Swiss Reinsurance Co.
Annual Report 2012

Plain-text annual report

Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements Content 02 02 03 04 06 08 Group financial statements Income statement Statement of comprehensive income Balance sheet Statement of shareholder’s equity Statement of cash flow 106 Swiss Reinsurance Company Ltd 106 Annual Report 109 Income statement 110 Balance sheet 112 Notes 123 Proposal for allocation of disposable profit 124 Report of the statutory auditor 10 Notes to the Group financial statements 126 General information 126 Cautionary note on forward-looking 10 Note 1 Organisation and summary statements of significant accounting policies 18 Note 2 Investments 24 Note 3 Fair value disclosures 42 Note 4 Derivative financial 128 Note on risk factors 134 Corporate calendar and contact information 48 instruments Note 5 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) Note 6 Acquisitions and disposals 50 51 Note 7 Debt and contingent capital instruments 54 Note 8 Unpaid claims and claim adjustment expenses 56 Note 9 Insurance information 61 Note 10 Premiums written 62 Note 11 Income taxes 65 Note 12 Benefit plans 73 Note 13 Share-based payments 76 Note 14 Commitments and contingent liabilities 77 Note 15 Information on business segments 90 Note 16 Subsidiaries and equity investees 94 Note 17 Variable interest entities 98 Note 18 Restructuring provision 99 Note 19 Related parties 102 Note 20 Risk management bodies and functions 104 Report of the statutory auditor Swiss Reinsurance Company Ltd Swiss Reinsurance Company Ltd is a leading and highly diversified global reinsurer and part of the Swiss Re group of companies. The company operates through offices in more than 20 countries. Founded in Zurich, Switzerland, in 1863, Swiss Re offers financial services products that enable risk-taking essential to enterprise and progress. The company’s traditional reinsurance products and related services for property and casualty, as well as the life and health business are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management. Swiss Reinsurance Company Ltd is rated AA– by Standard & Poor’s, A1 by Moody’s and A+ by A.M. Best. The new Swiss Re corporate structure was reflected in the Group financial statements beginning with the first quarter of 2012. During the first half of 2012, Swiss Reinsurance Company Ltd transfered Corporate Solutions and Admin Re® entities through a dividend in-kind to Swiss Re Ltd. Following these transfers, the Corporate Solutions and Admin Re® entities are no longer be subsidiaries of Swiss Reinsurance Company Ltd and are instead subsidiaries of Swiss Re Ltd. Swiss Reinsurance Company Consolidated 2012 Annual Report 1 Financial statements | Group financial statements Income statement For the years ended 31 December USD millions Revenues Premiums earned Fee income from policyholders Net investment income – non-participating Net realised investment gains – non-participating (total impairments for the years ended 31 December were 435 in 2011 and 197 in 2012, of which 254 and 149, respectively, were recognised in earnings) Net investment result – unit-linked and with-profit Other revenues Total revenues Expenses Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Other expenses Interest expenses Total expenses Income before income tax expense Income tax expense/benefit Net income before attribution of non-controlling interests Income attributable to non-controlling interests Net income after attribution of non-controlling interests Interest on contingent capital instruments Net income attributable to common shareholder The accompanying notes are an integral part of the Group financial statements. Note 2011 2012 9 9 2 2 2 9 9 9 11 21 300 876 4 626 1 655 –403 51 28 105 –8 810 –8 414 –61 –4 021 –3 115 –851 –25 272 2 833 –83 2 750 –172 2 578 0 2 578 21 496 122 3 124 879 223 80 25 924 –6 337 –6 952 –439 –4 132 –2 511 –748 –21 119 4 805 –1 122 3 683 –136 3 547 –56 3 491 2 Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Group financial statements Statement of comprehensive income For the years ended 31 December USD millions Net income before attribution of non-controlling interests Other comprehensive income, net of tax: Change in unrealised gains/losses (tax: –1 326 in 2011 and –322 in 2012) Change in other-than-temporary impairment (tax: –24 in 2011 and –38 in 2012) Change in foreign currency translation (tax: –42 in 2011 and 43 in 2012) Change in adjustment for pension benefits (tax: 83 in 2011 and 61 in 2012) Total comprehensive income before attribution of non-controlling interests Interest on contingent capital instruments Comprehensive income attributable to non-controlling interests Total comprehensive income attributable to common shareholder The accompanying notes are an integral part of the Group financial statements. 2011 2 750 3 181 51 –182 –253 5 547 –172 5 375 2012 3 683 927 74 707 –180 5 211 –56 –136 5 019 Swiss Reinsurance Company Consolidated 2012 Annual Report 3 Financial statements | Group financial statements Balance sheet As of 31 December Assets USD millions Investments Fixed income securities: Available-for-sale, at fair value (including 7 034 in 2011 and 9 256 in 2012 subject to securities lending and repurchase agreements) (amortised cost: 86 984 in 2011 and 62 762 in 2012) Trading (including 620 in 2011 and 196 in 2012 subject to securities lending and repurchase agreements) Equity securities: Available-for-sale, at fair value (including 45 in 2011 and 0 in 2012 subject to securities lending and repurchase agreements) (cost: 1 907 in 2011 and 2 263 in 2012) Trading Policy loans, mortgages and other loans Investment real estate Short-term investments, at amortised cost which approximates fair value (including 87 in 2011 and 3 454 in 2012 subject to securities lending and repurchase agreements) Other invested assets Investments for unit-linked and with-profit business (including fixed income securities trading: 4 095 in 2011 and 0 in 2012, equity securities trading: 16 182 in 2011 and 841 in 2012) Total investments Cash and cash equivalents (including 36 in 2011 and 75 in 2012 subject to securities lending) Accrued investment income Premiums and other receivables Reinsurance recoverable on unpaid claims and policy benefits Funds held by ceding companies Deferred acquisition costs Acquired present value of future profits Goodwill Income taxes recoverable Other assets Note 2, 3, 4 2011 2012 93 770 66 827 3 453 1 795 1 960 571 8 325 645 13 660 19 821 22 349 164 554 11 298 1 226 11 441 11 837 9 064 3 923 4 226 4 051 703 5 797 2 538 671 3 713 772 16 103 12 383 841 105 643 8 662 743 10 157 8 175 14 427 3 811 1 986 4 075 417 4 971 9 5, 9 5 Total assets 228 120 163 067 The accompanying notes are an integral part of the Group financial statements. 4 Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Group financial statements Liabilities and equity USD millions Liabilities Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Policyholder account balances Unearned premiums Funds held under reinsurance treaties Reinsurance balances payable Income taxes payable Deferred and other non-current taxes Short-term debt Accrued expenses and other liabilities Long-term debt Total liabilities Equity Contingent capital instruments Common stock, CHF 0.10 par value 2011: 370 706 931; 2012: 344 052 565 shares authorised and issued1 Additional paid-in capital Treasury shares, net of tax Shares in Swiss Re Ltd, net of tax Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax Other-than-temporary impairment, net of tax Cumulative translation adjustments, net of tax Accumulated adjustment for pension and post-retirement benefits, net of tax Total accumulated other comprehensive income Retained earnings Shareholder’s equity Non-controlling interests Total equity Total liabilities and equity Note 2011 2012 3 7 7 7 64 878 39 044 34 162 8 299 2 436 3 962 440 2 853 4 101 20 213 16 541 196 929 0 35 8 958 –1 032 –102 4 223 –118 –3 924 –775 –594 22 229 29 494 1 697 31 191 58 904 20 270 6 512 7 535 3 275 3 666 498 2 996 6 551 13 436 16 482 140 125 1 102 32 8 875 0 –144 3 059 –27 –3 180 –928 –1 076 14 129 22 918 24 22 942 228 120 163 067 1 Please refer to Note 1 “Organisation and summary of significant accounting policies” for details on the number of shares authorised and issued. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2012 Annual Report 5 Financial statements | Group financial statements Statement of shareholder’s equity For the years ended 31 December USD millions Contingent capital instruments Balance as of 1 January Issued Balance as of period end Common shares Balance as of 1 January Issue/cancellation of common shares Balance as of period end Additional paid-in capital Balance as of 1 January Contingent capital instruments’ issuance cost Share-based compensation Realised gains/losses on treasury shares Sale of Swiss Re Specialised Investments Holdings (UK) Ltd1 Dividends on common shares2 Balance as of period end Treasury shares, net of tax Balance as of 1 January Purchase of treasury shares Issuance of treasury shares, including share-based compensation to employees Cancellation of treasury shares3 Balance as of period end Shares in Swiss Re Ltd, net of tax Balance as of 1 January Change of shares in Swiss Re Ltd3 Balance as of period end Net unrealised gains/losses, net of tax Balance as of 1 January Effect of change in Group structure4 Other changes during the period Balance as of period end Other-than-temporary impairment, net of tax Balance as of 1 January Effect of change in Group structure4 Other changes during the period Balance as of period end Foreign currency translation, net of tax Balance as of 1 January Effect of change in Group structure4 Other changes during the period Balance as of period end Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January Effect of change in Group structure4 Change during the period Balance as of period end 6 Swiss Reinsurance Company Consolidated 2012 Annual Report 2011 2012 0 0 35 35 10 530 –87 –421 –29 –1 035 8 958 –1 483 –168 619 –1 032 0 –102 –102 1 042 3 181 4 223 –169 51 –118 –3 742 –182 –3 924 –522 –253 –775 0 1 102 1 102 35 –3 32 8 958 –18 –29 –36 8 875 –1 032 1 032 0 –102 –42 –144 4 223 –2 091 927 3 059 –118 17 74 –27 –3 924 37 707 –3 180 –775 27 –180 –928 Financial statements | Group financial statements Retained earnings Balance as of 1 January Effect of change in Group structure4 Net income after attribution of non-controlling interests Interest on contingent capital instruments, net of tax Dividends on common shares Cumulative effect of adoption of ASU 2010-265, net of tax Cancellation of treasury shares3 Effect of transfer of Aurora National Life Assurance Company6 Effect of new reinsurance agreements7 Balance as of period end Shareholder’s equity Non-controlling interests Balance as of 1 January Effect of change in Group structure4 Change during the period Income attributable to non-controlling interests Effect of transfer of Aurora National Life Assurance Company6 Balance as of period end Total equity 19 651 2 578 22 229 29 494 1 564 –39 172 1 697 31 191 22 229 –8 536 3 547 –56 –2 636 –24 –1 029 191 443 14 129 22 918 1 697 –414 –1 935 136 540 24 22 942 1 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. 2 Dividends to shareholders were paid in the form of a withholding tax-exempt repayment of legal reserves from capital contributions. 3 Based on a resolution adopted at Swiss Reinsurance Company Ltd.’s Annual General Meeting, held 19 March 2012, to reduce the share capital, the former Swiss Reinsurance Company Ltd shares have been cancelled. The Group presents all transactions related to common shares of Swiss Re Ltd, the parent company of Swiss Reinsurance Company Ltd, in a separate section “Shares in Swiss Re Ltd, net of tax” in its “Statement of equity”. The comparative period is presented accordingly. 4 Please refer to Note 1 “Organisation and summary of significant accounting policies”. 5 The Group adopted a new accounting pronouncement, ASU 2010-26 “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” as of 1 January 2012, which required the release of USD 24 million of deferred acquisition costs against retained earnings. Refer to Note 5 for more details on the adoption of ASU 2010-26. 6 Please refer to Note 19 “Related parties” for more details. 7 Due to the sale of Admin Re® US to Jackson National by the Swiss Re Group, certain blocks of business were retained by the Swiss Re Group mainly by way of retrocession to Swiss Reinsurance Company Group legal entities effective 1 July 2012. This resulted in an increase in retained earnings by USD 443 million. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2012 Annual Report 7 Financial statements | Group financial statements Statement of cash flow For the years ended 31 December USD millions Cash flows from operating activities Net income attributable to common shareholder Add net income attributable to non-controlling interests Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items Net realised investment gains/losses Change in: Technical provisions, net Funds held by ceding companies and other reinsurance balances Reinsurance recoverable on unpaid claims and policy benefits Other assets and liabilities, net Income taxes payable/recoverable Income from equity-accounted investees, net of dividends received Trading positions, net Securities purchased/sold under agreement to resell/repurchase, net Net cash provided/used by operating activities Cash flows from investing activities Fixed income securities: Sales and maturities Purchases Net purchase/sale/maturities of short-term investments Equity securities: Sales Purchases Cash paid/received for acquisitions/disposal and reinsurance transactions, net1 Net purchases/sales/maturities of other investments Net cash provided/used by investing activities Cash flows from financing activities Issuance/repayment of long-term debt Issuance/repayment of short-term debt Proceeds from the issuance of contingent capital instruments, net of issuance cost Purchase/sale of shares in Swiss Re Ltd Dividends paid to shareholders/parent2 Net cash provided/used by financing activities Total net cash provided/used Effect of foreign currency translation Change in cash and cash equivalents Cash and cash equivalents as of 1 January Effect of change in Group structure3 Effect of transfer of Aurora National Life Assurance Company4 Cash and cash equivalents as of 31 December 2011 2012 2 578 172 3 112 –409 –4 093 –1 501 275 –20 –546 –225 2 880 –785 1 438 142 952 –145 148 6 952 2 351 –3 173 80 –454 3 560 –181 –9 044 –270 –1 035 –10 530 –5 532 –98 –5 630 16 928 11 298 3 491 136 3 305 –1 069 –5 047 1 291 –179 –40 1 195 –340 –1 350 844 2 237 95 954 –94 683 –4 259 1 228 –1 868 –483 1 105 –3 006 931 532 1 084 –133 –2 636 –222 –991 42 –949 11 298 –2 138 451 8 662 1 New California Holdings, Inc. was acquired for USD 548 million in cash. Swiss Re Private Equity Partners AG, Swiss Re’s private equity fund-of-fund business, has been sold to BlackRock, Inc. for USD 65 million in cash. Swiss Re continues to be invested as a limited partner in the funds. Please refer to Note 6 “Acquisitions and Disposals” for further information. 2 In 2011, Swiss Reinsurance Company paid dividends to its shareholders, and in 2012 to its parent company, Swiss Re Ltd. 3 Please refer to Note 1 “Organisation and summary of significant accounting policies”. 4 Please refer to Note 19 “Related parties” for more details. 8 Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Group financial statements Interest paid was USD 1 099 million and USD 887 million for the years ended 31 December 2011 and 2012, respectively. Tax paid was USD 706 million and USD 54 million for the years ended 31 December 2011 and 2012, respectively. Effective 1 January 2012, Swiss Reinsurance Company Ltd transferred its shares in Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Ltd through a dividend-in-kind to Swiss Re Ltd. Please refer to Note 1 “Organisation and summary of significant accounting policies”. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2012 Annual Report 9 Financial statements Notes to the Group financial statements 1  Organisation and summary of significant accounting policies Nature of operations The Swiss Reinsurance Company Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company Ltd   (the parent company, referred to as “SRZ”) and its subsidiaries (collectively, the “Swiss Reinsurance Company Group” or the “Group”). The  Swiss Reinsurance Company 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 and  public sector clients. SRZ is a wholly owned subsidiary of Swiss Re Ltd. Swiss Re Ltd is the ultimate parent company of the Swiss Re Group, which consists of  three separate business units: the Swiss Reinsurance Company Group, Swiss Re Corporate Solutions Ltd (“Swiss Re Corporate Solutions”)  and its subsidiaries (collectively, the “Corporate Solutions Business Unit”) and Swiss Re Life Capital Ltd (“Swiss Re Life Capital”) and its  subsidiaries (collectively, the “Admin Re® Business Unit”) as well as Swiss Re Specialised Investments Holdings (UK) Ltd. Basis of presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in  the United States of America (US GAAP) and comply with Swiss law. All significant intra-group transactions and balances have been  eliminated on consolidation.  On 27 April 2012, Swiss Reinsurance Company Ltd transferred the shares of Swiss Re Corporate Solutions and Swiss Re Life Capital   through a dividend in-kind to Swiss Re Ltd. Following the transfer, Swiss Re Corporate Solutions and Swiss Re Life Capital ceased to be  subsidiaries of Swiss Reinsurance Company Ltd and, therefore, the Corporate Solutions Business Unit and Admin Re® Business Unit   are no longer part of the Swiss Reinsurance Company Group. Swiss Re Corporate Solutions and Swiss Re Life Capital instead became  subsidiaries of Swiss Re Ltd. Risks and benefits related to these entities passed to Swiss Re Ltd as of 1 January 2012. Consequently these  financial statements were prepared as if the Corporate Solutions Business Unit and the Admin Re® Business Unit had been transferred to  Swiss Re Ltd as of 1 January 2012. As the assets and liabilities, as well as the business and operations, of the Corporate Solutions Business  Unit and the Admin Re® Business Unit were reflected in the Swiss Reinsurance Company Group’s financial statements for the year-end 2011,  but not for the year-end 2012, period-to-period comparisons are significantly impacted by the transfers. Effective 25 June 2012 and prior to the sale of Admin Re® US to Jackson National Life Insurance Company (Jackson National) by the  Swiss Re Group, reinsurance and other obligations under a modified coinsurance agreement were transferred from an affiliated company to  the Swiss Reinsurance Company Group’s balance sheet. Consequently, from the second quarter of 2012 Aurora National Life Assurance  Company was consolidated by the Group. Please refer to Note 6 for more details. Furthermore, in connection with the completion of the sale of Admin Re® US to Jackson National by the Swiss Re Group, certain blocks of  business were assumed by the Swiss Reinsurance Company Group mainly by way of retrocession effective 1 July 2012.  On 4 September 2012, the Group completed the sale of Swiss Re Private Equity Partners AG to BlackRock, Inc. The sale resulted in a  reduction in non-controlling interests of USD 1 400 million related to private equity funds. The Group continues to be invested as a limited  partner in the funds. Please refer to Note 6 for further information. Principles of consolidation The Group’s financial statements include the consolidated financial statements of SRZ and its subsidiaries. Voting entities which SRZ 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 it 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. 10  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Use of estimates in the preparation of financial statements The preparation of financial statements requires management to make significant estimates and assumptions that affect the reported  amounts of assets, liabilities, revenues and expenses as well as the related disclosure including contingent assets and liabilities. The Group’s  liabilities for unpaid claims and claim adjustment expenses and policy benefits for life and health include estimates for premium, claim   and benefit data not received from ceding companies at the date of the financial statements. In addition, the Group uses certain financial   instruments and invests in securities of certain entities for which exchange trading does not exist. The Group determines these estimates  based on historical information, actuarial analyses, financial modelling and other analytical techniques. Actual results could differ  significantly from the estimates described above. 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 shareholder’s 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 shareholder’s equity. Valuation of financial assets The fair value of the majority of the Group’s financial instruments is based on quoted prices in active markets or observable inputs. These   instruments include government and agency securities, commercial paper, most investment-grade corporate debt, most high-yield debt  securities, exchange-traded derivative instruments, most mortgage- and asset-backed securities and listed equity securities. In markets with  reduced or no liquidity, spreads between bid and offer prices are normally wider compared to spreads in highly liquid markets. Such market  conditions affect the valuation of certain asset classes of the Group, such as some asset-backed securities as well as certain derivative  structures referencing such asset classes. The Group considers both the credit risk of its counterparties and own risk of non-performance in the valuation of derivative instruments   and other over-the-counter financial assets. In determining the fair value of these financial instruments, the assessment of the Group’s  exposure to the credit risk of its counterparties incorporates consideration of existing collateral and netting arrangements entered into with  each counterparty. The measure of the counterparty credit risk is estimated with incorporation of the observable credit spreads, where  available, or credit spread estimates derived based on the benchmarking techniques where market data is not available. The impact of the  Group’s own risk of non-performance is analysed in the manner consistent with the aforementioned approach, with consideration of the  Group’s observable credit spreads. The value representing such risk is incorporated into the fair value of the financial instruments (primarily  derivatives), in a liability position as of the measurement date. The change in this adjustment from period to period is reflected in realised  gains and losses in the income statement. 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 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 2012, the Group had not provided any collateral on financial  instruments in excess of its own market value estimates. Investments The Group’s investments in fixed income and equity securities are classified as available-for-sale (AFS) or trading. Fixed income securities  AFS and equity securities AFS are carried at fair value, based on quoted market prices, with the difference between original cost and fair  value being recognised in shareholder’s equity. Trading fixed income and equity securities are carried at fair value with unrealised gains and  losses being recognised in earnings. The cost of equity securities AFS is reduced to fair value, with a corresponding charge to realised investment losses if the decline in value,  expressed in functional currency terms, is other-than-temporary. Subsequent recoveries of previously recognised impairments are not  recognised in earnings. Swiss Reinsurance Company Consolidated 2012 Annual Report  11 Financial statements | Notes to the Group financial statements 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. Interest on fixed income securities is recorded in net investment income when earned and is adjusted for the amortisation of any purchase  premium or discount. Dividends on equity securities are recorded on the basis of the ex-dividend date. Realised gains and losses on sales are  included in earnings and are calculated using the specific identification method. Policy loans, mortgages and other loans are carried at amortised cost. Interest income is recognised in accordance with the effective yield  method. Investment in real estate that the Group intends to hold for the production of income is carried at depreciated cost, net of any write-downs  for impairment in value. Impairment in value is recognised if the sum of the estimated future undiscounted cash flows from the use of the real  estate is lower than its carrying value. Impairment in value, depreciation and other related charges or credits are included in net investment  income. Investment in real estate held for sale is carried at the lower of cost or fair value, less estimated selling costs, and is not depreciated.  Reductions in the carrying value of real estate held for sale are included in realised investment losses. Short-term investments are carried at amortised cost, which approximates fair value. The Group considers highly liquid investments with a  remaining maturity at the date of acquisition of one year or less, but greater than three months, to be short-term investments.  Other invested assets include affiliated companies, equity accounted companies, derivative financial instruments, collateral receivables,  securities purchased under agreement to resell, and investments without readily determinable fair value (including limited partnership   investments). Investments in limited partnerships where the Group’s interest equals or exceeds 3% are accounted for using the equity  method. Investments in limited partnerships where the Group’s interest is below 3% and equity investments in corporate entities which are  not publicly traded are accounted for at estimated fair value with changes in fair value recognised as unrealised gains/losses in shareholder’s  equity.  The Group enters into security lending arrangements under which it loans certain securities in exchange for collateral and receives securities  lending fees. The Group’s policy is to require collateral, consisting of cash or securities, equal to at least 102% of the carrying value of the  securities loaned. In certain arrangements, the Group may accept collateral of less than 102% if the structure of the overall transaction offers  an equivalent level of security. Cash received as collateral is recognised along with an obligation to return the cash. Securities received   as collateral that can be sold or repledged are also recognised along with an obligation to return those securities. Security lending fees are  recognised over the term of the related loans. Derivative financial instruments and hedge accounting The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange-traded financial futures for the  Group’s trading and hedging strategy in line with the overall risk management strategy. Derivative financial instruments are primarily used as  a means of managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing  assets or existing liabilities and also to lock in attractive investment conditions for funds which become available in the future. The Group  recognises all of its derivative instruments on the balance sheet at fair value. Derivatives that are not designated as hedging instruments are  adjusted to fair value through earnings. If the derivative is designated as a hedge of the fair value of assets or liabilities, changes in the fair value of the derivative are recognised in  earnings, together with changes in the fair value of the related hedged item. If the derivative is designated as a hedge of the variability in  expected future cash flows related to a particular risk, changes in the fair value of the derivative are reported in other comprehensive income  until the hedged item is recognised in earnings. The ineffective portion of the hedge is recognised in earnings. When hedge accounting is  discontinued on a cash flow hedge, the net gain or loss remains in accumulated other comprehensive income and is reclassified to earnings  in the period in which the formerly hedged transaction is reported in earnings. When the Group discontinues hedge accounting because it   is no longer probable that a forecasted transaction will occur within the required time period, the derivative continues to be carried on the  balance sheet at fair value, and gains and losses that were previously recorded in accumulated other comprehensive income are recognised  in earnings.  The Group recognises separately derivatives that are embedded within other host instruments if the economic characteristics and risks   are not clearly and closely related to the economic characteristics and risks of the host instrument and if it meets the definition of a derivative  if it were stand-alone.  12  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements 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. The Group also designates non-derivative monetary financial instruments as a hedge of the foreign currency exposure of its net investment  in certain foreign operations. From the inception of the hedging relationship, remeasurement gains and losses on the designated non- derivative monetary financial instruments and translation gains and losses on the hedged net investment are reported as translation gains  and losses in shareholder’s equity.  Cash and cash equivalents Cash and cash equivalents include cash on hand, short-term deposits, certain short-term investments in money market funds, and highly  liquid debt instruments with a remaining maturity at the date of acquisition of three months or less. Deferred acquisition costs Acquisition costs, which vary with, and are primarily related to, the production of new insurance and reinsurance business, are deferred to  the extent they are deemed recoverable from future gross profits. Deferred acquisition costs consist principally of commissions. Deferred  acquisition costs for short-duration contracts are amortised in proportion to premiums earned. Future investment income is considered in  determining the recoverability of deferred acquisition costs for short-duration contracts. Deferred acquisition costs for long-duration  contracts are amortised over the life of underlying contracts. Deferred acquisition costs for universal-life and similar products are amortised  based on the present value of estimated gross profits. Estimated gross profits are updated quarterly. Business combinations The Group applies the purchase method of accounting for business combinations. This method allocates the cost of the acquired entity to  the assets and liabilities assumed based on their estimated fair values at the date of acquisition. 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. The underlying liabilities and assets acquired are subsequently accounted for according to the relevant GAAP guidance, including specific  guidance applicable to subsequent accounting for assets and liabilities recognised as part of the purchase method of accounting, including  present value of future profit, goodwill and other intangible assets. Acquired present value of future profits The acquired present value of future profits (PVFP) of business in force is recorded in connection with the acquisition of life and/or health  business. The initial value is determined actuarially by discounting estimated future gross profits as a measure of the value of business  acquired. The resulting asset is amortised on a constant yield basis over the expected revenue recognition period of the business acquired,  generally over periods ranging up to 30 years, with the accrual of interest added to the unamortised balance at the earned rate. For  universal-life and similar products, PVFP is amortised in line with estimated gross profits, and estimated gross profits are updated quarterly.  The carrying value of PVFP is reviewed periodically for indicators of impairment in value. Adjustments to reflect impairment in value are  recognised in earnings during the period in which the determination of impairment is made or to other comprehensive income for shadow  loss recognition. Swiss Reinsurance Company Consolidated 2012 Annual Report  13 Financial statements | Notes to the Group financial statements Goodwill The excess of the purchase price of acquired businesses over the estimated fair value of net assets acquired is recorded as goodwill, which   is reviewed periodically for indicators of impairment in value. Adjustments to reflect impairment in value are recognised in earnings in the  period in which the determination of impairment is made. Other assets Other assets include deferred expenses on retroactive reinsurance, prepaid reinsurance premiums, receivables related to investing activities,  real estate for own use, property, plant and equipment, accrued income, certain intangible assets and prepaid assets.  The excess of estimated liabilities for claims and claim adjustment expenses payable over consideration received in respect of retroactive  property and casualty reinsurance contracts is recorded as a deferred expense. The deferred expense on retroactive reinsurance contracts is  amortised through earnings over the expected claims-paying period.  Real estate for own use, property, plant and equipment are carried at depreciated cost.  Capitalised software costs External direct costs of materials and services incurred to develop or obtain software for internal use, payroll and payroll-related costs   for employees directly associated with software development and interest cost incurred while developing software for internal use are  capitalised and amortised on a straight-line basis through earnings over the estimated useful life. Deferred income taxes Deferred income tax assets and liabilities are recognised based on the difference between financial statement carrying amounts and the  corresponding income tax bases of assets and liabilities using enacted income tax rates and laws. A valuation allowance is recorded against  deferred tax assets when it is deemed more likely than not that some or all of the deferred tax asset may not be realised. 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. The Group does not discount liabilities arising from prospective property and casualty insurance and reinsurance contracts, including  liabilities which are discounted for US statutory reporting purposes. Liabilities arising from property and casualty insurance and reinsurance  contracts acquired in a business combination are initially recognised at fair value in accordance with the purchase method of accounting. Experience features which are directly linked to a reinsurance asset or liability are classified in a manner that is consistent with the  presentation of that asset or liability. 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 (re)insurance benefits liabilities  range from 0.4% to 12%. 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 with a charge to earnings if it is determined that future   cash flows, including investment income, are insufficient to cover future benefits and expenses. Where assets backing liabilities for policy  benefits are held at available for sale these liabilities for policyholder benefits are increased by a shadow adjustment, with a charge to   other comprehensive income, where future cash flows at market rates are insufficient to cover future benefits and expenses. 14  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements The liability for accident and health policy benefits consists of active life reserves and the estimated present value of the remaining   ultimate net costs of incurred claims. The active life reserves include unearned premiums and additional reserves. The additional reserves   are computed on the net level premium method using assumptions for future investment yield, mortality and morbidity experience. The  assumptions are based on projections of past experience and include provisions for possible adverse deviation. Policyholder account balances Policyholder account balances relate to universal life-type contracts and investment contracts. Interest crediting rates for policyholder  account balances range from 3% to 9%. Universal life-type contracts are long-duration insurance contracts, providing either death or annuity benefits, with terms that are not fixed  and guaranteed.  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-lined and with-profit business, which are presented in a separate line  item on the face of the balance sheet.  Amounts assessed against policyholders for mortality, administration and surrender are shown as fee income. Amounts credited to  policyholders are shown as interest credited to policyholders. Investment income and realised investment gains and losses 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. Funds held assets and liabilities Funds held assets and liabilities include amounts retained by the ceding company or the Group for business written on a funds withheld  basis, and amounts arising from the application of the deposit method of accounting to insurance and reinsurance contracts that do not   indemnify the ceding company or the Group against loss or liability relating to insurance risk.  Under the deposit method of accounting, the deposit asset or liability is initially measured based on the consideration paid or received. For  contracts that transfer neither significant timing nor underwriting risk, and contracts that transfer only significant timing risk, changes in  estimates of the timing or amounts of cash flows are accounted for by recalculating the effective yield. The deposit is then adjusted to the  amount that would have existed had the new effective yield been applied since the inception of the contract. The revenue and expense  recorded for such contracts is included in net investment income. For contracts that transfer only significant underwriting risk, once a loss   is incurred, the deposit is adjusted by the present value of the incurred loss. At each subsequent balance sheet date, the portion of the  deposit attributable to the incurred loss is recalculated by discounting the estimated future cash flows. The resulting changes in the carrying  amount of the deposit are recognised in claims and claim adjustment expenses. Shadow adjustments Shadow adjustments are recognized in other comprehensive income reflecting the offset of adjustments to deferred acquisition costs and  PVFP, typically related to universal life-type contracts, and policyholder liabilities. The purpose is to reflect the fact that certain amounts  recorded as unrealised investment gains and losses within shareholder’s equity will ultimately accrue to policyholders and not the  shareholder. Shadow loss recognition testing becomes relevant in low interest rate environments. The test considers whether the hypothetical sale of  AFS securities and the reinvestment of proceeds at lower yields would lead to negative operational earnings in future periods and thereby  causing a loss recognition event. For shadow loss recognition testing, the group uses current market yields to determine best estimate GAAP  reserves rather than using locked in or current book yields. If the unlocked best estimate GAAP reserves based on current market rates are in  excess reserves based on locked in or current book yields, then a shadow loss recognition reserve is recognized. Shadow loss recognition is  recognized in other comprehensive income and does not impact net income. In addition, shadow losses recognized can reverse up to the  amount of losses recognized due to a loss recognition event. Swiss Reinsurance Company Consolidated 2012 Annual Report  15 Financial statements | Notes to the Group financial statements Premiums Property and casualty reinsurance premiums are recorded when written and include an estimate for written premiums receivable at period  end. Premiums earned are generally recognised in income over the contract period in proportion to the amount of reinsurance provided.  Unearned premiums consist of the unexpired portion of reinsurance provided. Life reinsurance premiums are earned when due. Related   policy benefits are recorded in relation to the associated premium or gross profits so that profits are recognised over the expected lives of   the contracts.  Life and health reinsurance premiums for group coverages are generally earned over the term of the coverage. For group contracts that allow  experience adjustments to premiums, such premiums are recognised as the related experience emerges. Reinsurance ceded The Group uses retrocession arrangements to increase its aggregate underwriting capacity, to diversify its risk and to reduce the risk of  catastrophic loss on reinsurance assumed. The ceding of risks to retrocessionaires does not relieve the Group of its obligations to its ceding  companies. The Group regularly evaluates the financial condition of its retrocessionaires and monitors the concentration of credit risk   to minimise its exposure to financial loss from retrocessionaires’ insolvency. Premiums and losses ceded under retrocession contracts are  reported as reductions of premiums earned and claims and claim adjustment expenses. Amounts recoverable for ceded short- and long- duration contracts, including universal life-type and investment contracts, are reported as assets in the balance sheet. The Group provides reserves for uncollectible amounts on reinsurance balances ceded, based on management’s assessment of the  collectability of the outstanding balances.  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 financial difficulties of the debtor, and can be as high as the outstanding net balance. Pensions and other post-retirement benefits The Group accounts for its pension and other post-retirement benefit costs using the accrual method of accounting. Amounts charged to  expense are based on periodic actuarial determinations. Share-based payment transactions The Group has a long-term incentive plan, a fixed option plan, a restricted share plan, and an employee participation plan. These plans are  described in more detail in Note 13. 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.  For share-based compensation plans which are settled in cash, compensation costs are recognised as liabilities, whereas for equity-settled  plans, compensation costs are recognised as an accrual to additional paid-in capital within shareholder’s equity. Treasury shares Treasury shares are reported at cost in shareholder’s equity. Treasury shares also include stand-alone derivative instruments indexed to the  Swiss Re Ltd shares that meet the requirements for classification in shareholder’s equity. 16  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Subsequent events Subsequent events for the current reporting period have been evaluated up to 14 March 2013. This is the date on which the financial  statements are available to be issued. Recent accounting guidance In October 2010, the FASB issued “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (ASU 2010-26),    an update to Topic 944 – Financial Services – Insurance. This update limits the definition of deferrable acquisition costs to costs directly  related to the successful acquisition or renewal of insurance contracts. The Group adopted this guidance as of 1 January 2012. Please refer  to Note 5 and to the statement of shareholder’s equity for the impact on deferred acquisition costs and retained earnings, respectively.  In April 2011, the FASB issued “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03), an update to Topic 860 –  Transfers and Servicing. The amendments in this update remove from the assessment of effective control for repurchase agreements and  similar agreements the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the   agreed terms, even in the event of default by the transferee. The Group adopted this guidance as of 1 January 2012. The adoption did not  have an impact on the Group’s financial statements. In May 2011, the FASB issued “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and  IFRS” (ASU 2011-04), an update to Topic 820 – Fair Value Measurement. The guidance requires additional fair value disclosures. In addition,  the ASU increases the emphasis on the unit of account and introduces more restrictive guidance on the incorporation of premiums and  discounts relating to the size of a position of financial instruments held in measuring fair value. The Group adopted this update as of  1 January 2012. Changes in fair value measurements resulting from the application of the new guidance were immaterial. The additional  disclosure requirements are reflected in Note 3.  In June 2011, the FASB issued “Presentation of Comprehensive Income” (ASU 2011-05), an update to Topic 220 – Comprehensive Income.  In December 2011, an amendment of ASU 2011-05 was issued, “Deferral of the Effective Date for Amendments to the Presentation of  Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (ASU 2011-12).  Amended ASU 2011-05 requires entities to present net income and other comprehensive income in either a single continuous statement   or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other   comprehensive income in the statement of changes in equity is eliminated. The Group has adopted this guidance as of 1 January 2012 by  adjusting its presentation of net income and other comprehensive income accordingly.  In September 2011, the FASB issued “Testing Goodwill for Impairment“ (ASU 2011-08), an update to Topic 350 – Intangibles – Goodwill   and Other. The update provides entities with the option of performing a “qualitative” assessment to determine whether further impairment  testing is necessary. The Group adopted this guidance as of 1 January 2012. The adoption did not have an impact on the Group’s financial   statements. Swiss Reinsurance Company Consolidated 2012 Annual Report  17 Financial statements | Notes to the Group financial statements 2  Investments Investment income Net investment income by source (excluding unit-linked and with-profit business) was as follows: USD millions Fixed income securities Equity securities Policy loans, mortgages and other loans  Investment real estate Short-term investments Other current investments Share in earnings of equity-accounted investees Cash and cash equivalents Net result from deposit-accounted contracts Deposits with ceding companies Gross investment income Investment expenses Interest charged for funds held Net investment income – non-participating 2011 3 474 78 770 134 103 –173 276 100 145 339 5 246 –515 –105 4 626 2012 1 888 74 94 134 93 24 452 66 142 544 3 511 –378 –9 3 124 Dividends received from investments accounted for using the equity method were USD 51 million and USD 112 million for 2011 and 2012,  respectively.  Realised gains and losses Realised gains and losses for fixed income equity securities and other investments (excluding unit-linked and with-profit business) were as  follows: USD millions Fixed income securities available-for-sale: Gross realised gains Gross realised losses Equity securities available-for-sale: Gross realised gains Gross realised losses Other-than-temporary impairments Net realised investment gains/losses on trading securities Change in net unrealised investment gains/losses on trading securities Other investments: Net realised/unrealised gains/losses Net realised/unrealised gains/losses on insurance-related derivatives Foreign exchange gains/losses Net realised investment gains/losses – non-participating 2011 2012 2 608 –612 96 –234 –254 575 71 –866 –67 338 1 655 1 935 –336 154 –67 –149 58 65 –195 –164 –422 879 18  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Proceeds from sales of fixed income securities available-for-sale amounted to USD 115 775 million and USD 90 338 million 2011 and 2012,  respectively. Sales of equity securities available-for-sale were USD 2 389 million and USD 1 230 million for 2011 and 2012, respectively.  Investment result – unit-linked and with-profit business The net investment result on unit-linked and with-profit business credited to policyholders amounted to USD –403 million and USD 223 million  for 2011 and 2012, respectively, mainly originating from gains/losses on equity securities. In 2011, net investment result on unit-linked   and with-profit business included results related to the former Admin Re® segment. Following the carve-out effective on 1 January 2012   this business is no longer included in the Group results.  Impairment on fixed income securities related to credit losses Other-than-temporary impairments for debt securities are bifurcated between credit and non-credit components, with the credit component  recognised through earnings and the non-credit component recognised in other comprehensive income. The credit component of other- than-temporary impairments is defined as the difference between a security’s amortised cost basis and expected cash flows. Methodologies  for measuring the credit component of impairment are aligned to market observer forecasts of credit performance drivers. Management  believes that these forecasts are representative of median market expectations. For securitised products, cash flow projection analysis is conducted 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 similar hybrid debt instruments, an expected loss approach based on default  probabilities and loss severities expected in the current and forecast 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 net present  value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments. A reconciliation of other-than-temporary impairment related to credit losses recognised in earnings was as follows: USD millions Balance as of 1 January Effect of change in Group structure1 Credit losses for which an other-than-temporary impairment was not previously recognised  Reductions for securities sold during the period  Increase of credit losses for which an other-than-temporary impairment has been recognised previously,  when the Group does not intend to sell, or more likely than not will not be required to sell before recovery Impact of increase in cash flows expected to be collected  Impact of foreign exchange movements Balance as of 31 December 1 Please refer to Note 1 “Organisation and summary of significant accounting policies”. 2011 829 141 –418 54 –85 –6 515 2012 515 –122 10 –145 46 –49 5 260 Swiss Reinsurance Company Consolidated 2012 Annual Report  19 Financial statements | Notes to the Group financial statements 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: 2011  USD millions Debt securities issued by governments  and government agencies: US Treasury and other US government  corporations and agencies US Agency securitised products States of the United States and political  subdivisions of the states United Kingdom Canada Germany France Other Total Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Fixed income securities available-for-sale Equity securities available-for-sale 2012 USD millions Debt securities issued by governments  and government agencies: US Treasury and other US government  corporations and agencies US Agency securitised products States of the United States and political  subdivisions of the states United Kingdom Canada Germany France Other Total Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Fixed income securities available-for-sale Equity securities available-for-sale Amortised cost  or cost Gross   unrealised   gains Gross  unrealised  losses Other-than-temporary  impairments  recognised in other  comprehensive income Estimated   fair value 20 387 3 866 245 15 182 3 078 4 791 3 068 6 849 57 466 21 467 2 119 3 820 2 112 86 984 1 907 1 881 144 24 1 865 806 200 45 453 5 418 2 065 30 222 64 7 799 201 –1 –3 –6 –51 –2 –51 –52 –56 –222 –265 –154 –141 –54 –836 –148 22 267 4 007 263 16 996 3 882 4 940 3 061 7 245 62 661 23 254 1 885 3 863 2 107 93 770 1 960 –1 –1 –13 –110 –38 –15 –177 Amortised cost  or cost Gross   unrealised   gains Gross  unrealised  losses Other-than-temporary  impairments  recognised in other  comprehensive income Estimated   fair value 11 618 3 844 88 9 653 3 339 5 224 2 855 6 543 43 164 13 906 850 2 510 2 332 62 762 2 263 606 109 11 461 756 240 225 383 2 791 1 271 37 198 29 4 326 318 –34 –7 –1 –40 –1 –7 –5 –35 –130 –31 –23 –30 –6 –220 –43 12 190 3 946 98 10 074 4 094 5 457 3 075 6 891 45 825 15 128 850 2 676 2 348 66 827 2 538 –18 –14 –2 –7 –41 The “Other-than-temporary impairments recognised in other comprehensive income” column includes only securities with a credit-related  loss recognised in earnings. Subsequent recovery in fair value of securities previously impaired in other comprehensive income is presented  in the “Other-than-temporary impairments recognised in other comprehensive income” column. 20  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Investments trading Fixed income securities and equity securities classified as trading (excluding unit-linked and with-profit business) as of 31 December were  as follows: USD millions Debt securities issued by governments and government agencies Corporate debt securities Mortgage- and asset-backed securities Fixed income securities trading – non-participating Equity securities trading – non-participating 2011 2 957 214 282 3 453 571 2012 1 432 177 186 1 795 671 Investments held for unit-linked and with-profit business Investments held for unit-linked and with-profit business as of 31 December were as follows: USD millions Fixed income securities trading Equity securities trading Investment real estate Short-term investments Total investments for unit-linked and with-profit business Unit-linked 2 354 15 231 828 734 19 147 2011 With-profit 1 741 951 510 3 202 Unit-linked 2012 With-profit 841 841 0 Maturity of fixed income securities available-for-sale The amortised cost or cost and estimated fair values of investments in fixed income securities AFS by remaining maturity are shown below.  Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2011 and  2012, USD 10 274 million and USD 8 536 million, respectively, of fixed income securities AFS were callable. USD millions Due in one year or less Due after one year through five years Due after five years through ten years  Due after ten years Mortgage- and asset-backed securities with no fixed maturity Total fixed income securities available-for-sale Amortised   cost or cost 3 020 19 696 17 955 38 594 7 719 86 984 2011 Estimated   fair value 3 040 20 156 19 072 43 977 7 525 93 770 Amortised   cost or cost 1 885 16 536 11 769 27 170 5 402 62 762 2012 Estimated   fair value 1 902 16 978 12 603 29 763 5 581 66 827 Assets pledged As of 31 December 2012, investments with a carrying value of USD 8 414 million were on deposit with regulatory agencies in accordance  with local requirements. As of 31 December 2012, investments with a carrying value of USD 11 021 million were placed on deposit or  pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries. As of 31 December 2011 and 2012, securities of USD 7 823 million and USD 12 981 million, respectively, were pledged as collateral in  securities lending transactions and repurchase agreements. The associated liabilities of USD 8 681 million and USD 4 237 million,  respectively, were recognised in accrued expenses and other liabilities. A real estate portfolio with a carrying value of USD 258 million serves as collateral for short-term senior operational debt of USD 710 million. Collateral accepted which the Group has the right to sell or repledge As of 31 December 2011 and 2012, the fair value of the government and corporate bond securities received as collateral was  USD 4 241 million and USD 4 339 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2011 and 2012  was nil and USD 1 205 million respectively. The sources of the collateral are reverse repurchase agreements and derivative transactions.  Swiss Reinsurance Company Consolidated 2012 Annual Report  21   Financial statements | Notes to the Group financial statements 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 2011 and 2012. As of  31 December 2011 and 2012, USD 144 million and USD 26 million, respectively, of the gross unrealised loss on equity securities AFS  relates to declines in value for less than 12 months and USD 4 million and USD 17 million, respectively, to declines in value for   more than 12 months. 2011  USD millions Debt securities issued by governments  and government agencies: US Treasury and other US government  corporations and agencies US Agency securitised products States of the United States and political  subdivisions of the states United Kingdom Canada Germany France Other Total Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Total 2012  USD millions Debt securities issued by governments  and government agencies: US Treasury and other US government  corporations and agencies US Agency securitised products States of the United States and political  subdivisions of the states United Kingdom Canada Germany France Other Total Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Total Less than 12 months 12 months or more Total Fair value Unrealised losses Fair value Unrealised losses Fair value Unrealised losses 337 500 37 2 832 79 1 027 1 133 1 210 7 155 2 760 829 812 662 12 218 1 3 1 50 1 50 52 44 202 145 111 123 15 596 40 47 2 10 4 142 245 700 702 342 184 2 173 5 1 1 1 13 21 133 153 56 54 417 Less than 12 months 12 months or more 337 500 77 2 879 81 1 037 1 137 1 352 7 400 3 460 1 531 1 154 846 14 391 1 3 6 51 2 51 52 57 223 278 264 179 69 1 013 Total Fair value Unrealised losses Fair value Unrealised losses Fair value Unrealised losses 2 840 757 34 2 741 173 506 147 1 852 9 050 1 411 60 175 478 11 174 34 7 1 40 1 7 5 32 127 23 2 11 6 169 2 840 757 34 2 741 175 520 147 1 884 9 098 1 667 483 515 576 12 339 34 7 1 40 1 7 5 35 130 49 37 32 13 261 2 14 32 48 256 423 340 98 1 165 3 3 26 35 21 7 92 22  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Mortgages, loans and real estate As of 31 December 2011 and 2012, the carrying values of investments in mortgages, policy and other loans, and real estate (excluding unit- linked and with-profit business) were as follows: USD millions Policy loans Mortgage loans Other loans Investment real estate 2011 3 664 1 336 3 325 645 2012 270 656 2 787 772 The fair value of the real estate as of 31 December 2011 and 2012 was USD 2 215 million and USD 2 531 million, respectively. The carrying  value of policy loans, mortgages and other loans approximates fair value.  As of 31 December 2011 and 2012, the Group’s investment in mortgages and other loans included USD 270 million and USD 282 million,  respectively, of loans due from employees, and USD 357 million and USD 390 million, respectively, due from officers. These loans generally  consist of mortgages offered at variable and fixed interest rates. As of 31 December 2011 and 2012, investments in real estate included USD 6 million and nil, respectively, of real estate held for sale. Depreciation expense related to income-producing properties was USD 21 million and USD 24 million for 2011 and 2012, respectively.  Accumulated depreciation on investment real estate totalled USD 460 million and USD 549 million as of 31 December 2011 and 2012,   respectively. Substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies. Swiss Reinsurance Company Consolidated 2012 Annual Report  23 Financial statements | Notes to the Group financial statements 3  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.  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. Level 3 inputs are unobservable inputs. These inputs reflect the Group’s own assumptions about market pricing using the best internal and  external information available. The types of instruments valued, based on unadjusted quoted market prices in active markets, include most US government and sovereign  obligations, active listed equities and most money market securities. Such instruments are generally classified within level 1 of the fair value  hierarchy.  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. Exchange-traded derivative instruments typically fall within level 1 or level 2 of the fair value hierarchy depending on whether they are  considered to be actively traded or not. Certain financial instruments are classified within level 3 of the fair value hierarchy, because they trade infrequently and therefore have little  or no price transparency. Such instruments include private equity, less liquid corporate debt securities and certain asset-backed securities.  Certain over-the-counter derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these  derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy. Pursuant to the election   of the fair value option, the Group classifies certain liabilities for life and health policy benefits in level 3 of the fair value hierarchy. When   appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations. Such adjustments   are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. The fair values of assets are adjusted to incorporate the counterparty risk of non-performance. Similarly, the fair values of liabilities reflect   the risk of non-performance of the Group, captured by the Group’s credit spread. These valuation adjustments from assets and liabilities  measured at fair value using significant unobservable inputs are recognised in net realised gains and losses. For the year ended   31 December 2012, these adjustments were not material. Whenever the underlying assets or liabilities are reported in a specific business  segment, the valuation adjustment is allocated accordingly. Valuation adjustments not attributable to any business segment are reported   in Group items.  In certain situations, the Group uses inputs to measure the fair value of asset or liability positions that fall into different levels of the fair   value hierarchy. In these situations, the Group will determine the appropriate level based upon the lowest level input that is significant to the  determination of the fair value. 24  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Valuation techniques US government securities typically have quoted market prices in active markets and are categorised as level 1 instruments in the fair value  hierarchy. Non-US government holdings are generally classified as level 2 instruments and are valued on the basis of the quotes provided   by pricing services, which are subject to the Group’s pricing validation reviews and pricing vendor challenge process. Valuations provided    by pricing vendors are generally based on the actual trade information as substantially all of the Group’s non-US government holdings are  traded in a transparent and liquid market. Corporate debt securities mainly include US and European investment-grade positions, which are priced on the basis of quotes provided   by third-party pricing vendors and first utilise valuation inputs from actively traded securities, such as bid prices, bid spreads to Treasury   securities, Treasury curves, and same or comparable issuer curves and spreads. Issuer spreads are determined from actual quotes and  traded prices and incorporate considerations of credit/default, sector composition, and liquidity and call features. Where market data is not  available, valuations are developed based on the modelling techniques that utilise observable inputs and option-adjusted spreads and  incorporate considerations of the security’s seniority, maturity and the issuer’s corporate structure. Values of residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and other asset-backed  securities (Other ABS) are obtained both from third-party pricing vendors and through quoted prices, some of which may be based on the  prices of comparable securities with similar structural and collateral features. Values of certain ABS for which there are no significant  observable inputs are developed using benchmarks to similar transactions or indices. For both RMBS and CMBS, cash flows are derived  based on the transaction-specific information, which incorporates priority in the capital structure, and are generally adjusted to reflect  benchmark yields, market prepayment data, collateral performance (default rates and loss severity) for specific vintage and geography,   credit enhancements, and ratings. For certain RMBS and CMBS with low levels of market liquidity, judgments may be required to determine  comparable securities based on the loan type and deal-specific performance. CMBS terms may also incorporate lock-out periods that  restrict borrowers from prepaying the loans or provide disincentives to prepay and therefore reduce prepayment risk of these securities,   compared to RMBS. The factors specifically considered in valuation of CMBS include borrower-specific statistics in a specific region,   such as debt service coverage and loan-to-value ratios, as well as the type of commercial property.  The category “Other ABS” primarily includes debt securitised by credit card, student loan and auto loan receivables. Pricing inputs for these  securities also focus on capturing, where relevant, collateral quality and performance, payment patterns, and delinquencies.  The Group uses third-party pricing vendor data to value agency securitised products, which mainly include collateralised mortgage  obligations (CMO) and mortgage-backed government agency securities. The valuations generally utilise observable inputs consistent with  those noted above for RMBS and CMBS. Equity securities held by the Group for proprietary investment purposes are mainly classified in levels 1 and 2. Securities classified in level 1  are traded on public stock exchanges for which quoted prices are readily available. Level 2 equities include equity investments fair valued  pursuant to the fair value option election and certain hedge fund positions; all valued based on primarily observable inputs.  The category “Other assets” mainly includes the Group’s private equity and hedge fund investments which are made directly or via ownership  of funds. Substantially all these investments are classified as level 3 due to the lack of observable prices and significant judgment required   in valuation. Valuation of direct private equity investments requires significant management judgment due to the absence of quoted   market prices and the lack of liquidity. Initial valuation is based on the acquisition cost, and is further refined based on the available market  information for the public companies that are considered comparable to the Group’s holdings in the private companies being valued, and   the private company-specific performance indicators; both historic and projected. Subsequent valuations also reflect business or asset  appraisals, as well as market transaction data for private and public benchmark companies and the actual companies being valued, such   as financing rounds and mergers and acquisitions activity. The Group’s holdings in private equity and hedge funds are generally valued  utilising net asset values (NAV), subject to adjustments, as deemed necessary, for restrictions on redemption (lock-up periods and amount  limitations on redemptions).  Swiss Reinsurance Company Consolidated 2012 Annual Report  25 Financial statements | Notes to the Group financial statements The Group holds both exchange-traded and over-the-counter (OTC) interest rate, foreign exchange, credit and equity derivative contracts   for hedging and trading purposes. The fair values of exchange-traded derivatives measured using observable exchange prices are classified  in level 1. Long-dated contracts may require adjustments to the exchange-traded prices which would trigger reclassification to level 2 in   the fair value hierarchy. OTC derivatives are generally valued by the Group based on the internal models, which are consistent with industry  standards and practices, and use both observable (dealer, broker or market consensus prices, spot and forward rates, interest rate and   credit curves and volatility indices) and unobservable inputs (adjustments for liquidity, inputs derived from the observable data based on the  Group’s judgments and assumptions).  The Group’s OTC interest rate derivatives primarily include interest rate swaps, futures, options, caps and floors, and are valued based on the  cash flow discounting models which generally utilise as inputs observable market yield curves and volatility assumptions.  The Group’s OTC foreign exchange derivatives primarily include forward, spot and option contracts and are generally valued based on the  cash flow discounting models, utilising as main inputs observable foreign exchange forward curves.  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 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.  The Group also holds complex structured credit contracts, such as credit default swaps (CDS) referencing MBS, certain types of collateralised  debt obligation (CDO) transactions, and the products sensitive to correlation between two or more underlying parameters (CDO-squared);  all of which are classified within level 3 of the fair value hierarchy. A CDO is a debt instrument collateralised by various debt obligations,  including bonds, loans and CDS of differing credit profiles. In a CDO-squared transaction, both the primary instrument and the underlying  instruments are represented by CDOs. Generally, for CDO and CDO-squared transactions, the observable inputs such as CDS spreads   and recovery rates are modified to adjust for correlation between the underlying debt instruments. The correlation levels are modelled at the  portfolio level and calibrated at a transaction level to liquid benchmark rates. Governance around level 3 fair valuation The Swiss Re Group’s Senior Risk Committee, chaired by the Group Chief Risk Officer, has a primary responsibility for governing and  overseeing all of the Group’s valuation policies and operating parameters (including level 3 measurements). The Senior Risk Committee  delegates the responsibility for implementation and overseeing of consistent application of the Group’s pricing and valuation policies to the  Pricing and Valuation Committee, which is a management control committee. Key functions of the Pricing and Valuation Committee include:  oversight over the entire valuation process, approval of internal valuation methodologies, approval of external pricing vendors, monitoring of  the independent price verification (IPV) process and resolution of significant or complex valuation issues. A formal IPV process is undertaken monthly by members of the IPV team within a Financial Risk Management function. The process includes  monitoring and in-depth analyses of approved pricing methodologies and valuations of the Group’s financial instruments aimed at identifying  and resolving pricing discrepancies.  The Risk function is responsible for independent validation and ongoing review of the Group’s valuation models. The Product Control group  within Finance is tasked with reporting of fair values and is empowered to challenge vendor- and model-based valuations. 26  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Assets and liabilities measured at fair value on a recurring basis As of 31 December 2011 and 2012, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: As of 31 December 2011  USD millions Assets Fixed income securities held for proprietary   investment purposes Debt securities issued by US government  and government agencies US Agency securitised products Debt securities issued by non-US   governments and government agencies Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Fixed income securities backing unit-linked and   with-profit life and health policies Equity securities Equity securities backing unit-linked and   with-profit life and health policies Equity securities held for proprietary   investment purposes Derivative financial instruments Interest rate contracts2 Foreign exchange contracts Derivative equity contracts2 Credit contracts Other contracts Other assets Total assets at fair value Liabilities Derivative financial instruments Interest rate contracts2 Foreign exchange contracts Derivative equity contracts2 Credit contracts Other contracts Liabilities for life and health policy benefits Accrued expenses and other liabilities Total liabilities at fair value Quoted prices in   active markets for   identical assets  and liabilities   (Level 1) Significant other  observable  inputs  (Level 2) Significant   unobservable  inputs  (Level 3) Impact of   netting1 20 383 75 701 1 139 20 383 18 161 16 173 1 988 50 3 40 7 2 773 41 367 –33 –16 –4 –6 –7 –2 926 –2 959 2 170 4 018 39 047 22 357 2 031 3 962 2 116 4 095 483 9 474 7 010 4 147 866 1 400 391 206 1 860 89 149 –4 902 –3 439 –764 –376 –238 –85 –3 546 –8 448 1 111 4 8 16 69 69 2 646 1 471 112 41 986 36 2 041 5 895 –5 875 –1 075 –66 –170 –1 075 –3 489 –341 –2 331 –8 547 –7 252 –7 252 5 950 5 950 Total 97 223 22 553 4 018 39 047 23 468 2 035 3 970 2 132 4 095 18 713 16 182 2 531 2 454 5 618 981 1 481 1 377 249 6 674 129 159 –4 860 –4 530 –834 –552 –1 313 –3 581 –341 –8 803 –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. 2  During 2012 the Group revised the classification of certain derivative instruments from interest rate contracts to equity contracts and the 2011 figures have been revised  accordingly. The revision has no impact on net income and shareholder’s equity of the Group. Swiss Reinsurance Company Consolidated 2012 Annual Report  27 Financial statements | Notes to the Group financial statements As of 31 December 2012 USD millions Assets Fixed income securities held for proprietary   investment purposes Debt securities issued by US government  and government agencies US Agency securitised products Debt securities issued by non-US   governments and government agencies Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Fixed income securities backing unit-linked and   with-profit life and health policies Equity securities Equity securities backing unit-linked and   with-profit life and health policies Equity securities held for proprietary   investment purposes Derivative financial instruments Interest rate contracts Foreign exchange contracts Derivative equity contracts Credit contracts Other contracts Other assets Total assets at fair value Liabilities Derivative financial instruments Interest rate contracts Foreign exchange contracts Derivative equity contracts Credit contracts Other contracts Liabilities for life and health policy benefits Accrued expenses and other liabilities Total liabilities at fair value Quoted prices in   active markets for   identical assets  and liabilities   (Level 1) Significant other  observable  inputs  (Level 2) Significant   unobservable  inputs  (Level 3) Impact of   netting1 11 689 56 296 637 11 689 3 450 841 2 609 261 194 26 34 7 747 16 147 –273 –205 –12 –42 –14 –885 –1 158 626 3 953 30 989 14 681 920 2 770 2 357 624 13 526 74 526 6 689 5 240 415 508 393 133 1 372 64 883 –5 578 –3 977 –792 –380 –412 –17 –2 556 –8 134 74 1 010 636 223 151 2 071 3 792 –5 644 –5 644 –2 865 4 990 –232 –271 –2 362 –272 –1 625 –4 762 4 990 Total 68 622 12 315 3 953 30 989 15 305 920 2 783 2 357 4 050 841 3 209 2 316 5 434 441 1 178 616 291 4 190 79 178 –3 726 –4 182 –804 –654 –683 –2 393 –272 –5 066 –9 064 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. 28  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Transfers between level 1 and level 2 Transfers between level 1 and level 2 for the year ended 31 December 2012 were as follows: 2012   USD millions Assets Transfer into1 Transfer out of1 Liabilities Transfer into1 Transfer out of1 Quoted prices in active  markets for identical  assets and liabilities  (Level 1) Significant other  observable inputs  (Level 2) 278 –160 2 583 –1 590 –1 933 589 1  Transfers are recognised at the date of the event or change in circumstances that caused the transfer. With the introduction of ASU No. 2011-4, the Group has reassessed the  observability of fair value inputs as of 1 January 2012. Yield curves for instruments with maturities above 20 years were deemed observable and related positions were therefore  reclassified from level 3 to level 2. The inputs of one level 2 position were assessed to be unobservable, the respective assets and liabilities were therefore shifted to level 3.  Swiss Reinsurance Company Consolidated 2012 Annual Report  29 Financial statements | Notes to the Group financial statements Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December 2011 and 2012, the reconciliation of the fair values of assets and liabilities measured on a recurring basis using  significant unobservable inputs were as follows: 2011  USD millions Assets Balance as of 1 January 2011 Realised/unrealised gains/losses: Included in net income  Included in other comprehensive income Purchases Issuances Sales Settlements Transfers into level 31 Transfers out of level 31 Impact of foreign exchange movements Closing balance as of 31 December 2011 Liabilities Balance as of 1 January 2011 Realised/unrealised gains/losses: Included in net income Included in other comprehensive income Purchases Issuances Sales Settlements Transfers into level 31 Transfers out of level 31 Impact of foreign exchange movements Closing balance as of 31 December 2011 Corporate debt  securities Residential   mortgage-backed   securities Commercial   mortgage-backed   securities US Agency  securitised  products  Other asset-  backed securities Equity securities held  for proprietary  Derivative interest  Derivative foreign   Derivative equity   Derivative credit   Other derivative   investment purposes rate contracts2 exchange contracts contracts2 contracts contracts Other assets Total 1 748 –1 –1 76 –670 –147 223 –99 –18 1 111 7 –4 4 –3 4 –3 –1 4 3 –5 49 –30 17 –28 2 8 0 10 –10 0 123 –15 –15 163 –218 –12 10 –21 1 16 839 851 206 –397 13 –41 1 471 –825 –413 46 1 116 203 38 4 21 –196 1 –2 69 –271 –69 –1 –341 162 –63 95 –85 3 112 –72 13 –7 0 1 11 –1 41 –11 41 –56 2 –116 1 214 –77 163 –239 –23 –52 986 202 –48 –134 20 –4 36 1 411 39 20 1 136 –501 –1 9 –70 –2 2 041 –158 –771 90 1 8 –154 5 912 716 12 1 930 –2 471 –153 305 –335 –21 5 895 –1 396 –7 144 –152 –116 116 16 –8 547 –1 075 –66 –170 –3 489 –1 –1 075 18 –2 331 Liabilities for life and  Derivative interest  Derivative foreign   Derivative equity   Derivative credit   Other derivative   Accrued expenses  health policy benefits rate contracts2 exchange contracts contracts2 contracts contracts and other liabilities Total –1 007 –2 572 –2 349 –7 152 1  Transfers are recognised at the date of the event or change in circumstances that caused the transfers. 2  During 2012 the Group has revised the classification of certain derivative instruments from interest rate contracts to equity contracts and the 2011 figures have been revised  accordingly. The revision has no impact on net income and shareholder’s equity of the Group. 30  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Corporate debt  mortgage-backed   mortgage-backed    Other asset-  securities securities securities products backed securities Residential   Commercial   US Agency  securitised  Equity securities held  for proprietary  investment purposes Derivative interest  rate contracts2 Derivative foreign   exchange contracts Derivative equity   contracts2 Derivative credit   contracts Other derivative   contracts Other assets Total 1 748 –1 –1 76 –670 –147 223 –99 –18 1 111 7 –4 4 –3 4 –3 –1 4 3 –5 49 –30 17 –28 2 8 0 10 –10 0 123 –15 –15 163 –218 –12 10 –21 1 16 203 38 4 21 –196 1 –2 69 839 851 206 –397 13 –41 1 471 162 –63 95 –85 3 112 0 1 11 –1 41 –11 41 1 214 –77 163 –239 –23 –52 986 202 –48 –134 20 –4 36 1 411 39 20 1 136 –501 –1 9 –70 –2 2 041 Liabilities for life and  health policy benefits Derivative interest  rate contracts2 Derivative foreign   exchange contracts Derivative equity   contracts2 Derivative credit   contracts Other derivative   contracts Accrued expenses  and other liabilities 5 912 716 12 1 930 –2 471 –153 305 –335 –21 5 895 Total 1  Transfers are recognised at the date of the event or change in circumstances that caused the transfers. 2  During 2012 the Group has revised the classification of certain derivative instruments from interest rate contracts to equity contracts and the 2011 figures have been revised  accordingly. The revision has no impact on net income and shareholder’s equity of the Group. –271 –69 –1 –341 –1 007 –2 572 –2 349 –7 152 –825 –413 46 1 116 –72 13 –7 –56 2 –116 –158 –771 90 1 8 –154 –1 075 –66 –170 –1 –1 075 –3 489 18 –2 331 –1 396 –7 144 –152 –116 116 16 –8 547 2011  USD millions Assets Balance as of 1 January 2011 Realised/unrealised gains/losses: Included in net income  Included in other comprehensive income Purchases Issuances Sales Settlements Transfers into level 31 Transfers out of level 31 Impact of foreign exchange movements Closing balance as of 31 December 2011 Liabilities Balance as of 1 January 2011 Realised/unrealised gains/losses: Included in net income Included in other comprehensive income Purchases Issuances Sales Settlements Transfers into level 31 Transfers out of level 31 Impact of foreign exchange movements Closing balance as of 31 December 2011 Swiss Reinsurance Company Consolidated 2012 Annual Report  31 Financial statements | Notes to the Group financial statements 2012  USD millions Assets Balance as of 1 January 2012 Effect of change in Group structure1 Realised/unrealised gains/losses: Included in net income  Included in other comprehensive income Purchases Issuances Sales Settlements Transfers into level 32 Transfers out of level 32 Impact of foreign exchange movements Closing balance as of 31 December 2012 Liabilities Balance as of 1 January 2012 Effect of change in Group structure1 Realised/unrealised gains/losses: Included in net income Included in other comprehensive income Purchases Issuances Sales Settlements Transfers into level 32 Transfers out of level 32 Impact of foreign exchange movements Closing balance as of 31 December 2012 Corporate debt  securities Residential   mortgage-backed   securities Commercial   mortgage-backed   securities  Other asset-  backed securities Equity securities held  for proprietary  Derivative interest  Derivative foreign   Derivative equity   Derivative credit   Other derivative   investment purposes rate contracts exchange contracts contracts contracts contracts Other assets Total 1 111 –520 28 50 –19 –32 18 –12 624 4 –4 0 8 –5 6 5 –1 13 16 32 –32 –9 –7 0 1 471 112 41 986 –192 –430 69 20 3 –18 1 –1 74 68 1 –272 7 –7 2 0 –1 473 –2 2 1 075 0 –112 0 –200 266 0 828 –41 636 –170 54 59 –19 96 –368 116 –232 36 44 44 –13 40 151 –49 –90 –29 256 –34 –80 37 –256 223 7 –126 343 –2 –271 –3 489 –45 582 1 084 2 041 –32 –16 124 192 –214 –1 41 –74 10 2 071 813 5 895 –557 –567 155 324 –317 –142 972 –1 981 10 3 792 –8 547 9 1 793 –70 911 –83 –723 2 056 –108 –4 762 –2 362 –107 –1 625 Liabilities for life and  Derivative interest  Derivative foreign   Derivative equity   Derivative credit   Other derivative   Accrued expenses  health policy benefits rate contracts exchange contracts contracts contracts contracts and other liabilities Total –341 –1 075 –66 –1 075 –2 331 1 Please refer to Note 1 “Organisation and summary of significant accounting policies”. 2  Transfers are recognised at the date of the event or change in circumstances that caused the transfer. With the introduction of ASU No. 2011-4 the Group has reassessed the  observability of fair value inputs as of 1 January 2012. Yield curves for instruments with maturities above 20 years were deemed observable, and related positions were therefore  reclassified to level 2. The inputs of one level 2 position were assessed to be unobservable, the respective assets and liabilities were therefore shifted to level 3.  32  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements 2012  USD millions Assets Balance as of 1 January 2012 Effect of change in Group structure1 Realised/unrealised gains/losses: Included in net income  Included in other comprehensive income Purchases Issuances Sales Settlements Transfers into level 32 Transfers out of level 32 Impact of foreign exchange movements Closing balance as of 31 December 2012 Liabilities Balance as of 1 January 2012 Effect of change in Group structure1 Realised/unrealised gains/losses: Included in net income Included in other comprehensive income Purchases Issuances Sales Settlements Transfers into level 32 Transfers out of level 32 Impact of foreign exchange movements Closing balance as of 31 December 2012 Residential   Commercial   Corporate debt  mortgage-backed   mortgage-backed    Other asset-  securities securities securities backed securities 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 1 111 –520 28 50 –19 –32 18 –12 624 4 –4 0 8 –5 6 5 –1 13 16 32 –32 –9 –7 0 69 20 3 –18 1 –1 74 1 471 112 41 986 7 –192 –430 –7 2 –1 473 0 –112 0 828 –41 636 –34 –80 37 –256 223 36 44 44 –13 40 151 2 041 –32 –16 124 192 –214 –1 41 –74 10 2 071 Liabilities for life and  health policy benefits Derivative interest  rate contracts Derivative foreign   exchange contracts Derivative equity   contracts Derivative credit   contracts Other derivative   contracts Accrued expenses  and other liabilities –341 –1 075 –66 68 1 –272 –2 2 1 075 0 –200 266 0 –170 54 59 –19 96 –368 116 –232 –1 075 –3 489 –45 –2 331 582 1 084 813 –49 –90 –29 256 –2 362 –107 –1 625 7 –126 343 –2 –271 5 895 –557 –567 155 324 –317 –142 972 –1 981 10 3 792 Total –8 547 9 1 793 –70 911 –83 –723 2 056 –108 –4 762 1 Please refer to Note 1 “Organisation and summary of significant accounting policies”. 2  Transfers are recognised at the date of the event or change in circumstances that caused the transfer. With the introduction of ASU No. 2011-4 the Group has reassessed the  observability of fair value inputs as of 1 January 2012. Yield curves for instruments with maturities above 20 years were deemed observable, and related positions were therefore  reclassified to level 2. The inputs of one level 2 position were assessed to be unobservable, the respective assets and liabilities were therefore shifted to level 3.  Swiss Reinsurance Company Consolidated 2012 Annual Report  33 Financial statements | Notes to the Group financial statements 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 2011 and 2012 were as follows: USD millions Gains/losses included in net income for the period Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date 2011 –680 –1 286 2012 1 226 983 34  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements This page intentionally left blank Swiss Reinsurance Company Consolidated 2012 Annual Report  35 Financial statements | Notes to the Group financial statements Quantitative information about level 3 fair value measurements Unobservable inputs for major level 3 assets and liabilities for the year ended 31 December 2012 were as follows: USD millions Assets Corporate debt securities Surplus notes with a mortality underlying Private placement corporate debt Private placement credit tenant leases Derivative equity contracts OTC equity option referencing correlated equity indices Derivative credit contracts Credit default swaps referencing various asset-backed securities (ABS) Credit correlation tranche transactions Liabilities Derivative equity contracts OTC equity option referencing correlated equity indices Option contract referencing a private equity underlying Derivative credit contracts Credit default swaps referencing various asset-backed securities (ABS) Credit correlation tranche transactions Other derivative contracts and liabilities for life and health policy benefits Variable annuity and fair valued GMDB contracts Embedded derivatives in Mod-Co and Coinsurance with Funds Withheld treaties –170 Discounted cash flow model 1 Represents average input value for the reporting period. 36  Swiss Reinsurance Company Consolidated 2012 Annual Report Fair value as of 31 December 2012 Valuation technique Unobservable input Range (weighted average) 624 168 378 72 636 636 223 109 112 –232 –81 –144 –271 –86 –171 –2 634 –2 287 Discounted cash flow model Corporate spread matrix Discounted cash flow model Illiquidity premium 75 bps (na) Illiquidity premium 15 bps – 277 bps (100 bps) Illiquidity premium 75 bps – 250 bps (129 bps) Proprietary option model Correlation –30% – 100% (35%)1 Credit spreads derived based on a   Up-front credit default   reciprocal of a reference instrument Base correlation model swap premium Correlation 23% – 96% (73%) 27% – 81% (54%)1 Proprietary option model Option model Correlation Volatility Growth rate –30% – 100% (35%)1 120% – 155% (137%)1 4% (n.a.) Credit spreads derived based on a   Up-front credit default   reciprocal of a reference instrument Base correlation model swap premium Correlation 23% – 96% (73 %) 27% – 81% (54%)1 Discounted cash flow model Risk margin Volatility Lapse Mortality adjustment Withdrawal rate Lapse Mortality adjustment 4% (n.a.) 4% – 47% 0.5% – 14% –2% – 0% 0% – 90% 3% –10% 80% (n.a.) USD millions Assets Corporate debt securities Surplus notes with a mortality underlying Private placement corporate debt Private placement credit tenant leases Derivative equity contracts OTC equity option referencing correlated equity indices Derivative credit contracts Credit default swaps referencing various asset-backed securities (ABS) Credit correlation tranche transactions Liabilities Derivative equity contracts OTC equity option referencing correlated equity indices Option contract referencing a private equity underlying Derivative credit contracts Credit default swaps referencing various asset-backed securities (ABS) Credit correlation tranche transactions Other derivative contracts and liabilities for life and health policy benefits Variable annuity and fair valued GMDB contracts 1 Represents average input value for the reporting period. Financial statements | Notes to the Group financial statements Fair value as of 31 December 2012 Valuation technique Unobservable input Range (weighted average) 624 168 378 72 636 636 223 109 112 –232 –81 –144 –271 –86 –171 –2 634 –2 287 Discounted cash flow model Corporate spread matrix Discounted cash flow model Illiquidity premium Illiquidity premium Illiquidity premium 75 bps (na) 15 bps – 277 bps (100 bps) 75 bps – 250 bps (129 bps) Proprietary option model Correlation –30% – 100% (35%)1 Credit spreads derived based on a   reciprocal of a reference instrument Base correlation model Up-front credit default   swap premium Correlation 23% – 96% (73%) 27% – 81% (54%)1 Proprietary option model Option model Correlation Volatility Growth rate –30% – 100% (35%)1 120% – 155% (137%)1 4% (n.a.) Credit spreads derived based on a   reciprocal of a reference instrument Base correlation model Up-front credit default   swap premium Correlation 23% – 96% (73 %) 27% – 81% (54%)1 Discounted cash flow model Risk margin Volatility Lapse Mortality adjustment Withdrawal rate Lapse Mortality adjustment 4% (n.a.) 4% – 47% 0.5% – 14% –2% – 0% 0% – 90% 3% –10% 80% (n.a.) Swiss Reinsurance Company Consolidated 2012 Annual Report  37 Embedded derivatives in Mod-Co and Coinsurance with Funds Withheld treaties –170 Discounted cash flow model Financial statements | Notes to the Group financial statements Sensitivity of recurring level 3 measurements to changes in unobservable inputs The significant unobservable input used in the fair value measurement of the Group’s surplus notes, private placement debt securities and  private placement credit tenant leases is illiquidity premium. Significant increase (decrease) in this input in isolation would result in a  significantly higher (lower) fair value measurement.  The significant unobservable input used in the fair value measurement of the Group’s OTC equity option referencing correlated equity indices  is correlation. Where the Group is long correlation risk, a significant increase (decrease) in this input in isolation would result in a significantly  higher (lower) fair value measurement. Where the Group is short correlation risk, 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 credit default swaps referencing ABS is a current   up-front credit default swap premium. Where the Group is long protection, a significant increase (decrease) in this input in isolation would  result in a significantly higher (lower) fair value measurement. Where the Group is short protection, a significant decrease (increase) in   this input in isolation would result in a significantly higher (lower) fair value measurement.  The significant unobservable input used in the fair value measurement of the Group’s credit correlation tranche transactions is correlation.  Where the Group is long correlation, a significant increase (decrease) in this input in isolation would result in a significantly higher (lower) fair  value measurement. Where the Group is short correlation, a significant increase (decrease) in this input in isolation would result in a  significantly lower (higher) fair value measurement.  The significant unobservable inputs used in the fair value measurement of the Group’s option referencing private equity underlying are:  volatility and growth rate. Where the Group is long vega, a significant increase (decrease) in volatility in isolation would result in a  significantly higher (lower) fair value measurement. Where the Group is short vega, a significant increase (decrease) in volatility in isolation  would result in a significantly lower (higher) fair value measurement. Where the Group is long delta, a significant increase (decrease) in   the growth rate in isolation would result in a significantly higher (lower) fair value measurement. Where the Group is short delta, a significant  increase (decrease) in the growth rate in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of the Group’s variable annuity and fair valued guaranteed minimum  death benefit (GMDB) contracts are: risk margin, volatility, lapse, mortality adjustment rate and withdrawal rate. Significant increase  (decrease) in isolation in each of the following inputs: risk margin, volatility and withdrawal rate would result in a significantly higher (lower)  fair value of the Group’s obligation. Significant increase (decrease) in isolation in a lapse rate for in-the-money contracts would result in a  significantly lower (higher) fair value of the Group’s obligation, whereas for out-of-the-money contracts, an isolated increase (decrease) in a  lapse assumption would increase (decrease) fair value of the Group’s obligation. Changes in the mortality adjustment rate impact fair value   of the Group’s obligation differently for living-benefit products, compared to death-benefit products. For the former, significant increase  (decrease) in the mortality adjustment rate (ie: increase (decrease) in mortality, respectively) in isolation would result in a decrease (increase)  in fair value of the Group’s liability. For the latter, significant increase (decrease) in the mortality adjustment rate in isolation would result in   an increase (decrease) in fair value of the Group’s liability.  The significant unobservable inputs underlying the fair valuation of an embedded derivative bifurcated from the Group’s modified  coinsurance (Mod-Co) and Coinsurance with Funds Withheld treaties are lapse and mortality adjustment to published mortality tables;   both are applied to build an expectation of cash flows associated with the underlying block of term business. Both inputs are not   expected to significantly fluctuate over time. 38  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Other assets measured at net asset value Other assets measured at net asset value as of 31 December 2011 and 2012, respectively, were as follows: USD millions Private equity funds Hedge funds Private equity direct Real estate funds Total 2011  Fair value 679 1 030 171 172 2 052 2012 Fair value 673 1 140 96 223 2 132 Unfunded  commitments 266 82 348 Redemption frequency  (if currently eligible) Redemption   notice period non-redeemable na redeemable1 90 – 180 days2 non-redeemable non-redeemable na na 1 The redemption frequency varies from monthly to three years. 2 Cash distribution can be delayed for up to three years depending on the sale of the underlyings. 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. The private equity direct portfolio consists of equity and equity-like investments directly in other companies. These investments have no  contractual term and are generally held based on financial or strategic intent. Private equity and real estate funds generally have limitations imposed on the amount of redemptions from the fund during the redemption  period due to illiquidity of the underlying investments. Fees may apply for redemptions or transferring of interest to other parties.  Distributions are expected to be received from these funds as the underlying assets are liquidated over the life of the fund, which is generally  from 10 to 12 years. The redemption frequency of hedge funds varies depending on the manager as well as the nature of the underlying product. Additionally,  certain funds may impose lock-up periods and redemption gates as defined in the terms of the individual investment agreement. 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: Equity securities trading The Group elected the fair value option for an investment previously classified as AFS within other invested assets in the balance  sheet.  The Group economically hedges the investment with derivative instruments that offset this exposure. The changes in fair value of the  derivatives are recorded in earnings. Electing the fair value option eliminates the mismatch previously caused by the economic hedging of  the investment and reduces the volatility in the income statement. Liabilities for life and health policy benefits The Group elected the fair value option for existing GMDB reserves related to certain variable annuity contracts which are classified as  universal life-type contracts. The Group has applied the fair value option, as the equity risk associated with those contracts is managed on   a fair value basis and it is economically hedged with derivative options in the market. Swiss Reinsurance Company Consolidated 2012 Annual Report  39 Financial statements | Notes to the Group financial statements 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 2011 and 2012 were as follows: USD millions Assets Equity securities trading of which at fair value pursuant to the fair value option Liabilities Liabilities for life and health policy benefits of which at fair value pursuant to the fair value option 2011 571 455 2012 671 509 –39 044 –341 –20 270 –272 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: USD millions Equity securities trading Liabilities for life and health policy benefits Total 2011 –20 –71 –91 2012 54 71 125 Fair value changes from equity securities trading are reported in “Net realised investment gains/losses”. Fair value changes from the GMDB  reserves are shown in “Life and health benefits”. 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 for the year ended 31 December 2012,   were as follows: 2012   USD millions Assets Policy loans Mortgage loans Other loans Investment real estate Total assets Liabilities Debt Total liabilities Quoted prices in active  markets for identical  assets and liabilities  (Level 1) Significant other  observable inputs  (Level 2) Significant   unobservable  inputs (Level 3) 270 656 2 787 2 531 6 244 Total 270 656 2 787 2 531 6 244 –9 970 –9 970 –13 270 –13 270 –23 240 –23 240 Policy loans, other loans and certain mortgage loans are classified as level 3 measurements, as they do not have an active exit market.   The majority of these positions needs to be assessed in conjunction with the corresponding insurance business. Considering these   circumstances, the Group presents the carrying amount as an approximation for the fair value. Investments in real estate are fair valued primarily by external appraisers based on proprietary discounted cash flow models that incorporate  applicable risk premium adjustments to discount yields and projected market rental income streams based on market-specific data. These  fair value measurements are classified in level 3 in the fair value hierarchy.  Debt positions, which are fair valued based on executable broker quotes or based on the discounted cash flow method using observable  inputs, are classified as level 2 measurements. Fair value of the majority of the Group’s level 3 debt positions is judged to approximate  carrying value due to the highly tailored nature of the obligation and short-notice termination provisions.  40  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements This page intentionally left blank Swiss Reinsurance Company Consolidated 2012 Annual Report  41 Financial statements | Notes to the Group financial statements 4  Derivative financial instruments The Group uses a variety of derivative financial instruments including swaps, options, forwards, credit derivatives and exchange-traded  financial futures in its trading and hedging strategies, in line with the Group’s overall risk management strategy. The objectives include  managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or  liabilities, as well as locking in attractive investment conditions for future available funds. The fair values represent the gross carrying value amounts at the reporting date for each class of derivative contract held or issued by the  Group. The gross fair values are not an indication of credit risk, as many over-the-counter transactions are contracted and documented under  ISDA master agreements or their equivalent. Management believes that such agreements provide for legally enforceable setoff in the event  of default, which substantially reduces credit exposure. 42  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Fair values and notional amounts of derivative financial instruments As of 31 December 2011 and 2012, the fair values and notional amounts of the derivatives outstanding were as follows: As of 31 December 2011  USD millions Derivatives not designated as hedging instruments Interest rate contracts1 Foreign exchange contracts Equity contracts1 Credit contracts Other contracts Total Derivatives designated as hedging instruments Interest rate contracts Foreign exchange contracts Total Notional amount   assets/liabilities Fair value   assets Fair value   liabilities Carrying value   assets/liabilities 145 712 28 714 17 332 45 241 24 039 261 038 2 914 2 077 4 991 4 739 981 1 481 1 377 249 8 827 879 879 –4 526 –766 –552 –1 313 –3 581 –10 738 –4 –68 –72 213 215 929 64 –3 332 –1 911 875 –68 807 Total derivative financial instruments 266 029 9 706 –10 810 –1 104 Amount offset Where a right of setoff exists  Due to cash collateral Total net amount of derivative financial instruments As of 31 December 2012 USD millions Derivatives not designated as hedging instruments Interest rate contracts1 Foreign exchange contracts Equity contracts1 Credit contracts Other contracts Total Derivatives designated as hedging instruments Interest rate contracts Foreign exchange contracts Total –5 756 –1 496 2 454 5 756 194 –4 860 –2 406 Notional amount   assets/liabilities Fair value   assets Fair value   liabilities Carrying value   assets/liabilities 129 217 25 739 17 917 33 204 23 129 229 206 2 828 1 609 4 437 4 614 441 1 178 616 291 7 140 820 820 –4 182 –785 –654 –683 –2 393 –8 697 –19 –19 432 –344 524 –67 –2 102 –1 557 820 –19 801 Total derivative financial instruments 233 643 7 960 –8 716 –756 Amount offset Where a right of setoff exists  Due to cash collateral Total net amount of derivative financial instruments –4 466 –1 178 2 316 4 466 524 –3 726 –1 410 1  During 2012 the Group revised the classification of certain derivative instruments from interest rate contracts to equity contracts and the 2011 figures have been revised  accordingly. The revision has no impact on net income and shareholder’s equity of the Group. The notional amounts of derivative financial instruments give an indication of the Group’s volume of derivative activity. The fair value assets  are included in “Other invested assets” and the fair value liabilities are included in “Accrued expenses and other liabilities”. The fair value  amounts that were not offset were nil as of 31 December 2011 and 2012. Swiss Reinsurance Company Consolidated 2012 Annual Report  43 Financial statements | Notes to the Group financial statements 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 2011 and 2012, the gains and losses of derivative financial instruments not designated as hedging instruments  were as follows: USD millions Derivatives not designated as hedging instruments Interest rate contracts1 Foreign exchange contracts1 Equity contracts1 Credit contracts Other contracts Total gain/loss recognised in income 2011 –37 250 198 –219 –799 –607 2012 –123 –547 –775 –77 1 085 –437 1  During 2012 the Group revised the 2011 amounts for interest, foreign exchange and equity contracts in the periods presented. The changes reflect the reclassification of certain  interest rate contracts to equity contracts and the exclusion of certain foreign exchange transactions which did not qualify as derivative instruments under ASC 815. The revision  has no impact on net income and shareholder’s equity of the Group.  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 2011 and 2012, 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 2011 and 2012, the gains and losses attributable to the hedged  risks were as follows: USD millions Fair value hedging relationships Interest rate contracts Foreign exchange contracts Total gain/loss recognised in income Gains/losses   on derivatives 2011 Gains/losses on   hedged items  Gains/losses   on derivatives 2012 Gains/losses on   hedged items  406 –69 337 –398 74 –324 –26 –24 –50 33 11 44 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 2011 and 2012, the Group recorded an accumulated net unrealised foreign currency remeasurement  gain of USD 397 million and a gain of USD 100 million, respectively, in shareholder’s equity. These offset translation gains and losses on the  hedged net investment. 44  Swiss Reinsurance Company Consolidated 2012 Annual Report   Financial statements | Notes to the Group financial statements 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 2011 and 2012 was approximately USD 3 950 million and USD 3 494 million, respectively. The maximum potential  loss is based on the positive market replacement cost assuming non-performance of all counterparties, excluding cash collateral. Credit risk-related contingent features Certain derivative instruments held by the Group contain provisions that require its debt to maintain an investment-grade credit rating. If the  Group’s credit rating were downgraded or no longer rated, the counterparties could request immediate payment, guarantee or an ongoing  full overnight collateralisation on derivative instruments in net liability positions. The total fair value of derivative financial instruments containing credit risk-related contingent features amounted to USD 1 538 million and  USD 1 446 million as of 31 December 2011 and 2012, respectively. For derivative financial instruments containing credit risk-related  contingent features, the Group posted collateral of USD 194 million and USD 524 million as of 31 December 2011 and 2012, respectively. In  the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD 922 million additional collateral would  have had to be posted as of 31 December 2012. The total equals the amount needed to settle the instruments immediately as of  31 December 2011 and 2012, respectively. Credit derivatives written/sold The Group writes/sells credit derivatives, including credit default swaps, credit spread options and credit index products, and total return  swaps. The total return swaps, for which the Group assumes asset risk mainly of variable interest entities, qualify as guarantees under FASB  ASC Topic 460. These activities are part of the Group’s overall portfolio and risk management strategies. The events that could require the  Group to perform include bankruptcy, default, obligation acceleration or moratorium of the credit derivative’s underlying. The following tables show the fair values and the maximum potential payout of the credit derivatives written/sold as of 31 December 2011  and 2012, 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. The fair values of the credit derivatives written/sold do not represent the Group’s effective net exposure as the ISDA master agreement and  the cash collateral netting are excluded. The Group has purchased protection to manage the performance/payment risks related to credit derivatives. As of 31 December 2011 and  2012, the total purchased credit protection based on notional values was USD 26 367 million and USD 16 689 million, respectively, of which  USD 8 159 million and USD 8 220 million, respectively, were related to identical underlyings for which the Group sold credit protection. For  tranched indexes and baskets, only matching tranches of the respective index were determined as identical. In addition to the purchased  credit protection, the Group manages the performance/payment risks through a correlation hedge, which is established with non-identical  offsetting positions. The maximum potential payout is based on notional values of the credit derivatives. The Group enters into total return swaps mainly with  variable interest entities which issue insurance-linked and credit-linked securities. Swiss Reinsurance Company Consolidated 2012 Annual Report  45 Financial statements | Notes to the Group financial statements As of 31 December 2011 and 2012, the fair values and maximum potential payout of the written credit derivatives outstanding were   as follows: As of 31 December 2011  USD millions Credit Default Swaps Credit spread in basis points 0 – 2501 251 – 500 501 – 1 000 Greater than 1 0001 Total Credit Index Products Credit spread in basis points 0 – 2501 251 – 500 501 – 1 000 Greater than 1 0001 Total Total Return Swaps Credit spread in basis points No credit spread available Total Total fair values   of credit   derivatives   written/sold   Maximum potential payout (time to maturity) 0–5 years 5–10 years Over 10 years Total maximum  potential payout 40 –40 –17 –98 –115 –409 –57 –47 –289 –802 100 100 1 563 95 145 144 1 947 14 089 12 10 14 111 997 997 40 5 45 1 786 106 71 116 2 079 0 143 37 143 323 17 352 369 0 692 1 603 238 182 292 2 315 15 892 106 83 478 16 559 997 997 19 871 Total credit derivatives written/sold –817 17 055 2 124 1  During 2012 the Group revised the classification of certain written credit derivatives from credit default swaps to credit index products and the 2011 figures have been revised  accordingly. The revision has no impact on net income and shareholder’s equity of the Group. 46  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements As of 31 December 2012 USD millions Credit Default Swaps Credit spread in basis points 0 – 250 251 – 500 501 – 1 000 Greater than 1 000 Total Credit Index Products Credit spread in basis points 0 – 250 251 – 500 501 – 1 000 Greater than 1 000 Total Total Return Swaps Credit spread in basis points No credit spread available Total Total credit derivatives written/sold Total fair values   of credit   derivatives   written/sold  Maximum potential payout (time to maturity) 0–5 years 5–10 years Over 10 years Total maximum  potential payout 9 –1 –11 –91 –94 –63 30 1 174 38 96 213 1 521 14 400 427 –33 14 827 72 72 –55 773 773 17 121 1 174 38 130 346 1 688 14 400 427 0 0 14 827 773 773 34 133 167 0 0 167 17 288 0 0 0 0 Swiss Reinsurance Company Consolidated 2012 Annual Report  47 Financial statements | Notes to the Group financial statements 5  Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) For the years ended 31 December, the DAC were as follows: 2011  USD millions Opening balance as of 1 January 2011 Deferred Effect of acquisitions/disposals and retrocessions Amortisation Effect of foreign currency translation  Closing balance as of 31 December 2011 Property & Casualty  Reinsurance 819 2 233 –1 –1 798 –6 1 247 Life & Health  Reinsurance 2 743 254 –313 –21 2 663 Other1 9 199 –9 –188 2 13 Total 3 571 2 686 –10 –2 299 –25 3 923 1  For 2011 presentation, prior to the carve-out effective from January 2012, the Corporate Solutions and Admin Re® business segments have been included in the “Other” column.  For further information please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. 2012  USD millions Opening balance as of 1 January 2012 Effect of change in Group structure1 Cumulative effect of adoption of ASU No. 2010-26 Deferred Effect of acquisitions/disposals and retrocessions Amortisation Effect of foreign currency translation  Closing balance as of 31 December 2012 Property & Casualty  Reinsurance 1 247 Life & Health  Reinsurance 2 663 2 119 –2 266 3 1 103 –35 399 –367 53 2 713 Other 13 –17 23 2 –28 2 –5 Total 3 923 –17 –35 2 541 2 –2 661 58 3 811 1 Please refer to Note 1 “Organisation and summary of significant accounting policies”. Retroceded DAC may arise on retrocession of reinsurance portfolios, including reinsurance undertaken as part of a securitisation. The  associated potential retrocession recoveries are determined by the nature of the retrocession agreements and by the terms of the  securitisation. As of 1 January 2012, the Group adopted ASU 2010-26 “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts”  (ASU 2010-26). This new guidance limits the definition of deferrable acquisition costs to costs directly related to the successful acquisition  or renewal of insurance contracts. The Group chose to adopt the standard retroactively. Due to immateriality, the release of USD 35 million of  DAC not qualifying for deferral under the update was recognised against retained earnings as of 1 January 2012. Consequently, prior-period  information has not been retrospectively adjusted. The impact of the guidance on the Group is immaterial. 48  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements For the years ended 31 December, the PVFP was as follows: USD millions Opening balance Effect of change in Group structure2 Effect of acquisitions/disposals and retrocessions Amortisation Interest accrued on unamortised PVFP Effect of foreign currency translation  Effect of change in unrealised gains/losses Closing balance Life & Health  Reinsurance 1 736 112 –218 54 –10 1 674 Other1 2 829 135 –413 177 –10 –166 2 552 2011 Total 4 565 247 –631 231 –20 –166 4 226 Life & Health  Reinsurance 1 674 –206 –201 51 40 1 358 Other 2 552 –2 552 615 –18 2 29 628 2012 Total 4 226 –2 552 409 –219 53 40 29 1 986 1  For 2011 presentation, prior to the carve-out effective from January 2012, the Admin Re® business segment has been included in the “Other” column. For further information  please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. 2  Please refer to Note 1 “Organisation and summary of significant accounting policies”. Retroceded PVFP may arise on retrocession of reinsurance portfolios, including reinsurance undertaken as part of a securitisation.   The associated potential retrocession recoveries are determined by the nature of the retrocession agreements and by the terms of the  securitisation. The percentage of PVFP which is expected to be amortised in each of the next five years is 8%, 8%, 7%, 7% and 6%. Swiss Reinsurance Company Consolidated 2012 Annual Report  49 Financial statements | Notes to the Group financial statements 6  Acquisitions and disposals Disposal of Swiss Re Private Equity Partners AG The sale of Swiss Re Private Equity Partners AG, the management company of Swiss Re’s private equity fund-of-fund business, to   BlackRock, Inc. was completed on 4 September 2012. As a result of the transaction, the Group recognised a gain of USD 38 million. The   sale resulted in a reduction in non-controlling interests of USD 1 400 million related to private equity funds. The Group continues to be  invested as a limited partner in the funds and recognises its share in the funds at the reported net asset value, accounting for them under   the equity method of accounting.  Acquisition of New California Holdings, Inc. In 2000, Swiss Re and the shareholders of New California Holdings, Inc. entered into a put/call agreement for the acquisition of New  California Holdings, Inc., which is the parent company of Aurora National Life Assurance Company. The latter was already fully consolidated  by the Group as a variable interest entity (VIE) from 1 January, 2010 due to an update to Topic 810 – Consolidation, because the majority of  the mortality, investment and expense risk was passed on to the Group via a modified coinsurance agreement. As the modified coinsurance  agreement only covered 95% of Aurora’s business, the Group reported a non-controlling interest from the consolidation of this VIE. Please  refer also to Note 13. On 29 August, 2012, the Group closed the acquisition of New California Holdings, Inc., which was immediately merged into its subsidiary  Aurora National Life Assurance Company. The only significant balance sheet item of New California Holdings, Inc. was its investment in  Aurora National Life Assurance Company. Therefore the impact on the Group’s balance sheet and income statement from this acquisition   is not material, considering the consolidation of Aurora National Life Assurance Company as a VIE in prior reporting periods. New California Holdings, Inc. was acquired for USD 548 million in cash. As of the acquisition date, the Group also fully owns Aurora National  Life Assurance Company and consequently no longer reports any non-controlling interest related to this entity.  50  Swiss Reinsurance Company Consolidated 2012 Annual Report Financialstatements| Notes to the Group financial statements 7 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. Interest expense is classified accordingly. The Group’s debt as of 31 December was as follows: USD millions Senior financial debt Senior operational debt Short-termdebt–financialandoperationaldebt Senior financial debt Senior operational debt Subordinated financial debt Subordinated operational debt Long-termdebt–financialandoperationaldebt Totalcarryingvalue Totalfairvalue Maturityoflong-termdebt As of 31 December, long-term debt as reported above had the following maturities: USD millions Due in 2013 Due in 2014 Due in 2015 Due in 2016 Due in 2017 Due after 2017 Totalcarryingvalue 1 Balance was reclassified to short-term debt. 2011 279 3 822 4 101 2 976 4 854 3 587 5 124 16 541 20 642 19 996 2011 1 605 1 735 691 2 304 1 403 8 803 16 541 2012 3 753 2 798 6551 4 952 1 900 4 302 5 328 16482 23033 23240 2012 01 1 959 708 2 136 1 428 10 251 16482  SwissReinsuranceCompanyConsolidated2012 Annual Report 51 Financialstatements| Notes to the Group financial statements Seniorlong-termdebt Instrument Senior loan EMTN EMTN EMTN EMTN EMTN EMTN Credit-linked note EMTN Senior notes1 Senior notes Senior notes1 Senior notes1 Senior notes Payment undertaking agreements Maturity 2014 2014 2014 2014 2014 2015 2015 2016 2017 2019 2022 2026 2030 2042 Various Totalseniordebtasof31December2012 Total senior debt as of 31 December 2011 1 Assumed in the acquisition of Insurance Solutions. Issued in 2012 2009 2010 2009 2009 2001 2010 2007 2011 1999 2012 1996 2000 2012 various Currency GBP EUR CHF CHF CHF CHF CHF USD CHF USD USD USD USD USD USD Nominal in millions 120 600 250 500 50 150 500 46 600 400 250 600 350 500 610 Interest rate 2.41% 7.00% 1.75% 3.25% 2.94% 4.00% 2.00% 1M Libor 2.13% 6.45% 2.88% 7.00% 7.75% 4.25% various Book value in USD millions 196 818 273 551 55 164 544 46 651 515 248 886 579 488 838 6852 7 830 52 SwissReinsuranceCompanyConsolidated2012 Annual Report Financialstatements| Notes to the Group financial statements 2 245 3 083 1 315 752 810 776 9630 8 711 2012 161 109 238 251 759 2016 2016 2019 2017 2011 80 283 230 256 849 Subordinatedlong-termdebt Maturity 2042 2047 2057 Instrument Subordinated fixed-to-floating rate loan note Subordinated private placement (amortising, limited recourse) Subordinated private placement (amortising, limited recourse) Subordinated perpetual loan note Subordinated perpetual loan note Subordinated perpetual loan note 2 subordinated perpetual loan notes Totalsubordinateddebtasof31December2012 Total subordinated debt as of 31 December 2011 Issued in 2012 Currency EUR Nominal in millions 500 Interest rate 6.63% first call in 2022 Book value in USD millions 649 2007 GBP 1 381 4.90% 2007 2006 2006 2007 2007 GBP EUR USD GBP AUD 1 897 1 000 752 500 750 4.76% 5.25% 6.85% 6.30% various Interestexpenseonlong-termdebtandcontingentcapitalinstruments Interest expense on long-term debt for the years ended 31 December was as follows: USD millions Senior financial debt Senior operational debt Subordinated financial debt Subordinated operational debt Total Interest expense on contingent capital instruments for the year ended 31 December 2012 was USD 56 million. Long-termdebtissuedin2012 In February 2012, Swiss Re Europe Holdings S.A., a subsidiary of Swiss Reinsurance Company Ltd, entered into a loan agreement, maturing in 2014, with an affiliated company. The loan has a face value of GBP 120 million and a fixed coupon of 2.41%. In December 2012, the Group revised the classification of this debt from short-term to long-term. In July 2012, Swiss Reinsurance Company Ltd issued a 30-year subordinated fixed-to-floating rate loan note which is callable after 10 years. The instrument has a face value of EUR 500 million, with a fixed coupon of 6.625% per annum until the first optional redemption date (1 September 2022). In December 2012, Swiss Re Treasury (US) Corporation, a subsidiary of Swiss Reinsurance Company Ltd, issued two tranches of senior notes, maturing in 2022 and 2042, respectively. The 2022 notes have a face value of USD 250 million, with a fixed coupon of 2.875%. The 2042 notes have a face value of USD 500 million, with a fixed coupon of 4.25%. The notes are guaranteed by Swiss Reinsurance Company Ltd. Contingentcapitalinstrumentsissuedin2012 In February 2012, Swiss Reinsurance Company Ltd issued a perpetual subordinated note with stock settlement. The instrument has a face value of CHF 320 million, with a fixed coupon of 7.25% per annum until the first optional redemption date (1 September 2017). In March 2012, Swiss Reinsurance Company Ltd issued a perpetual subordinated capital instrument with stock settlement. The instrument has a face value of USD 750 million, with a fixed coupon of 8.25% per annum until the first optional redemption date (1 September 2018). Both instruments may be converted, at the option of the issuer, into Swiss Re Ltd shares at any time at market or within six months following a solvency event at a pre-set floor price. These instruments are referred to in these financial statements as “contingent capital instruments”.  SwissReinsuranceCompanyConsolidated2012 Annual Report 53 Financialstatements| Notes to the Group financial statements 8 Unpaid claims and claim adjustment expenses The liability for unpaid claims and claim adjustment expenses as of 31 December is analysed as follows: USD millions Non-Life Life & Health Total 2011 53 827 11 051 64 878 2012 48 650 10 254 58904 A reconciliation of the opening and closing reserve balances for non-life unpaid claims and claim adjustment expenses for the period is presented as follows: USD millions Balance as of 1 January Reinsurance recoverable Deferred expense on retroactive reinsurance Effect of change in Group structure1 Netbalanceasof1January Incurred related to: Current year Prior year Amortisation of deferred expense on retroactive reinsurance and impact of commutations Total incurred Paid related to: Current year Prior year Total paid Foreign exchange Effect of acquisitions, disposals, new retroactive reinsurance and other items Netbalanceasof31December Reinsurance recoverable Deferred expense on retroactive reinsurance Balanceasof31December 1 Please refer to Note 1 “Organisation and summary of significant accounting policies”. 2011 53 345 –5 717 –401 47 227 10 322 –1 735 73 8 660 –1 694 –7 899 –9 593 –441 1 044 46 897 6 610 320 53 827 2012 53 827 –6 610 –320 –2 675 44222 7 638 –1 460 64 6 242 –1 598 –7 191 –8 789 798 246 42719 5 702 229 48650 The Group does not discount liabilities arising from prospective property and casualty insurance and reinsurance contracts, including liabilities which are discounted for US statutory reporting purposes. Liabilities arising from property and casualty insurance and reinsurance contracts acquired in a business combination are initially recognised at fair value in accordance with the purchase method of accounting. 54 SwissReinsuranceCompanyConsolidated2012 Annual Report Financialstatements| Notes to the Group financial statements Prior-yeardevelopment In 2012, claims development on prior years was driven by favourable experience in all lines except motor. For property, releases on earlier years more than offset increases for some of the large 2011 claims, mainly the floods in Thailand and the earthquakes in New Zealand. For liability favourable experience across all regions more than offset increases for asbestos and environmental losses. For motor, the unfavourable experience is attributed to various issues in Europe and Americas. Accident & health saw releases from a large commutation partly offset by small increases in losses driven by exposures in the US. For special lines, there was favourable development in most regions and most lines. In 2011, claims development on prior years was 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 or 2012, as it was already recognised at the minimum commutation value at year-end 2010 and remains recognised at that value. USasbestosandenvironmentalclaimsexposure The Group’s obligation for claims payments and claims settlement charges also includes obligations for long-latent injury claims arising out of policies written prior to 1986 as well as business acquired subsequently through reinsurance arrangements with affiliated companies within the Swiss Re Group, but outside Swiss Reinsurance Company Consolidated, in particular in the area of US asbestos and environmental liability. At the end of 2012, the Group carried net reserves for US asbestos and environmental hazards equal to USD 1 763 million. During 2012, the Group incurred positive ultimate loss development of USD 12 million and paid net against these liabilities USD 144 million. 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. The Group maintains an active commutation strategy to reduce exposure. When commutation payments are made, the traditional “survival ratio” is artificially reduced by premature payments which should not imply a reduction in reserve adequacy.  SwissReinsuranceCompanyConsolidated2012 Annual Report 55 Financialstatements| Notes to the Group financial statements 9 Insurance information For the year ended 31 December Premiumsearnedandfeesassessedagainstpolicyholders 2011 USD millions Premiumsearned,thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Premiumsearnedbeforeretrocessiontoexternalparties Reinsurance ceded to external parties Netpremiumsearned Feeincomefrompolicyholders,thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Grossfeeincomebeforeretrocessiontoexternalparties Fee income ceded to external parties Netfeeincome Property & Casualty Reinsurance Life & Health Reinsurance 13 076 –116 12 960 –2 825 10 135 0 27 10 073 109 10 209 –1 892 8 317 83 16 99 –12 87 Other1 2 975 641 7 3 623 –775 2 848 650 155 –16 789 789 Total 3 002 23 790 0 26 792 –5 492 21 300 650 238 0 888 –12 876 1 For 2011 presentation, prior to the carve-out effective from January 2012, the Corporate Solutions and Admin Re® business segments have been included in the “Other” column. For further information please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. 56 SwissReinsuranceCompanyConsolidated2012 Annual Report Financialstatements| Notes to the Group financial statements For the year ended 31 December Premiumsearnedandfeesassessedagainstpolicyholders 2012 USD millions Premiumsearned,thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Premiumsearnedbeforeretrocessiontoexternalparties Reinsurance ceded to external parties Netpremiumsearned Feeincomefrompolicyholders,thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Grossfeeincomebeforeretrocessiontoexternalparties Fee income ceded to external parties Netfeeincome Property & Casualty Reinsurance Life & Health Reinsurance 16 319 17 16 336 –4 007 12329 0 179 10 756 10 935 –1 885 9050 72 72 72 Other 83 99 –17 165 –48 117 11 39 50 50 Total 262 27 174 0 27 436 –5 940 21496 11 111 0 122 0 122  SwissReinsuranceCompanyConsolidated2012 Annual Report 57 Financialstatements| Notes to the Group financial statements For the year ended 31 December Claimsandclaimadjustmentexpenses 2011 USD millions Claimspaid,thereof: Property & Casualty Reinsurance Life & Health Reinsurance Other1 Consolidation Total Gross claims paid to external parties Intra-group transactions (assumed and ceded) Claimsbeforereceivablesfromretrocessiontoexternalparties Receivables from retrocession to external parties Netclaimspaid –9 285 –1 214 –10 499 1 545 –8 954 –8 147 –121 –8 268 1 991 –6 277 Changeinunpaidclaimsandclaimadjustmentexpenses; lifeandhealthbenefits,thereof: Gross – with external parties Intra-group transactions (assumed and ceded) Unpaidclaimsandclaimadjustmentexpenses;lifeandhealth benefitsbeforeimpactofretrocessiontoexternalparties Reinsurance ceded to external parties Netunpaidclaimsandclaimadjustmentexpenses;lifeand healthbenefits –486 1 500 1 014 559 1 573 –5 210 1 335 –3 875 653 –3 222 1 164 –1 567 –403 47 36 67 103 –106 –3 –356 –22 642 0 –22 642 4 189 –18 453 729 0 729 500 1 229 –17 224 0 15 15 15 15 Claimsandclaimadjustmentexpenses;lifeandhealthbenefits –7 381 –6 280 –3 578 1 For 2011 presentation, prior to the carve-out effective from January 2012, the Corporate Solutions and Admin Re® business segments have been included in the “Other” column. For further information please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. Acquisitioncosts 2011 USD millions Acquisitioncosts,thereof: Property & Casualty Reinsurance Life & Health Reinsurance Other1 Consolidation Total Gross acquisition costs with external parties Intra-group transactions (assumed and ceded) Acquisitioncostsbeforeimpactofretrocessiontoexternal parties Retrocession to external parties Netacquisitioncosts –2 745 7 –2 738 890 –1 848 –2 024 –27 –2 051 306 –1 745 –604 20 –584 163 –421 –7 –7 –7 –5 380 0 –5 380 1 359 –4 021 1 For 2011 presentation, prior to the carve-out effective from January 2012, the Corporate Solutions and Admin Re® business segments have been included in the “Other” column. For further information please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. 58 SwissReinsuranceCompanyConsolidated2012 Annual Report Financialstatements| Notes to the Group financial statements For the year ended 31 December Claimsandclaimadjustmentexpenses 2012 USD millions Claimspaid,thereof: Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total Gross claims paid to external parties Intra-group transactions (assumed and ceded) Claimsbeforereceivablesfromretrocessiontoexternalparties Receivables from retrocession to external parties Netclaimspaid –10 408 –8 –10 416 1 664 –8752 –8 468 –3 –8 471 2 210 –6261 Changeinunpaidclaimsandclaimadjustmentexpenses;life andhealthbenefits,thereof: Gross – with external parties Intra-group transactions (assumed and ceded) Unpaidclaimsandclaimadjustmentexpenses;lifeandhealth benefitsbeforeimpactofretrocessiontoexternalparties Reinsurance ceded to external parties Netunpaidclaimsandclaimadjustmentexpenses;lifeand healthbenefits 1 888 –23 1 865 581 –136 8 –128 –398 2446 –526 –255 11 –244 22 –222 –43 15 –28 54 26 Claimsandclaimadjustmentexpenses;lifeandhealthbenefits –6306 –6787 –196 –19 131 0 –19 131 3 896 –15235 1 709 0 1 709 237 1946 –13289 0 0 0 Acquisitioncosts 2012 USD millions Acquisitioncosts,thereof: Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total Gross acquisition costs with external parties Intra-group transactions (assumed and ceded) Acquisitioncostsbeforeimpactofretrocessiontoexternal parties Retrocession to external parties Netacquisitioncosts –3 559 –3 –3 562 1 246 –2316 –2 071 –2 071 284 –1787 –38 3 –35 6 –29 –5 668 0 –5 668 1 536 –4132 0  SwissReinsuranceCompanyConsolidated2012 Annual Report 59 Financialstatements| Notes to the Group financial statements Reinsuranceassetsandliabilities The reinsurance assets and liabilities as of 31 December were as follows: 2011 USD millions Assets Reinsurance recoverable Deferred acquisition costs Liabilities Unpaid claims and claim adjustment expenses Life and health policy benefits Policyholder account balances Property & Casualty Reinsurance Life & Health Reinsurance Other1 Consolidation Total 4 951 1 247 49 451 2 902 2 663 9 310 18 367 2 423 13 502 13 14 148 21 424 32 486 –9 518 –8 031 –747 –747 11 837 3 923 64 878 39 044 34 162 1 For 2011 presentation, prior to the carve-out effective from January 2012, the Corporate Solutions and Admin Re® business segments have been included in the “Other” column. For further information please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 2012 USD millions Assets Reinsurance recoverable Deferred acquisition costs Liabilities Unpaid claims and claim adjustment expenses Life and health policy benefits Policyholder account balances 5 583 1 103 48 465 2 447 2 713 9 505 17 439 1 466 191 –5 983 2 831 5 046 Reinsurancereceivables Reinsurance receivables as of 31 December were as follows: USD millions Premium receivables invoiced Receivables from ceded re/insurance business Assets arising from the application of the deposit method of accounting and meeting the definition of financing receivables Recognised allowance 1 During 2012 the Group revised its classification of reinsurance receivables and, as a result, the notional amounts of some receivables that were previously classified as premium receivables invoiced are now classified as receivables from ceded re/insurance business. The 2011 figures have been revised accordingly. Policyholderdividends Policyholder dividends are recognised as an element of policyholder benefits. The amount of policyholder dividend expense in 2011 and 2012 was USD 134 million and USD 9 million, respectively. 60 SwissReinsuranceCompanyConsolidated2012 Annual Report –46 –49 2011 1 6811 7471 707 –132 8 175 3 811 58 904 20 270 6 512 2012 980 264 1 320 –80 Financialstatements| Notes to the Group financial statements 10 Premiums written For the years ended 31 December 2011 USD millions Grosspremiumswritten,thereof: Direct Reinsurance Intra-group transactions (assumed) Grosspremiumswritten Intra-group transactions (ceded) Grosspremiumswrittenbeforeretrocessiontoexternal parties Reinsurance ceded to external parties Netpremiumswritten Property & Casualty Reinsurance Life & Health Reinsurance Other1 Consolidation Total 14 810 401 15 211 –553 14 658 –3 017 11 641 27 10 136 109 10 272 10 272 –1 882 8 390 3 082 609 553 4 244 –510 3 734 –897 2 837 3 109 25 555 0 28 664 0 28 664 –5 796 22 868 –1 063 –1 063 1 063 0 1 For 2011 presentation, prior to the carve-out effective from January 2012, the Corporate Solutions and Admin Re® business segments have been included in the “Other” column. For further information please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. 2012 USD millions Grosspremiumswritten,thereof: Direct Reinsurance Intra-group transactions (assumed) Grosspremiumswritten Intra-group transactions (ceded) Grosspremiumswrittenbeforeretrocessiontoexternal parties Reinsurance ceded to external parties Netpremiumswritten Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 15 841 24 15 865 15 865 –3 458 12407 387 10 715 11 102 11 102 –1 871 9231 104 94 198 –24 174 –59 115 491 26 650 0 27 141 0 27 141 –5 388 21753 –24 –24 24 0  SwissReinsuranceCompanyConsolidated2012 Annual Report 61 Financial statements | Notes to the Group financial statements 11  Income taxes The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group  operates. The components of the income tax charge were: USD millions Current taxes Deferred taxes Income tax expense 2011 112 –29 83 Tax rate reconciliation The following table reconciles the expected tax expense at the Swiss statutory tax rate to the actual tax expense in the accompanying  income statement: USD millions Income tax at the Swiss statutory tax rate of 21.0%  Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates Impact of foreign exchange movements Tax exempt income/dividends received deduction Change in valuation allowance Tax effects of losses not recognized Basis differences in subsidiaries Change in statutory tax rates Change in liability for unrecognised tax benefits including interest and penalties Other, net Total 2011 596 138 –38 –45 –143 –368 –122 99 –34 83 2012 465 657 1 122 2012 1 009 163 3 –26 –184 60 –207 –44 145 203 1 122 For 2012, the Group reported a tax expense of USD 1 122 million. This represents an effective tax rate of 23.4%, compared to an effective  tax rate of 2.9% in the prior year. The increase in the tax rate was primarily due to lower tax benefits in the year from reductions in tax basis in  subsidiaries based on write-downs in the value required in local statutory statements, changes in local country tax rates and tax effects of  losses not recognized. 62  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows: USD millions Deferred tax assets Income accrued/deferred Technical provisions Pension provisions Benefit on loss carryforwards Currency translation adjustments Other Gross deferred tax asset Valuation allowance Total Deferred tax liabilities Present value of future profits Income accrued/deferred Bond amortisation Deferred acquisition costs Technical provisions Unrealised gains on investments Untaxed realised gains Foreign exchange provisions Other Total Deferred income taxes Liability for unrecognised tax benefits including interest and penalties Deferred and other non-current taxes 2011 2012 599 1531 292 3 965 481 1 378 8 246 –1 337 6 909 –1 082 –629 –139 –687 –2 446 –1932 –373 –418 –800 –8 506 415 533 335 3 312 474 830 5 899 –1 032 4 867 –360 –581 –187 –676 –1 979 –1 107 –490 –288 –716 –6 384 –1 597 –1 517 –1 256 –1 479 –2 853 –2 996 As of 31 December 2012, 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 4 240 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. As of 31 December 2012, the Group had USD 10 497 million net operating tax loss carryforwards, expiring as follows: USD 3 million   in 2017, USD 6 500 million in 2018 and beyond and USD 3 994 million never expire.  The Group also had capital loss carryforwards of USD 34 million, expiring as follows: USD 19 million in 2014, and USD 15 million   never expire. Net operating tax losses of USD 945 million and capital tax losses of USD 136 million were utilised or expired during the period ended  31 December 2012. Income taxes paid in 2012 and 2011 were USD 54 million and USD 707 million, respectively. Swiss Reinsurance Company Consolidated 2012 Annual Report  63 Financial statements | Notes to the Group financial statements Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: USD millions Balance as of 1 January Effect of change in Group structure1 Additions based on tax positions of current year Reductions for tax positions of current year Additions for tax positions of prior years Reductions for tax positions of prior years Settlements Lapse of statute of limitations Balance as of 31 December 2011 980 373 9 –219 –1 –95 1 047 2012 1 047 –13 240 –24 88 –132 –8 16 1 214 1 Please refer to Note 1 “Organisation and summary of significant accounting policies”. The amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were  approximately USD 726 million and USD 856 million at 31 December 2011 and 2012, respectively.  Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such benefit for the period ending  31 December 2012 was USD 56 million (USD 6 million for the period ending 31 December 2011). As of 31 December 2011 and 2012,  USD 209 million and USD 265 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The   accrued interest balance as of 31 December 2012 is included within the deferred and other non-current taxes section reflected above   and in the statement of financial position. The balance of gross unrecognised tax benefits as of 31 December 2012 presented in the table above is less than the liability for unrecognised  tax benefits reflected in the deferred and other non-current taxes section due to the removal of interest expense (USD 265 million).  During the year, certain tax positions and audits in Switzerland and Germany were effectively settled. The Group continually evaluates proposed adjustments by taxing authorities. The Group believes that it is reasonably possible (more   than remote and less than likely) that the balance of unrecognised tax benefits could increase or decrease over the next 12 months due to  settlements or expiration of statutes of limitation. However, quantification of an estimated range cannot be made at this time. The following table summarises jurisdictions and tax years that remain subject to examination: Australia Belgium Brazil Canada China Denmark France Germany Hong Kong India Ireland Israel Italy Japan 2006 – 2012 2010 – 2012 2008 – 2012 2007 – 2012 2003 – 2012 2008 – 2012 2008 – 2012 2001 – 2012 1994 – 2012 2005 – 2012 2010 – 2012 2008 – 2012 2008 – 2012 2008 – 2012 Korea Luxembourg Malaysia Mexico Netherlands New Zealand Singapore Slovakia South Africa Spain Switzerland United Kingdom United States 2008 – 2012 2008 – 2012 1996 – 2012 2007 – 2012 2010 – 2012 2006 – 2012 2007 – 2012 2007 – 2012 2004 – 2005; 2009 – 2012 2008 – 2012 2005 – 2012 2008, 2011 – 2012 2009 – 2012 64  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements 12 Benefit plans Defined benefit pension plans and post-retirement benefits The Group sponsors various funded defined benefit pension plans. Employer contributions to the plans are charged to income on a basis   which recognises the costs of pensions over the expected service lives of employees covered by the plans. The Group’s funding policy for  these plans is to contribute annually at a rate that is intended to maintain a level percentage of compensation for the employees covered.   A full valuation is prepared at least every three years.  The Group also provides certain healthcare and life insurance benefits for retired employees and their dependants. Employees become  eligible for these benefits when they become eligible for pension benefits. The measurement date of these plans is 31 December for each year presented. 2011  USD millions Benefit obligation as of 1 January Service cost Interest cost Amendments Actuarial gains/losses Benefits paid Employee contribution Acquisitions/disposals/additions Effect of curtailment and termination benefits Effect of foreign currency translation Benefit obligation as of 31 December Fair value of plan assets as of 1 January Actual return on plan assets Company contribution Benefits paid Employee contribution Acquisitions/disposals/additions Effect of curtailment and termination benefits Effect of foreign currency translation Fair value of plan assets as of 31 December Funded status Swiss plan 3 202 113 91 –39 118 –163 25 1 –20 3 328 3 104 –71 91 –163 25 1 –4 2 983 –345 Foreign plans 1 902 10 102 Other benefits 330 5 13 31 –69 –24 1 952 1 778 73 58 –69 –26 1 814 –138 32 –15 –2 363 15 –15 0 –363 Total 5 434 128 206 –39 181 –247 25 0 1 –46 5 643 4 882 2 164 –247 25 1 0 –30 4 797 –846 Swiss Reinsurance Company Consolidated 2012 Annual Report  65 Financial statements | Notes to the Group financial statements 2012  USD millions Benefit obligation as of 1 January Service cost Interest cost Amendments Actuarial gains/losses Benefits paid Employee contribution Acquisitions/disposals/additions Effect of curtailment and termination benefits Effect of foreign currency translation Benefit obligation as of 31 December Fair value of plan assets as of 1 January Actual return on plan assets Company contribution Benefits paid Employee contribution Acquisitions/disposals/additions Effect of curtailment and termination benefits Effect of foreign currency translation Fair value of plan assets as of 31 December Funded status Swiss plan 3 328 106 78 231 –158 25 1 80 3 691 2 983 205 88 –158 25 1 69 3 213 –478 Foreign plans 1 952 6 75 2 188 –62 –370 –56 39 1 774 1 814 141 56 –62 –357 –56 33 1 569 –205 Other benefits 363 6 13 23 –15 –9 1 382 15 –15 0 –382 Amounts recognised in the balance sheet, as of 31 December 2011 and 2012, respectively, were as follows: 2011  USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised 2012  USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised Swiss plan –345 –345 Swiss plan –478 –478 Foreign plans 78 –2 –214 –138 Foreign plans 37 –3 –239 –205 Other benefits –16 –347 –363 Other benefits –16 –366 –382 Total 5 643 118 166 2 442 –235 25 –379 –55 120 5 847 4 797 346 159 –235 25 –357 –55 102 4 782 –1 065 Total 78 –18 –906 –846 Total 37 –19 –1 083 –1 065 66  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Amounts recognised in accumulated other comprehensive income, gross of tax, as of 31 December were as follows: 2011  USD millions Net gain/loss Prior service cost/credit Total 2012  USD millions Net gain/loss Prior service cost/credit Total Swiss plan 951 –1 950 Swiss plan 1 035 –1 1 034 Foreign plans 271 271 Other benefits –100 –111 –211 Foreign plans 343 2 345 Other benefits –68 –99 –167 Components of net periodic benefit cost The components of pension and post-retirement cost for the years ended 31 December 2011 and 2012, respectively, were as follows: 2011  USD millions Service cost (net of participant contributions) Interest cost Expected return on assets Amortisation of:    Net gain/loss    Prior service cost Effect of settlement, curtailment and termination Net periodic benefit cost 2012  USD millions Service cost (net of participant contributions) Interest cost Expected return on assets Amortisation of:    Net gain/loss    Prior service cost Effect of settlement, curtailment and termination Net periodic benefit cost Swiss plan 113 91 –128 Foreign plans 10 102 –106 Other benefits 5 13 37 6 1 120 17 23 –11 –11 –2 –6 Swiss plan 106 78 –100 Foreign plans 6 75 –75 Other benefits 6 13 42 1 127 13 10 29 –8 –11 0 Total 1 122 –112 1 010 Total 1 310 –98 1 212 Total 128 206 –234 43 –5 –1 137 Total 118 166 –175 47 –11 11 156 Swiss Reinsurance Company Consolidated 2012 Annual Report  67 Financial statements | Notes to the Group financial statements Other changes in plan assets and benefit obligations recognised in other comprehensive income for the years ended 31 December were   as follows: 2011  USD millions Net gain/loss Prior service cost/credit Amortisation of:    Net gain/loss    Prior service cost Effect of settlement, curtailment and termination Exchange rate gain/loss recognised during the year Total recognised in other comprehensive income, gross of tax Total recognised in net periodic benefit cost and other comprehensive income, gross of tax 2012  USD millions Net gain/loss Prior service cost/credit Amortisation of:    Net gain/loss    Prior service cost Effect of settlement, curtailment and termination Effect of change in Group structure1 Exchange rate gain/loss recognised during the year Total recognised in other comprehensive income, gross of tax Total recognised in net periodic benefit cost and other comprehensive income, gross of tax 1 Please refer to Note 1 “Organisation and summary of significant accounting policies”. Swiss plan 317 –39 –37 –6 235 355 Foreign plans 64 Other benefits 32 –17 –1 46 69 11 11 54 48 Swiss plan 126 Foreign plans 122 2 Other benefits 23 –42 84 211 –13 –10 –38 11 74 103 8 11 2 44 44 Total 413 –39 –43 5 0 –1 335 472 Total 271 2 –47 11 –10 –38 13 202 358 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 2013 are USD 72 million and USD 1 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 2013 are USD 5 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 5 185 million and USD 5 350 million as of 31 December 2011 and 2012, respectively. Pension plans with an accumulated benefit obligation in excess of plan assets as of 31 December were as follows: USD millions Projected benefit obligation Accumulated benefit obligation Fair value of plan assets 2011 4 275 4 235 3 717 2012 4 650 4 582 3 937 68  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Principal actuarial assumptions Assumptions used to determine obligations at the end of the year Discount rate Rate of compensation increase Assumptions used to determine net periodic pension costs for the year ended Discount rate Expected long-term return  on plan assets Rate of compensation increase Assumed medical trend rates at year end Medical trend – initial rate Medical trend – ultimate rate Year that the rate reaches  the ultimate trend rate Swiss plan Foreign plans weighted average Other benefits weighted average 2011 2012 2011 2012 2011 2012 2.4% 2.3% 2.8% 4.0% 2.3% 2.0% 2.3% 2.4% 3.3% 2.3% 4.9% 2.2% 5.4% 6.0% 2.5% 4.1% 2.1% 4.9% 5.1% 2.2% 3.5% 3.9% 3.1% 3.4% 4.0% 3.5% 4.1% 3.9% 6.3% 4.7% 2015 6.2% 4.5% 2019 The expected long-term rates of return on plan assets are based on long-term expected inflation, interest rates, risk premiums and targeted  asset category allocations. The estimates take into consideration historical asset category returns. 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 2012: USD millions Effect on total of service and interest cost components Effect on post-retirement benefit obligation 1 percentage point  increase 1 28 1 percentage point  decrease –1 –24 Swiss Reinsurance Company Consolidated 2012 Annual Report  69 Financial statements | Notes to the Group financial statements 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 2011 and  2012, is as follows: Asset category Equity securities Debt securities Real estate Other Total Swiss plan allocation Foreign plans allocation 2011 2012 Target allocation 2011 2012 Target allocation 27% 44% 20% 9% 100% 27% 45% 19% 9% 100% 25% 48% 21% 6% 100% 36% 54% 2% 8% 100% 35% 56% 1% 8% 100% 35% 60% 1% 4% 100% 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 3 million (0.1% of total plan assets) and USD 5 million (0.1% of total plan assets) as  of 31 December 2011 and 2012, respectively. The Group’s pension plan investment strategy is to match the maturity profiles of the assets and liabilities in order to reduce the future  volatility of pension expense and funding status of the plans. This involves balancing investment portfolios between equity and fixed income  securities. Tactical allocation decisions that reflect this strategy are made on a quarterly basis. Assets measured at fair value For a description of the different fair value levels and valuation techniques see Note 3 Fair value disclosures. Certain items reported as pension plan assets at fair value in the table below are not within the scope of Note 3, namely two positions: real  estate and an insurance contract.  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.  The fair value of the insurance contract is based on the fair value of the assets backing the contract. Other assets classified within level 3 mainly consist of private equity investments valued with the same methodology as mentioned in  Note 3. 70  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements As of 31 December, the fair values of pension plan assets by level of input were as follows:  2011  USD millions Assets Fixed income securities: Debt securities issued by the US government  and government agencies Debt securities issued by non-US governments  and government agencies Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Equity securities: Equity securities held for proprietary investment purposes Derivative financial instruments Real estate Other assets Total assets at fair value Cash Total plan assets 2012  USD millions Assets Fixed income securities: Debt securities issued by the US government  and government agencies Debt securities issued by non-US governments  and government agencies Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Equity securities: Equity securities held for proprietary investment purposes Derivative financial instruments Real estate Other assets Total assets at fair value Cash Total plan assets Quoted prices in   active markets for   identical assets  (Level 1) Significant other   observable inputs   (Level 2) Significant   unobservable inputs   (Level 3) 2 355 40 1 140 1 116 50 5 4 650 41 48 3 094 3 094 804 –47 51 2 810 225 1 035 549 119 668 668 Quoted prices in   active markets for   identical assets  (Level 1) Significant other   observable inputs   (Level 2) Significant   unobservable inputs   (Level 3) 2 383 62 788 1 474 49 5 5 547 20 48 2 998 2 998 866 3 50 919 168 1 087 572 125 697 697 Total 2 355 40 1 140 1 116 50 5 4 1 454 –47 641 169 4 572 225 4 797 Total 2 383 62 788 1 474 49 5 5 1 413 3 642 173 4 614 168 4 782 Swiss Reinsurance Company Consolidated 2012 Annual Report  71 Financial statements | Notes to the Group financial statements 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: 2011  USD millions Balance as of 1 January Realised/unrealised gains/losses: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases, issuances and settlements Transfers in and/or out of Level 3 Impact of foreign exchange movements Closing balance as of 31 December 2012  USD millions Balance as of 1 January Realised/unrealised gains/losses: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases, issuances and settlements Transfers in and/or out of Level 3 Impact of foreign exchange movements Closing balance as of 31 December Real estate 539 Other assets 113 6 7 –3 549 –9 1 16 –2 119 Real estate 549 Other assets 119 1 10 12 572 –13 3 15 1 125 Expected contributions and estimated future benefit payments The employer contributions expected to be made in 2013 to the defined benefit pension plans are USD 186 million and to the post- retirement benefit plan are USD 16 million. As of 31 December 2012, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for  employees’ voluntary contributions, are as follows: USD millions 2013 2014 2015 2016 2017 Years 2018–2022 Swiss plan 155 157 155 161 164 858 Foreign plans 59 62 64 66 69 383 Other benefits 16 17 18 18 19 108 Total 652 –3 1 23 0 –5 668 Total 668 –12 3 25 0 13 697 Total 230 236 237 245 252 1349 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 2011 and in 2012 was  USD 58 million and USD 65 million, respectively. 72  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements 13  Share-based payments Group Compensation awards settled in equity are settled in Swiss Re Ltd shares. As of 31 December 2011 and 2012, the Group had the share-based compensation plans described below. Total compensation cost for share-based compensation plans recognised in net income was USD 52 million and USD 64 million in 2011 and  2012, respectively. The related tax benefit was USD 16 million and USD 15 million, respectively. 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. Under the fixed-option plan, the exercise price of each option is equal to the market price of  the shares on the date of the grant. Options issued vest at the end of the fourth year and have a maximum life of ten years. A summary of the activity of the Group’s stock option plans is as follows: 2012 Outstanding as of 1 January Options sold Options forfeited or expired  Outstanding as of 31 December Exercisable as of 31 December Weighted average   exercise price in CHF 109 75 144 72 72 Number of options 2 363 734 –187 350 –1 217 482 958 902 958 902 The following table summarises the status of stock options outstanding as of 31 December 2012: Range of exercise   prices in CHF 67–83 93–100 67–100 Number of   options 818 902 140 000 958 902 Weighted average remaining  contractual life in years 0.2 2.4 0.5 Weighted average exercise  price in CHF 68 95 72 All stock options outstanding are also exercisable and the status of these exercisable options is reflected in the table above. The fair value of  each option grant was estimated on the date of grant using a binomial option-pricing model. Swiss Reinsurance Company Consolidated 2012 Annual Report  73   Financial statements | Notes to the Group financial statements Restricted shares The Group issued 14 834 and 38 930 restricted shares to selected employees in 2011 and 2012, respectively. Moreover, as an alternative  to the Group’s cash bonus programme, 425 154 and 273 946 shares were issued during 2011 and 2012, respectively, which are not  subject to forfeiture risk. A summary of the movements in shares relating to outstanding awards granted under the restricted share plans for the year ended  31 December 2012 is as follows: Non-vested at 1 January  Granted Delivery of restricted shares Outstanding as of 31 December Number of shares 780 188 312 876 –608 055 485 009 Weighted average   grant date fair value in CHF 48 54 49 50 The weighted average fair value of restricted shares, which equals the market price of the shares on the date of the grant, was CHF 48 and  CHF 50 in 2011 and 2012, respectively.  Board level Performance Share Plan In 2009 and 2010, the Group granted a share plan for the Chairman and Vice Chairman of the Board of Directors. The Group did not grant   a further plan in 2011 and 2012. The plans have a requisite service period of three years and are settled in shares. The plans are measured  based on Swiss Re’s Total Shareholder Return (TSR), representing the share price performance plus paid dividend in any performance   period, against a selected peer group. The final number of shares to be released upon vesting can vary between 0% and 150% of the original  grant. The fair value of the 2009 and 2010 plans were based on the share price as of the date of grant, which was CHF 36.00 and   CHF 53.60, respectively. The 2009 plan vested in 2012. 83 957 units were issued under the 2010 plan and the same number of units  remains outstanding as of 31 December 2012. Long-term Incentive Plan Between 2006 and 2011, the Group annually granted a Long-term Incentive plan (LTI) to selected employees with a three-year vesting  period. The requisite service period as well as the maximum contractual term for each plan was three years and the final payment, if any,  occured at the end of this performance measurement period. The plan included a payout factor which was derived from Return on Equity  (ROE) and Earnings per Share (EPS) targets over the vesting period. The payout ratio can vary between 0 and 2 and the final payment for  each plan depends on whether the performance targets have been achieved over the plan period. The fair value of the plans are based on  stochastic models which consider the likelihood of achieving performance targets and the impact of dividends. The 2009 LTI grant was settled in shares in March 2012. The payout factor was driven by average ROE and EPS compound annual growth  over the vesting period. Each of the plan grants that were outstanding as of 31 December 2012 are described below.  The LTI plans granted in 2010 and 2011 are expected to be settled in shares in March 2013 and March 2014, respectively. The payout  factors are driven by average ROE and average EPS over the vesting period. The share price used for measurement is based on the date of  grant and was CHF 48.15 and CHF 39.39 for the 2010 and 2011 plans, respectively. 74  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Leadership Performance Plan During 2011 the Compensation Committee reviewed the existing long-term incentive scheme, and, in March 2012, the LTI was replaced   by a new plan called the Leadership Performance Plan (LPP). The LPP plans granted in 2012 and 2013 are expected to be settled in shares,  and the requisite service as well as the maximum contractual term is three years. At grant date the award is split into two equal underlying  components, a Restricted Share Unit (RSU) and a Performance Share Unit (PSU). The RSU component is measured against a RoE   performance condition and will vest within a range of 0–100%. The PSU is based on relative total shareholder return, measured against a  pre-defined basket of peers and will vest within a range of 0–200%. The fair values of both components are measured separately, based   on stochastic models.  Value Alignment Incentive In 2009, the Group issued a compensation plan to selected employees. The plan had a requisite service period of three years and was paid  out in cash. The payout was based on a three-year risk free interest rate, the Swiss Re share price performance and dividend yield over the  vesting period. The plan was settled in 2012 with no further plans outstanding at 31 December 2012. Unrecognised compensation costs As of 31 December 2012, the total unrecognised compensation cost (net of forfeitures) related to non-vested, share-based compensation  awards was USD 53 million and the weighted average period over which that cost is expected to be recognised was 1.9 years. The number of shares authorised for the Group’s share-based payments to employees was 11 351 951 and 8 172 503 as of 31 December 2011  and 2012, respectively. Employee Participation Plan The Group’s employee participation plan consists of a savings scheme lasting two or three years. Employees combine regular savings with  the purchase of either actual or tracking options. The Group contributes to the employee savings over the period of the plan. At maturity, either the employee receives shares or cash equal to the accumulated savings balance, or the employee may elect to exercise  the options. In 2011 and 2012, 1 878 895 and 1 635 890 options, respectively, were issued to employees and the Group contributed USD 77 million  and USD 36 million, respectively, to the plan.  Swiss Reinsurance Company Consolidated 2012 Annual Report  75 Financial statements | Notes to the Group financial statements 14  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: As of 31 December 2012 2013 2014 2015 2016 2017 After 2017 Total operating lease commitments Less minimum non-cancellable sublease rentals Total net future minimum lease commitments USD millions 74 74 73 66 60 353 700 –50 650 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): USD millions Minimum rentals Sublease rental income Total 2011 60 –3 57 2012 60 –2 58 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 2012 were  USD 2 295 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. Life & Health retrocession with Berkshire Hathaway As previously reported, in 2010, Berkshire Hathaway through its affiliate, Berkshire Hathaway Life Insurance Company of Nebraska, entered  into a coinsurance agreement with Swiss Re Life & Health America Inc. (the “Co-insurance Agreement”) and a stop loss agreement with  Swiss Reinsurance Company Ltd in respect of Swiss Re’s US pre-2004 yearly renewable term life business. The agreements limit Berkshire  Hathaway’s exposure to USD 1.5 billion. On the basis of its perception of the performance of the retroceded business and losses incurred to date, Berkshire Hathaway has served  notice under the Co-insurance Agreement setting forth various specific and general allegations and alleging damages of between  USD 0.5 billion and USD 1.0 billion. As required by the Co-insurance Agreement, the parties have met to discuss the allegations and have exchanged, and continue to exchange,  proposals to resolve the dispute. Failure to resolve the dispute could result in commencement of arbitration proceedings. If arbitration  proceedings are commenced, there is no guarantee that arbitrators would agree with the Group’s position and findings against the Group  could have a material adverse effect on its financial condition and results of operations.  The Group believes that these claims are without merit. 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 matters is not expected to have a material adverse effect on the Group’s business, consolidated  financial position or results of operations. 76  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements 15  Information on business segments The Group provides reinsurance and insurance 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 performance of the Group. The Group adopted a new organisational structure effective 1 January 2012. On 27 April 2012, SRZ transferred the Corporate Solutions  entities and the Admin Re® entities through a dividend in-kind to Swiss Re Ltd and, as a result, the Corporate Solutions Business Unit and the  Admin Re® Business Unit are no longer owned by SRZ. Under the new structure, the former Asset Management segment of the Swiss Re  Group is split among business segments to ensure invested assets correspond to reinsurance liabilities. The assets and liabilities related to  specific transactions have been allocated to the respective business segments. The Group presents two core operating business segments: Property & Casualty Reinsurance and Life & Health Reinsurance.  Property & Casualty Reinsurance and Life & Health Reinsurance Reinsurance consists of two segments, Property & Casualty and Life & Health. The Reinsurance Business Unit operates globally, both through  brokers and directly with clients, and provides a large range of solutions for risk and capital management. Clients include insurance   companies and mutual as well as public sector and governmental entities. In addition to traditional reinsurance solutions, the Business Unit  offers insurance-linked securities and other insurance-related capital market products in both Property & Casualty and Life & Health. Property & Casualty includes the business lines property, casualty including motor, and specialty. Life & Health includes the life and health  sub-segments. Other Items not allocated to the business segments are included in the “Other” column which encompasses non-core activities. The    “Other” column includes 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. For the comparative period presented, the Corporate  Solutions and Admin Re® segments have also been included in this column. Effective 1 January 2012, these operating segments are no  longer included in the results of the Swiss Reinsurance Company Group. Please refer to Note 1 “Organisation and summary of significant  accounting policies” under “Basis for presentation” for further information. In connection with the sale of Admin Re® US to Jackson National by the Swiss Re Group, certain blocks of business were retained   by the Swiss Re Group mainly by way of retrocession to Group legal entities effective 1 July 2012. This business is shown as part of the  “Other” column.  Swiss Reinsurance Company Consolidated 2012 Annual Report  77 Financial statements | Notes to the Group financial statements Consolidation Segment information is presented net of external and internal retrocession and other intra-group arrangements. The Group total is obtained  after elimination of intra-group transactions in the “Consolidation” column. This includes significant intra-group reinsurance arrangements  and certain treasury-related activities. Each segment’s balance sheet is closely aligned to the segment legal entity structure. The assignment of assets and liabilities for entities that  span more than one segment are determined by considering local statutory requirements, legal and other constraints, the economic view of  duration and currency requirements of the reinsurance business written, and the capacity of the segments to absorb risks. This consideration  determined each segment’s initial capital position under the new structure. The segment income statement follows the segmental balance sheets and provides enhanced information regarding investment income,   realised investment gains and losses, interest expense, and tax expense and benefit. Investment income is the actual income earned on    the invested assets. Investment gains and losses are based on the asset portfolios assigned to the segment. Interest expense is incurred from  the segment’s capital funding position, and tax is derived from legal entity tax obligations. The 2011 comparative information has been restated and is presented based on the 2012 presentation. The accounting policies of the  business segments are in line with those described in the summary of significant accounting policies (see Note 1 to the Group’s annual   consolidated financial statements). 78  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements This page intentionally left blank Swiss Reinsurance Company Consolidated 2012 Annual Report  79 Financial statements | Notes to the Group financial statements a) Business segments – income statement For the years ended 31 December 2011 USD millions Revenues Premiums earned Fee income from policyholders Net investment income – non-participating Net realised investment gains – non-participating Net investment result – unit-linked and with-profit Other revenues Total revenues Expenses Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Other expenses Interest expenses Total expenses Income before income tax expense Income tax expense Net income before attribution of non-controlling interests Income attributable to non-controlling interests Net income after attribution of non-controlling interests Property & Casualty  Reinsurance Life & Health  Reinsurance Other1 Consolidation Total 10 135 1 307 512 72 12 026 –7 381 –1 848 –1 318 –155 –10 702 1 324 –65 1 259 –160 1 099 8 317 87 1 544 1 180 –25 11 103 –6 280 –34 –1 745 –716 –579 –9 354 1 749 –85 1 664 1 664 2 848 789 1 850 –37 –378 11 5 083 –1 459 –2 119 –27 –421 –1 114 –183 –5 323 –240 67 –173 –12 –185 21 300 876 4 626 1 655 –403 51 28 105 –8 810 –8 414 –61 –4 021 –3 115 –851 –25 272 2 833 –83 2 750 –172 2 578 2 578 –75 –32 –107 30 –15 –7 33 66 107 0 0 0 0 Interest on contingent capital instruments Net income attributable to common shareholder 1 099 1 664 –185 Claims ratio in % Expense ratio in % Combined ratio in % Management expense ratio in % Benefit ratio in % 72.8 31.2 104.0 7.2 74.5 1  For 2011 presentation, prior to the carve-out effective from January 2012, the Corporate Solutions and Admin Re® business segments have been included in the “Other” column.  For further information please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. 80  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Business segments – income statement For the years ended 31 December 2012  USD millions Revenues Premiums earned Fee income from policyholders Net investment income – non-participating Net realised investment gains/losses – non-participating Net investment result – unit-linked and with-profit Other revenues Total revenues Expenses Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Other expenses Interest expenses Total expenses Income/loss before income tax expense Income tax expense Net income/loss before attribution of non-controlling interests Income attributable to non-controlling interests Net income/loss after attribution of non-controlling interests Interest on contingent capital instruments Net income/loss attributable to common shareholder Claims ratio in % Expense ratio in % Combined ratio in % Management expense ratio in % Benefit ratio in % Property & Casualty  Reinsurance Life & Health  Reinsurance Other Consolidation Total 21 496 122 3 124 879 223 80 25 924 –6 337 –6 952 –439 –4 132 –2 511 –748 –21 119 4 805 –1 122 3 683 –136 3 547 –56 3 491 18 –18 0 5 –5 0 0 0 0 0 12 329 1 451 259 95 14 134 –6 306 –2 316 –1 325 –111 –10 058 4 076 –934 3 142 –134 3 008 –18 2 990 51.2 29.5 80.7 117 50 290 58 1 2 518 –36 –160 –168 –29 –353 –51 –797 –279 43 –236 –2 –238 –238 9 050 72 1 365 562 222 1 11 272 –6 787 –271 –1 787 –833 –586 –10 264 1 008 –231 777 777 –38 739 7.9 75.5 Swiss Reinsurance Company Consolidated 2012 Annual Report  81 Financial statements | Notes to the Group financial statements Business segments – balance sheet As of 31 December 2011 2011  USD millions Total assets Property & Casualty  Reinsurance 87 888 Life & Health  Reinsurance 63 831 Other1 96 154 Consolidation –19 753 Total 228 120 1  For 2011 presentation, prior to the carve-out effective from January 2012, the Corporate Solutions and Admin Re® business segments have been included in the “Other” column.  For further information please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. Business segments – balance sheet As of 31 December 2012 2012  USD millions Total assets Property & Casualty  Reinsurance 90 752 Life & Health  Reinsurance 61 530 Other 18 344 Consolidation –7 559 Total 163 067 82  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements This page intentionally left blank Swiss Reinsurance Company Consolidated 2012 Annual Report  83 Financial statements | Notes to the Group financial statements b) Property & Casualty Reinsurance business segment – by line of business For the years ended 31 December 2011  USD millions Premiums earned Expenses Claims and claim adjustment expenses Acquisition costs Other expenses Total expenses before interest expenses Property 4 766 Casualty 3 313 Specialty 2 056 Total 10 135 –4 502 –612 –617 –5 731 –2 248 –781 –373 –3 402 –631 –455 –328 –1 414 –7 381 –1 848 –1 318 –10 547 Underwriting result –965 –89 642 Net investment income Net realised investment gains/losses Other revenues Interest expenses Income before income tax expenses Claims ratio in % Expense ratio in % Combined ratio in % 94.4 25.8 120.2 67.9 34.8 102.7 30.7 38.1 68.8 –412 1 307 512 72 –155 1 324 72.8 31.2 104.0 84  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Property & Casualty Reinsurance business segment – by line of business For the years ended 31 December 2012 USD millions Premiums earned Expenses Claims and claim adjustment expenses Acquisition costs Other expenses Total expenses before interest expenses Property 5 795 Casualty 4 630 Specialty 1 904 Total 12 329 –2 832 –781 –687 –4 300 –2 818 –1 128 –406 –4 352 –656 –407 –232 –1 295 Underwriting result 1 495 278 609 Net investment income Net realised investment gains/losses Other revenues Interest expenses Income before income tax expenses Claims ratio in % Expense ratio in % Combined ratio in % 48.9 25.3 74.2 60.9 33.1 94.0 34.4 33.6 68.0 –6 306 –2 316 –1 325 –9 947 2 382 1 451 259 95 –111 4 076 51.2 29.5 80.7 Swiss Reinsurance Company Consolidated 2012 Annual Report  85 Financial statements | Notes to the Group financial statements c) Life & Health Reinsurance business segment – by line of business For the years ended 31 December 2011  USD millions Revenues Premiums earned Fee income from policyholders Net investment income – non-participating Net investment income – unit-linked and with-profit Net realised investment gains/losses – unit-linked and with-profit Net realised investment gains/losses – insurance-related derivatives Other revenues Total revenues before non-participating realised gains/losses Expenses Life and health benefits Return credited to policyholders Acquisition costs Other expenses Total expenses before interest expenses Life Health Total 5 977 87 1 004 30 –55 36 7 079 –4 647 –34 –1 286 –569 –6 536 2 340 540 –8 2 872 –1 633 –459 –147 –2 239 8 317 87 1 544 30 –55 28 0 9 951 –6 280 –34 –1 745 –716 –8 775 Operating income 543 633 1 176 Net realised investment gains/losses – non-participating and excluding insurance-related  derivatives Interest expenses Income before income tax expenses Management expense ratio in % Benefit ratio1 in % 8.1 76.3 5.1 69.8 1 152 –579 1 749 7.2 74.5 1  The benefit ratio is calculated as life and health benefits 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. 86  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Life & Health Reinsurance business segment – by line of business For the years ended 31 December 2012  USD millions Revenues Premiums earned Fee income from policyholders Net investment income – non-participating Net investment income – unit-linked and with-profit Net realised investment gains/losses – unit-linked and with-profit Net realised investment gains/losses – insurance-related derivatives Other revenues Total revenues before non-participating realised gains/losses Expenses Life and health benefits Return credited to policyholders Acquisition costs Other expenses Total expenses before interest expenses Life Health Total 6 176 72 899 32 190 –147 1 7 223 –4 625 –271 –1 299 –613 –6 808 2 874 466 3 340 –2 162 –488 –220 –2 870 9 050 72 1 365 32 190 –147 1 10 563 –6 787 –271 –1 787 –833 –9 678 Operating income 415 470 885 Net realised investment gains/losses – non-participating and excluding insurance-related  derivatives Interest expenses Income before income tax expenses Management expense ratio in % Benefit ratio1 in % 8.6 75.7 6.6 75.2 709 –586 1 008 7.9 75.5 1  The benefit ratio is calculated as life and health benefits 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. Swiss Reinsurance Company Consolidated 2012 Annual Report  87 Financial statements | Notes to the Group financial statements d) Gross premiums earned and fee income from policyholders by geography Gross premiums earned and fee income from policyholders by regions for the years ended 31 December USD millions Americas Europe (including Middle East and Africa) Asia-Pacific Total Gross premiums earned and fee income from policyholders by country for the years ended 31 December USD millions United States United Kingdom China France Australia Canada Germany Japan Ireland Switzerland Italy Other Total 2011 12 814 9 880 4 986 27 680 2011 10 190 3 118 1 711 925 1 665 1 325 1 328 763 308 553 580 5 214 27 680 2012 11 087 10 431 6 040 27 558 2012 8 471 2 503 2 416 2 384 1 734 1 241 1 135 887 589 504 482 5 212 27 558 Gross premiums earned and fee income from policyholders are allocated by country based on the underlying contract. 88  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements This page intentionally left blank Swiss Reinsurance Company Consolidated 2012 Annual Report  89 Financial statements | Notes to the Group financial statements 16 Subsidiaries and equity investees Subsidiaries and equity investees Europe Belgium Swiss Re Treasury (Belgium) N.V., Brussels Denmark Swiss Re Denmark Services A/S, Copenhagen France Antverpia III Compagnie anonyme d’ assurance sur la vie SA, Roubaix Protegys Assurance, Paris Germany ASS Assekuranz, Service-und Sachverständigengesellschaft mbH,   Sundern Paarl Grundbesitzverwaltung GmbH & Co. KG Objekt Köln Sterrenhofweg,  Munich ReIntra GmbH medizinisch-berufskundlicher Beratungs- und Reintegra- tionsdienst, Unterföhring bei München ROLAND Partner Beteiligungsverwaltung GmbH, Cologne Swiss Re Germany AG, Unterföhring bei München Ireland Swiss Re International Treasury (Ireland) Ltd., Dublin Liechtenstein Elips Life AG, Vaduz Elips Versicherungen AG, Vaduz Luxembourg Swiss Re Europe Holdings S.A., Luxembourg Swiss Re Europe S.A., Luxembourg Swiss Re Finance (Luxembourg) S.A., Luxembourg Swiss Re Funds (Lux) I, Senningerberg1 Malta Bodensee Limited, Sliema Share capital  (USD millions) Share capital  (CHF millions) Affiliation in % as of  31.12.2012 Method of  consolidation 0 0 6 33 0 6 0 0 59 0 14 5 0 0 5 30 0 6 0 0 54 0 12 5 138 461 0 10 197 127 422 0 9 334 1086 994 100 100 26 34 26 22 49 20 100 100 100 100 100 100 100 100 49 f f e e e e e e f f f f f f f f e Method of consolidation f  full e   equity 1  Net asset value instead of share capital 90  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Switzerland European Reinsurance Company of Zurich Ltd, Zurich Schweiz Allgemeine Versicherungs-Aktien-Gesellschaft, Adliswil Swiss Re Asset Management Geneva SA, Geneva Swiss Re Direct Investments Company Ltd, Zurich Swiss Re Principal Investments Company Ltd, Zurich Tertianum AG, Zurich United Kingdom Swiss Re BHI Limited, London Swiss Re Capital Markets Limited, London Swiss Re Frankona LM Limited, London Swiss Re GB Limited, London Swiss Re Services Limited, London The Mercantile & General Reinsurance Company Limited, Glasgow Americas and Caribbean Barbados European Finance Reinsurance Company Ltd., Bridgetown European International Reinsurance Company Ltd., Bridgetown Gasper Funding Corporation, Bridgetown Milvus I Reassurance Limited, Bridgetown Share capital  (USD millions) Share capital  (CHF millions) Affiliation in % as of  31.12.2012 Method of  consolidation 278 8 0 0 0 10 0 60 11 0 4 0 5 1 17 0 254 7 0 0 0 10 0 55 10 0 3 0 5 1 16 0 100 100 100 100 100 21 100 100 100 100 100 100 100 100 100 100 f e f f f e f f f f f f f f f f Swiss Reinsurance Company Consolidated 2012 Annual Report  91 Financial statements | Notes to the Group financial statements Bermuda CORE Reinsurance Company Limited, Hamilton Group Ark Insurance Holdings Limited, Hamilton Swiss Re Global Markets Limited, Hamilton Swiss Re Capital Management (Bermuda) Ltd., Hamilton Swiss Re Investments (Bermuda) Ltd., Hamilton Brazil Swiss Re Brasil Resseguros S.A., Sao Paulo Swiss Re Corporate Solutions Brasil Seguros S.A., Sao Paulo Canada 7547552 Canada Inc., Toronto SwissRe Holdings (Canada) Inc., Toronto Cayman Islands SR Alternative Financing II SPC, George Town United States Aurora National Life Assurance Company, Wethersfield Facility Insurance Corporation, Austin Facility Insurance Holding Corporation, Dallas Rialto Re I Inc., Burlington Sterling Re Inc., Burlington Swiss Re America Holding Corporation, Wilmington Swiss Re Atrium Corporation, Wilmington Swiss Re Capital Markets Corporation, New York Swiss Re Financial Products Corporation, Wilmington Swiss Re Financial Services Corporation, Wilmington Swiss Re Life & Health America Holding Company, Wilmington Swiss Re Life & Health America Inc., Hartford Swiss Re Partnership Holding, LLC, Dover Swiss Re Risk Solutions Corporation, Wilmington Swiss Re Solutions Holding Corporation, Wilmington Swiss Re Treasury (US) Corporation, Wilmington Swiss Reinsurance America Corporation, Armonk Share capital  (USD millions) Share capital  (CHF millions) Affiliation in % as of  31.12.2012 Method of  consolidation 0 235 0 0 0 59 44 0 0 0 0 0 0 0 0 0 1 0 2 116 0 0 4 368 0 9 0 6 0 216 0 0 0 54 40 0 0 0 0 0 0 0 0 0 0 0 1 937 0 0 4 337 0 8 0 5 100 20 100 100 100 100 84 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 f e f f f f f e e f f f f f f f f f f f f f f f f f f 92  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Australia Swiss Re Australia Ltd, Sydney Swiss Re Life & Health Australia Limited, Sydney Africa South Africa Eastern Foreshore Investments Limited, Cape Town Swiss Re Life and Health Africa Limited, Cape Town Asia China Alltrust Insurance Company of China Limited, Shanghai Beijing Prestige Health Consulting Services Company Limited, Beijing Vietnam Vietnam National Reinsurance Corporation, Hanoi Share capital  (USD millions) Share capital  (CHF millions) Affiliation in % as of  31.12.2012 Method of  consolidation 73 213 1 0 126 6 32 67 195 1 0 115 6 30 100 100 100 100 5 100 25 f f f f e e e Swiss Reinsurance Company Consolidated 2012 Annual Report  93 Financial statements | Notes to the Group financial statements 17 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. When analysing the status of an entity, the Group mainly assesses if (1) the equity is sufficient to finance the entity’s activities without  additional subordinated financial support, (2) the equity holders have the right to make significant decisions affecting the entity’s operations,  and (3) the holders of the voting rights substantively participate in the gains and losses of the entity. When one of these criteria is not met,  the entity is considered a VIE and needs to be assessed for consolidation under the VIE section of the Consolidation Topic.  The party that has a controlling financial interest is called the primary beneficiary and consolidates the VIE. An enterprise is deemed to have  a controlling financial interest if it has both of the following:  ̤ the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and  ̤ the obligation to absorb losses of the entity that could potentially be significant to the VIE, or the right to receive benefits from the entity  that could potentially be significant to the 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. Whenever facts and circumstances change, a review is undertaken of the impact these changes could have on the consolidation  assessment previously performed. When the assessment might be impacted, a reassessment to determine the primary beneficiary is  performed. Modified coinsurance agreement The Group assumes insurance risk via a modified coinsurance agreement from Aurora National Life Assurance Company. Until the second  quarter of 2012, Aurora National Life Assurance Company was recognised as a VIE in which the Group qualified as the primary beneficiary  and consolidated the entity (for further details please refer to Annual Report 2011). In the third quarter of 2012, a put/call option to acquire the parent of Aurora National Life Assurance Company, New California Holdings Inc.,  was exercised. As a result, Aurora National Life Assurance Company is wholly owned by SRZ and does not qualify as a VIE. The related non- controlling interests are no longer reported. Please refer to Note 6 for further information.  94  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Insurance-linked and credit-linked securitisations The insurance-linked and credit-linked securitisations transfer pre-existing insurance or credit risk to the capital markets through the  issuance of insurance-linked or credit-linked securities. In insurance-linked securitisations, the securitisation vehicle assumes the insurance  risk through insurance or derivative contracts. In credit-linked securitisations, the securitisation vehicle assumes the credit risk through   credit default swaps. The securitisation vehicle generally retains the issuance proceeds as collateral. The collateral held predominantly consists  of investment-grade securities.  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.  Generally, the activities of a securitisation vehicle are pre-determined at formation. There are substantially no ongoing activities during the  life of the VIE that could significantly impact the economic performance of the vehicle. Consequently, the main focus to identify the primary  beneficiary is on the activities performed and decisions made when the VIE was designed. Typically, the Group is considered the primary  beneficiary of a securitisation vehicle when the Group acts as a sponsor of risk passed to the VIE and enters at the same time into a total return swap with the VIE to protect the VIE’s assets from market risk. Under the total return swap, the Group would incur losses if some or   all of the securities held as collateral in the securitisation vehicle decline in value or default. Therefore, the Group’s maximum exposure to    loss equals the principal amount of the collateral protected under the total return swap. As of 31 December 2012, 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 2 992 million. The total assets of the vehicles in which the Group is the primary  beneficiary were USD 62 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. Debt financing vehicles Debt financing vehicles issue preference shares or loan notes to provide the Group with funding. The Group is partially exposed to the asset  risk by holding equity rights or by protecting some of the assets held by the VIEs via guarantees or derivative contracts. The assets held by  the VIEs consist of investment-grade securities, structured products, hedge fund units, derivatives and others. The Group consolidates certain debt financing vehicles as it has power over the investment management in the vehicles, which is  considered to be the activity that most significantly impacts the entities’ economic performance. In addition, the Group absorbs the  variability of the investment return so that both criteria for a controlling financial interest are met. The total assets of the debt financing vehicles in which the Group is the primary beneficiary were USD 7 195 million as of 31 December 2012. Investment vehicles During 2012, this VIE category has been introduced to disclose the new VIEs resulting from the sale of Swiss Re Private Equity Partners AG  (please see Note 6). Another private equity limited partnership, previously reported in the category “Other”, has been included in this  category. Investment vehicles are private equity limited partnerships, in which the Group is invested as part of its investment strategy. Typically, the  Group’s variable interests arise through limited partner ownership interests in the vehicles. The Group does not own the general partners of  the limited partnerships, and does not have any significant kick-out or participating rights. Therefore the Group lacks power over the relevant  activities of the vehicles and, consequently, does not qualify as the primary beneficiary. The Group is exposed to losses when the values   of the investments held by the vehicles decrease. The maximum exposure to loss equals the carrying amount of the ownership interest.   As of 31 December 2012, the total assets of investment vehicles in which the Group holds variable interests but is not the primary  beneficiary were USD 2 359 million.  Swiss Reinsurance Company Consolidated 2012 Annual Report  95   Financial statements | Notes to the Group financial statements 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 residential real estate and other.  As of 31 December 2012, the total assets of other VIEs in which the Group holds variable interests but is not the primary beneficiary were  USD 1 209 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 747 million.  The Group did not provide financial or other support to any VIEs during 2012 that it was not previously contractually required to provide.  Consolidated VIEs The following table shows the total assets and liabilities on the Group’s balance sheet relating to VIEs of which the Group is the primary  beneficiary as of 31 December: USD millions Fixed income securities available-for-sale  Policy loans, mortgages and other loans  Short-term investments  Other invested assets  Cash and cash equivalents  Accrued investment income  Premiums and other receivables  Reinsurance recoverable on unpaid claims and policy benefits  Funds held by ceding companies  Income taxes recoverable  Acquired present value of future profits  Other assets  Total assets Unpaid claims and claim adjustment expenses  Liabilities for life and health policy benefits  Policyholder account balances  Reinsurance balances payable Deferred and other non-current taxes  Short-term debt  Accrued expenses and other liabilities  Long-term debt  Total liabilities Carrying value 9254 191 998 202 928 78 9 7 2 1 23 273 11 966 Carrying value 15 1 165 1 365 5 180 973 633 5 172 9 508 2011 Whereof restricted: 9254 191 998 202 928 78 9 7 2 1 23 253 11 946 Whereof  limited recourse: 15 1 165 1 365 5 180 973 633 5 172 9 508 Carrying value 6 896 2012 Whereof restricted: 6 896 610 258 177 44 610 258 177 44 19 8 004 1 7 986 Carrying value Whereof  limited recourse: 504 76 5 328 5 908 504 76 5 328 5 908 The above USD 11 966 million total assets as of year-end 2011 include USD 3 473 million total assets of the modified coinsurance  agreement. As of 31 December 2012, the consolidation of the VIEs resulted in non-controlling interests in the balance sheet of nil (31 December 2011:  USD 414 million). The non-controlling interests in income were USD 12 million and USD 1 million net of tax for years ended 31 December 2011  and 2012, respectively. All non-controlling interests were related to Aurora National Life Assurance Company, which has been fully owned  by Swiss Re since the third quarter of 2012. Therefore, the non-controlling interests are no longer reported (see above under “Modified  coinsurance agreement” and Note 6 for further information). 96  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Non-consolidated VIEs The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs in which the Group held a variable  interest but was not the primary beneficiary as of 31 December: USD millions Fixed income securities: Available-for-sale Trading Other invested assets Total assets Short-term debt Accrued expenses and other liabilities Total liabilities 2011 99 20 680 799 393 509 902 2012 72 12 1 138 1 222 399 385 784 The following table shows the Group’s assets, liabilities and maximum exposure to loss related to VIEs in which the Group held a variable  interest but was not the primary beneficiary as of 31 December: USD millions Insurance-linked/Credit- linked securitisations Swaps in trusts Investment vehicles Other Total Total assets Total liabilities  Maximum expo- sure to loss 2011 Difference between  exposure  and liabilities Total assets Total liabilities Maximum expo- sure  to loss 2012 Difference between   exposure  and liabilities 261 212 63 263 799 316 586 902 1 168 –1 63 1 089 –1 1 168 – 63 503 – 212 149 829 32 1 222 240 544 784 842 –1 829 1 622 –1 842 – 829 1 078 – 1 The maximum exposure to loss for swaps in trusts cannot be meaningfully quantified due to their derivative character. The assets and liabilities for the swaps in trusts represent the positive and negative fair values of the derivatives the Group has entered into  with the trusts. Liabilities of USD 544 million recognised for the “Other” category relate mainly to collateral received. Swiss Reinsurance Company Consolidated 2012 Annual Report  97 Financial statements | Notes to the Group financial statements 18  Restructuring provision In 2012, the Group set up total provisions of USD 7 million, and released USD 4 million. The increase in provisions in the Property & Casualty Reinsurance business segment of USD 7 million in 2012 is related to office structure  simplification costs and leaving benefits. Changes in restructuring provisions are disclosed in the “Other expenses” line in the Group’s income statement. For the years ended 31 December, restructuring provision developed as follows: 2011   USD millions Balance as of 1 January  Increase in provision Release of provision Costs incurred Balance as of 31 December 2012   USD millions Balance as of 1 January  Effect of change in Group structure2 Increase in provision Release of provision Costs incurred Balance as of 31 December Property & Casualty   Reinsurance 92 17 –7 –59 43 Life & Health  Reinsurance 5 –3 2 Property & Casualty   Reinsurance 43 Life & Health  Reinsurance 2 7 –4 –14 32 –1 1 Other1 9 9 Other 9 –9 0 Total 97 26 –7 –62 54 Total 54 –9 7 –4 –15 33 1  For 2011 presentation, prior to the carve-out effective from January 2012, the Corporate Solutions and Admin Re® business segments have been included in the “Other” column.  For further information please refer to Note 1 “Organisation and summary of significant accounting policies”, under “Basis of presentation”. 2 Please refer to Note 1 “Organisation and summary of significant accounting policies”. 98  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements 19  Related parties Insurance activities The Group assumes and cedes certain re/insurance contracts from/to affiliated companies within the Swiss Re Group, but outside   Swiss Reinsurance Company Group, resulting in the following related party transactions on the income statement and balance sheet: For the year ended 31 December 2012 USD millions Premiums earned Fee income from policyholders Net investment income – non-participating Total revenues Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Total expenses As of 31 December 2012 USD millions Premiums and other receivables Reinsurance recoverable on unpaid claims and policy benefits Funds held by ceding companies Deferred acquisition costs Other assets Total assets Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Unearned premiums Funds held under reinsurance treaties Reinsurance balances payable Total liabilities Corporate Solutions –296 77 –219 431 58 489 Corporate Solutions 59 271 2 097 –39 601 2 989 7 393 91 447 7 931 Admin Re® 274 16 102 392 –264 –64 –19 –347 Admin Re® 145 10 2 157 115 7 122 Other 56 56 –28 –26 –54 Other 43 1 30 74 42 78 1 1 122 Total 34 16 179 229 403 –264 –64 13 88 Total 247 282 2 099 –9 601 3 220 7 550 7 169 1 448 8 175 Swiss Reinsurance Company Consolidated 2012 Annual Report  99 Financial statements | Notes to the Group financial statements Investment activities The Group conducts various investing activities with affiliated companies in the Swiss Re Group. These include loans, funding agreements  and derivatives and result in the following related party transactions on the income statement and balance sheet: For the year ended 31 December 2012 USD millions Net investment income/loss – non-participating Net realised investment gains/losses – non-participating As of 31 December 2012 USD millions Policy loans, mortgages and other loans Accrued investment income Other invested assets Accrued expenses and other liabilities Corporate Solutions –4 4 Corporate Solutions 1 Admin Re® 52 41 Admin Re® 634 24 Other 4 3 Other 508 30 4 Total 52 48 Total 1 142 24 31 4 Financing activities The Group enters into various financing activities where it borrows funds from affiliated companies in the Swiss Re Group. These activities  result in the following related party transactions on the income statement and balance sheet: For the year ended 31 December 2012 USD millions Net investment income/loss – non-participating Net realised investment gains/losses – non-participating Interest expense As of 31 December 2012 USD millions Policy loans, mortgages and other loans Accrued investment income Short-term debt Accrued expenses and other liabilities Long-term debt Admin Re® –2 Admin Re® Other 6 –69 –30 Other 1 6251 41 3 513 1 6441 196 Total 6 –69 –32 Total 1 625 4 3 513 1 644 196 1  The balances reported in “Policy loans, mortgages and other loans” and “Accrued investment income”, which are offset in “Accrued expenses and other liabilities”, are part of two  funding transactions of the Swiss Re Group. The counterparty of these balances is Swiss Re Specialised Investments Holdings (UK) Ltd.  Issued in 2005 2008 2012 2012 Total short-term debt as of 31 December 2012 Instrument Senior loan Senior loan Senior loan Senior loan Maturity 2028 2028 2013 2013 Issued in 2012 Total long-term debt as of 31 December 2012 Instrument Senior loan1 Maturity 2014 Currency GBP GBP CHF USD Currency GBP Nominal in millions 100 240 1 245 1 600 Interest rate 1 month LIBOR 4.98% 10 month LIBOR +0.825% 6 month LIBOR +0.35% Book value in USD millions 162 390 1 361 1 600 3 513 Nominal in millions 120 Interest rate 2.41% Book value in USD millions 196 196 1 The Group has refined the classificaiton of an instrument issued in 2012 from short-term debt to long-term debt. There is no impact on net income or shareholder’s equity. 100  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements Operating transactions The Group enters into various arrangements with affiliated companies in the Swiss Re Group for the provision of services. These activities  result in the following related party transactions on the income statement and balance sheet: For the year ended 31 December 2012 USD millions Net investment income/loss – non-participating Other revenues Other expenses Interest expense As of 31 December 2012 USD millions Other assets Accrued expenses and other liabilities Corporate Solutions 1 13 498 –1 Admin Re® 2 29 50 Corporate Solutions 413 298 Admin Re® 149 117 Other 1 –59 Other 6 92 Total 3 43 489 –1 Total 568 507 Effective 25 June 2012, due to the sale of Admin Re® US to Jackson National by the Swiss Re Group, reinsurance and other obligations  under a modified coinsurance agreement were transferred from an affiliated company to the Swiss Reinsurance Company Group’s   balance sheet. Subsequently in the second quarter of 2012, Aurora National Life Assurance Company, which is a VIE to the Group, was  consolidated. Consolidation resulted mainly in additional investments of USD 3 983 million, liabilities for life and health policy benefits   of USD 1 350 million, policyholder account balances of USD 1 310 million, and net unrealised investment gains of USD 318 million.   Retained earnings were increased by USD 191 million and non-controlling interests by USD 540 million. Assets and liabilities were   recognised at carrying amounts in accordance with US GAAP transactions between entities under common control guidance. As of 31 December 2011, the Swiss Reinsurance Company Group was a party to various transactions with Swiss Re Specialised Investments  Holdings (UK) Ltd (“SRSIH”). These transactions consisted of USD 2 686 million of loans granted to SRSIH and USD 685 million of other  loans granted to equity accounted investees of SRSIH and accrued expenses and other liabilities in respect of SRSIH of USD 2 331 million.  Related income statement amounts were not material. Swiss Reinsurance Company Consolidated 2012 Annual Report  101   Financial statements | Notes to the Group financial statements 20  Risk assessment Article 663b sub-para. 12 of the Swiss Code of Obligations requires disclosure of information on the performance of a 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 the  Swiss Re Group. The Board of Directors is ultimately responsible for the Group’s governance principles and policies, including approval of the Group’s overall  risk tolerance. The Board mainly deals with risk management through two committees:  ̤ The Finance and Risk Committee is responsible for reviewing the Group Risk Policy and capacity limits, as well as for monitoring risk  tolerance and reviewing top risk issues and exposures.  ̤ The Audit Committee is responsible for overseeing internal controls and compliance procedures. The Group Executive Committee (Group EC) is responsible for implementing the risk management framework through four sub-committees:  ̤ The Group Risk and Capital Committee has responsibility for allocating capital and insurance risk capacity, approving investment and  counterparty credit risk limits, and determining changes to the internal risk and capital methodology.  ̤ The Group Asset-Liability Committee oversees the management of Swiss Re’s balance sheet, in particular its liquidity, capital and funding  positions and related policies.  ̤ The Group Products and Limits Committee determines Swiss Re's product policy and underwriting standards, sets transaction limits, and  decides on large or non-standard transactions.  ̤ The Group Regulatory Committee is the central information and coordination platform for regulatory matters and compliance. It ensures a  consistent approach to external communication on regulatory issues. The Group Chief Risk Officer, who is a member of the Group EC, reports directly to the Group CEO as well as to the Board’s Finance and Risk  Committee. The Group Chief Risk Officer is a member of the four Group EC committees, serving as the chairman of both the Group Risk and  Capital Committee and the Group Regulatory Committee. In addition, the Group Chief Risk Officer leads the Group’s Risk Management  function, which is responsible for risk oversight and control across the Group. The Group Risk Management function is structured with global departments providing shared services such as Risk Reporting, as well as  dedicated departments for the Reinsurance, Corporate Solutions, and Admin Re® Business Units. All of these departments have dedicated Chief Risk Officers who report directly to the Group CRO, with a secondary reporting line to their  respective Business Unit CEOs. They are responsible for risk oversight in their respective Business Unit, including identifying, assessing, and  controlling risks as well as establishing the proper risk governance to assure proper execution of these activities. Senior managers of business and corporate units are responsible for managing operational risks in their area of activity, based on a centrally  coordinated methodology. Their self-assessments are reviewed and challenged by operational risk specialists in partnership with the  dedicated risk management units. Risk management experts also review Swiss Re's underwriting decision processes. The Group’s risk management activities are also integrally supported by Group Internal Audit and Compliance. The Group Internal Audit  department carries out independent, objective assessments of the adequacy and effectiveness of internal control systems. It evaluates the  execution of processes within Swiss Re, including those within Risk Management. The Compliance function is principally responsible for overseeing Swiss Re’s compliance with applicable laws, regulations, rules and the  Code of Conduct, as well as management of Compliance Risk. It serves to assist the Board of Directors, the Group EC and Management in  discharging their respective duties to effectively identify, mitigate and manage Compliance Risks. The Risk Management function continuously reviews Swiss Re’s organisation in order to ensure alignment with the Group’s structure. 102  Swiss Reinsurance Company Consolidated 2012 Annual Report Financial statements | Notes to the Group financial statements This page intentionally left blank Swiss Reinsurance Company Consolidated 2012 Annual Report  103 Financial statements | Notes to the Group financial statements Report of the statutory auditor Report of the statutory auditor to the General Meeting of Swiss Reinsurance Company Ltd Zurich Report of the statutory auditor on the consolidated financial statements As statutory auditor, we have audited the consolidated financial statements of Swiss Re Group, which comprise the income statement,  statement of comprehensive income ,balance sheet, statement of shareholder’s equity, statement of cash flow, and notes (pages 2 to 102)   for the year ended 31 December 2012. Board of Directors’ responsibility The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with  accounting principles generally accepted in the United States of America (US GAAP) and the requirements of Swiss law. This responsibility  includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of   consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further  responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the  circumstances. 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. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.  The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated  financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system   relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that   are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control  system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting   estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence  we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements for the year ended 31 December 2012 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. 104  Swiss Reinsurance Company Consolidated 2012 Annual Report Reportonotherlegalrequirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors. We recommend that the consolidated financial statements submitted to you be approved. PricewaterhouseCoopers Ltd Dawn M Kink Alex Finn Audit expert Auditor in charge Zurich, 14 March 2013  SwissReinsuranceCompanyConsolidated2012 Annual Report 105 Financial statements | Notes to the Group financial statements Financial statements Annual Report Swiss Reinsurance Company Ltd Reinsurance and sub-holding company Swiss Reinsurance Company Ltd (the Company), domiciled in Zurich, Switzerland, performs a dual role within the Swiss Re Group as both   a reinsurance company and a sub-holding company for the Reinsurance business segment. Financial year 2012 Net income for the financial year 2012 amounted to CHF 3 600 million, compared to a loss of CHF 63 million in the prior year. The financial year under review was impacted by a positive investment result, compared to a significant loss in the prior year. This loss was  driven by the restructuring of Swiss Re Group. As a consequence from the restructuring in 2011, valuation adjustments on investments in  subsidiaries and affiliated companies were required. Swiss Reinsurance Company Ltd transferred its subsidiaries, Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Ltd, through a  dividend in-kind on 27 April 2012 to Swiss Re Ltd, the ultimate holding company of the Swiss Re Group. The transactions reduced the   Company's balance sheet by CHF 5 810 million. In connection with the sale of Admin Re® US to Jackson National Life Insurance Company by Swiss Re Life Capital Ltd on   4 September 2012, certain blocks of business from Reassure America Life Insurance Company were assumed by the Company effective  1 July 2012. These transactions impacted life and health business related balance sheet and income statement positions    as well as the investment portfolio. Reinsurance result Reinsurance result amounted to a gain of CHF 1 290 million in 2012, compared to a gain of CHF 3 025 million in 2011. Premiums earned increased from CHF 8 825 million in 2011 to CHF 11 579 million in the current reporting year. Without the effect of foreign  exchange movements, total premiums earned amounted to CHF 11 088 million in 2012.  Property and casualty premiums earned decreased from CHF 5 638 million in 2011 to CHF 5 084 million in 2012. The decrease was driven  by a change in the intragroup retrocession program, introduced with the new Swiss Re Group corporate structure, partly offset by stronger   external business renewals and new business written mainly in Asia. Without the effect of foreign exchange movements, property and  casualty premiums earned amounted to CHF 4 916 million in 2012. Life and health premiums earned increased significantly from CHF 3 187 million in 2011 to CHF 6 496 million in 2012. The increase was  mainly driven by the assumption of blocks of business from Reassure America Life Insurance Company before its disposal. Excluding this  one-off transaction and foreign exchange movements, life and health premiums earned remained materially unchanged. Claims and claim adjustment expenses decreased significantly from CHF 9 970 million in 2011 to CHF 6 016 million in 2012. Without   the effect of foreign exchange movements, total claims and claim adjustment expenses amounted to CHF 5 753 million in 2012. Property and casualty claims and claim adjustment expenses decreased by CHF 317 million to CHF 2  776 million in 2012, compared to   2011. The year under review was mainly impacted by losses caused by Hurricane Sandy which occurred in the United States of America,  whereas the prior year witnessed several natural catastrophe events in Japan, Australia, New Zealand and Thailand. In 2012, the Company  strengthened its reserves by increasing the equalisation provision by CHF 400 million, as against a release of CHF 550 million in 2011. Life and health claims and claim adjustment expenses decreased by CHF 3 637 million to CHF 3 240 million in 2012. The expenses were  significantly higher in 2011, as a result of the one-off recapture of reinsurance treaties with affiliated companies. In turn, these transactions  reduced the Company’s liability for life and health benefits in that year. In 2012, the Company setup an additional liability for life and health  policy benefits in connection with the assumed blocks of business from Reassure America Life Insurance Company. 106  Swiss Reinsurance Company Ltd 2012 Annual Report Financial statements | Swiss Reinsurance Company Ltd Investment result Investment result amounted to a gain of CHF 3 073 million in 2012, compared to a loss of CHF 2 313 million in 2011. Investment income increased by CHF 1 285 million to CHF 6 212 million in 2012, mainly due to the lower market value of derivative financial  instruments related to life and health variable annuity business. Investment expenses decreased from CHF 6 648 million in 2011 to CHF 2 751 million in 2012. Investment expenses were significantly  higher in 2011, due to the restructuring of the Swiss Re Group which resulted in valuation adjustments on investments in subsidiaries and  affiliated companies. Other income and expenses Other net expenses decreased by CHF 127 million, driven by revised treatment of foreign exchange gains and losses. Assets Total assets decreased by 4% to CHF 80 742 million in 2012, compared to prior year. Without the effect of foreign exchange movements,  total assets amounted to CHF 81 805 million in 2012. As a result from the restructuring of the Swiss Re Group in 2011, investments in subsidiaries and affiliated companies decreased by  CHF 5 338 million in 2012, reflecting the transfer of its investments in Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Ltd  through a dividend in-kind to Swiss Re Ltd, partially offset by capital contributions in cash and in-kind to an affiliated company. The balance of equity securities decreased by CHF 569 million to CHF 1 139 million in 2012, mainly due to the cancellation of its own   shares in 2012 and hence as of 31 December 2012, Swiss Re Ltd held directly 100% (2011: 92.8%) in the Company. The increase in fixed income securities from CHF 17 179 million in 2011 to CHF 19 146 million in 2012 was mainly related to asset portfolios  assumed by the Company from reinsurance with Reassure America Life Insurance Company and invested operational cash. These impacts  were partially offset by the disposal of shares in investment funds in fixed income securities, due to a transfer to short-term investments. The  increase in short-term investments by CHF 5 186 million to CHF 8 912 million was mostly driven by new investments in connection with a  loan from the parent company and a transfer from long-term securities. Assets in derivative financial investments increased from CHF 214 million in 2011 to CHF 1 700 million in 2012 in connection with the life  and health variable annuity business. Funds held by ceding companies increased significantly, mainly as a result of the portfolios assumed by the Company from   Reassure America Life Insurance Company. The decrease in other assets related mostly to security lending collateral and reverse   repurchase transactions. Swiss Reinsurance Company Ltd 2012 Annual Report  107 Financial statements | Swiss Reinsurance Company Ltd Liabilities Total liabilities increased by 3% to CHF 68 400 million in 2012. Without the effect of foreign exchange movements, total liabilities amounted  to CHF 69 416 million in 2012. Technical provisions increased by 3% to CHF 39 170 million in 2012. The increase was mainly driven by a provision for life and health policy  benefits relating to the assumed business from Reassure America Life Insurance Company and setup of an equalisation provision of  CHF 400 million. The increase was partially offset by the release of provision established for the 2011 natural catastrophe losses and the  change in the intragroup retrocession program. During the year, the Company revised its policy on the treatment of foreign exchange gains and losses and their recognition in the provision  for currency fluctuation. Details of the impact on the financial statements are disclosed in the notes “Significant accounting principles”. The increase in debts from CHF 7 030 million in 2011 to CHF 11 629 million in 2012 was driven by loans from the parent company as well as  the issuance of hybrid capital instruments and a subordinated loan by the Company. Liabilities from derivative financial instruments decreased from CHF 3 466 million in 2011 to CHF 2 087 million in 2012, mainly due to the  valuation changes of derivative financial instruments in connection with the life and health variable annuity business. The increase in funds held under reinsurance treaties resulted from a change of an existing treaty to a funds withheld-basis. The decrease in  other liabilities related to reduction of current account balance with a subsidiary as well as reduced payables in respect of repurchase  agreements and securities lending transactions. Shareholder’s equity  Shareholder’s equity decreased from CHF 17 751 million as of 31 December 2011 to CHF 12 342 million as of 31 December 2012. The decrease mainly resulted from the ordinary and extraordinary dividends in cash of CHF 2 466 million and from the transfer of its  investments in Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Ltd through a dividend in-kind of CHF 5  810 million, reflected   by lower other reserves and lower legal reserves from capital contributions. Due to cancellation of its own shares, the share capital was   reduced by CHF 3 million to CHF 34 million and the reserve for own shares was released. 108  Swiss Reinsurance Company Ltd 2012 Annual Report Financial statements | Swiss Reinsurance Company Ltd Income statement Swiss Reinsurance Company Ltd For the years ended 31 December CHF millions Reinsurance Premiums earned Claims and claim adjustment expenses Life and health benefits Change in equalisation provision Acquisition costs Other reinsurance result Operating costs Allocated investment return Reinsurance result Investments Investment income Investment expenses Allocated investment return Investment result Other income and expenses Other interest income Other interest expenses Other income Other expenses Result from other income and expenses Income before income tax expense Income tax expense Net income/loss Notes  2   2011 2012 3 8 825 –9 970 4 538 550 –867 271 –914 592 3 025 4 927 –6 648 –592 –2 313 67 –410 69 –330 –604 108 –171 –63 11 579 –6 016 –2 271 –400 –1 581 419 –828 388 1 290 6 212 –2 751 –388 3 073 50 –436 250 –341 –477 3 886 –286 3 600 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2012 Annual Report  109                                               Financial statements | Swiss Reinsurance Company Ltd Balance sheet Swiss Reinsurance Company Ltd  As of 31 December Assets CHF millions Non-current assets Investments Investment real estate Investments in subsidiaries and affiliated companies Loans to subsidiaries and affiliated companies Mortgages and other loans Equity securities Fixed income securities Short-term investments Alternative investments Assets in derivative financial instruments Total investments Tangible assets Intangible assets Total non-current assets Current assets Premiums and other receivables from reinsurance Funds held by ceding companies Deferred acquisition costs Cash and cash equivalents Other receivables Other assets Accrued income Total current assets Total assets Notes 2011 2012 1 095 22 552 4 636 714 1 708 17 179 3 726 2 430 214 54 254 696 26 1 232 17 214 3 683 740 1 139 19 146 8 912 2 082 1 700 55 848 673 33 54 976 56 554 5 865 11 385 592 3 527 2 981 4 422 173 4 980 12 979 443 3 194 179 2 245 168 28 945 24 188 83 921 80 742 4 4 4 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. 110  Swiss Reinsurance Company Ltd 2012 Annual Report                                                 Financial statements | Swiss Reinsurance Company Ltd Liabilities and shareholder’s equity CHF millions Liabilities Technical provisions Unpaid claims Liabilities for life and health policy benefits Unearned premiums Provisions for profit commissions Equalisation provision Total technical provisions Non-technical provisions Provision for taxation Provision for currency fluctuation Other provisions Total non-technical provisions Debt Debentures Loans Total debt Funds held under reinsurance treaties Reinsurance balances payable Liabilities from derivative financial instruments Other liabilities Accrued expenses Total liabilities Shareholder’s equity Share capital Other legal reserves Reserve for own shares Legal reserves from capital contributions Other reserves Retained earnings/loss brought forward Net income/loss for the financial year Total shareholder’s equity Total liabilities and shareholder’s equity Notes 2011 2012 5 5 5 5 5 5 5 6 26 895 7 892 3 002 143  – 37 932 53 1 735 441 2 229 4 459 2 571 7 030 4 029 2 686 3 466 8 613 185 26 592 9 959 2 060 159 400 39 170 159 1 397 491 2 047 6 073 5 556 11 629 5 236 3 197 2 087 4 769 265 66 170 68 400 37 650 748 8 995 7 334 50 –63 34 650 – 8 057 14 –13 3 600 17 751 12 342 83 921 80 742 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2012 Annual Report  111                                                 Financial statements | Swiss Reinsurance Company Ltd Notes Swiss Reinsurance Company Ltd 1  Significant accounting principles Basis of presentation The financial statements are prepared in accordance with Swiss Company Law. Time period The 2012 financial year comprises the accounting period from 1 January 2012 to 31 December 2012. 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. 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 maintained in Swiss francs at historical exchange rates. Income and expenses are converted into Swiss francs at  average exchange rates for the reporting year. Cash and cash equivalents Cash and cash equivalents include cash at bank, short-term deposits and certain short-term deposits in money-market funds with an original  maturity of three months or less. Such current assets are held at nominal value. 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-coupon bonds)  ̤ Investments in funds  ̤ Alternative investments  ̤ Assets in derivative financial instruments Subsequent recoveries of previously recorded downward value adjustments may be recognised up to the lower of historical cost or market  value at the balance sheet date. The valuation rules prescribed by the Swiss Financial Market Supervisory Authority FINMA are observed. Zero-coupon bonds reported under fixed income securities are valued at their amortised cost values. Assets in derivative financial instruments include reinsurance contracts or features embedded in reinsurance contracts that fulfil the  characteristics of derivative financial instruments. Short-term investments contain investments with an original duration of between three months and one year. Such investments are  generally held until maturity and are maintained at their amortised cost values. Loans to subsidiaries and affiliated companies, mortgages and other loans are carried at nominal value. Value adjustments are recorded  where the expected recovery value is lower than the nominal value. Tangible assets Property for own use is valued at the purchase or construction cost less necessary and legally permissible depreciation. Other tangible assets are carried at cost, less individually scheduled straight-line depreciation over their useful lives. Items of minor value are  not capitalised. Intangible assets Intangible assets, consisting of capitalised development costs for software for internal use, are stated at cost less straight-line amortisation  over the estimated useful lives. 112  Swiss Reinsurance Company Ltd 2012 Annual Report Financial statements | Swiss Reinsurance Company Ltd 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. Other assets Other assets include deferred expenses on retroactive reinsurance policies, which are amortised through earnings over the expected   claims-paying period, as well as receivables in connection with securities lending collateral and reverse repurchase transactions, which are  carried at nominal value. Other current assets Other current assets are carried at nominal value after deduction of known credit risks if applicable. Technical provisions Unpaid claims are based on information provided by clients and own estimates of expected claims experience, which are drawn from  empirical statistics. These include provisions for claims incurred but not reported. Unpaid insurance obligations are set aside at the full  expected amount of future payment. Liabilities for life and health policy benefits are determined on the basis of actuarially calculated present values taking experience into  account. For business written directly by the Company, or via a branch of the Company, liabilities are based on the cedant-reported  information or a prospective net level premium valuation, on assumptions based on estimates of own experience drawn from internal  studies. Reference is made to cedant-reported information given the importance of deposit reserves in Europe. If the data the Company  receives is sufficiently granular, however, a prospective gross premium valuation approach can also be adopted. With respect to the  business ceded by the Company's subsidiaries a prospective gross premium valuation is applied. The method is prospective as it takes into  account expected future cash flows inherent in the reinsurance contract from the valuation date until expiry of the contract obligations.   The assumptions used in the valuation are based on estimates from experience studies. Cash flows include primarily premiums, claims,   commissions and expenses, with margins added for prudence to reflect the uncertainties of the underlying best estimates. The gross  premium valuation approach could result in a negative liability provision, which is typically set to zero at a reinsurance treaty level. Accounting principles for life and health business require that no contract is treated as an asset on the balance sheet, with the exception   of specific contracts where an offsetting amount has been paid and is recoverable from the ceding company. Modified coinsurance arrangements are treated on a gross basis with the separate recognition of the funds withheld, as well as the liabilities  for life and health policy benefits. Premiums written relating to future periods are stated as unearned premiums and are normally calculated by statistical methods. The accrual  of commissions is determined proportionally and is reported under “Deferred acquisition costs”. Provisions for profit commissions are based on contractual agreements with clients and depend on the results of reinsurance treaties. The equalisation provision is established to achieve a protection of the balance sheet and to break peaks of incurred claims in individual  financial years with an exceptionally high claims burden by releasing appropriate amounts from the provision. The shares of technical provisions pertaining to retroceded business are determined or estimated according to the contractual agreement  and the underlying gross business data per treaty. Liabilities assumed and consideration provided in connection with portfolio transactions are established through the respective lines in the  income statement. The initial recognition of assumed outstanding claims is recorded as change in unpaid claims, with the consideration  being recognised as negative claims paid. The assumption of the provision for unearned premiums is established through the change in   unearned premiums, with the respective consideration accounted for as premiums written. The liability for life and health policy benefits   is established as a charge against life and health benefits, with the initial premium consideration recorded as premiums written. The initial set up of assets and liabilities in respect of property and casualty retroactive treaties with external counterparties is accounted for  as a balance sheet transaction. Swiss Reinsurance Company Ltd 2012 Annual Report  113 Financial statements | Swiss Reinsurance Company Ltd Non-technical provisions The provision for taxation reflects the related tax expense for the financial year under report. The provision for currency fluctuation comprises the net effect of foreign exchange gains and losses arising from the revaluation of the   opening balance sheet and the translation adjustment of the income statement from average to closing exchange rates at year-end. These  net impacts are recognised in the income statement over a time period of up to nine years, based on the average duration of the technical  provisions. Where the provision for currency fluctuation results in an overall negative liability provision in a given year, it is set to zero and   the difference is recognised in the income statement. Other provisions are determined according to business principles and are based on estimated needs and in accordance with tax regulations. Debt Debt is held at redemption value. Funds held under reinsurance treaties Funds held under reinsurance treaties mainly contain cash deposits withheld from retrocessionaires, which are stated at redemption value. Reinsurance balances payable Reinsurance balances payable are held at redemption value. Liabilities from derivative financial instruments Liabilities from derivative financial instruments are generally maintained at the highest commitment amount as per a balance sheet date  during the life of the underlying contracts. Premiums received in respect of derivative financial instruments are not realised until expiration   or settlement of the contract. Included in this position are reinsurance contracts or features embedded in reinsurance contracts that fulfil the characteristics of derivative  financial instruments. For such contracts, premiums received may be recognised as income prior to contract expiration or settlement, in  cases where the recorded commitment has already reached the maximum liability amount potentially payable under the terms of the respective  contracts. Decreases in the liability amounts prior to expiration or settlement are only recognised as income for contracts for which hedges  are in place. Other liabilities Other liabilities include payables in connection with repurchase agreements and securities lending transactions, which are held at  redemption value. Deposit arrangements Contracts which do not meet risk transfer requirements, defined as transferring a reasonable probability of a significant loss to the reinsurer,  are accounted for as deposit arrangements. Deposit amounts are adjusted for payments received and made, as well as for amortisation or  accretion of interest. Allocated investment return The allocated investment return contains the calculated interest generated on the investments covering the technical provisions. The interest  rate reflects the currency-weighted, five-year average yield on five-year government bonds. Management expenses Overall management expenses are allocated to the reinsurance business, the investment business and to other expenses on an imputed basis. Foreign exchange gains and losses Foreign exchange gains and losses arising from foreign exchange transactions, as well as any changes of the provision for currency fluctuation  over time are recognised in the income statement and included in other expenses or other income, respectively. Capital and indirect taxes Capital and indirect taxes related to the financial year are included in other expenses. Value-added taxes are included in the respective  expense lines in the income statement. Income tax expense The income tax expense relates to the financial year under report. 114  Swiss Reinsurance Company Ltd 2012 Annual Report Financial statements | Swiss Reinsurance Company Ltd Change in accounting policy As of 1 January 2012, the Company revised its accounting policy for the treatment of foreign exchange gains and losses and their  recognition in the provision for currency fluctuation. In the previous years, foreign exchange gains and losses, consisting of foreign exchange gains and losses arising from the revaluation of the  opening balance sheet, the translation adjustment of the income statement from average to closing exchange rates at year-end as well as  foreign exchange gains and losses arising from foreign exchange transactions, were deferred in the provision for currency fluctuation. Where  the provision was not sufficient to absorb a negative difference, the amount was recognised in the income statement. As of 1 January 2012, foreign exchange gains and losses arising from the revaluation of the opening balance sheet and the translation  adjustment of the income statement from average to closing exchange rates at year-end are deferred in the provision for currency fluctuation  and recognised in the income statement over a period of up to nine years, based on the average duration of the technical provisions. Where  the provision for currency fluctuation results in an overall negative liability provision in a given year, it is set to zero and the difference is  recognised in the income statement. Foreign exchange gains and losses arising from foreign exchange transactions are now recognised in  the income statement in the year they occur. Retroactive application of the revised accounting policy in the previous years would have resulted in a provision for currency fluctuation   of CHF 1 257 million as of 31 December 2011. The difference of CHF 478 million to the booked provision for currency fluctuation as of   31 December 2011 will be recognised in the income statement over a period of five years starting from the financial year 2012. Swiss Reinsurance Company Ltd 2012 Annual Report  115 Financial statements | Swiss Reinsurance Company Ltd 2  Reinsurance result CHF millions Premiums written  Change in unearned premiums Premiums earned Claims paid and claim adjustment expenses Change in unpaid claims Claims and claim adjustment expenses Gross 13 850 –1 244 12 606 –13 930 –2 220 –16 150 Retro –4 696 915 –3 781 3 528 2 652 6 180 2011 Net 9 154 –329 8 825 –10 402 432 –9 970 Gross 16 348 464 16 812 –8 998 314 –8 684 Life and health benefits 5 751 –1 213 4 538 –2 364 Change in equalisation provision 550  – 550 –400 –1 717 –242 –1 959 148 574 722 1 052 40 1 092 –51 –400 –451 –2 875 –256 –3 131 140 737 877 –665 –202 –867 97 174 271 –914 592 3 025 Fixed commissions Profit commissions Acquisition costs Other reinsurance income and expenses Result from cash deposits Other reinsurance result Operating costs Allocated investment return Reinsurance result 3  Investment result CHF millions Income from real estate investment Income from subsidiaries and affiliated companies Income from equity securities Income from fixed income securities, mortgages and other loans Income from derivative financial instruments Income from short-term investments Income from alternative investments Income from investment services Valuation readjustments on investments Realised gains on sale of investments Investment income Expenses from derivative financial instruments Investment management expenses Valuation adjustments on investments Realised losses on sale of investments Investment expenses Allocated investment return Investment result 116  Swiss Reinsurance Company Ltd 2012 Annual Report Retro –5 680 447 –5 233 3 162 –494 2 668 93 – 1 514 36 1 550 –78 –380 –458 2011 98 2 335 33 638 23 65 61 40 29 1 605 4 927 –13 –268 –6 082 –285 –6 648 –592 –2 313 2012 Net 10 668 911 11 579 –5 836 –180 –6 016 –2 271 –400 –1 361 –220 –1 581 62 357 419 –828 388 1 290 2012 106 2 564 36 695 10 59 68 39 1 212 1 423 6 212 – –230 –2 160 –361 –2 751 –388 3 073 Financial statements | Swiss Reinsurance Company Ltd 4  Assets from reinsurance CHF millions Premiums and other receivables from reinsurance Funds held by ceding companies Deferred acquisition costs Assets from reinsurance Gross 5 668 11 385 1 324 18 377 Retro 197 – –732 –535 5  Liabilities from reinsurance CHF millions Unpaid claims Liabilities for life and health policy benefits  Unearned premiums Provisions for profit commissions Equalisation provision Funds held under reinsurance treaties Reinsurance balances payable Liabilities from reinsurance 6  Shareholder’s equity Change in shareholder’s equity Gross 33 597 9 987 5 146 176 – 1 769 49 676 Retro –6 702 –2 095 –2 144 –33 – 4 028 1 917 –5 029 CHF millions Shareholder’s equity as of 1 January Ordinary cash dividend paid for the previous year Ordinary dividend in-kind paid for the previous year Extraordinary cash dividend paid Capital reduction due to cancellation of treasury shares Net income/loss for the financial year Shareholder’s equity on 31 December before proposed dividend payments Proposed dividend payments Shareholder’s equity on 31 December after proposed dividend payments 1 Details on the proposed dividend payment for the financial year 2012 are disclosed on page 123. 2011 Net 5 865 11 385 592 17 842 2011 Net 26 895 7 892 3 002 143 – 4 029 2 686 44 647 Gross 4 820 12 979 1 166 18 965 Retro 160 – –723 –563 Gross 32 664 12 144 4 541 193 400 19 1 498 51 459 Retro –6 072 –2 185 –2 481 –34 – 5 217 1 699 –3 856 2011 18 757 –943 – – – –63 17 751 –6 838 10 913 2012 Net 4 980 12 979 443 18 402 2012 Net 26 592 9 959 2 060 159 400 5 236 3 197 47 603 2012 17 751 –1 028 –5 810 –1 438 –733 3 600 12 342 –1 8311 10 511 Swiss Reinsurance Company Ltd 2012 Annual Report  117 Financial statements | Swiss Reinsurance Company Ltd 7  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. In addition, as a component of the Swiss Re Group’s financing structure, the Company has guaranteed CHF 3  760 million   (2011: CHF 5 678 million) of debt issued by certain subsidiaries and letter of credit facilities benefiting various subsidiaries of which no  amount was utilised as of 31 December 2012 and 2011, respectively.  8  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 2012, total commitments remaining uncalled were  CHF 1 711 million (2011: CHF 660 million). 9  Leasing contracts Total off-balance-sheet commitments from operating leases for the next five years and there after are as follows: CHF millions 2012 2013 2014 2015 2016 After 2017 Total operating leases, net 2011 22 21 18 15 8 27 111 2012 – 21 20 18 12 32 103 These commitments pertain to the non-cancellable contract periods and refer primarily to office and apartment space rented by the Company. In 2011, a financial lease of IT hardware was recognised on the balance sheet with a value of CHF 10 million. In 2012, this financial lease  was fully repaid. 10  Security deposits To secure the technical provisions at the 2012 balance sheet date, securities with a value of CHF 16 318 million (2011: CHF 10 687 million)  were deposited in favour of ceding companies, of which CHF 4 866 million (2011: CHF 9 200 million) referred to affiliated companies of   the Company. The prior year total amount of securities deposited has been revised to include securities in investment funds which were   deposited in favour of ceding companies which had not been previously included. In addition, a real estate portfolio with a carrying amount of CHF 673 million (2011: CHF 673 million) serves as collateral for short-term  senior operational debt of CHF 650 million with an external counterparty. 118  Swiss Reinsurance Company Ltd 2012 Annual Report Financial statements | Swiss Reinsurance Company Ltd 11  Securities lending and repurchase agreements To enhance the performance of its investment portfolio, the Company enters into securities lending and 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 collateral for the    Swiss Re Group, providing funding diversification, enabling secured cash investment and yield enhancement. 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. An overview of the fair value of securities transferred under securities lending and repurchase agreements is provided in the following table  as of 31 December: CHF millions Fair value of securities transferred to third parties Fair value of securities transferred to affiliated companies Total 12  Investment funds 2011 5 646 5 682 11 328 2012 9 143 7 608 16 751 As of 31 December 2012, fixed income securities of CHF 3 464 million (2011: CHF 4 581 million) were held in investment funds, which   are owned by its affiliated companies. The securities in these funds and their revenues are reported in the corresponding asset category.    The securities which were held and lent directly by the investment funds are excluded in the amounts above. 13  Fire insurance value of tangible assets As of 31 December 2012, the insurance value of tangible assets, comprising the real estate portfolio and other tangible assets, amounted   to CHF 2 506 million (2011: CHF 2 555 million). 14  Obligations towards employee pension fund As of 31 December 2012, other liabilities included CHF 5 million (2011: CHF 5 million) payable to the employee pension fund. 15  Public placed debentures As of 31 December 2012, the following public placed debentures were outstanding: Instrument Subordinated bond Subordinated bond Subordinated bond Senior bond Senior bond Senior bond Issued in 2012 2012 2012 2011 2010 2009 Currency CHF USD EUR CHF CHF CHF Nominal  in millions 320 750 500 600 500 700 Interest rate 7.250% 8.250% 6.625% 2.125% 2.000% 4.250% Maturity/  First call in 2017 2018 2022 2017 2015 2013 Book value  CHF millions 320 687 603 600 500 700 Swiss Reinsurance Company Ltd 2012 Annual Report  119 Financial statements | Swiss Reinsurance Company Ltd 16  Investments in subsidiaries Details on the Company’s subsidiaries are disclosed on pages 90 to 93. 17  Own shares As of 31 December 2011, the Swiss Re Group held 370 706 931 Swiss Reinsurance Company Ltd shares, of which Swiss Re Ltd owned  344 052 565 shares and the Company owned directly 26 654 366 shares. On 25 May 2012, Swiss Reinsurance Company Ltd cancelled   all its 26 654 366 treasury shares and hence Swiss Re Ltd held directly 100% (2011: 92.8%) in Swiss Reinsurance Company Ltd, which  equalled to 344 052 565 Swiss Reinsurance Company Ltd shares as of 31 December 2012. 18  Deposit arrangements The following balances were generated and included in: CHF millions Reinsurance result Premiums and other receivables from reinsurance Funds held by ceding companies Funds held under reinsurance treaties Reinsurance balances payable 19  Claims on and obligations towards affiliated companies of the Company CHF millions Premiums and other receivables from reinsurance Funds held by ceding companies Other receivables Other assets Loans Funds held under reinsurance treaties Reinsurance balances payable Other liabilities 2011 41 263 55 1 396 2011 1 183 9 074 2 836 77 1 921 3 862 1 330 6 519 2012 22 153 672 19 1 032 2012 1 119 7 165 119 26 4 906 5 034 1 216 3 801 120  Swiss Reinsurance Company Ltd 2012 Annual Report Financial statements | Swiss Reinsurance Company Ltd 20  Conditional capital and authorised capital As of 31 December 2012, the Company had 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. Authorised capital The Board of Directors is authorised to increase the share capital of the Company at any time up to 15 April 2013 by an amount not exceeding  CHF 8 500 000 through the issuance of up to 85 000 000 registered shares, payable in full, each with a nominal value of CHF 0.10.   Increases by underwriting as well as partial increases are permitted. The date of issue, the issue price, the type of contribution and any   possible acquisition of assets, the date of dividend entitlement as well as the expiry or allocation of non exercised subscription rights will   be determined by the Board of Directors. With respect to a maximum of CHF 5 000 000 through the issuance of up to 50 000 000 registered shares, payable in full, each with a  nominal value of CHF 0.10, out of the total amount of authorised capital referred to above, the subscription rights of shareholders may not   be excluded. With respect to a maximum of CHF 3 500 000 through the issuance of up to 35 000 000 registered shares, payable in full, each with a  nominal value of CHF 0.10, out of the total amount of authorised capital referred to above, the Board of Directors may exclude or restrict the  subscription rights of the existing shareholders for the use of shares in connection with (i) mergers, acquisitions (including take-over) of  companies, parts of companies or holdings, equity stakes (participations) or new investments planned by the Company and /or Group  companies of Swiss Reinsurance Company Ltd, financing or re-financing of such mergers, acquisitions or new investments, the conversion  of loans, securities or equity securities, and /or (ii) improving the regulatory capital position of the Company or Group companies of  Swiss Reinsurance Company Ltd in a fast and expeditious manner if the Board of Directors deems it appropriate or prudent to do so   (including by way of private placements). 21  Release of undisclosed reserves In the year under report, undisclosed reserves on investments or on provisions were released by a net amount of CHF 233 million   (2011: no net release). 22  Major shareholders As of 31 December 2012, the Company was a fully owned subsidiary of Swiss Re Ltd. 23  Personnel information As of 31 December 2012, Swiss Reinsurance Company Ltd employed a worldwide staff of 3 878 (2011: 3 654). Personnel expenses for   the 2012 financial year amounted to CHF 1 058 million (2011: CHF 885 million). 24  Management fee contribution In 2012, management expenses of CHF 574 million (2011: CHF 282 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”. Swiss Reinsurance Company Ltd 2012 Annual Report  121 Financial statements | Swiss Reinsurance Company Ltd 25  Risk assessment Article 663b sub-para. 12 of the Swiss Code of Obligations requires disclosure of information on the performance of a risk assessment. 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. Details are disclosed on page 102. 122  Swiss Reinsurance Company Ltd 2012 Annual Report Financial statements | Swiss Reinsurance Company Ltd Proposal for allocation   of disposable profit/loss  The Board of Directors proposes to the Annual General Meeting to be held in Zurich on 25 March 2013 to approve the following allocation  and a dividend payment: CHF millions Retained earnings/loss brought forward Net income/loss for the financial year Disposable profit/loss Allocation to other reserves Retained earnings/loss after allocation CHF millions Other reserves brought forward Allocation from retained earnings Cash dividend Dividend in-kind of Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Ltd out of other reserves Other reserves after allocation and dividend payment 2011 50 –63 –13  – –13 2011 6 8521 – –1 028 –5 810 14 2012 –13 3 600 3 587 –3 550 37 2012 14 3 550 –1 831 – 1 733 1  Other reseves brought forward of CHF 6 852 million consisted of the other reserves balance as of 31 December 2011 of CHF 7 334 million, the dividend payment in the amount   of CHF 500 million out of such reserves, as resolved by the Extraordinary General Meeting on 26 June 2012, and the allocation from reserve for own shares of CHF 18 million in  connection with the cancellation of its own shares on 25 May 2012. Dividend If the Board of Directors’ proposal for allocation and a dividend payment is accepted, a cash dividend of CHF 1 831 million will be paid   out of other reserves. Zurich, 14 March 2013 Swiss Reinsurance Company Ltd 2012 Annual Report  123 Report of the statutory auditor Report of the statutory auditor  to the General Meeting of  Swiss Reinsurance Company Ltd    Zurich 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 109 to 122), for the year ended 31 December 2012. Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law    and the company’s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system  relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of   Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable  in the circumstances.  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  whether the financial statements are free from material misstatement.  An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The   procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial  statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to   the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for  the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the  appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall  presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide   a basis for our audit opinion. Opinion In our opinion, the financial statements for the year ended 31 December 2012 comply with Swiss law and the company’s articles of  incorporation. Report on other legal requirements We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence    (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence. In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system   exists which has been designed for the preparation of financial statements according to the instructions of the Board of Directors. We further confirm that the proposal for allocation of disposable profit/loss complies with Swiss law and the company’s articles of  incorporation. We recommend that the financial statements submitted to you be approved. PricewaterhouseCoopers Ltd Alex Finn  Audit expert  Auditor in charge Zurich, 14 March 2013 Dawn M Kink 124  Swiss Reinsurance Company Ltd 2012 Annual Report Financial statements | Swiss Reinsurance Company Ltd  Financial statements | Swiss Reinsurance Company Ltd This page intentionally left blank Swiss Reinsurance Company Ltd 2012 Annual Report  125 General information Cautionary note on forward-looking  statements Certain statements and illustrations contained herein are forward-looking. These statements  and illustrations provide current expectations of future events based on certain assumptions  and include any statement that does not directly relate to a historical fact or current fact. 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 one or more Group  companies, and developments adversely affecting the Group’s ability to achieve  improved ratings; 126  Swiss Reinsurance Company Consolidated 2012 Annual Report  General information | Cautionary note on forward-looking statements  ̤ the cyclicality of the reinsurance industry;  ̤ uncertainties in estimating reserves;  ̤ uncertainties in estimating future claims for purposes of financial reporting, particularly  with respect to large natural catastrophes, 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;  ̤ the frequency, severity and development of insured claim events;  ̤ acts of terrorism and acts of war;  ̤ mortality, morbidity and longevity experience;  ̤ policy renewal and lapse rates;  ̤ extraordinary events affecting the Group’s clients and other counterparties, such as  bankruptcies, liquidations and other credit-related events;  ̤ current, pending and future legislation and regulation affecting the Group or its ceding  companies;  ̤ 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 or  other issues experienced in connection with any such transactions;  ̤ changing levels of competition; and  ̤ operational factors, including the efficacy of risk management and other internal  procedures in managing the foregoing risks.  These factors are not exhaustive. The Group operates in a continually changing environment  and new risks emerge continually. Readers are cautioned not to place undue reliance on  forward-looking statements. The Group undertakes no obligation to publicly revise or update  any forward-looking statements, whether as a result of new information, future events or  otherwise. Swiss Reinsurance Company Consolidated 2012 Annual Report  127 General information Note on risk factors General impact of adverse market conditions At various points during 2012, there was deterioration in bank funding markets, depressed  volumes of capital markets activity overall, sharply higher yields on sovereign debt of  Greece, Italy, Ireland, Portugal and Spain and significant capital outflows from banks in  certain of these countries. It remains unclear whether European Union leaders will be able to  deliver on proposals for a banking union and recapitalisation of banks through direct equity  injections and whether these proposals will be sufficient to adequately address the eurozone  sovereign debt crisis. At the same time, there remains continued need for structural reforms  in a number of economies and a lack of consensus over the virtue and efficacy of austerity- led versus growth-led reforms. Uncertainty around economic growth can also be  compounded by domestic political concerns in various EU member states, including  upcoming elections and proposed referendums on EU participation.   The uncertainty around the future of the euro and the volatility in the financial and credit  markets could increase the severity and duration of economic recession, cause more  economic turmoil in the near term, cause further disruptions in the global financial markets  and impact foreign currency exchange rates. These developments in turn could have an  adverse impact on the investment results of Swiss Reinsurance Company Ltd (“Swiss Re”)  and its subsidiaries’ (collectively, the “Group”), its ability to access the capital markets and  the bank funding market, the ability of counterparties to meet their obligations to the Group  and the short-term outlook for the life insurance industry, particularly in North America and  Europe, with a corresponding negative impact on the Group’s Life & Health business. The foregoing developments could have material adverse effects on the Group’s industry  and on the Group. Regulatory changes Swiss Re and its subsidiaries 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 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. Legislative initiatives directly impacting the Group’s industry include the establishment of a  pan- European regulator for insurance companies, the European Insurance and  Occupational Pension Authority (the “EIOPA”), which has the power to overrule national  regulators in certain circumstances. In addition, Swiss Re is subject to the Swiss Solvency  Test, and will be subject to Solvency II, which was expected to be transposed into law in  June 2013 and become binding on insurers in January 2014, but which could be delayed to  as late as 2016. In July 2012, the EIOPA published the results of its consultation with  insurance and reinsurance stakeholders on guidelines for Own Risk and Solvency  Assessments (“ORSA”) for Solvency II, as well as other draft proposals with regard to the  Supervisory Reporting & Public Disclosure in the Solvency II framework. While the so-called  “stabilized draft” of the ORSA guidelines is not expected to result in significant changes,  there remains significant uncertainty regarding the implementation process for Solvency II.  In the United States, as a possible step towards federal oversight of insurance, the US  Congress created the Federal Insurance Office within the Department of Treasury. In  addition, provisions of the Wall Street Reform and Consumer Protection Act of 2010, as well  128  Swiss Reinsurance Company Consolidated 2012 Annual Report  General information | Note on risk factors as provisions in the proposed European Market Infrastructure Regulation and proposed  changes to the Markets in Financial Instruments Directive (MiFID), in respect of derivatives  could have a significant impact on the Group. 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  “systemically important,” a designation which is expected to result in enhanced regulatory  supervision and heightened capital, liquidity and diversification requirements under evolving  reforms. There is an emerging focus on classifying certain insurance companies as  systemically important as well. The Group could be designated as a global systemically  important financial institution. Separately, the International Association of Insurance  Supervisors, an international body that represents insurance regulators and supervisors,  undertook a consultation on a methodology for identifying global systemically important  insurers and on a framework for supervision of internationally active insurance groups. The  Group could be subject to one or both of the resulting regimes as well, once implemented.  Designations as any of the foregoing systemically important institutions could occur as early  as April 2013. The Group cannot predict which legislative and regulatory initiatives ultimately will be  enacted or promulgated, what the scope and content of these initiatives ultimately will be,  when they will be effective and what the implications will be for the industry, in general, and  for the Group, in particular. Certain of these initiatives could have a material impact on the  Group’s business. 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. These changes could increase the costs of doing business,  reduce access to liquidity, limit the scope of business or affect the competitive balance, or  could make reinsurance less attractive to primary insurers. Market risk Volatility and disruption in the global financial markets can expose the Group to significant  financial and capital markets risk, including changes in interest rates, credit spreads, equity  prices and foreign currency exchange rates, which may adversely impact the Group’s  financial condition, results of operations, liquidity and capital position. The Group’s exposure  to interest rate risk is primarily related to the market price and cash flow variability  associated with changes in interest rates. Exposure to credit spreads primarily relates to  market price and cash flow variability associated with changes in credit spreads. When  credit spreads widen, the net unrealised loss position of the Group’s investment portfolio  can increase, as could other-than-temporary impairments. With respect to equity prices, the  Group is exposed to changes in the level and volatility of equity prices, as they affect the  value of equity securities themselves as well as the value of securities or instruments that  derive their value from a particular equity security, a basket of equity securities or a stock  index. The Group is also subject to equity price risk to the extent that the values of life- related benefits under certain products and life contracts, most notably variable annuity  business, are tied to financial market values; to the extent market values fall, the financial  exposure on guarantees related to these contracts would increase to the extent this  exposure is not hedged. While the Group has discontinued writing new variable annuity  business and has in place an extensive hedging programme covering its existing variable  annuity business that it believes is sufficient, certain risks cannot be hedged, including  actuarial risks, basis risk and correlation risk. Exposure to foreign exchange risk arises from  Swiss Reinsurance Company Consolidated 2012 Annual Report  129 General information | Note on risk factors exposures to changes in spot prices and forward prices as well as to volatile movements in  exchange rates. These risks can have a significant effect on investment returns and market values of  securities positions, which in turn may affect both the Group’s results of operations and  financial condition. The Group continues to focus on asset-liability management for its  investment portfolio, but pursuing even this strategy has its risks – including possible  mismatch – that in turn can lead to reinvestment risk. The Group seeks to manage the risks  inherent in its investment portfolio by repositioning the portfolio from time to time, as  needed, and to reduce risk and fluctuations through the use of hedges and other risk  management tools. The Group has reduced risk to the portfolio by repositioning the  components of the portfolio and, as a result, profitability could potentially be impacted and,  unless offset by underwriting returns, reduced. 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. In addition, the Group 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. The Group manages liquidity and funding risks by focusing  on the liquidity stress that is likely to result from extreme capital markets scenarios or from  extreme loss events, or combinations of the two. Generally, the ability to meet liquidity  needs could be adversely impacted by factors that the Group cannot control, such as market  dislocations or interruptions, adverse economic conditions, severe disruption in the financial  and worldwide credit markets and the related increased constraints on the availability of  credit; changes in interest rates, foreign exchange rates and credit spreads, or by  perceptions among market participants of the extent of the Group’s liquidity needs. The Group may not be able to secure new sources of liquidity or funding, should projected or  actual liquidity fall below levels it requires. The ability to meet liquidity needs through asset  sales may be constrained by market conditions and the related stress on valuations, and  130  Swiss Reinsurance Company Consolidated 2012 Annual Report  General information | Note on risk factors through third-party funding may be limited by constraints on the general availability of credit  and willingness of lenders to lend. In addition, the Group’s ability to meet liquidity needs may  also be constrained by regulatory requirements that require regulated entities to maintain or  increase regulatory capital, or that restrict intra-group transactions, the timing of dividend  payments from subsidiaries or the fact that certain assets may be encumbered or otherwise  non-tradable. Failure to meet covenants in lending arrangements could give rise to  collateral-posting or defaults, and further constrain access to liquidity. Finally, any adverse  ratings action could trigger a need for further liquidity (for example, by triggering termination  provisions or collateral delivery requirements in contracts to which the Group is a party) at a  time when the Group’s ability to obtain liquidity from external sources is limited by such  ratings action. Counterparty risks The Group’s general exposure to counterparty risk was heightened during the credit crisis,  and this risk could still be exacerbated to the extent defaults, or concerns about possible  defaults, by certain market participants trigger more systemic concerns about liquidity.  Losses due to defaults by counterparties, including issuers of investment securities (which  include structured securities) or derivative instrument counterparties, could adversely affect  the Group. In addition, trading counterparties, counterparties under swaps and other  derivative contracts, and financial intermediaries may default on their obligations due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure,  fraud or other reasons, which could also have a material adverse effect on the Group. The Group could also be adversely affected by the insolvency of, or other credit constraints  affecting, counterparties in its reinsurance operations. Moreover, the Group could be  adversely affected by liquidity issues at ceding companies or at third parties to whom the  Group has retroceded risk, and such risk could be exacerbated to the extent any such  exposures are concentrated.  Risks relating to credit rating downgrades Ratings are an important factor in establishing the competitive position of reinsurance  companies, and market conditions could increase the risk of downgrade. Third-party rating  agencies assess and rate the financial strength of reinsurers and insurers. These ratings are  intended to measure a company’s ability to repay its obligations and are based upon criteria  established by the rating agencies. The Group’s ratings reflect the current opinion of the relevant rating agencies. One or more  of its ratings could be downgraded or withdrawn in the future. Rating agencies may increase  the frequency and scope of ratings reviews, revise their criteria or take other actions that  may negatively impact the Group’s ratings. In addition, changes to the process or  methodology of issuing ratings, or the occurrence of events or developments affecting the  Group, could make it more difficult for the Group to achieve improved ratings, which it would  otherwise have expected.  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. Swiss Reinsurance Company Consolidated 2012 Annual Report  131 General information | Note on risk factors Legal and regulatory risks In the ordinary course of business, the Group is involved in lawsuits, arbitrations and other  formal and informal dispute resolution procedures, the outcomes of which determine rights  and obligations under insurance, reinsurance and other contractual agreements. From time  to time, the Group may institute, or be named as a defendant in, legal proceedings, and the  Group may be a claimant or respondent in arbitration proceedings. These proceedings could  involve coverage or other disputes with ceding companies, disputes with parties to which  the Group transfers risk under reinsurance arrangements, disputes with other counterparties  or other matters. The Group cannot predict the outcome of any of the foregoing, which could  be material for the Group. 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 the Group’s 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 affect its business. Insurance, operational and other risks As part of the Group’s ordinary course of 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; competitive conditions; cyclicality of the industry; risks related to  emerging claims and coverage issues (including, for example, trends to establish stricter  building standards, which can lead to higher industry losses for earthquake cover based on  higher replacement values); 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 operational systems and infrastructure. In addition,  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. Any of the foregoing, as well as  other concerns in respect of the Group’s business, could also give rise to reputational risk. 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, and such actual data  could deviate from the Group’s 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. 132  Swiss Reinsurance Company Consolidated 2012 Annual Report  The Group’s results may be impacted by changes in accounting standards, or changes in the  interpretation of accounting standards. The Group’s results may also be impacted if  regulatory authorities take issue with any conclusions the Group may reach in respect of  accounting matters. Changes in accounting standards could impact future reported results  or require restatement of past reported results. The Group uses non-GAAP financial measures in its external reporting, including in this  report. These measures are not prepared in accordance with US GAAP or any other  comprehensive set of accounting rules or principles, and should not be viewed as a  substitute for measures prepared in accordance with US GAAP. Moreover, these may be  different from or otherwise inconsistent with non-GAAP financial measures used by other  companies. These measures have inherent limitations, are not required to be uniformly  applied and are not audited. Risks related to realignment of the Swiss Re corporate structure Following the realignment of the corporate structure of Swiss Re Ltd in 2012, the asset base,  liquidity position, capital profile and/or other characteristics of the Group of relevance to its  counterparties have changed.  Most importantly, the Group is now a wholly owned  subsidiary of Swiss Re Ltd. Furthermore, the Group represents only two of the four operating  segments of the Swiss Re Ltd group. With a changed legal entity profile, the Reinsurance  business unit and its constituent subsidiaries are impacted differently than under the Group’s  historical structure, including, without limitation, in respect of legal and regulatory  requirements (including as to capital and liquidity), ratings considerations, and lender and  other counterparty considerations.  Swiss Reinsurance Company Consolidated 2012 Annual Report  133 Corporate calendar   and contact information Corporate calendar 10 April 2013 149th Annual General Meeting 2 May 2013 First quarter 2013 results 8 August 2013 Second quarter 2013 results 7 November 2013 Third quarter 2013 results Contact information Investor Relations Telephone +41 43 285 4444  Fax +41 43 282 4444  investor_relations@swissre.com Media Relations Telephone +41 43 285 7171  Fax +41 43 285 2023  media_relations@swissre.com Share Register Telephone +41 43 285 3294  Fax +41 43 285 3480  share_register@swissre.com 134  Swiss Reinsurance Company Consolidated 2012 Annual Report  General information © 2013 Swiss Re. All rights reserved. Title: Swiss Reinsurance Company Consolidated 2012 Annual Report  Production: Logistics /Media Production This report is available only at: www.swissre.com  Swiss Reinsurance Company Ltd  Mythenquai 50 /60  P.O. Box  8022 Zurich  Switzerland Telephone +41 43 285 2121  Fax +41 43 285 2999  www.swissre.com 

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