 inputs are market-based inputs that are directly or indirectly observable but not considered level 1 quoted prices. Level 2 inputs consist of (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical assets or liabilities in non-active markets (eg markets which have few transactions and where prices are not current or price quotations vary substantially); (iii) inputs other than quoted prices that are observable (eg interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates); and (iv) inputs derived from, or corroborated by, observable market data.
The types of instruments valued, based on quoted market prices in active markets, include most US government and sovereign obligations, active listed equities and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. The Group does not adjust the quoted price for such instruments, even in situations where it holds a large position and a sale could reasonably impact the quoted price.
The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most government agency securities, investment-grade corporate bonds, certain mortgage- and asset-backed products, less liquid listed equities, and state, municipal and provincial obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.
The Group uses third-party pricing vendor data to value agency securitised products, which mainly include collateralised mortgage obligations (CMO) and MBS government agency securities. The valuations generally utilise observable inputs consistent with those noted above for RMBS and CMBS.
The Group’s investments in equity derivatives primarily include OTC equity option contracts on single or baskets of market indices and equity options on individual or baskets of equity securities, which are valued using internally developed models (such as the Black-Scholes option pricing model, various simulation models) calibrated with the inputs, which include underlying spot prices, dividend curves, volatility surfaces, yield curves, and correlations between underlying assets.
The Group’s OTC credit derivatives include index and single name credit default swaps, as well as more complex structured credit derivatives. Plain vanilla credit derivatives, such as index and single-name credit default swaps, are valued by the Group based on the models consistent with the industry valuation standards for these credit contracts, and primarily utilising observable inputs published by market data sources, such as credit spreads and recovery rates. These valuation techniques warrant classification of plain vanilla OTC derivatives as level 2 financial instruments in the fair value hierarchy.
Assets and liabilities measured at fair value on a recurring basis As of 31 December 2010 and 2011, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: As of 31 December 2010 USD millions
Equity securities backing unit-linked and with-profit life and health policies 18 495 45 18 540 Equity securities held for proprietary investment purposes 1 477 767 203 2 447
Liabilities for life and health policy benefits –271 –271 Accrued expenses and other liabilities –398 –1 290 –1 688 Total liabilities at fair value –975 –6 939 –4 803 5 772 –6 945 1 The netting of derivative receivables and derivative payables is permitted when a legally enforceable master netting agreement exists between two counterparties. A master netting agreement provides for the net settlement of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default, or on the termination of any one contract.
Debt securities issued by US government and government agencies 20 383 2 194 22 577 US Agency securitised products 4 018 4 018 Debt securities issued by non-US governments and government agencies 40 558 40 558
Equity securities backing unit-linked and with-profit life and health policies 16 173 9 16 182 Equity securities held for proprietary investment purposes 1 988 474 69 2 531
Interest rate contracts –16 –3 439 –1 191 –4 646 Foreign exchange contracts –4 –764 –66 –834 Derivative equity contracts –6 –376 –54 –436 Credit contracts –238 –1 075 –1 313 Other contracts –7 –85 –3 489 –3 581
Liabilities for life and health policy benefits –341 –341 Accrued expenses and other liabilities –2 926 –3 546 –2 331 –8 803 Total liabilities at fair value –2 959 –8 448 –8 547 5 950 –14 004 1 The netting of derivative receivables and derivative payables is permitted when a legally enforceable master netting agreement exists between two counterparties. A master netting agreement provides for the net settlement of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default, or on the termination of any one contract.
Purchases, issuances, and settlements –220 –220 Transfers into level 31 Transfers out of level 31 Impact of foreign exchange movements
Realised/unrealised gains/losses: Included in net income –69 –413 13 2 –158 –771 –1 396 Included in other comprehensive income
Closing balance as of 31 December 2011 –341 –1 191 –66 –54 –1 075 –3 489 –2 331 –8 547 1 Transfers are recognised at the date of the event or change in circumstances that caused the transfer. 2 ASU No. 2010-06, gross presentation of activity within level 3 roll forward, presenting separately information about purchases, issuances, sales, and settlements.
Equity securities held for proprietary investment purposes Derivative interest rate contracts Derivative foreign exchange contracts Derivative equity contracts Derivative credit contracts Other derivative contracts Other assets Total
Transfers out of level 31 –99 –3 –28 –10 –21 –11 –52 –70 –294 Impact of foreign exchange movements –18 –1 2 1 –2 3 –4 –2 –21
Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) were as follows: Other assets measured at net asset value Other assets measured at net asset value as of 31 December 2010 and 2011 were as follows: The hedge fund investments employ a variety of strategies including global macro, relative value, and event-driven strategies across various asset classes including long/short equity and credit investments.
Fair value option The fair value option under the Financial Instruments Topic permits the choice to measure specified financial assets and liabilities at fair value on an instrument-by-instrument basis.
The Group elected the fair value option for positions in the following line items in the balance sheet: Fixed income securities trading The Group elected the fair value option for the specific investments acquired within a transaction. These securities are classified as debt securities under the Group’s accounting policies. Upon election of the fair value option the securities were classified as trading, with changes in fair value recorded in earnings. The primary reason for electing the fair value option is to mitigate volatility in earnings as a result of using different measurement attributes. In the second quarter of 2010, these fixed income securities matured.
Gains/losses included in net income for the period –36 –680 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date –825 –1 286
Real estate funds 168 172 66 non-redeemable3 na 1 The redemption frequency varies from once a month to once every three years. 2 Cash distribution can be delayed for up to three years depending on the sale of the underlyings. 3 One exception is a real estate fund that can be redeemed annually based on a 90-day notice period. This fund was fully redeemed in the second quarter of 2011.
Assets and liabilities measured at fair value pursuant to election of the fair value option Pursuant to the election of the fair value option for the items described, the balances as of 31 December 2010 and 2011 were as follows: Changes in fair values for items measured at fair value pursuant to election of the fair value option Gains/losses included in earnings for items measured at fair value pursuant to election of the fair value option including foreign exchange impact were as follows: Fair value changes, interest and dividends from fixed income securities trading and equity securities trading are reported in net realised investment gains/losses. Fair value changes from liabilities for life and health policy benefits are shown in life and health benefits.
Financial statements | Notes to the Group financial statements 4 Derivative financial instruments
Amount offset Where a right of setoff exists –5 756 5 756 Due to cash collateral –1 496 194
Non-hedging activities The Group primarily uses derivative financial instruments for risk management and trading strategies. Gains and losses of derivative financial instruments not designated as hedging instruments are recorded in net realised investment gains/losses in the income statement. For the years ended 31 December 2010 and 2011, the gains and losses of derivative financial instruments not designated as hedging instruments were as follows: Hedging activities The Group designates certain derivative financial instruments as hedging instruments. The designation of derivative financial instruments is primarily used for overall portfolio and risk management strategies. As of 31 December 2010 and 2011, the following hedging relationships were outstanding: Fair value hedges The Group enters into interest rate and foreign exchange swaps to reduce the exposure to interest rate and foreign exchange volatility for certain of its issued debt positions. These derivative instruments are designated as hedging instruments in qualifying fair value hedges. Gains and losses on derivative financial instruments designated as fair value hedging instruments are recorded in net realised investment gains/losses in the income statement. For the years ended 31 December 2010 and 2011, the gains and losses attributable to the hedged risks were as follows: Hedges of the net investment in foreign operations The Group designates non-derivative monetary financial instruments as hedging the foreign currency exposure of its net investment in certain foreign operations.
For the years ended 31 December 2010 and 2011, the Group recorded an accumulated net unrealised foreign currency remeasurement gain of USD 171million and a gain of USD 397 million, respectively, in shareholders’ equity. These offset translation gains and losses on the hedged net investment.
Maximum potential loss In consideration of the rights of setoff and the qualifying master netting arrangements with various counterparties, the maximum potential loss as of 31 December 2010 and 2011 was approximately USD 4 409 million and USD 3 950 million, respectively. The maximum potential loss is based on the positive market replacement cost, assuming non-performance of all counterparties, net of cash collateral.
The total fair value of derivative financial instruments containing credit risk-related contingent features amounted to USD 1 975 million and USD 1 538 million as of 31 December 2010 and 2011, respectively. For derivative financial instruments containing credit risk-related contingent features, the Group posted collateral of USD 335 million and USD 194 million as of 31 December 2010 and 2011, respectively. In the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD 1 344 million additional collateral would have had to be posted as of 31 December 2011. The total equals the amount needed to settle the instruments immediately as of 31 December 2010 and 2011, respectively.
The following tables show the fair values and the maximum potential payout of the credit derivatives written/sold as of 31 December 2010 and 2011, categorised by the type of credit derivative and credit spreads, which were based on external market data. The fair values represent the gross carrying values, excluding the effects of netting under ISDA master agreements and cash collateral netting. The maximum potential payout is based on the notional values of the derivatives and represents the gross undiscounted future payments the Group would be required to make, assuming the default of all credit derivatives’ underlyings.
Total credit derivatives written/sold –817 17 055 2 124 692 19 871
Interest accrued on unamortised PVFP 231 Effect of foreign currency translation –2 –23 –25 –20 Effect of change in unrealised gains/losses –166 Closing balance as of 31 December 2011 1 227 2 696 3 923 4 226
Financial statements | Notes to the Group financial statements 6 Debt
The Group enters into long- and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines short-term debt as debt having a maturity at the balance sheet date of less than one year and long-term debt as having a maturity of greater than one year. Interest expense is classified accordingly.
Subordinated financial debt 1 781 Short-term debt – financial and operational debt 10 798 4 101
USD millions 2010 2011 1 Balance was reclassified to short-term debt.
Maturity Instrument Issued in Currency Nominal in millions Interest rate Book value in USD millions 2013 Insurance-linked placements 2007 USD 47 various 47 2016 Credit-linked note 2007 USD 235 1M Libor 235
Various Payment undertaking agreements various USD 732 various 1 035 Total senior debt as of 31 December 2011 7 830 Total senior debt as of 31 December 2010 9 566 1 Assumed in the acquisition of Insurance Solutions.
Maturity Instrument Issued in Currency Nominal in millions Interest rate… … first call in Book value in USD millions
Subordinated private placement (amortising, limited recourse) 2007 GBP 1 432 4.90% 2 225
Subordinated private placement (amortising, limited recourse) 2007 GBP 1 866 4.78% 2 899 Subordinated perpetual loan note 2006 EUR 1 000 5.25% 2016 1 294 Subordinated perpetual loan note 2006 USD 752 6.85% 2016 752 Subordinated perpetual loan note 2007 GBP 500 6.30% 2019 774 2 subordinated perpetual loan notes 2007 AUD 750 various 2017 767
Total subordinated debt as of 31 December 2011 8 711 Total subordinated debt as of 31 December 2010 8 861
Senior financial debt 75 80 Senior operational debt 349 283 Subordinated financial debt 266 230 Subordinated operational debt 248 256
Financial statements | Notes to the Group financial statements 7 Unpaid claims and claim adjustment expenses
Foreign exchange –562 –441 Effect of acquisitions, disposals, new retroactive reinsurance and other items 158 1 044
Prior-year development Claims development on prior years were driven by favourable experience in property, liability, credit and other specialty lines. Some reserve strengthening was absorbed in the overall number, on US Workers’ Compensation business, UK Motor business and an increase for US asbestos and environmental losses. The adverse development cover with Berkshire Hathaway, which covers losses from 2008 or earlier, remains in place but had no impact on the result for 2011, as it was already recognised at the minimum commutation value at year-end 2010 and remains recognised at that value.
Ceded –18 –18 –12 –12 Total fee income from policyholders 918 918 876 876
Current taxes 696 112 Deferred taxes –155 –29 Income�tax�expense 541 83
Deferred�and�other�non-current�taxes The components of deferred and other non-current taxes were as follows: As of 31 December 2011, the aggregate amount of temporary differences associated with investment in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognised, amount to approximately USD 3 850 million. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
Unrealised losses on investments 63 10 Pension provisions 243 292 Benefit on loss carryforwards 4 222 3 965 Currency translation adjustments 483 481
Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such benefit for the period ending 31 December 2011 was USD 6 million (USD 21 million for the period ending 31 December 2010). As of 31 December 2010 and 2011, USD 216 million and USD 209 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2011 is included within the deferred and other non-current taxes section reflected above and in the statement of financial position.
During the year, certain tax positions and audits in Switzerland, the UK and the US were effectively settled.
The following table summarises jurisdictions and tax years that remain subject to examination: USD millions 2010 2011
Balance as of 1 January 1 138 980 Additions based on tax positions of current year 69 373 Additions for tax positions of prior years –126 9 Reductions for tax positions of prior years 46 –219 Settlements –147 –1 Lapse of statute of limitations –95 Balance�as�of�31�December 980 1�047
Benefits paid –149 –61 –14 –224 Employee contribution 20 20 Acquisitions /disposals /additions 3 –1 2 Effect of foreign currency translation 306 –38 268 Fair�value�of�plan�assets�as�of�31�December 3 104 1 778 0 4 882 Funded�status –98 –124 –330 –552
Amounts recognised in the balance sheet, as of 31 December 2010 and 2011, respectively, were as follows: 2010 USD millions Swiss plan Foreign plans Other benefits Total
Non-current assets 96 96 Current liabilities –1 –15 –16 Non-current liabilities –98 –219 –315 –632 Net�amount�recognised –98 –124 –330 –552
Non-current assets 78 78 Current liabilities –2 –16 –18 Non-current liabilities –345 –214 –347 –906 Net�amount�recognised –345 –138 –363 –846
Benefit obligation as of 1 January 3 202 1 902 330 5 434
Amounts recognised in accumulated other comprehensive income, gross of tax, in 2010 and 2011, respectively, were as follows: Components�of�net�periodic�benefit�cost The components of pension and post-retirement cost for the years ended 31 December 2010 and 2011, respectively, were as follows: 2010 USD millions Swiss plan Foreign plans Other benefits Total
Expected return on assets –128 –106 –234 Amortisation of: Net gain /loss 37 17 –11 43 Prior service cost 6 –11 –5 Effect of settlement, curtailment and termination 1 –2 –1 Net�periodic�benefit�cost 120 23 –6 137
Other changes in plan assets and benefit obligations recognised in other comprehensive income were as follows: The estimated net loss and prior service cost for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2012 are USD 54 million and USD nil million, respectively. The estimated net gain and prior service credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2012 was USD 7 million and USD 11 million, respectively.
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 5 035 million and USD 5 185 million as of 31 December 2010 and 2011, respectively.
Pension plans with an accumulated benefit obligation in excess of plan assets were as follows: USD millions 2010 2011
Fair value of plan assets 4 290 3 717 2010 USD millions Swiss plan Foreign plans Other benefits Total
Net gain /loss 155 –61 11 105 Prior service cost /credit –7 –7 Amortisation of: Net gain /loss –10 –19 11 –18 Prior service cost –6 11 5 Exchange rate gain /loss recognised during the year –8 –8 Total�recognised�in�other�comprehensive�income,�gross�of�tax 139 –88 26 77 Total�recognised�in�net�periodic�benefit�cost� and�other�comprehensive�income,�gross�of�tax 198 –66 22 154
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend rates would have had the following effects for 2011: Swiss plan Foreign plans weighted average Other benefits weighted average
Plan�asset�allocation�by�asset�category The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2010 and 2011, is as follows: Actual asset allocation is determined by a variety of current economic and market conditions and considers specific asset class risks.
Equity securities include Swiss Re common stock of USD 4 million (0.1% of total plan assets) and USD 3 million (0.1% of total plan assets) as of 31 December 2010 and 2011, respectively.
Assets�measured�at�fair�value For a description of the different fair value levels and valuation techniques see Note 3 Fair value disclosures.
Swiss plan allocation Foreign plans allocation 2010 2011 Target�allocation 2010 2011 Target�allocation
For the years ended 31 December, the fair values of pension plan assets by level of input were as follows: 2010 USD millions
Debt securities issued by the US government and government agencies 27 27 Debt securities issued by non-US governments and government agencies 996 996
Equity securities: Equity securities held for proprietary investment purposes 1 042 612 1 654
Debt securities issued by the US government and government agencies 40 40 Debt securities issued by non-US governments and government agencies 1 140 1 140
Equity securities: Equity securities held for proprietary investment purposes 804 650 1 454
Assets�measured�at�fair�value�using�significant�unobservable�inputs�(Level�3) For the years ended 31 December, the reconciliation of fair value of pension plan assets using significant unobservable inputs were as follows: Expected�contributions�and�estimated�future�benefit�payments The employer contributions expected to be made in 2012 to the defined benefit pension plans are USD 150 million and to the post-retirement benefit plan are USD 16 million.
As of 31 December 2011, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: Defined�contribution�pension�plans The Group sponsors a number of defined contribution plans to which employees and the Group make contributions. The accumulated balances are paid as a lump sum at the earlier of retirement, termination, disability or death. The amount expensed in 2010 and 2011 was USD 39 million and USD 58 million, respectively.
Purchases, issuances and settlements 0 Transfers in and /or out of Level 3 5 12 17 Impact of foreign exchange movements 53 –2 51 Closing�balance�as�of�31�December 539 113 652
Stock�option�plans Stock option plans include a fixed-option plan and an additional grant to certain members of executive management. No options were granted under these plans from 2007 onwards.
Value�alignment�incentive In 2009, the Group issued a compensation plan to selected employees. The plan has a requisite service period of three years and is expected to be settled in cash and shares. The settlement is based on a three-year risk-free interest rate, the Swiss Re share price performance and dividend yield over the vesting period. The grant price was based on the closing share price as of 19 February 2009 of CHF 16.74. A total of 140 570 units were outstanding as of 1 January 2011, and after forfeitures during 2011, 131 361 units were outstanding as of 31 December 2011.
The number of shares authorised for the Group’s share-based payments to employees was 12 619 829 and 11 351 951 as of 31 December 2010 and 2011, respectively.
Financial statements | Notes to the Group financial statements 12 Commitments and contingent liabilities
Leasing commitments As part of its normal business operations, the Group enters into a number of lease agreements. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: The following schedule shows the composition of total rental expenses for all operating leases as of 31 December (except those with terms of a month or less that were not renewed): Other commitments As a participant in limited investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnerships for periods of up to 10 years. The total commitments remaining uncalled as of 31 December 2011 were USD 1 243 million.
The Group enters into a number of contracts in the ordinary course of reinsurance and financial services business which, if the Group’s credit rating and /or defined statutory measures decline to certain levels, would require the Group to post collateral or obtain guarantees. The contracts typically provide alternatives for recapture of the associated business.
Legal proceedings In the normal course of business operations, the Group is involved in various claims, lawsuits and regulatory matters. In the opinion of management, the disposition of these or any other legal matters is not expected to have a material adverse effect on the Group’s business, consolidated financial position or results of operations.
Total operating lease commitments 745 Less minimum non-cancellable sublease rentals –63 Total net future minimum lease commitments 682
The Group provides reinsurance, insurance and capital market solutions for clients that complement its re /insurance offering throughout the world through its business segments. The business segments are determined by the organisational structure and by the way in which management reviews the operating result of the Group.
The Life & Health segment consists of the following sub-segments: Life traditional, Health traditional and Admin Re®. The Life & Health business segment includes variable annuity business and Life & Health insurance-linked securities.
Group items include certain costs of Corporate Centre functions not allocated to the business segments, certain foreign exchange items, interest expenses on operating and financial debt and other items not considered for the performance of the operating segments. From 1 January 2011 non-core activities which are largely in run-off (formerly presented in the business segment Legacy) are being reported within Group items. 2010 comparatives are presented accordingly.
The accounting policies of the business segments are in line with those described in the summary of significant accounting policies (see Note 1).
Other expenses –1 184 –817 –525 –2 526 Interest expenses –1 094 –1 094 2011 USD millions Property & Casualty Life & Health Asset Management Group items Allocation Total
Net realised investment gains /losses 48 –1 230 1 264 327 409
Expenses Claims and claim adjustment expenses; life and health benefits –8 812 –8 414 2 –17 224 Return credited to policyholders –61 –61
USD millions, for the year ended 31 December 2011 Property & Casualty Life & Health Asset Management Allocation
Financial statements | Notes to the Group financial statements b) Property & Casualty business segment – by line of business For the years ended 31 December 2010 USD millions
Net realised investment gains /losses –80 103 23 87 110 Other revenues –2 –2 2 0
Expenses Claims and claim adjustment expenses –5 088 –2 566 –920 –8 574 –238 –8 812 Acquisition costs –623 –804 –516 –1 943 –84 –2 027 Other expenses –542 –491 –297 –1 330 –59 –1 389
Net investment income – unit-linked 36 557 593 Net investment income – with-profit business 145 145 Net investment income – non-participating 632 303 1 379 2 314 Net realised investment gains /losses – unit-linked –23 2 057 2 034 Net realised investment gains /losses – with-profit business 196 196 Net realised investment gains /losses – non-participating 120 –3 –16 101
Benefit ratio2 in % 88.7 1 Operating revenues exclude net investment income and net realised investment gains /losses from unit-linked and with-profit business as these are passed through to contract holders. Operating revenues also exclude net realised investment gains /losses from non-participating business.
Net realised investment gains /losses –20 –8 –1 202 –1 230 Other revenues
Expenses Claims and claim adjustment expenses; life and health benefits –4 871 –1 632 –1 911 –8 414 Return credited to policyholders –6 –55 –61 Acquisition costs –1 250 –446 –290 –1 986 Other expenses –415 –162 –448 –1 025
Net investment income – unit-linked 30 655 685 Net investment income – with-profit business 158 158 Net investment income – non-participating 610 274 1 354 2 238 Net realised investment gains /losses – unit-linked –55 –1 217 –1 272 Net realised investment gains /losses – with-profit business 26 26 Net realised investment gains /losses – non-participating 35 –8 –11 16
Benefit ratio2 in % 87.9 1 Operating revenues exclude net investment income and net realised investment gains /losses from unit-linked and with-profit business as these are passed through to contract holders. Operating revenues also exclude net realised investment gains /losses from non-participating business.
2 The benefit ratio is calculated as claims paid and claims adjustment expenses in relation to premiums earned, both of which exclude unit-linked and with-profit business. Additionally, the impact of guaranteed minimum death benefit (GMDB) products is excluded, as this ratio is not indicative of the operating performance of such products.
Net realised investment gains /losses 1 368 –104 1 264 Other revenues 25 25
Financial statements | Notes to the Group financial statements 14 Subsidiaries, equity investees and variable interest entities
Denmark Swiss Re Denmark Services A /S, Copenhagen 0 0 100 f
Germany ASS Assekuranz, Service-und Sachverständigengesellschaft mbH, Sundern 0 0 100 e EXTREMUS Versicherungs-Aktiengesellschaft, Cologne 65 61 15 e Paarl Grundbesitzverwaltung GmbH & Co. KG Objekt Köln Sterrenhofweg, Munich 6 6 22 e ROLAND Partner Beteiligungsverwaltung GmbH, Cologne 0 0 20 e Swiss Re Germany AG, Unterföhring bei München 58 55 100 f
Ireland Swiss Re International Treasury (Ireland) Ltd., Dublin 0 0 100 f
Switzerland European Reinsurance Company of Zurich Ltd, Zurich 274 256 100 f Swiss Re Asset Management Geneva SA, Geneva 0 0 100 f Swiss Re Corporate Solutions Ltd, Zurich 119 111 100 f Swiss Re Life Capital Ltd, Zurich 0 0 100 f Tertianum AG, Zurich 10 10 21 e
Bermuda CORE Reinsurance Company Limited, Hamilton 0 0 100 f Old Fort Insurance Company, Ltd., Hamilton 0 0 100 f Swiss Re Global Markets Limited, Hamilton 0 0 100 f Swiss Re Capital Management (Bermuda) Ltd., Hamilton 0 0 100 f Swiss Re Investments (Bermuda) Ltd., Hamilton 0 0 100 f
Cayman Islands Ampersand Investments (UK) Limited, George Town 932 872 100 f SR Alternative Financing II SPC, George Town 0 0 100 f SR Cayman Holdings Ltd, George Town 0 0 100 f Swiss Re Strategic Investments UK Limited, George Town 0 0 100 f
Australia Swiss Re Australia Ltd, Sydney 21 19 100 f Swiss Re Life & Health Australia Limited, Sydney 159 149 100 f
South Africa Eastern Foreshore Investments Limited, Cape Town 1 1 100 f Swiss Re Life and Health Africa Limited, Cape Town 0 0 100 f
Variable interest entities The Group enters into arrangements with variable interest entities (VIEs) in the normal course of business. The involvement ranges from being a passive investor to designing, structuring, and managing the VIEs. The variable interests held by the Group arise as a result of the Group’s involvement in a modified coinsurance agreement, certain insurance-linked and credit-linked securitisations, swaps in trusts, debt financing and other entities which meet the definition of a VIE.
The Group assesses for all its variable interests in VIEs whether it has a controlling financial interest in these entities and, thus, is the primary beneficiary. For this, the Group identifies the activities that most significantly impact the entity’s performance and determines whether the Group has the power to direct those activities. In conducting the analysis, the Group considers the purpose, the design, and the risks that the entity was designed to create and pass through to its variable interest holders. In a second step, the Group assesses if it has the obligation to absorb losses or if it has the right to receive benefits of the VIE that could potentially be significant to the entity. If both criteria are met, the Group has a controlling financial interest in the VIE and consolidates the entity.
The total assets of the modified coinsurance vehicles in which the Group is the primary beneficiary were USD 3 473 million as of 31 December 2011.
Typically, the variable interests held by the Group arise through ownership of insurance-linked and credit-linked securities, or through protection provided under a total return swap for the principal of the collateral held by the securitisation vehicle.
As of 31 December 2011, the total assets of the insurance-linked and credit-linked securitisation vehicles in which the Group holds variable interests but is not the primary beneficiary were USD 2 587 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 730 million.
Swaps in trusts The Group provides risk management services to certain asset securitisation trusts which qualify as VIEs. As the involvement of the Group is limited to interest rate and foreign exchange derivatives, the Group does not have power to direct any activities of the trusts and therefore does not qualify as primary beneficiary of any of these trusts. These activities are in run-off.
USD millions Carrying value Whereof restricted: Carrying value Whereof restricted: Fixed income securities: Policy loans, mortgages and other loans 596 203 191 191
Other The VIEs in this category were created for various purposes. Generally, the Group is exposed to the asset risk of the VIEs by holding an equity stake in the VIE or by guaranteeing a part or the entire asset value to third-party investors. A significant portion of the Group’s exposure is either retroceded or hedged. The assets held by the VIEs consist mainly of private equity investments, residential real estate and others.
The Group did not provide financial or other support to any VIEs during 2011 that it was not previously contractually required to provide.
1 The maximum exposure to loss for swaps in trusts cannot be meaningfully quantified due to their derivative character.
Financial statements | Notes to the Group financial statements 15 Restructuring provision
In 2011, the Group set up total provisions of USD 26 million, related to the cost savings and efficiency programmes announced in early 2010, and released USD 7 million.
The increase of the provision in the Property & Casualty and the Life & Health business segments of USD 10 million and USD 14 million, respectively, in 2011 are related to leaving benefits, office structure simplification costs and cost for the concentration of support resources allocated to the Property & Casualty and the Life & Health business segments.
Financial statements | Notes to the Group financial statements 16 Risk assessment
The bodies and committees mentioned below belong to the Swiss Re Group as the identification, assessment and control of risk exposures of the Swiss Reinsurance Company Group is integrated in and covered by the Group risk management organisation and processes of Swiss Re Group.
Liquidity risk, capital adequacy, and emerging risks are managed at Group level. Risk management activities that are also performed globally at Group level, across all risk categories include risk governance, risk modelling, risk reporting and the steering of the Group’s regulatory activities. Swiss Re’s Group Internal Audit department carries out independent, objective assessments of the adequacy and effectiveness of internal control systems. It evaluates the execution of processes within Swiss Re, including those within Risk Management.
Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
Opinion In our opinion, the consolidated financial statements for the year ended 31 December 2011 present fairly, in all material respects, the financial position, the results of operations and the cash flows in accordance with accounting principles generally accepted in the United States of America (US GAAP) and comply with Swiss law.
In conjunction with the restructuring of the Swiss Re Group, Swiss Re Ltd was incorporated on 2 February 2011 and established as the new ultimate holding company of the Swiss Re Group through an exchange offer. Swiss Reinsurance Company Ltd shareholders were offered the opportunity to exchange their shares in Swiss Reinsurance Company Ltd for shares in Swiss Re Ltd on a one-for-one basis. Effective 20 May 2011, Swiss Re Ltd became the ultimate holding company of the Swiss Re Group, and hence Swiss Reinsurance Company Ltd became a fully owned subsidiary of Swiss Re Ltd. The shares of Swiss Reinsurance Company Ltd were delisted from the SIX Swiss Exchange on 8 December 2011.
Property and casualty was significantly impacted by the extraordinary accumulation of natural catastrophe events but benefited from successful renewals and new business written following these losses.
In 2011, the Swiss franc fluctuated against the majority of the main currencies which markedly affected the comparison of year-on-year reported income statement and balance sheet figures.
Premiums earned decreased from CHF 12.2 billion to CHF 8.8 billion in the year under report. Without the effect of foreign exchange movements, total premiums earned amounted to CHF 10.1 billion in 2011. Property and casualty premiums earned declined from CHF 6.3 billion in 2010 to CHF 5.6 billion in 2011, mainly driven by a weakening of most of our underlying business currencies against the Swiss franc resulting in a negative impact of CHF 0.8 billion. This deterioration was partially offset by successful renewals and new business written, notably with large clients in Asia.
Premium volume for life and health business decreased significantly from CHF 5.9 billion in 2010 to CHF 3.2 billion in 2011, driven by nonrecurring initial premiums received in 2010 for the integration of the life and health portfolio of a subsidiary of the Company into a branch of Swiss Reinsurance Company Ltd. Excluding this one-off transaction and foreign exchange movements, life and health premiums earned increased by 4%.
Life and health claims and claim adjustment expenses rose by CHF 3.2 billion to CHF 6.9 billion in 2011, primarily driven by recaptures of reinsurance treaties with affiliated companies of the Company, but partially offset by the recapture of the external retrocession treaty with ALPSII. In return, these transactions reduced the Company’s liability for life and health benefits, partially offset by less favourable mortality, of CHF 6.4 billion. In the financial year 2010, life and health claims and claim adjustment expenses as well as life and health benefits, included in the result of the initial recognition of the technical provisions assumed at the inception of a portfolio from a subsidiary of the Company, offset the initial premium received.
In 2011, investment expenses increased by CHF 4.5 billion to CHF 6.6 billion, mainly as a result of valuation adjustments on investments in subsidiaries and affiliated companies in conjunction with the restructuring of the Swiss Re Group and higher valuation adjustments on derivative financial instruments related to reinsurance business.
The Company has revised the classification between certain income statement categories. Specifically, the capital tax and indirect taxes of CHF 68 million were reclassified in 2011 from tax expense to other expenses. Therefore, the previously reported 2010 figures of tax expense and other expenses with a respective amount of CHF 60 million have been reclassified accordingly.
As a result of the restructuring, investments in subsidiaries and affiliated companies increased by CHF 1.2 billion reflecting various capital contributions, partially offset by valuation adjustments as well as capital repayments.
The repayment of the CPCI to National Indemnity Company in early 2011 resulted in higher balances of cash and short-term investments as of 2010, compared to the year under report.
Various recaptures of reinsurance treaties in the life and health business caused the funds held to decrease by CHF 6.3 billion to CHF 11.4 billion. The increase in other assets related mostly to security lending collateral and reverse repurchase transactions.
Technical provisions declined 13% to CHF 37.9 billion. Life and health policy benefits decreased significantly, mainly as a result of the recaptures of reinsurance treaties by affiliated companies of the Company, partially offset by the recapture of the retrocession treaty with ALPSII. Life and health unpaid claims remained stable compared to 2010. Property and casualty gross unpaid claims increased by 8% mainly due to the 2011 natural catastrophe events. As a result of these losses the equalisation provision of CHF 0.6 billion was completely released in the year under report.
Debts decreased significantly to CHF 7.0 billion as a result of the redemption of the CPCI issued in 2009 to National Indemnity Company. The redemption agreement was signed effective 2010 with a repayment of CHF 3.7 billion in early 2011. Liabilities from derivative financial instruments increased mainly due to derivatives in connection with the life and health variable annuity business.
As a result of guidance issued by the Swiss Federal Tax Administration in connection with the capital contribution principle introduced in Swiss Tax Law, which became effective as of 1 January 2011, the Annual General Meeting on 15 April 2011 approved a reclassification of reserves of CHF 9 762 million from other reserves to legal reserves from capital contributions on the Company’s stand-alone balance sheet as of 31 December 2010.
As of 31 December 2011, legal reserves from capital contributions decreased to CHF 8 995 million due to the net effect of the dividend payment of CHF 943 million, the inclusion of additional reserves from newly issued shares and a reclassification from other reserves to legal reserves from capital contributions of issuance costs related to capital increases in previous years.
Investment expenses –2 151 –6 648 Allocated investment return –858 –592 Investment result 318 –2 313
Liabilities Technical provisions Unpaid claims 4 27 548 26 895 Liabilities for life and health policy benefits 4 12 658 7 892
Provisions for profit commissions 4 162 143 Equalisation provision 4 550 –
Time period The 2011 financial year comprises the accounting period from 1 January 2011 to 31 December 2011.
Use of estimates in the preparation of annual accounts The preparation of the annual accounts requires management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses as well as the related disclosures. Actual results could differ significantly from these estimates.
All exchange rate differences arising from the revaluation of the opening balance sheet, the adjustments from application of year-end or average rates and foreign exchange transactions are booked to the provision for currency fluctuation. Recognition through the income statement only occurs when the provision is not sufficient to absorb a negative difference.
Investments The following assets are carried at cost, less necessary and legally permissible depreciation: ̤ Investment real estate ̤ Investments in subsidiaries and affiliated companies ̤ Equity securities ̤ Fixed income securities (other than zero bonds) ̤ Investments in funds ̤ Alternative investments ̤ Assets in derivative financial instruments
Zero bonds reported under fixed income securities are valued at their amortised cost values.
Tangible assets Property for own use is valued at the purchase or construction cost less necessary and legally permissible depreciation.
Deferred acquisition costs Deferred acquisition costs consist principally of commissions and are related to the production of new reinsurance business. Deferred acquisition costs for short duration contracts are amortised in proportion to premiums earned. Deferred acquisition costs for long duration contracts are amortised over the life of the underlying contracts.
Management expenses Overall management expenses are allocated to the reinsurance business, the investment business and to other expenses on an imputed basis.
Change in unearned premiums –20 138 118 –1 244 915 –329
Other reinsurance income and expenses 248 –81 167 148 –51 97 Result from cash deposits 863 –618 245 574 –400 174
Premiums and other receivables from reinsurance 5 007 60 5 067 5 668 197 5 865 Funds held by ceding companies 17 655 – 17 655 11 385 – 11 385
Liabilities for life and health policy benefits 16 073 –3 415 12 658 9 987 –2 095 7 892
Provisions for profit commissions 211 –49 162 176 –33 143 Equalisation provision 550 – 550 – – – Funds held under reinsurance treaties 2 4 799 4 801 1 4 028 4 029
Financial�statements�| Swiss Reinsurance Company Ltd 6 Further notes to the financial statements
Contingent�liabilities Swiss Reinsurance Company Ltd has issued a number of guarantees to several of its subsidiaries in support of their business activities by securing either their overall capital positions or specific transactions. These guarantees are generally not limited by a nominal amount but rather by the exposure of the underlying business.
Unfunded�commitments As a participant in limited investment partnerships, the Company commits itself to making available certain amounts of investment funding, callable by the partnerships in general for periods of up to 10 years. As of 31 December 2011, total commitments remaining uncalled were CHF 660 million (2010: CHF 854 million).
In addition, a real estate portfolio with a carrying amount of CHF 673 million (2010: CHF 676 million) serves as collateral for short-term senior operational debt of CHF 650 million with an external counterparty.
Securities�lending�and�repurchase�agreements To enhance the performance of its investment portfolio, the Company enters into securities lending and reverse repurchase transactions. In the context of such transactions securities are transferred to the counterparty.
Additionally, the Company performs the role of the collateral clearer for the Swiss Re Group, centrally managing and reducing counterpart credit exposure for the asset holding entities, providing funding diversification and enabling secured cash investment. As such the Company acts as principal in collateral transactions, borrowing securities from its affiliated companies and entering into lending and borrowing as well as repurchase and reverse repurchase agreements with third parties. As a matter of policy, the Company requires that collateral, consisting of cash or securities, is provided to cover the assumed counterparty risk associated with such transactions.
Reinsurance result 80 41 Premiums and other receivables from reinsurance 469 263 Funds held by ceding companies 66 55 Funds held under reinsurance treaties 2 1 Reinsurance balances payable 617 396
An overview of the fair value of securities transferred under securities lending and borrowing as well as repurchase agreements is provided in the following table as of 31 December: These securities were transferred with the right to be sold or pledged by the borrowing entity. The securities which were held and lent by investment funds are excluded from the table above.
Fire�insurance�value�of�tangible�assets As of 31 December 2011, the insurance value of tangible assets, comprising the real estate portfolio and other tangible assets, amounted to CHF 2 555 million (2010: CHF 2 563 million).
Obligations�towards�employee�pension�fund Other liabilities include CHF 5 million (2010: CHF 5 million) payable to the employee pension fund.
Deposit�account Deposit arrangements generated the following balances, which are included in: Instrument Issued in Currency Nominal in millions Interest rate Maturity/
Conditional�capital�and�authorised�capital At Swiss Reinsurance Company Ltd’s Annual General Meeting, held in Zurich 15 April 2011, shareholders approved the adaptation of the conditional capital and authorised capital structure as described below.
As of 31 December 2011, the Company has therefore the following conditional capital and authorised capital: Conditional�capital�for�Equity-Linked�Financing�Instruments The share capital of the Company shall be increased by an amount not exceeding CHF 5 000 000 through the issuance of a maximum of 50 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10 through the voluntary or mandatory exercise of conversion and /or option rights granted in connection with bonds or similar instruments including loans or other financial instruments by the Company or Group companies of Swiss Reinsurance Company Ltd (hereinafter collectively the “Equity-Linked Financing Instruments”). Existing shareholders’ subscription rights are excluded.
Funds held under reinsurance treaties 3 189 3�862 Reinsurance balances payable 962 1�330 Other liabilities 7 404 6�519
Major�shareholders As of 31 December 2011, the Company was a fully owned subsidiary of Swiss Re Ltd.
Personnel�information As of 31 December 2011, Swiss Reinsurance Company Ltd employed a worldwide staff of 3 654 (2010: 3 513). Personnel expenses for the 2011 financial year amounted to CHF 885 million (2010: CHF 967 million).
Management�fee�contribution In 2011, management expenses of CHF 282 million (2010: CHF 171 million) were recharged to affiliated companies of the Company and invoiced to third parties. These recharges were reported net under “Operating costs”, “Investment expenses” and “Other expenses”.
The identification, assessment and control of risk exposures of Swiss Reinsurance Company Ltd on a stand-alone basis are integrated in and covered by Swiss Re’s Group risk management organisation and processes.
Outlook�2012 As a result of the new Swiss Re Group corporate structure, during the first half of 2012, Swiss Reinsurance Company Ltd will transfer its investments in Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Ltd through a dividend in-kind to Swiss Re Ltd. These transfers are subject to the approval of Swiss Re’s principal regulator, Swiss Financial Market Supervisory Authority FINMA. Following these transfers, Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Ltd will no longer be subsidiaries of Swiss Reinsurance Company Ltd and will instead become direct subsidiaries of Swiss Re Ltd.
Proposal for allocation of disposable profit/loss The Annual General Meeting of Swiss Reinsurance Company Ltd to be held in Zurich on 19 March 2012 has at its disposal the following loss: The Board of Directors proposes to the Annual General Meeting of Swiss Reinsurance Company Ltd to allocate the disposable loss and to pay dividends as follows: Dividends If this Board of Directors’ proposal for allocation is accepted, the following dividends will be paid: ̤ a cash dividend of CHF 1 028 209 497 out of other reserves ̤ a dividend in-kind of Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Ltd of total CHF 5 809 689 701 out of other reserves
Retained earnings brought forward 50 211 859 50�431�171 Profit /loss for the financial year 380 219 312 –63�439�410 Disposable�profit�/loss 430 431 171 –13�008�239
Report�of�the�statutory�auditor�on�the�Financial�Statements As statutory auditor, we have audited the financial statements of Swiss Reinsurance Company Ltd, which comprise the income statement, balance sheet and notes (pages 91 to 102), for the year ended 31 December 2011.
Opinion In our opinion, the financial statements for the year ended 31 December 2011 comply with Swiss law and the company’s articles of incorporation.
Forward-looking statements typically are identified by words or phrases such as “anticipate”, “assume”, “believe”, “continue”, “estimate”, “expect”, “foresee”, “intend”, “may increase” and “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, liquidity position or prospects to be materially different from any future results of operations, financial condition, solvency ratios, liquidity position or prospects expressed or implied by such statements. Such factors include, among others: ̤ further instability affecting the global financial system and developments related thereto, including as a result of concerns over, or adverse developments relating to, sovereign debt of euro area countries; ̤ further deterioration in global economic 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; ̤ 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 its investment policy or the changed composition of its investment assets, and the impact of the timing of any such changes relative to changes in market conditions; ̤ uncertainties in valuing credit default swaps and other credit-related instruments; ̤ possible inability to realise amounts on sales of securities on the Group’s balance sheet equivalent to their mark-to-market values recorded for accounting purposes; ̤ the outcome of tax audits, the ability to realise tax loss carryforwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings; ̤ the possibility that the Group’s hedging arrangements may not be effective; ̤ the lowering or loss of financial strength or other ratings of Group companies, and developments adversely affecting the Group’s ability to achieve improved ratings;
The foregoing developments could have material adverse effects on our industry and on us.
Regulatory changes Swiss Reinsurance Company Ltd (“Swiss Re”) and its subsidiaries (collectively, the “Group”) are regulated in a number of jurisdictions in which they conduct business. New legislation as well as changes to existing legislation have been proposed and/or recently adopted in a number of jurisdictions that are expected to alter, in a variety of ways, the manner in which the financial services industry is regulated. Although it is difficult to predict which proposals will become law and when and how new legislation ultimately will be implemented by regulators (including in respect of the extraterritorial effect of reforms), it is likely that significant aspects of existing regulatory regimes governing financial services will change. These may include changes as to which governmental bodies regulate financial institutions, changes in the way financial institutions generally are regulated, enhanced governmental authority to take control over operations of financial institutions, restrictions on the conduct of certain lines of business, changes in the way financial institutions account for transactions and securities positions, changes in disclosure obligations and changes in the way rating agencies rate the creditworthiness and financial strength of financial institutions.
Other changes are focused principally on banking institutions, but some could have direct applicability to insurance or reinsurance operations and others could have a general impact on the regulatory landscape for financial institutions, which might indirectly impact capital requirements and/or required reserve levels or have other direct or indirect effects on the Group. Changes are particularly likely to impact financial institutions designated as
Credit risk Although the Group has taken significant steps to de-risk its portfolio and reposition its assets, if the credit markets were again to deteriorate and further asset classes were to be impacted, the Group could experience further losses. Changes in the market value of the underlying securities and other factors impacting their price could give rise to market value losses. If the credit markets were to deteriorate again, the Group could also face further write-downs in other areas of its portfolio, including other structured instruments, and the
Group and its counterparties could once again face difficulties in valuing credit-related instruments. Differences in opinion with respect to valuations of credit-related instruments could result in legal disputes among the Group and its counterparties as to their respective obligations, the outcomes of which are difficult to predict and could be material.
Liquidity risks The Group’s business requires, and its clients expect, that it has sufficient capital and sufficient liquidity to meet its reinsurance obligations, and that this would continue to be the case following the occurrence of any event or series of events, including extreme catastrophes, that would trigger insurance or reinsurance coverage obligations. The Group’s uses of funds include obligations arising in its reinsurance business (including claims and other payments as well as insurance provision repayments due to portfolio transfers, securitisations and commutations), which may include large and unpredictable claims (including catastrophe claims), funding of capital requirements and operating costs, payment of principal and interest on outstanding indebtedness and funding of acquisitions. The Group also enters into contracts or trading arrangements that could give rise to significant short-term funding obligations and, in connection with the Group’s trading operations, it could be subject to unexpected calls to deliver collateral or unwind trading positions at a net cost to it. The Group also has unfunded capital commitments in its private equity and hedge fund investments, which could result in funding obligations at a time when it is subject to liquidity constraints. The Group also has potential collateral requirements in connection with a number of reinsurance arrangements, the amounts of which may be material and the meeting of which could require the Group to liquidate cash equivalents or other securities.
As claims paying and financial strength ratings are key factors in establishing the competitive position of reinsurers, a decline in ratings alone could make reinsurance provided by the Group less attractive to clients relative to reinsurance from competitors with similar or stronger ratings. A decline in ratings could also cause the loss of clients who are required by either policy or regulation to purchase reinsurance only from reinsurers with certain ratings. A decline in ratings could also impact the availability and terms of unsecured financing and obligate the Group to provide collateral or other guarantees in the course of its reinsurance business or trigger early termination of funding arrangements. Any rating downgrades could also have a material adverse impact on the Group’s costs of borrowing and limit its access to the capital markets. Further negative ratings action could also impact reinsurance contracts.
Legal and regulatory risks The Group has been named, from time to time, as a defendant in various legal actions in connection with its operations. The Group is also involved, from time to time, in investigations and regulatory proceedings, certain of which could result in adverse judgments, settlements, fines and other outcomes. The number of these investigations and proceedings involving the financial services industry has increased in recent years, and the potential scope of these investigations and proceedings has also increased, not only in respect of matters covered by our direct regulators, but also in respect of compliance with broader business conduct rules such as market abuse regulations, anti-bribery legislation, anti-money laundering legislation and trade sanctions legislation. The Group could be subject to risks arising from alleged, or actual, violations of any of the foregoing, and could also be subject to risks arising from potential employee misconduct, including non-compliance with internal policies and procedures. Substantial legal liability could materially adversely affect the Group’s business, financial condition or results of operations or could cause significant reputational harm, which could seriously harm its business.
Use of models; accounting matters The Group is subject to risks relating to the preparation of estimates and assumptions that management uses, for example, as part of its risk models as well as those that affect the reported amounts of assets, liabilities, revenues and expenses in the Group’s financial statements, including assumed and ceded business. For example, the Group estimates premiums pending receipt of actual data from ceding companies, which actual data could deviate from the estimates. In addition, particularly with respect to large natural catastrophes, it may be difficult to estimate losses, and preliminary estimates may be subject to a high degree of uncertainty and change as new information becomes available. Deterioration in market conditions could have an adverse impact on assumptions used for financial reporting purposes, which could affect possible impairment of present value of future profits, fair value of assets and liabilities, deferred acquisition costs or goodwill. To the extent that management’s estimates or assumptions prove to be incorrect, it could have a material impact on underwriting results (in the case of risk models) or on reported financial condition or results of operations, and such impact could be material.