Cash flows from operating activities Net income attributable to common shareholders 331 421 Add net income/loss attributable to non-controlling interests –5 19 Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items 542 331 Net realised investment gains/losses –4 048 2 530 Income from equity-accounted investees, net of dividends received 70 4 Change in: Technical provisions and other reinsurance assets and liabilities, net 5 739 –1 796 Funds held by ceding companies and under reinsurance treaties –276 212 Reinsurance recoverable on unpaid claims and policy benefits 61 656 Other assets and liabilities, net –386 –421 Income taxes payable/recoverable –606 –682 Trading positions, net –119 298
Securities purchased/sold under agreement to resell/repurchase, net –1 042 3 464 Cash paid/received for acquisitions/disposals and reinsurance transactions, net 36 –11 Net purchases/sales/maturities of other investments –2 103 –869 Net purchases/sales/maturities of investments held for unit-linked and with-profit business 2 356 1 288
Cash flows from financing activities Policyholder account balances, unit-linked and with-profit business: Issuance/repayment of long-term debt –270 346 Issuance/repayment of short-term debt –1 221 –428 Issuance/repayment of contingent capital instrument –352 –750 Purchase/sale of treasury shares –1 142 –1 446 Dividends paid to shareholders –1 559 –1 592 Dividends paid to non-controlling interests –152 Transactions with non-controlling interests 811
Change in cash and cash equivalents –2 205 –821 Cash and cash equivalents as of 1 January 9 011 6 806
Cash and cash equivalents include restricted cash and restricted cash equivalents, for instance pledged cash and cash equivalents (please refer to Note 7, “Investments“).
202 Swiss Re 2018 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.
In the half-year 2018 report, the impact of the Accounting Standard Updates (ASUs) 2016-01, 2016-16 and 2018-02 was reflected in the Group’s statement of comprehensive income. In the year-end 2018 report, the Group revised the presentation and presented the statement of comprehensive income without the impact of these ASUs totalling USD –139 million. The revision had no impact on the Group’s financial position, net income and cash flow. Please refer to the subsection ”Adoption of new accounting standards” for more details about the ASUs.
Principles of consolidation The Group’s financial statements include the consolidated financial statements of Swiss Re Ltd and its subsidiaries. Voting entities which Swiss Re Ltd 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 Swiss Re 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 it directly or indirectly exercises significant influence, are accounted for using the equity method or the fair value option and are included in other invested assets. The Swiss Re 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 remeasurement and translation Transactions denominated in foreign currencies are remeasured to the respective subsidiary’s functional currency at average exchange rates. Monetary assets and liabilities are remeasured to the functional currency at closing exchange rates, whereas nonmonetary 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-forsale securities, investments in consolidated subsidiaries and investments accounted for using the equity method are reported in shareholders’ equity.
For consolidation purposes, assets and liabilities of subsidiaries with functional currencies other than US dollars are translated from the functional currency to US dollars at closing rates. Revenues and expenses are translated at average exchange rates. Translation adjustments 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. Although management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and judgement over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. As of 31 December 2018, the Group had not provided any collateral on financial instruments in excess of its own market value estimates.
Investment in real estate that the Group intends to hold for the production of income is carried at depreciated cost, net of any writedowns for impairment in value. Depreciation on buildings is recognised on a straight-line basis over the estimated useful life of the asset. Land is recognised at cost and not depreciated. Impairment in value is recognised if the sum of the estimated future undiscounted cash flows from the use of the real estate is lower than its carrying value. The impairment loss is measured as the amount by which the asset’s carrying amount exceeds its fair value and is recognised in realised investment losses. Depreciation
Investment contracts are long-duration contracts that do not incorporate significant insurance risk, ie there is no mortality and morbidity risk, or the mortality and morbidity risk associated with the insurance benefit features offered in the contract is of insignificant amount or remote probability. Amounts received as payment for investment contracts are reported as policyholder account balances. Related assets are included in general account assets except for investments for unit-linked and with-profit business, which are presented in a separate line item on the face of the balance sheet.
allocable to policyholders are included in net investment income and net realised investment gains/losses except for unit-linked and with-profit business, which is presented in a separate line item on the face of the income statement.
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 the age of the receivable and/or any 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 any financial difficulties of the debtor, and can be as high as the outstanding net balance.
Share-based payment transactions As of 31 December 2018, the Group has a Leadership Performance Plan, restricted shares and a Global Share Participation Plan. These plans are described in more detail in Note 15. The Group accounts for share-based payment transactions with employees using the fair value method. Under the fair value method, the fair value of the awards is recognised in earnings over the vesting period.
Adoption of new accounting standards 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 adopted ASU 201409 on 1 January 2018 together with the following ASUs related to topic 606: ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, ASU 2016-10 “Identifying Performance Obligations and Licensing”, ASU 2016-12 “Narrow-Scope Improvements and Practical Expedients” and ASU 2016-20 “Technical Corrections and Improvements to Topic 606”. The retrospective adoption of ASU 2014-09 and related ASUs did not have a material impact on the Group’s financial statements.
Life Capital Life Capital manages Swiss Re’s primary life and health business. It encompasses the closed and open life and health insurance books, including the ReAssure business and the primary life and health insurance business comprising elipsLife and iptiQ. Through ReAssure, Swiss Re acquires closed blocks of inforce life and health insurance business, either through reinsurance or corporate acquisition, and typically assumes responsibility for administering the underlying policies. The administration of the business may be managed directly or, where appropriate, in partnership with a third party. In the open books business, elipsLife, the Group life and health insurance business, offers solutions to pension funds, corporates and affinity groups through an intermediated business to business to consumer (“B2B2C”) model. The iptiQ business, primarily the individual life and health business, partners with distributors and enables individuals to address their protection needs on a white labelled basis.
Total expenses before interest expenses –18 584 –12 148 –4 871 –5 671 –474 352 –41 396
Net income/loss before attribution of non-controlling interests –394 1 140 –746 161 232 0 393
Net income/loss after attribution of non-controlling interests –394 1 140 –741 161 232 0 398
Interest on contingent capital instruments, net of tax –19 –48 –67
Claims ratio in % 79.0 97.4 82.3 Expense ratio in % 32.5 36.0 33.1 Combined ratio in % 111.5 133.4 115.4 Management expense ratio in % 5.7 Net operating margin in % –1.3 13.1 –23.5 10.9 2.8
Business segments – income statement For the year ended 31 December 2018 Property & Casualty Reinsurance
Premiums earned 16 095 12 683 3 925 1 172 33 875 Fee income from policyholders 152 434 586 Net investment income – non-participating business 1 380 1 305 207 1 256 262 –335 4 075 Net realised investment gains – non-participating business –16 347 16 66 –348 65 Net investment result – unit-linked and with-profit business –33 –1 560 –1 593 Other revenues 36 1 3 353 –354 39
Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2018 Property Casualty Specialty Unallocated Total USD millions
Premiums earned 6 029 7 664 2 402 16 095 Net investment income 1 380 1 380 Net realised investment gains/losses –16 –16 Other revenues 36 36
Claims ratio in % 71.1 76.5 61.2 72.2 Expense ratio in % 28.8 34.1 32.2 31.8 Combined ratio in % 99.9 110.6 93.4 104.0
218 Swiss Re 2018 Financial Report c) Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2017 Life Health Unallocated Total USD millions
Management expense ratio in % 5.7 5.6 5.7 Net operating margin1 in % 9.9 8.8 13.1 1 Net operating margin is calculated as ”Income before interest and income tax expense” divided by ”Total revenues” excluding ”Net investment result – unit-linked and with-profit business”.
Total expenses before interest expenses –9 095 –3 993 0 –13 088
Management expense ratio in % 5.2 5.6 5.4 Net operating margin1 in % 7.3 8.2 9.4 1 Net operating margin is calculated as ”Income before interest and income tax expense” divided by ”Total revenues” excluding ”Net investment result – unit-linked and with-profit business”.
Americas 16 101 16 075 Europe (including Middle East and Africa) 10 546 11 044 Asia-Pacific 7 058 7 342
United States 13 509 13 519 United Kingdom 3 382 3 487 Australia 2 095 2 061 China 1 933 1 644 Japan 1 168 1 426 Germany 1 258 1 226 Canada 1 137 1 209 Switzerland 886 952 Netherlands 502 837 France 730 789 Ireland 673 685 Other 6 432 6 626
Retrocession to external parties –371 –1 348 –303 –328 –2 350
Retrocession to external parties –1 –1 2018 Property & Casualty Reinsurance
Claims and claim adjustment expenses For the year ended 31 December 2017 Property & Casualty Reinsurance
Change in unpaid claims and claim adjustment expenses; life and health benefits, thereof: Gross – with external parties –3 791 –533 –1 016 727 –4 613 Intra-group transactions (assumed and ceded) 365 –53 –365 53 0
Claims and claim adjustment expenses; life and health benefits –13 172 –9 211 –3 558 –1 872 –27 813
Unpaid claims and claim adjustment expenses; life and health benefits before impact of retrocession to external parties –957 –707 –555 1 109 –1 110
Acquisition costs, thereof: Gross acquisition costs with external parties –4 073 –2 211 –660 –364 –7 308 Intra-group transactions (assumed and ceded) –4 –58 4 58 0
Reinsurance receivables Reinsurance receivables as of 31 December were as follows: Premium receivables invoiced 3 135 3 041 Receivables invoiced from ceded re/insurance business 427 445 Assets arising from the application of the deposit method of accounting and meeting the definition of financing receivables 147 124 Recognised allowance –71 –58
Gross premiums written 16 544 13 313 4 193 1 761 –1 036 34 775 Intra-group transactions (ceded) –112 –144 –254 –526 1 036 0
Gross premiums written before retrocession to external parties 16 432 13 169 3 939 1 235 34 775
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 57 355 66 795 Reinsurance recoverable −4 044 −4 458 Deferred expense on retroactive reinsurance −211 −240
Incurred related to: Amortisation of deferred expense on retroactive reinsurance and impact of commutations −5 −41
For the life and health business, the adverse claims development on prior-year business was across a number of lines of business, in particular the individual life and disability portfolios in the US and the group disability portfolio in Australia. This was partially offset by positive experience in other regions, including Continental Europe and Asia. Claims development related to prior years also includes an element of interest accretion for unpaid claims reported at the estimated present value.
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: 1 The Group revised its methodology for determining the prior-year net claims and claim adjustment expenses development on a certain health business. Comparative information for 2017 has been amended accordingly.
Estimating ultimate asbestos and environmental liabilities is particularly complex for a number of reasons, relating in part to the long period between exposure and manifestation of claims and in part to other factors, which include risks and lack of predictability inherent in complex litigation, changes in projected costs to resolve and in the projected number of asbestos and environmental claims, the effect of bankruptcy protection, insolvencies and changes in the legal, legislative and regulatory environment. As a result, the Group believes that projection of exposures for asbestos and environmental claims is subject to far less predictability relative to non-environmental and non-asbestos exposures. Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts and the current state of the law. However, reserves are subject to revision as new information becomes available and as claims develop. Additional liabilities may arise for amounts in excess of reserves, and the Group’s estimate of claims and claim adjustment expenses may change. Any such additional liabilities or increases in estimates cannot be reasonably estimated in advance but could result in charges that could be material to operating results.
Amounts shown in the claims development tables are net of external retrocession and retrocession between business segments to the extent a retrocession program can be allocated to a disaggregation category. Ceded retroactive reinsurance is not included in the claims development table if it cannot be allocated on a reasonable basis to the disaggregation categories used to present claims development information.
Contract-level reserving is based on standard actuarial techniques but requires more detailed contract, pricing, claim and exposure information than required for the business reviewed on a portfolio level.
Life & Health Reinsurance reports claims frequency information based on individual incidence. The number of reported claims is the actual number of claims booked. For Group income protection business, claims with multiple payments in a year are counted as one claim with the corresponding amount annualised. Claims that are reported but not admitted are included in the claim count.
The liability for unpaid claims and claim adjustment expenses for property in Property & Casualty Reinsurance shows positive development on most recent accident years. Claims in accident year 2011 were at a high level due to several large natural catastrophes including the earthquake and tsunami in Japan, the earthquakes in Christchurch, New Zealand, and floods in Thailand. The 2017 accident year claims incurred are higher due to natural catastrophes, mainly stemming from cyclone Debbie, hurricanes Harvey, Irma and Maria in the Americas, the two earthquakes in Mexico and the wildfires in California. The 2018 accident year claims incurred are lower than 2017 but include a higher level of natural catastrophes than 2012 to 2016.
The increase in incurred losses for accident year 2015 compared to other years is due to an increase in volume of business written. Liabilities before 2009 include reserves for historic US Asbestos and Environmental losses.
Liabilities for claims and claim adjustment expenses, net of reinsurance 4 959
Property & Casualty Reinsurance – Motor, proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance
The increase in the incurred losses from accident year 2010 onwards is driven by new business volume across all regions. Proportional motor business includes both longer-tailed liability business and shorter-tailed hull business.
Liabilities for claims and claim adjustment expenses, net of reinsurance 4 575
Life & Health Reinsurance, long tail Incurred claims and allocated claim adjustment expenses, net of reinsurance
The net outstanding liabilities correspond to the total liabilities for unpaid claims and claim adjustment expenses, net of reinsurance for each disaggregation category.
Other short duration contract lines includes reserves for business that is not material to the Group and where accident year information is not available. For Life & Health Reinsurance, in certain markets, cedents do not provide sufficient information to reinsurers to split claims incurred and claims paid by accident year. This is based on existing market practice. For these markets, an assessment of available information from other sources was made along with investigating approximations that could be used to provide claims development information by accident year. However, these alternate sources and estimates, based on currently available data and methods, could not be used to generate meaningful and representative accident year information and therefore have been excluded from disclosure. Other short duration contract lines also contain other treaties from Property & Casualty Reinsurance and Corporate Solutions which could not be allocated on a consistent basis to disaggregation categories or specific accident years.
Property 7 533 Liability, proportional 7 914 Liability, non-proportional 8 851 Accident & Health 4 959 Motor, proportional 3 458 Motor, non-proportional 5 718 Specialty 4 575
Total net discounted outstanding liabilities excluding other short duration contract lines and before unallocated reinsurance recoverable 50 602 Other short duration contract lines 2 802
Corporate Solutions 4 160 Consolidation –4 113 Impact of acquisition accounting –111 Other short duration contract lines 649
1 Interest accretion is shown as part of “Life and health benefits” in the income statement.
Opening balance as of 1 January 2 280 3 465 444 11 6 200 Deferred 4 068 1 294 553 71 5 986 Effect of acquisitions/disposals and retrocessions –5 2 5 2 Amortisation –4 255 –508 –549 –67 –5 379 Effect of foreign currency translation and other changes 53 –12 4 17 62 2018 Property & Casualty Life & Health Corporate USD millions Reinsurance Reinsurance Solutions Life Capital Total
Opening balance as of 1 January 2 146 4 234 454 37 6 871 Deferred 4 048 1 235 634 978 6 895 Amortisation –4 012 –496 –595 –187 –5 290 Effect of foreign currency translation and other changes –26 –189 –5 –39 –259
As of 31 December, the PVFP was as follows: Life & Health Reinsurance Life Capital Total 2017 Positive Negative USD millions PVFP PVFP Total
Life & Health Reinsurance Life Capital Total 2018 Positive Negative USD millions PVFP PVFP Total
The percentage of PVFP which is expected to be amortised in each of the next five years is 14%, 13%, 12%, 11% and 10%.
246 Swiss Re 2018 Financial Report 7 Investments Investment income Net investment income by source (excluding unit-linked and with-profit business) was as follows: Fixed income securities 2 778 2 905 Equity securities 79 71 Policy loans, mortgages and other loans 148 213 Investment real estate 200 220 Short-term investments 65 62 Other current investments 118 128 Share in earnings of equity-accounted investees 100 166 Cash and cash equivalents 25 47 Net result from deposit-accounted contracts 127 250 Deposits with ceding companies 457 447
Dividends received from investments accounted for using the equity method were USD 170 million and USD 170 million for 2017 and 2018, respectively.
Realised gains and losses Realised gains and losses for fixed income securities, equity securities and other investments (excluding unit-linked and with-profit business) were as follows: Fixed income securities available-for-sale: Gross realised gains 748 526 Gross realised losses –148 –225
Other-than-temporary impairments –46 –9 Net realised investment gains/losses on equity securities1 21 Change in net unrealised investment gains/losses on equity securities1 –483 Net realised investment gains/losses on trading securities 27 –69 Change in net unrealised investment gains/losses on trading securities 3 39 Net realised/unrealised gains/losses on other investments –8 117 Net realised/unrealised gains/losses on insurance-related activities 99 97 Foreign exchange gains/losses 121 51
Net realised investment gains/losses – non-participating business 1 727 65 1 Change due to ASU 2016-01. Please refer to Note 1 for more details.
Net investment result on unit-linked and with-profit business credited to policyholders was as follows: 2017 2018 USD millions Unit-linked With-profit Unit-linked With-profit
Investment income – fixed income securities 69 120 68 120 Investment income – equity securities 705 69 715 72 Investment income – other 20 11 17 10
Total net investment result – unit-linked and with-profit business 2 904 411 –1 399 –194
For securitised products, cash flow projection analysis is conducted by integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecasted economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and the present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.
Equity securities available-for-sale 3 544 365 –47 3 862 2018 Amortised cost Gross unrealised Gross unrealised
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 12 144 218 –156 12 206 US Agency securitised products 6 416 18 –130 6 304 States of the United States and political subdivisions of the states 1 584 55 –19 1 620 United Kingdom 7 837 1 085 –74 8 848 Germany 2 723 229 –7 2 945 Canada 2 721 192 –29 2 884 France 1 723 205 –6 1 922 Australia 1 658 14 –3 1 669 Other 9 026 273 –135 9 164
Less than 12 months 12 months or more Total 2018 Unrealised Unrealised Unrealised USD millions Fair value losses Fair value losses Fair value losses
Due in one year or less 7 399 7 410 10 449 10 379 Due after one year through five years 29 459 29 724 24 547 24 614 Due after five years through ten years 15 921 16 652 16 183 16 471 Due after ten years 36 550 41 370 34 749 37 262 Mortgage- and asset-backed securities with no fixed maturity 3 949 4 092 3 745 3 812
Investments trading and at fair value through earnings The carrying amounts of fixed income securities classified as trading and equity securities classified as trading and at fair value through earnings (excluding unit-linked and with-profit business) as of 31 December were as follows: Debt securities issued by governments and government agencies 2 414 3 314 Corporate debt securities 38 37 Mortgage- and asset-backed securities 86 63
Fixed income securities trading – non-participating business 2 538 3 414
Equity securities at fair value through earnings – non-participating business1 3 036 1 Change due to ASU 2016-01. Please refer to Note 1 for more details.
Investments held for unit-linked and with-profit business The carrying amounts of investments held for unit-linked and with-profit business as of 31 December were as follows: 2017 2018 USD millions Unit-linked With-profit Unit-linked With-profit
Fixed income securities trading 2 105 3 104 2 253 2 685 Equity securities trading1 26 582 2 201 Equity securities at fair value through earnings1 21 326 1 797 Investment real estate 543 281 537 230 Other 286 64 702 16
Mortgage, policy and other loans and investment real estate As of 31 December, the carrying and respective fair values of investments in mortgage, policy and other loans and investment real estate (excluding unit-linked and with-profit business) were as follows: 2017 2018 USD millions Carrying value Fair value Carrying value Fair value
Policy loans 94 94 84 84 Mortgage loans 2 665 2 674 2 890 2 882 Other loans 1 351 1 367 1 568 1 587 Investment real estate 2 220 4 099 2 411 4 307
Depreciation expense related to investment real estate was USD 49 million and USD 57 million for 2017 and 2018, respectively. Accumulated depreciation on investment real estate totalled USD 585 million and USD 609 million as of 31 December 2017 and 2018, respectively.
Other invested assets Derivative financial instruments 527 527 Reverse repurchase agreements 3 058 3 058 Securities lending/borrowing 776 1 065 1 841 Equity-accounted investments 446 2 446 2 892 Other 63 828 695 1 586
Accrued expenses and other liabilities 3 307 0 1 046 0 2 837 7 190
Derivative financial instruments 582 582 Repurchase agreements 581 581 Securities lending 301 59 360 Securities sold short 1 538 1 538 Other 1 077 2 660 3 737
Accrued expenses and other liabilities 2 421 0 1 717 0 2 660 6 798 1 Amounts do not relate to financial assets or liabilities.
Offsetting of derivatives, financial assets and financial liabilities Offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows: Gross amounts of Net amounts of financial Related financial 2017 recognised Collateral set-off assets presented instruments not set-off USD millions financial assets in the balance sheet in the balance sheet in the balance sheet Net amount
Derivative financial instruments – assets 1 620 –1 052 568 568 Reverse repurchase agreements 4 285 –3 234 1 051 –1 051 0 Securities borrowing 110 –99 11 –11 0
As of 31 December 2017 and 2018, a real estate portfolio with a carrying value of USD 192 million and USD 191 million, respectively, served as collateral for a credit facility, allowing the Group to withdraw funds up to CHF 500 million.
Recognised gross liability for the obligation to return collateral that the Group has the right to sell or repledge As of 31 December 2017 and 2018, the gross amounts of liabilities related to repurchase agreements and securities lending by the class of securities transferred to third parties and by the remaining maturity are shown below. The liabilities are recognised for the obligation to return collateral that the Group has the right to sell or repledge.
Remaining contractual maturity of the agreements 2017 Overnight and continuous Greater than 90 days Total USD millions Up to 30 days 30–90 days
The programme is structured in a conservative manner within a clearly defined risk framework. Yield enhancement is conducted on a non-cash basis, thereby taking no re-investment risk.
254 Swiss Re 2018 Financial Report 8 Fair value disclosures Fair value, as defined by the Fair Value Measurements and Disclosures Topic, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Fair Value Measurements and Disclosures Topic requires all assets and liabilities that are measured at fair value to be categorised within the fair value hierarchy. This three-level hierarchy is based on the observability of the inputs used in the fair value measurement. The levels of the fair value hierarchy are defined as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the Group has the ability to access. Level 1 inputs are the most persuasive evidence of fair value and are to be used whenever possible.
Exchange-traded derivative instruments typically fall within level 1 or level 2 of the fair value hierarchy, depending on whether they are considered to be actively traded or not.
The fair values of assets are adjusted to incorporate the counterparty risk of non-performance. Similarly, the fair values of liabilities reflect the risk of non-performance of the Group, captured by the Group’s credit spread. These valuation adjustments from assets and liabilities measured at fair value using significant unobservable inputs are recognised in net realised gains and losses. For 2018, these adjustments were not material. Whenever the underlying assets or liabilities are reported in a specific business segment, the valuation adjustment is allocated accordingly. Valuation adjustments not attributable to any business segment are reported in Group items.
Governance around level 3 fair valuation The Asset Valuation Committee, endorsed by the Group Executive Committee, has a primary responsibility for governing and overseeing all of Group’s asset and derivative valuation policies and operating parameters (including level 3 measurements). The Asset Valuation Committee delegates the responsibility for implementation and oversight of consistent application of the Groupʼs pricing and valuation policies to the Pricing and Valuation Committee.
Debt securities issued by US government and government agencies 14 013 2 392 16 405 US Agency securitised products 5 965 5 965 Debt securities issued by non-US governments and government agencies 32 285 3 32 288 Corporate debt securities 41 287 1 343 42 630 Mortgage- and asset-backed securities 4 491 7 4 498
Fixed income securities backing unit-linked and with-profit business 5 209 5 209 Equity securities held for proprietary investment purposes 3 856 5 4 3 865 Equity securities backing unit-linked and with-profit business 28 770 13 28 783 Short-term investments held for proprietary investment purposes 1 021 3 825 4 846 Short-term investments backing unit-linked and with-profit business 59 59 Derivative financial instruments 50 1 274 386 –1 176 534
Liabilities for life and health policy benefits –126 –126 Accrued expenses and other liabilities –939 –1 785 –2 724
Total assets at fair value 39 319 93 504 2 312 –1 052 812 134 895
Total liabilities at fair value –316 –2 512 –636 923 –2 541 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.
Assets and liabilities Balance as of 1 January 1 182 4 461 209 496 2 352 –664 –144 –808
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) for the years ended 31 December were as follows: Gains/losses included in net income for the period 287 112 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date 226 33
Infrastructure loans 778 920 Discounted cash flow model Valuation spread 118–250 bps (192 bps) Private placement corporate debt 428 341 Corporate spread matrix Credit spread 131–402 bps (247 bps) Private placement credit tenant leases 46 42 Discounted cash flow model Illiquidity premium 125–150 bps (146 bps)
Derivative equity contracts 283 339 OTC equity option referencing correlated equity indices 283 339 Proprietary option model Correlation –35–40% (2.5%)1
Investment real estate 198 166 Discounted cash flow model Discount rate 5% per annum
HDD/CAT2 1 Represents average input value for the reporting period. 2 Heating Degree Days (HDD); Cumulative Average Temperature (CAT).
Sensitivity of recurring level 3 measurements to changes in unobservable inputs The significant unobservable input used in the fair value measurement of the Group’s infrastructure loans is valuation spread. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Group’s private placement corporate debt securities is credit spread. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Group’s private placement credit tenant leases is illiquidity premium. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement.
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 for the years ended 31 December were as follows: Other invested assets 36 6 Liabilities for life and health policy benefits 19 6 Accrued expenses and other liabilities 20 –11
Fair value changes from other invested assets and funds held by ceding companies are reported in “Net investment income – non-participating business”. Fair value changes from the GMDB reserves are shown in “Life and health benefits”. Fair value changes from accrued expenses and other liabilities are reported in “Net realised investment gains/losses – non-participating business“.
Assets and liabilities not measured at fair value but for which the fair value is disclosed Assets and liabilities not measured at fair value but for which the fair value is disclosed as of 31 December were as follows: Significant Significant other unobservable 2017 observable inputs inputs USD millions (level 2) (level 3) Total
Assets Policy loans 84 84 Mortgage loans 2 882 2 882 Other loans 1 587 1 587 Investment real estate 4 141 4 141
Amount offset Where a right of set-off exists –623 623 Due to cash collateral –429 300
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 2017 and 2018, the following hedging relationships were outstanding: Fair value hedges The Group enters into foreign exchange swaps to reduce the exposure to foreign exchange volatility for certain fixed income securities. 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 — non-participating business” in the income statement. For the years ended 31 December, the gains and losses attributable to the hedged risks were as follows: USD millions
For the year ended 31 December 2018, the Group recorded a gain of USD 25 million on derivatives in accumulated other comprehensive income. For the year ended 31 December 2018, the Group reclassified a gain of USD 10 million from accumulated other comprehensive income into income.
As of 31 December 2018, the maximum length of time over which the Group hedged its exposure to the variability in future cash flows for forecasted transactions, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, was eight years.
The Group believes that the net gains and losses associated with cash flow hedges expected to be reclassified from accumulated other comprehensive income within the next twelve months cannot be reasonably estimated as they relate to foreign exchange volatility.
270 Swiss Re 2018 Financial Report 10 Acquisitions Bradesco Seguros, S.A. On 3 July 2017, the Group and Bradesco Seguros, S.A. (Bradesco) entered into a partnership combining the large commercial risk business of Bradesco with Swiss Re Corporate Solutions Brasil Seguros S.A. (SRCSB). Upon closing this transaction, SRCSB became one of the leading insurers in the commercial large-risk insurance market in Brazil. The acquisition cost was BRL 210 million paid in cash and 40% shares of SRCSB. The transaction includes Bradesco’s related operations, its team of experts and a business portfolio, including existing, new and renewal business.
11 Debt and contingent capital instruments 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 not greater than one year and long-term debt as having a maturity of greater than one year. For subordinated debt positions, maturity is defined as the first optional redemption date (notwithstanding that optional redemption could be subject to regulatory consent). Interest expense is classified accordingly.
As of 31 December 2017 and 2018, operational debt, ie debt related to operational leverage, amounted to USD 2.8 billion (thereof USD 2.4 billion limited- or non-recourse) and USD 2.5 billion (thereof USD 2.1 billion limited- or non-recourse), respectively. Operational leverage is subject to asset/liability matching and is excluded from rating agency financial leverage calculations.
Maturity Instrument Issued in Currency Nominal in millions Interest rate Book value in USD millions 2021 Syndicated senior bank loans 2018 GBP 468 variable 596 2022 Senior notes 2012 USD 250 2.88% 249 2023 Senior notes 2016 EUR 750 1.38% 853 2024 EMTN 2014 CHF 250 1.00% 253 2026 Senior notes1 1996 USD 397 7.00% 476 2027 EMTN 2015 CHF 250 0.75% 254 2030 Senior notes1 2000 USD 193 7.75% 257 2042 Senior notes 2012 USD 500 4.25% 490 Various Payment undertaking agreements various USD 344 various 388
Total senior long-term debt as of 31 December 2017 4 171 1 Assumed in the acquisition of GE Insurance Solutions.
Total subordinated long-term debt as of 31 December 20171 5 002 1 Certain items previously described within the disclosure table as subordinated long-term debt are now included as contingent capital instruments classified as long-term debt. Comparative information for 2017 has been amended accordingly.
Interest expense on long-term debt and contingent capital instruments classified as equity Interest expense on long-term debt for the years ended 31 December was as follows: Senior financial debt 114 100 Senior operational debt 11 11 Subordinated financial debt1 128 108 Subordinated operational debt 114 118 Contingent capital instruments classified as financial debt1 38 38 1 Certain items previously described within the disclosure table as subordinated financial debt or convertible debt are now included as contingent capital instruments classified as financial debt. Comparative information for 2017 has been amended accordingly.
In June 2018, Swiss Re ReAssure Limited entered into a GBP 550 million revolving credit facility with a syndicate of banks. The facility has an expiry date of 26 June 2021. At 29 June 2018, the amount drawn under the facility was GBP 468 235 294. This revolving credit facility replaces the previous GBP 550 million revolving credit facility that Swiss Re ReAssure Limited (formerly known as Swiss Re Admin Re Limited) had entered into in April 2016.
Contingent capital instruments classified as equity In March 2012, Swiss Reinsurance Company Ltd issued a perpetual subordinated capital instrument with issuer stock settlement, a face value of USD 750 million and a fixed coupon of 8.25% per annum. This capital instrument was redeemed on 1 September 2018.
Weighted average common shares outstanding 320 811 238 306 841 773
Effect of dilutive securities Change in income available to common shares due to contingent capital instruments1 8 Change in average number of shares due to contingent capital instruments 6 203 404 Change in average number of shares due to employee options 514 803 604 473
Diluted earnings per share Net income assuming debt conversion and exercise of options 331 429 Weighted average common shares outstanding 321 326 041 313 649 650
At the 153rd Annual General Meeting held on 21 April 2017 and at the 154th Annual General Meeting held on 20 April 2018, the Group’s shareholders authorised the Group Board of Directors to repurchase up to a maximum CHF 1 billion purchase value of the Group’s own shares by way of a public buy-back programme for cancellation purposes prior to the 2018 and 2019 Annual General Meetings, respectively.
The public share buy-back programme approved by the 2017 Annual General Meeting was completed on 16 February 2018. The total number of shares repurchased amounted to 10.8 million, of which 6.3 million and 4.5 million shares were repurchased as of 31 December 2017 and between 1 January and 16 February 2018, respectively. On 20 April 2018, the 154th Annual General Meeting resolved the cancellation of the repurchased 10.8 million shares by way of share capital reduction. The shares were cancelled as of 24 July 2018, after completion of the procedure in respect of a share capital reduction as set forth in Article 732 et seqq. of the Swiss Code of Obligations.
The public share buy-back programme approved by the 2018 Annual General Meeting was completed on 15 February 2019. The total number of shares repurchased amounted to 11.2 million, of which 10 million and 1.2 million shares were repurchased as of 31 December 2018 and between 1 January and 15 February 2019, respectively.
Net of tax expense effects from contingent capital instruments, totalling USD 41 million in 2018, and the potential impact of these instruments on the weighted average number of shares, of 15 625 000 shares, have not been included in the diluted earnings per share calculation because the impact of such an inclusion was antidilutive.
For the year ended 31 December 2018, the Group reported a tax charge of USD 69 million on a pre-tax income of USD 550 million, compared to a charge of USD 132 million on a pre-tax income of USD 525 million for 2017. This translates into an effective tax rate in the current and prior-year reporting periods of 12.5% and 25.1%, respectively.
For the year ended 31 December 2018, the tax rate was largely driven by tax benefits from foreign currency translation differences between statutory and US GAAP accounts, the releases of valuation allowances on net operating losses and tax benefits from intra-entity transfers, partially offset by the impact of different rates in various jurisdictions and tax charges from unrecognised tax benefits. The higher rate in the year ended 31 December 2017 was largely driven by tax charges from currency translation differences between statutory and US GAAP accounts, impacts from unrecognised tax benefits and recognition of deferred tax charges from intra-entity transfers, partially offset by tax benefits from US tax law changes.
Liability for unrecognised tax benefits including interest and penalties –238 –295
As of 31 December 2018, 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 billion. 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.
As of 31 December 2018, the Group had capital loss carryforwards of USD 1 084 million, expiring as follows: USD 3 million in 2020, USD 4 million in 2021, USD 39 million in 2023, and USD 1 038 million never expire.
Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: Balance as of 1 January 216 206 Additions based on tax positions related to current year 24 49 Additions based on tax positions related to prior years 16 57 Reductions for tax positions of current year –9 –8 Reductions for tax positions of prior years –12 –15 Statute expiration –9 –19 Settlements –29 –7 Other (including foreign currency translation) 9 –6
Benefit obligation as of 1 January 3 916 2 358 369 6 643 Service cost 111 8 4 123 Interest cost 24 69 9 102 Amendments –55 –3 –58 Actuarial gains/losses –57 –48 42 –63 Benefits paid –185 –78 –17 –280 Employee contribution 26 26 Effect of settlement, curtailment and termination 2 –20 –18 Effect of foreign currency translation 166 175 9 350
Amounts recognised in “Other assets” and “Accrued expenses and other liabilities” in the Group’s balance sheet as of 31 December were as follows: 2017 USD millions Swiss plan Foreign plans Other benefits Total
Non-current assets 278 278 Current liabilities –3 –18 –21 Non-current liabilities –61 –174 –395 –630
Amounts recognised in accumulated other comprehensive income, gross of tax, as of 31 December were as follows: 2017 USD millions Swiss plan Foreign plans Other benefits Total
Service cost (net of participant contributions) 111 8 4 123 Interest cost 24 69 9 102 Expected return on assets –90 –78 –168 Amortisation of: Net gain/loss 77 35 –1 111 Prior service cost –9 –9
Effect of settlement, curtailment and termination 0 Exchange rate gain/loss recognised during the year –13 –13
Assumptions used to determine net periodic pension costs for the year ended Discount rate 0.6% 0.6% 2.9% 2.8% 2.4% 2.1% Expected long-term return on plan assets 2.5% 2.5% 3.5% 3.6% Rate of compensation increase 1.8% 1.8% 3.1% 3.0% 2.1% 2.1%
Assumed medical trend rates at year end Medical trend – initial rate 5.6% 4.7% Medical trend – ultimate rate 3.8% 3.6% Year that the rate reaches the ultimate trend rate 2021 2021
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 2018: USD millions 1 percentage point increase 1 percentage point decrease
Real estate positions classified as level 1 and level 2 are exchange-traded real estate funds where a market valuation is readily available. Real estate reported on level 3 is property-owned by the pension funds. These positions are accounted for at the capitalised income value. The capitalisation based on sustainable recoverable earnings is conducted at interest rates that are determined individually for each property, based on the property’s location, age and condition. If properties are intended for disposal, the estimated selling costs and taxes are recognised in provisions. Sales gains or losses are allocated to income from real estate when the contract is concluded.
As of 31 December, the fair values of pension plan assets by level of input were as follows: Quoted prices in active markets Significant other Significant Investments measured 2017 for identical observable unobservable at net asset value as USD millions assets (level 1) inputs (level 2) inputs (level 3) practical expedient Total
Assets Fixed income securities: Debt securities issued by the US government and government agencies 30 181 211 Debt securities issued by non-US governments and government agencies 1 224 1 224 Corporate debt securities 1 846 10 1 856 Residential mortgage-backed securities 23 23 Commercial mortgage-backed securities 1 1 Agency securitised products 0 Other asset-backed securities 1 1
Quoted prices in active markets Significant other Significant Investments measured 2018 for identical observable unobservable at net asset value as USD millions assets (level 1) inputs (level 2) inputs (level 3) practical expedient Total
Short-term investments 48 48 Derivative financial instruments 10 10 Real estate 721 721 Other assets 91 659 750
Purchases, issuances and settlements 19 11 30 Transfers in and/or out of level 3 0 Impact of foreign exchange movements 27 3 30
Balance as of 1 January 692 113 805 Realised/unrealised gains/losses: Relating to assets still held at the reporting date 27 –14 13 Relating to assets sold during the period 27 27
Purchases, issuances and settlements 10 –11 –1 Transfers in and/or out of level 3 –103 –103 Impact of foreign exchange movements –8 –2 –10
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 2017 and 2018 was USD 81 million and USD 85 million, respectively.
15 Share-based payments As of 31 December 2017 and 2018, the Group had the share-based compensation plans as described below.
Restricted shares The Group granted 29 914 and 24 627 restricted shares to selected employees in 2017 and 2018, respectively. Moreover, as an alternative to the Group’s cash bonus programme, 276 483 and 194 536 shares were delivered during 2017 and 2018, respectively, which are generally not subject to forfeiture risk.
For the year ended 31 December 2018, the outstanding units were as follows: RSUs LPP 2015 LPP 2016 LPP 2017 LPP 2018 Non-vested at 1 January 310 080 348 339 511 141 Granted 353 171 Forfeited –7 395 –25 188 –23 788 –7 914 Vested –302 685
Unrecognised compensation cost As of 31 December 2018, the total unrecognised compensation cost (net of forfeitures) related to non-vested, share-based compensation awards was USD 49 million and the weighted average period over which that cost is expected to be recognised is 1.9 years.
The number of shares authorised for the Group’s share-based payments to employees was 4 411 532 and 4 172 886 as of 31 December 2017 and 2018, respectively. The Group’s policy is to ensure that sufficient treasury shares are available at all times to settle future share-based compensation plans.
If the employee is still employed by Swiss Re at the end of a plan cycle, the employee will receive an additional number of shares equal to 30% of the total number of purchased and dividend shares held at that time. In 2017 and 2018, Swiss Re contributed USD 11 million and USD 11 million to the plans and authorised 162 487 and 197 194 shares as of 31 December 2017 and 2018, respectively.
Contributions made to defined benefit pension plans and post-retirement benefit plans are disclosed in Note 14 ‘‘Benefit plans’’. Plan assets of the defined benefit pension plans include Swiss Re common stock of USD 6 million (0.1% of total plan assets) and USD 4 million (0.1% of total plan assets) as of 31 December 2017 and 2018, respectively.
290 Swiss Re 2018 Financial Report 19 Significant subsidiaries and equity investees
Jersey ReAssure Holdings Limited, St Helier GBP 0 100 f ReAssure Jersey One Limited, St Helier GBP 1 85 f ReAssure Jersey Two Limited, St Helier GBP 3 100 f Swiss Re ReAssure Limited, St Helier GBP 3 100 f Swiss Re ReAssure Midco Limited, St Helier GBP 0 100 f
Liechtenstein Elips Life AG, Triesen CHF 12 100 f Elips Versicherungen AG, Triesen CHF 5 100 f
United Kingdom IptiQ Holdings Limited, Shropshire GBP 0 100 f ReAssure FSH UK Limited, Shropshire GBP 710 100 f ReAssure Group Limited, Shropshire GBP 0 100 f ReAssure Limited, Shropshire GBP 289 100 f Swiss Re Capital Markets Limited, London USD 60 100 f Swiss Re Services Limited, London GBP 2 100 f 1 Net asset value instead of share capital
Barbados European Finance Reinsurance Company Ltd., Bridgetown USD 5 100 f European International Reinsurance Company Ltd., Bridgetown USD 1 100 f Milvus I Reassurance Limited, Bridgetown USD 481 100 f
Brazil Sul America S.A., Rio de Janeiro BRL 3 320 15 e Swiss Re Brasil Resseguros S.A., São Paulo BRL 295 100 f Swiss Re Corporate Solutions Brasil Seguros S.A., São Paulo BRL 318 60 f
Cayman Islands FWD Group Ltd, Grand Cayman USD 1 15 e PEP SR I Umbrella L.P., George Town USD 484 100 f
Ivory Coast Société Manzi Finances S.A., Abidjan XOF 15 311 29 e
Australia Swiss Re Australia Ltd, Sydney AUD 845 100 f Swiss Re Life & Health Australia Limited, Sydney AUD 980 100 f
Vietnam Vietnam National Reinsurance Corporation, Hanoi VND 1 310 759 25 e
The commercial mortgage loans are made to non-recourse special purpose entities collateralised with commercial real estate. The entities are adequately capitalised and generally structured as voting interest entities. Occasionally, the borrower entities can be structured as limited partnerships where the limited partners do not have kick-out or participating rights, which results in the VIE designation.
The Group did not provide financial or other support to any VIEs during 2018 that it was not previously contractually required to provide.
Consolidated VIEs The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs of which the Group is the primary beneficiary as of 31 December: Fixed income securities available-for-sale 3 974 3 444 Investment real estate 198 166 Short-term investments 62 79 Cash and cash equivalents 14 20 Accrued investment income 34 30 Premiums and other receivables 29 26 Deferred acquisition costs 4 3 Deferred tax assets 41 212 Other assets 15 16
Unpaid claims and claim adjustment expenses 84 66 Liabilities for life and health policy benefits 1 Unearned premiums 12 8 Reinsurance balances payable 17 15 Deferred and other non-current tax liabilities 133 180 Accrued expenses and other liabilities 174 144 Long-term debt 2 369 2 112
Insurance-linked securitisations 311 314 447 462 Life and health funding vehicles 27 1 2 052 25 2 174 Swaps in trusts 25 66 –2 76 58 –2 Investment vehicles 2 493 2 494 2 130 2 130 Investment vehicles for unit-linked business 9 223 5 999 Senior commercial mortgage and infrastructure loans 1 297 1 297 1 795 1 795 1 Maximum exposure to loss is the loss the Group would absorb from a variable interest in a VIE in the event that all of the assets of the VIE are deemed worthless. 2 The maximum exposure to loss for swaps in trusts cannot be meaningfully quantified due to their derivative character.
298 Swiss Re 2018 Financial Report 21 Subsequent events Investment by MS&AD Insurance Group Holdings Inc into ReAssure In December 2018, Swiss Re reached an agreement with MS&AD Insurance Group Holdings Inc (MS&AD) for a further investment of GBP 315 million into ReAssure. MS&AD increased its 15% minority stake in ReAssure to a total shareholding of 25% as a result of the transaction, which closed on 20 February 2019.
Other matter Accounting principles generally accepted in the United States of America require that the supplementary information based on the requirements of ASU 2015-09, Disclosures about Short-Duration Contracts, on pages 232 to 240 be presented to supplement the consolidated financial statements. Such information, although not part of the consolidated financial statements, is required by the Financial Accounting Standards Board, which considers it an essential part of financial reporting for placing the consolidated financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the consolidated financial statements and other knowledge we obtained during our audit of the consolidated financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Key audit matter Investment valuation continues to be an area with inherent risk for certain level 2 and 3 investments that have unobservable or interpolated inputs. The risk is not the same for all investment types and is greatest for those listed below. These investments are more difficult to value because quoted prices are not always available and valuation requires complex valuation models: Fixed income securitised products Fixed income mortgage and asset-backed securities Private placements and infrastructure loans Private equities Derivatives Insurance-related financial products
In relation to the matters set out opposite, our substantive testing procedures included the following, which are applicable for both the standard reserving and large and/or structured transactions: Testing the completeness and accuracy of underlying data utilised by the Company’s actuaries in estimating P&C loss reserves.
Evaluating the appropriateness of any significant adjustments made by management to P&C loss reserve estimates.
Key audit matter The Company’s valuation of liabilities for L&H policy benefits and policyholder account balances involves complex judgements about future events affecting the business. Actuarial assumptions selected by the Company with respect to interest rates, inflation trends, investment returns, mortality, morbidity, lapse in coverage, longevity, persistency, expenses, stock market volatility and future policyholder behaviour may result in material impacts on the valuation of L&H reserves. The methodology and methods used can also have a material impact on the valuation of actuarially determined L&H reserves.
The valuation of actuarially determined L&H reserves depends on the use of complex models. The Company continues to migrate actuarial data and models from legacy systems and/or spreadsheets to new actuarial modelling systems. At the same time, management is validating models to ensure that new models are fit for use. Moving from one modelling platform to another is a complex and time-consuming process, frequently taking several years. Any resulting adjustments to reserves need to be assessed in terms of appropriateness and classified as changes in estimates or as an out-of-period adjustment.
In relation to the matters set out opposite, our substantive testing procedures included the following: Involving our own tax specialists to critically review management’s ‘more likely than not’ tax assessments to evaluate the Company’s judgements and estimates of the probabilities and the amounts.
Evaluating the appropriateness of management’s assessment of completeness of the uncertain tax provisions.
Revenues Premiums earned 22 664 19 652 21 300 Fee income 847 918 876 Net investment income 6 399 5 422 5 469 Net realised investment gains/losses 875 2 783 388 Other revenues 178 60 50
Net income before attribution of non-controlling interests 699 2 134 2 798
Interest on contingent capital instruments, net of tax –203 –1 117
Liabilities Unpaid claims and claim adjustment expenses 68 412 64 690 64 878 Liabilities for life and health policy benefits 39 944 39 551 39 044 Unearned premiums 6 528 6 305 8 299 Other liabilities 73 336 72 524 65 850 Long-term debt 19 184 18 427 16 541
Income statement Net income for 2018 amounted to CHF 3 077 million (2017: CHF 4 043 million) and was mainly driven by cash dividends from subsidiaries and affiliated companies of CHF 3 562 million.
Long-term liabilities increased by CHF 598 million to CHF 627 million as of 31 December 2018, mainly due to the issuance of convertible debt and an increase in the provision for currency fluctuation.
Shareholders’ equity Shareholders’ equity increased from CHF 24 245 million as of 31 December 2017 to CHF 24 470 million as of 31 December 2018, mainly due to net income of CHF 3 077 million, partially offset by dividends to shareholders of CHF 1 551 million and share buy-back programmes of CHF 1 304 million.
Share capital decreased by CHF 1 million to CHF 34 million as of 31 December 2018 and legal profit reserves decreased by CHF 991 million to CHF 6 294 million as of 31 December 2018 resulting from the cancellation of own shares.
Expenses Administrative expenses 3 –126 –133 Investment expenses 2 –2 –870 Other expenses –179 –107 Total expenses –307 –1 110
Swiss Re Ltd Financial statements 308 Swiss Re 2018 Financial Report
Foreign currency translation Assets and liabilities denominated in foreign currencies are converted into Swiss francs at year-end exchange rates, with the exception of participations, which are reported in Swiss francs at historical exchange rates. Income and expenses in foreign currencies are converted into Swiss francs at average exchange rates for the reporting year.
Payables to subsidiaries and affiliated companies/Other liabilities These liabilities are generally carried at nominal value.
Foreign exchange transaction gains and losses Foreign exchange gains and losses arising from foreign exchange transactions are recognised in the income statement and reported in other expenses or other revenues, respectively.
Income tax expense As a holding company incorporated in Switzerland, Swiss Re Ltd is exempt from income taxation at cantonal/communal level. On the federal level, dividends from subsidiaries and affiliated companies are indirectly exempt from income taxation (participation relief). However, income tax is payable on trademark licence fees charged to certain subsidiaries and affiliated companies.
Subsequent events Subsequent events for the current reporting period have been evaluated up to 13 March 2019. This is the date on which the financial statements are available to be issued.
Cash dividends from subsidiaries and affiliated companies 3 832 3 562 Realised gains on sale of investments 46 19 Income from short-term investments 6 0 Income from loans to subsidiaries and affiliated companies 63 113 Investment management income 1 0 Other interest revenues 70 84
Realised losses on sale of investments 1 66 Valuation adjustments on derivative financial instruments 1 0 16 Valuation adjustments on investments in subsidiaries and affiliated companies – 776 Investment management expenses 1 0 Other interest expenses 0 12 Investment expenses 2 870 1 The derivative financial instruments are included in Receivables from subsidiaries and affiliated companies.
An overview of the subordinated funding facilities is provided in the following table: 7 Debt
To economically offset the settlement of a noteholder initiated exchange (in cash or in Swiss Re Ltd shares), the Company purchased matching call options on Swiss Re Ltd shares with a portion of the proceeds of the offering. Consequently, no new Swiss Re Ltd shares will be issued upon a noteholder initiated exchange. Further information are detailed in Note 11 Debt and contingent capital instruments on page 271 in the 2018 Financial Report.
Share buy-back programme 20182 –889 –889 Other movements in own shares 9 –2 2 –6 3
Allocations relating to the dividend paid 3 972 –3 972 0 Dividend for the financial year 2016 –1 557 –1 557 Net income for the financial year 4 043 4 043 Share buy-back programme 2016 –479 –479
Share buy-back programme 2017 –585 –585 Other movements in own shares 19 1 –1 –17 2 1 At the 153rd Annual General Meeting held on 21 April 2017, the Group’s shareholders authorised the Group Board of Directors to repurchase up to a maximum CHF 1 billion purchase value of the Group’s own shares prior to the 2018 Annual General Meeting through a public share buy-back programme for cancellation purposes. The buy-back programme was completed on 16 February 2018. The total number of shares repurchased amounted to 10.8 million, of which 6.3 million and 4.5 million shares were repurchased by 31 December 2017 and between 1 January and 16 February 2018, respectively. On 20 April 2018, the 154th Annual General Meeting resolved the cancellation of the repurchased 10.8 million shares by way of share capital reduction. The shares were cancelled on 24 July 2018, after completion of the procedure in respect of a share capital reduction as set forth in Article 732 et seqq of the Swiss Code of Obligations.
4 Purchased at average price CHF 92.52 (2017: CHF 92.16). 5 Purchased at average price CHF 88.50.
In addition, Swiss Re Ltd held, as of 31 December 2018, directly and indirectly 38 575 324 (2017: 34 866 516) own shares, representing 11.39% (2017: 9.98%) of voting rights and share capital. Swiss Re Ltd cannot exercise the voting rights of own shares held.
Renato Fassbind, Vice Chairman, Chair Audit Committee 23 854 27 593 Raymond K.F. Ch’ien, Member 21 472 22 946 Mary Francis, former Member1 6 509 n/a Karen Gavan, Member2, 3 n/a 1 512 Rajna Gibson Brandon, former Member1 23 194 n/a C. Robert Henrikson, former Chair Compensation Committee1 13 248 n/a
Renato Fassbind, Vice Chairman, Chairman of the Audit Committee3 330 3 900 330 3 739
Vested options For the years ended 31 December 2017 and 2018, neither the members of the Board of Directors nor the members of the Group EC held any vested options.
Retained earnings brought forward 4 4 Net income for the financial year 4 043 3 077
Allocation to voluntary profit reserves –4 043 –3 077 Retained earnings after allocation 4 4
Report of the statutory auditor on the financial statements As statutory auditor, we have audited the accompanying financial statements of Swiss Re Ltd (the “Company”), which comprise the income statement, balance sheet and notes (pages 307 to 319), for the year ended 31 December 2018.
Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
Management of an insurance business in a way that coordinates investment-related decisions on assets and liabilities. Specifically, the ongoing process of formulating, implementing, monitoring and revising investment strategies related to assets and liabilities in an attempt to achieve financial objectives, while managing exposure to financial market risks, such as interest rates, credit spreads and currency movements.
The ratio of ordinary shareholders’ equity to the number of common shares entitled to dividend.
Economic Value Management (EVM) is Swiss Re Group’s proprietary integrated economic valuation and accounting framework for planning, pricing, reserving, and steering our business.
Sum of acquisition costs and other operating costs and expenses, in relation to premiums earned.
Line of insurance which offers coverage for property, accident and liability losses involving motor vehicles.
Defined as the gross outperformance after deducting the actual costs incurred by managing our actual investment portfolio in excess of the internal fee paid by underwriting for the purchase and maintenance of the investment portfolio replicating the best-estimate liability and backing the associated capital requirements.
Form of proportional reinsurance in which a defined percentage of the premiums earned and the claims incurred by the cedent in a specific line is reinsured for a given period. Quota share reinsurance arrangements represent a sharing of business in a fixed ratio or proportion.
The SST risk-bearing capital (SST RBC) is the amount of capital that is available to protect the policyholders of an entity in case of a large and unexpected adverse event
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 forwardlooking 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; ̤ changes in legislation and regulation, and the interpretations thereof by regulators and courts, affecting us or the Group’s ceding companies, including as a result of shifts away from multilateral approaches to regulation of global operations; ̤ the outcome of tax audits, the ability to realise tax loss carryforwards, 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, and the overall impact of changes in tax regimes on business models; ̤ failure of the Group’s hedging arrangements to be effective; ̤ the lowering or loss of one of the financial strength or other ratings of one or more Swiss Re Group companies, and developments adversely affecting the Group’s ability to achieve improved ratings; ̤ uncertainties in estimating reserves; ̤ policy renewal and lapse rates; ̤ uncertainties in estimating future claims for purposes of financial reporting, particularly with respect to large natural catastrophes and certain large man-made losses, as significant uncertainties may be involved in estimating losses from such events and preliminary estimates may be subject to change as new information becomes available; ̤ extraordinary events affecting the Group’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events; ̤ legal actions or regulatory investigations or actions, including those in respect of industry requirements or business conduct rules of general applicability; ̤ changes in accounting standards; ̤ significant investments, acquisitions or dispositions, and any delays, unexpected costs, lower-thanexpected benefits, or other issues experienced in connection with any such transactions; ̤ changing levels of competition, including from new entrants into the market; and
In addition, regulatory changes could occur in areas of broader application, such as competition policy and tax laws. Changes in tax laws, for example, could increase the taxes the Group pays, the attractiveness of products offered by the Group, the Group’s investment activities and the value of deferred tax assets. Any number of these changes could apply to the Group and its operations. Changes to the US tax regime enacted in early 2018 prompted us to modify our operating model for our US business. These changes, or inconsistencies between the various regimes that apply to the Group, could increase the costs of doing business (including due to increased capital requirements), reduce access to liquidity, limit the scope of current or future business or affect the competitive balance, or could make reinsurance less attractive to primary insurers.
Insurance, operational and other risks As part of the Group’s ordinary course operations, the Group is subject to a variety of risks, including risks that reserves may not adequately cover future claims and benefits; risks that catastrophic events (including hurricanes, windstorms, floods, earthquakes, acts of terrorism, man-made disasters such as industrial accidents, explosions, and fires, and pandemics) may expose the Group to unexpected large losses (and related uncertainties in estimating future claims in respect of such events); changes in the insurance industry that affect ceding companies, particularly those that further increase their sensitivity to counterparty risk; competitive conditions (including as a result of consolidation and the availability of significant levels of alternative capacity); cyclicality of the industry; risks related to emerging claims and coverage issues; macro developments giving rise to emerging risks, such as climate change and technological developments (including greater exposure to cyber risks, which could have a range of consequences from operational disruption, to loss of proprietary or customer data, to greater regulatory burdens and potential liability); risks arising from the Group’s dependence on policies, procedures and expertise of ceding companies; risks related to investments in emerging markets; and risks related to the failure of, or attacks directed at, the Group’s operational systems and infrastructure, including its information technology networks and systems. Any of the foregoing, as well as the occurrence of future risks that the Group’s risk management procedures fail to identify or anticipate, could have a material adverse effect on the Group, and could also give rise to reputational risk.
The Group includes in its annual report a section in respect of its results, including financial statements, prepared in accordance with the Group’s proprietary economic value management (“EVM”) principles (“EVM report”). Financial information included in the EVM report contains non-GAAP financial measures. The EVM principles differ significantly from US GAAP and, accordingly, the Group’s results prepared in accordance with US GAAP will differ from its EVM results, and those differences could be material. The Group’s annual EVM results can be more volatile than the US GAAP results because, among other things, assets and liabilities are measured on a marketconsistent basis, profit recognition on new contracts is recognised at inception rather than over the life time of the contract, and life and health actuarial assumptions are on a best estimate basis as opposed to generally being locked-in. The Groupʼs EVM financial statements should not be viewed as a substitute for the Group’s US GAAP financial statements.