Swiss Reinsurance Co.
Annual Report 2014

Plain-text annual report

Swiss Reinsurance Company Consolidated 2014 Annual Report Content Swiss Reinsurance Company Ltd Annual Report Income statement Balance sheet Notes Proposal for allocation of disposable profit Report of the statutory auditor General Information Cautionary note on forward- looking statements Note on risk factors 98 98 101 102 104 115 116 117 117 119 Group financial statements Income statement Statement of comprehensive income Balance sheet Statement of shareholder’s equity Statement of cashflow Notes to the Group financial  statements Note 1 Organisation and summary of significant accounting policies Note 2 Information on business segments Note 3 Insurance information Note 4 Premiums written Note 5 Unpaid claims and claim adjustment expenses 4 4 5 6 8 9 10 10 19 30 35 36 Note 6 Deferred acquisition costs 38 (DAC) and acquired present value of future profits (PVFP) Note 7 Assets held for sale Note 8 Investments Note 9 Fair value disclosures Note 10 Derivative financial instruments Note 11 Debt and contingent capital instruments Note 12 Income taxes Note 13 Benefit plans Note 14 Share-based payments Note 15 Related parties Note 16 Significant subsidiaries and equity investees Note 17 Commitments and contingent liabilities Note 18 Variable interest entities Note 19 Restructuring provision Note 20 Risk assessment Report of the statutory auditor 39 40 47 60 64 67 70 78 81 86 88 89 93 94 96 Swiss Reinsurance Company Consolidated 2014 Annual Report 3 Financial Statements I 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/losses – non-participating business (total impairments for the years ended 31 December were 34 in 2013 and 35 in 2014, of which 34 and 35, 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 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 2013 2014 3 3 8 8 8 3 3 3 12 24 905 162 3 120 427 249 71 28 934 –7 907 –8 665 –631 –4 449 –2 814 –777 –25 243 3 691 –219 3 472 –2 3 470 –67 3 403 26 992 163 3 187 550 75 60 31 027 –8 523 –9 602 –450 –5 920 –2 458 –713 –27 666 3 361 –395 2 966 –1 2 965 –69 2 896 4 Swiss Reinsurance Company Consolidated 2014 Annual Report 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 Change in other-than-temporary impairment Change in foreign currency translation Change in adjustment for pension benefits 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 Reclassification out of accumulated other comprehensive income For the years ended 31 December 2013 3 472 –2 318 21 –347 457 1 285 –67 –2 1 216 2014 2 966 2 721 3 –734 –291 4 665 –69 –1 4 595 2013 USD millions Balance as of 1 January Change during the period Amounts reclassified out of accumulated other comprehensive income Tax Balance as of period end 2014 USD millions Balance as of 1 January Change during the period Amounts reclassified out of accumulated other comprehensive income Tax Balance as of period end Unrealised gains/losses1 3 059 –2 842 –430 954 741 Unrealised gains/losses1 741 4 846 –1 107 –1 018 3 462 Other-than- temporary impairment1 –27 32 Foreign currency translation1,2 –3 180 –388 Adjustment from pension benefits3 –928 530 Accumulated other comprehensive income –1 076 –2 668 –11 –6 41 –3 527 58 –131 –471 –372 853 –3 263 Other-than- temporary impairment1 –6 4 Foreign currency translation1,2 –3 527 –498 Adjustment from pension benefits3 –471 –417 Accumulated other   comprehensive  income –3 263 3 935 –1 –3 –41 –195 –4 261 31 95 –762 –1 117 –1 119 –1 564 1 Reclassification adjustment included in net income is presented in the ’’Net realised investment gains/losses – non-participating business’’ line. 2 Reclassification adjustment is limited to translation gains and losses realised upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity. 3 Reclassification adjustment included in net income is presented in the ’’Other expenses’’ line. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2014 Annual Report 5 Financial Statements I Group Financial Statements Balance sheet As of 31 December Assets USD millions Investments Fixed income securities: Available-for-sale, at fair value (including 11 155 in 2013 and 12 325 in 2014 subject to securities lending and repurchase agreements) (amortised cost: 2013: 58 774; 2014: 60 600) Trading (including 1 in 2013 and 645 in 2014 subject to securities lending and repurchase agreements) Equity securities: Available-for-sale, at fair value (including 65 in 2013 and 190 in 2014 subject to securities lending and repurchase agreements) (cost: 2013: 4 594; 2014: 1 975) Trading Policy loans, mortgages and other loans Investment real estate Short-term investments, at fair value (including 3 194 in 2013 and 2 025 in 2014 subject to securities lending and repurchase agreements) Other invested assets Investments for unit-linked and with-profit business (equity securities trading: 988 in 2013 and 894 in 2014) Total investments Cash and cash equivalents (including 4 in 2013 and 45 in 2014 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 Deferred tax assets Other assets Note 8, 9, 10 2013 2014 59 123 65 127 1 522 2 219 5 294 615 4 340 820 17 777 9 233 988 99 712 5 883 690 10 806 6 654 13 451 4 424 2 085 4 091 425 5 023 2 973 2 396 65 3 908 881 10 520 7 353 894 93 363 5 855 721 10 340 5 346 12 173 4 480 1 899 3 916 109 5 206 2 895 3 6 6 12 Total assets 156 217 146 303 The accompanying notes are an integral part of the Group financial statements. 6 Swiss Reinsurance Company Consolidated 2014 Annual Report 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 tax liabilities Short-term debt Accrued expenses and other liabilities Long-term debt Total liabilities Equity Contingent capital instruments Common shares CHF 0.10 par value 2013: 344 052 565; 2014: 344 052 565 shares authorised and issued Additional paid-in capital 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 The accompanying notes are an integral part of the Group financial statements. Note 2013 2014 9 12 11 11 56 338 20 324 6 690 8 127 3 218 2 488 593 6 913 5 992 9 551 14 722 134 956 52 177 19 284 6 610 7 825 3 083 1 966 802 7 490 4 959 8 016 11 265 123 477 11 1 102 1 102 32 8 853 –148 741 –6 –3 527 –471 –3 263 14 660 21 236 25 21 261 32 8 823 –10 3 462 –3 –4 261 –762 –1 564 14 421 22 804 22 22 826 156 217 146 303 Swiss Reinsurance Company Consolidated 2014 Annual Report 7 Financial Statements I 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 of common shares Balance as of period end Additional paid-in capital Balance as of 1 January Share-based compensation Realised gains/losses on treasury shares Balance as of period end Shares in Swiss Re Ltd, net of tax Balance as of 1 January Change of shares in Swiss Re Ltd Balance as of period end Net unrealised gains/losses, net of tax Balance as of 1 January Changes during the period1 Balance as of period end Other-than-temporary impairment, net of tax Balance as of 1 January Changes during the period Balance as of period end Foreign currency translation, net of tax Balance as of 1 January Changes during the period1 Balance as of period end Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January Changes during the period Balance as of period end Retained earnings Balance as of 1 January Net income after attribution of non-controlling interests Interest on contingent capital instruments, net of tax Dividends on common shares and dividends-in-kind1 Effect of new reinsurance agreements2 Balance as of period end Shareholder’s equity  Non-controlling interests Balance as of 1 January Change during the period Income attributable to non-controlling interests Balance as of period end Total equity  2013 2014 1 102 1 102 32 32 8 875 13 –35 8 853 –144 –4 –148 3 059 –2 318 741 –27 21 –6 –3 180 –347 –3 527 –928 457 –471 14 129 3 470 –67 –2 973 101 14 660 21 236 24 –1 2 25 21 261 1 102 1 102 32 32 8 853 –35 5 8 823 –148 138 –10 741 2 721 3 462 –6 3 –3 –3 527 –734 –4 261 –471 –291 –762 14 660 2 965 –69 –3 135 14 421 22 804 25 –4 1 22 22 826 1 The impact of the transfer of the shares of Swiss Re Principal Investments Company Ltd through a dividend-in-kind to Swiss Re Ltd has been included in 2013. 2 Effective 31 December 2013, a novation of a reinsurance contract to a Group legal entity resulted in an increase in retained earnings of USD 101 million. 8 Swiss Reinsurance Company Consolidated 2014 Annual Report 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 items1 Net realised investment gains/losses Income from equity-accounted investees, net of dividends received Change in: Technical provisions and other reinsurance assets and liabilities, net1 Funds held by ceding companies and under reinsurance treaties1 Reinsurance recoverable on unpaid claims and policy benefits Other assets and liabilities, net1 Income taxes payable/recoverable 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 Maturities Purchases Net purchase/sale/maturities of short-term investments Equity securities: Sales Purchases Cash paid/received for acquisitions/disposal and reinsurance transactions, net 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 Purchase/sale of shares in Swiss Re Ltd Dividends paid to parent 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 Cash and cash equivalents as of 31 December 2013 2014 3 403 2 316 –637 –76 –2 087 1 020 908 256 –130 –877 84 2 182 71 627 2 900 –70 477 –1 954 2 095 –4 403 –170 –382 40 –2 554 4 –1 871 –4 381 –2 581 –198 –2 779 8 662 5 883 2 896 1 322 –588 1 –1 207 557 972 –218 –58 –807 219 2 090 48 287 3 384 –59 378 6 545 5 985 –2 428 39 303 2 737 37 –1 501 32 –3 120 –4 552 275 –303 –28 5 883 5 855 1 The Group revised the definition of certain items within the operating cash flow with no impact on "Net cash provided/used by operating activities". The amortisation of deferred acquisition costs and present value for future profits is reclassified from "Depreciation, amortisation and other non-cash items" and the changes in certain other reinsurance assets and liabilities are reclassified from "Funds held by ceding companies and under reinsurance treaties" and "Other assets and liabilities, net" to "Technical provisions and other reinsurance assets and liabilities, net". Comparatives are adjusted accordingly. Interest paid was USD 939 million and USD 891 million for the years ended 31 December 2013 and 2014, respectively. Tax paid was USD 352 million and USD 444 million for the years ended 31 December 2013 and 2014, respectively. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2014 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 Ltd (“SRZ”) and its subsidiaries (collectively, the “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 four business segments: Property & Casualty Reinsurance, Life & Health Reinsurance, Corporate Solutions and Admin  Re®. The presentation of each segment’s balance sheet is closely aligned with the segment legal entity structure.   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.  In the fourth quarter of 2014, the Group entered into an agreement to sell Aurora National Life Assurance Company (Aurora) to  Reinsurance Group of America, Incorporated (RGA). The transaction is expected to close in the second quarter of 2015 and,  therefore, the subject business was still within the scope of the consolidated Swiss Re Group as of 31 December 2014. For more  details on the transaction and its impact on the Group financial statements, please refer to Note 7. On 25 March 2013, SRZ transferred the shares of Principal Investments through a dividend-in-kind to Swiss Re Ltd. Following  the transfer, Principal Investments ceased to be a subsidiary of SRZ. Principal Investments instead became a subsidiary of Swiss  Re Ltd. Risks and benefits related to this entity passed to Swiss Re Ltd as of 1 January 2013. Consequently these financial  statements were prepared as if Principal Investments had been transferred to Swiss Re Ltd as of 1 January 2013. 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 or the  fair value option 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. 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 remeasurement and translation Transactions denominated in foreign currencies are remeasured to the respective subsidiary’s functional currency at average  exchange rates. Monetary assets and liabilities are remeasured to the functional currency at closing exchange rates, whereas  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. 10  Swiss Reinsurance Company Consolidated 2014 Annual Report 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 2014, 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  the applicable measure of 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. A trading classification is used  for securities that are bought and held principally for the purpose of selling them in the near term or for securities where the  Group has decided to apply the fair value option.  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. For debt securities AFS that 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 recognised as investment income on 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. Swiss Reinsurance Company Consolidated 2014 Annual Report  11 Financial Statements I Notes to the Financial Statements 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. Depreciation on buildings is recognised on a straight-line basis over the estimated useful  life of the asset. Land is recognised at cost and not depreciated. Impairment in value is recognised if the sum of the estimated  future undiscounted cash flows from the use of the real estate is lower than its carrying value. 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. As of 1 January 2014, the Group measures its short-term investments at fair value with changes in fair value recognised in net  income. Previously, the Group carried short-term investments at amortised cost, which approximated fair value. The impact of  this change is immaterial and comparatives have therefore not been restated. 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. Changes in fair value on derivatives that are not designated as hedging instruments are recorded in income. 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 a free-standing contract.  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 and 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 and 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.  12  Swiss Reinsurance Company Consolidated 2014 Annual Report 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 The Group incurs costs in connection with acquiring new and renewal reinsurance and insurance business. Some of these costs,  which consist primarily of commissions, are deferred as they are directly related to the successful acquisition of such business. 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. Modifications of insurance and reinsurance contracts The Group accounts for modifications of insurance and reinsurance contracts that result in a substantially unchanged contract as  a continuation of the replaced contract. The associated deferred acquisition costs and present value of future profits (PVFP) will  continue to be amortised. The Group accounts for modifications of insurance and reinsurance contracts that result in a  substantially changed contract as an extinguishment of the replaced contract. The associated deferred acquisition costs or PVFP  are written off immediately through income and any new deferrable costs associated with the replacement contract are  deferred. Business combinations The Group applies the acquisition 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. The underlying assets and liabilities acquired are subsequently accounted for according to the relevant GAAP guidance. This  includes specific requirements applicable to subsequent accounting for assets and liabilities recognised as part of the acquisition  method of accounting, including present value of future profits, 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. The earned rate corresponds to either the current earned rate or the original earned rate  depending on the business written. The rate is consistently applied for the entire life of the applicable business. 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 in other comprehensive  income for shadow loss recognition. 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, other classes of 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.  Swiss Reinsurance Company Consolidated 2014 Annual Report  13 Financial Statements I Notes to the Financial Statements Real estate for own use as well as other classes of property, plant and equipment are carried at depreciated cost. Depreciation  on buildings is recognised on a straight-line basis over the estimated useful life of the asset. Land is recognised at cost and not  depreciated.  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. 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. The Group recognizes the effect of income tax positions only if sustaining those positions is more likely than not.  Changes in  recognition or measurement are reflected in the period in which a change in judgment occurs.   Unpaid claims and claim adjustment expenses Liabilities for unpaid claims and claim adjustment expenses for property and casualty and life and health insurance and  reinsurance contracts are accrued when insured events occur and are based on the estimated ultimate cost of settling the  claims, using reports and individual case estimates received from ceding companies. A provision is also included for claims  incurred but not reported, which is developed on the basis of past experience adjusted for current trends and other factors that  modify past experience. The establishment of the appropriate level of reserves is an inherently uncertain process involving  estimates and 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 acquisition method of accounting. The Group does not discount life and health claim reserves except for disability income  claims in payment which are recognised at the estimated present value of the remaining ultimate net costs of the incurred claims. 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 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 rate assumptions for life  and health (re)insurance benefit liabilities are based on estimates of expected investment yields. Assumed mortality rates are  generally based on experience multiples applied to the actuarial select and ultimate tables based on industry experience.  Liabilities for life and health 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. Policyholder account balances Policyholder account balances relate to universal life-type contracts and investment contracts.  Universal life-type contracts are long-duration insurance contracts, providing either death or annuity benefits, with terms that are  not fixed and guaranteed.  14  Swiss Reinsurance Company Consolidated 2014 Annual Report Investment contracts are long-duration contracts that do not incorporate significant insurance risk, i.e. there is no mortality and  morbidity risk, or the mortality and morbidity risk associated with the insurance benefit features offered in the contract is of  insignificant amount or remote probability. Amounts received as payment for investment contracts are reported as policyholder  account balances. Related assets are included in general account assets except for investments for unit-linked and with-profit  business, which are presented in a separate line item on the face of the balance sheet.  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. Unit-linked and with-profit business are presented together as they are similar in nature. For unit-linked contracts, the investment   risk is borne by the policyholder. For with-profit contracts, the majority of the investment risk is also borne by the policyholder,  although there are certain guarantees that limit the down-side risk for the policyholder, and a certain proportion of the returns  may be retained by Swiss Re Group (typically 10%). Additional disclosures are provided in Note 8. Funds held assets and liabilities On the asset side, funds held by ceding companies consist mainly of amounts retained by the ceding company for business  written on a funds withheld basis. In addition, amounts arising from the application of the deposit method of accounting to  ceded retrocession or reinsurance contracts are included.  On the liability side, funds held under reinsurance treaties consist mainly of amounts arising from the application of the deposit  method of accounting to inward insurance and reinsurance contracts. In addition, amounts retained from ceded business written  on a funds withheld basis are included. Funds withheld assets are assets that would normally be paid to the Group but are withheld by the cedent to reduce a potential  credit risk or to retain control over investments. In case of funds withheld liabilities, it is the Group that withholds assets related to  ceded business in order to reduce its credit risk or retain control over the investments. The deposit method of accounting is applied to insurance and reinsurance contracts that do not indemnify the ceding company  or the Group against loss or liability relating to insurance risk. Under the deposit method of accounting, the deposit asset or  liability is initially measured based on the consideration paid or received. For contracts that transfer neither significant timing nor  underwriting risk, and contracts that transfer only significant timing risk, changes in estimates of the timing or amounts of cash  flows are accounted for by recalculating the effective yield. The deposit is then adjusted to the amount that would have existed  had the new effective yield been applied since the inception of the contract. The revenue and expense recorded for such  contracts is included in net investment income. For contracts that transfer only significant underwriting risk, once a loss is  incurred, the deposit is adjusted by the present value of the incurred loss. At each subsequent balance sheet date, the portion of  the deposit attributable to the incurred loss is recalculated by discounting the estimated future cash flows. The resulting changes  in the carrying amount of the deposit are recognised in claims and claim adjustment expenses. Funds withheld balances are presented together with assets and liabilities arising from the application of the deposit method  because of their common deposit type character. 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, thereby causing a loss recognition event.  For shadow loss recognition testing, the Group uses current market yields to  determine best estimate GAAP reserves rather than using locked in or current book yields. If the unlocked best estimate GAAP  reserves based on current market rates are in excess of reserves based on locked in or current book yields, a shadow loss  recognition reserve is set up. These reserves are recognised in other comprehensive income and do not impact net income. In  addition, shadow loss recognition reserves can reverse up to the amount of losses recognised due to past loss events. Swiss Reinsurance Company Consolidated 2014 Annual Report  15 Financial Statements I Notes to the 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. Reinstatement premiums are due where coverage limits for the remaining life of the contract are reinstated under pre-defined  contract terms. The recognition of reinstatement premiums as written depends on individual contract features. Reinstatement  premiums are either recognised as written at the time a loss event occurs or in line with the recognition pattern of premiums  written of the underlying contract. The accrual of reinstatement premiums is based on actuarial estimates of ultimate losses.  Reinstatement premiums are generally earned in proportion to the amount of reinsurance provided. Insurance and 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 As of 31 December 2014, the Group has a leadership performance plan, a fixed option plan, a restricted share plan, an employee  participation plan and a global Swiss Re share participation plan. These plans are described in more detail in Note 14. The Group  accounts for share-based payment transactions with employees using the fair value method. Under the fair value method, the fair  value of the awards is recognised in earnings over the vesting period.  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. Shares in Swiss Re Ltd Shares in Swiss Re Ltd are reported at cost in shareholder’s equity. Shareholder’s equity also includes stand-alone derivative  instruments indexed to the Swiss Re Ltd shares held by the Group that meet the requirements for classification in shareholder’s  equity. Subsequent events Subsequent events for the current reporting period have been evaluated up to 17 March 2015. This is the date on which the  financial statements are available to be issued. 16  Swiss Reinsurance Company Consolidated 2014 Annual Report Recent accounting guidance In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for  Which the Total Amount of the Obligation Is Fixed at the Reporting Date”, an update to Topic 405, “Liabilities”. ASU 2013-04  requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the  obligation within the scope of this guidance is fixed at the reporting date as the sum of the amount the reporting entity agreed to  pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on  behalf of its co-obligors. The Group adopted ASU 2013-04 on 1 January 2014. The adoption did not have an effect on the  Group’s financial statements.  In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon  Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”, an  update to Topic 830, “Foreign Currency Matters”. ASU 2013-05 precludes the release of the cumulative translation adjustment  into net income for derecognition events that occur within a foreign entity, unless such events represent a complete or  substantially complete liquidation of the foreign entity. Derecognition events related to investments in a foreign entity result in the  release of the entire cumulative translation adjustment related to the derecognised foreign entity, even when a non-controlling  financial interest is retained. The Group adopted ASU 2013-05 on 1 January 2014. The adoption did not have an effect on the  Group’s financial statements.  In June 2013, the FASB issued ASU 2013-08, “Amendments to the Scope, Measurement, and Disclosure Requirements”, an  update to Topic 946, “Financial Services - Investment Companies”. ASU 2013-08 changes the approach to the investment  company assessment in Topic 946, clarifies the characteristics of an investment company, and provides comprehensive  guidance for assessing whether an entity is an investment company. The Group adopted ASU 2013-08 on 1 January 2014. The  adoption did not have an effect on the Group’s financial statements.  In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss  Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”, an update to Topic 740, “Income Taxes”. ASU 2013-11  requires an entity to present an unrecognised tax benefit as a reduction to a deferred tax asset for a net operating loss  carryforward, a similar tax loss, or a tax credit carryforward, subject to some exceptions. The Group adopted ASU 2013-11 on 1  January 2014 on a prospective basis. The financial statement presentation of unrecognised tax benefits was adjusted  accordingly.  Swiss Reinsurance Company Consolidated 2014 Annual Report  17 Financial Statements I Notes to the Financial Statements This page intentionally left blank 18  Swiss Reinsurance Company Consolidated 2014 Annual Report 2  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 presents two core operating business segments: Property & Casualty Reinsurance and Life & Health Reinsurance. The  presentation of 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 is 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. Interest expense is based on the segment’s capital funding position. The tax impact of a  segment is derived from the legal entity tax obligations and the segmentation of the pre-tax result. While most of the tax items  can be directly attributed to individual segments, the tax which impacts two or more segments is allocated to the segments on a  reasonable basis. Property & Casualty Reinsurance and Life & Health Reinsurance share the same year-to-date effective tax rate  as both business segments belong to the Reinsurance Business Unit.  Accounting policies applied by the business segments are in line with those described in the summary of significant accounting  policies (please refer to Note 1). The Group operating segments are outlined below.  Property & Casualty Reinsurance and Life & Health Reinsurance Reinsurance consists of two segments, Property & Casualty and Life & Health. The Reinsurance business 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. As well as 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 lines of business. In the second quarter of 2014, the Reinsurance Business Unit revised the allocation of certain intra-group cost recharges  between Property & Casualty and Life & Health. The comparative periods have been adjusted accordingly. The revision had no  impact on net income and shareholder’s equity of the Group. 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. In the fourth quarter of 2014, the Group entered into an agreement to sell Aurora National Life Assurance Company (Aurora), a  US subsidiary, to Reinsurance Group of America, Incorporated (RGA). For more details on the transaction and its impact on the  Swiss Re Group financial statements, please refer to Note 7. In the fourth quarter of 2014, the Group revised the allocation of certain project costs from the Reinsurance Business Units to  Other. The comparative periods have not been adjusted as the costs relate primarily to projects launched in 2014. The revision  had no impact on net income and shareholder’s equity of the Group. 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. In the periods presented, significant intra- group transactions related to intra-group reinsurance arrangements and certain treasury-related activities are included. Swiss Reinsurance Company Consolidated 2014 Annual Report  19 Financial Statements I Notes to the Financial Statements a) Business segments – income statement For the year ended 31 December 2013  USD millions Revenues Premiums earned Fee income from policyholders Net investment income – non-participating Net realised investment gains – non-partici- pating 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/benefit Net income/loss before attribution of non- controlling interests Income attributable to non-controlling interests Net income/loss after attribution of non-con- trolling 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 % Operating margin in % Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 396 106 560 –26 30 1 066 –23 –590 –345 10 –396 –26 –1 370 –304 60 –244 –1 –245 –245 24 905 162 3 120 427 249 71 28 934 –7 907 –8 665 –631 –4 449 –2 814 –777 –25 243 3 691 –219 3 472 –2 3 470 –67 3 403 20 –20 0 0 0 0 0 0 14 542 1 098 184 61 15 885 –7 884 –2 761 –1 541 –207 –12 393 3 492 –244 3 248 –1 3 247 –19 3 228 54.2 29.6 83.8 9 967 56 1 442 269 249 11 983 –8 075 –286 –1 698 –877 –544 –11 480 503 –35 468 468 –48 420 7.6 5.8 20  Swiss Reinsurance Company Consolidated 2014 Annual Report Business segments – income statement For the year ended 31 December 2014  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/benefit Net income/loss before attribution of non- controlling interests Income attributable to non-controlling interests Net income/loss after attribution of non-con- trolling 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 % Operating margin in % Property & Casualty  Reinsurance Life & Health  Reinsurance Other Consolidation Total 182 110 545 106 15 958 –32 –406 –351 –49 –398 –22 –1 258 –300 94 –206 –206 –206 26 992 163 3 187 550 75 60 31 027 –8 523 –9 602 –450 –5 920 –2 458 –713 –27 666 3 361 –395 2 966 –1 2 965 –69 2 896 22 –24 –2 2 –2 2 2 0 0 0 0 15 598 1 076 699 69 17 442 –8 493 –3 382 –1 175 –255 –13 305 4 137 –552 3 585 –1 3 584 –20 3 564 54.5 29.2 83.7 11 212 53 1 544 –255 75 12 629 –9 194 –99 –2 489 –885 –438 –13 105 –476 63 –413 –413 –49 –462 6.9 2.6 Swiss Reinsurance Company Consolidated 2014 Annual Report  21 Financial Statements I Notes to the Financial Statements Business segments – balance sheet As of 31 December 2013  USD millions Total assets 2014  USD millions Total assets Property & Casualty  Reinsurance 86 394 Property & Casualty  Reinsurance 80 745 Life & Health  Reinsurance 60 499 Life & Health  Reinsurance 57 121 Other 16 484 Consolidation –7 160 Total 156 217 Other 15 595 Consolidation –7 158 Total 146 303 22  Swiss Reinsurance Company Consolidated 2014 Annual Report This page intentionally left blank Swiss Reinsurance Company Consolidated 2014 Annual Report  23 Financial Statements I Notes to the Financial Statements b) Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2013  USD millions Premiums earned  Expenses Claims and claim adjustment expenses Acquisition costs Other expenses Total expenses before interest expenses Property 6 945 Casualty 5 366 Specialty 2 231 Total 14 542 –3 342 –883 –796 –5 021 –3 563 –1 408 –520 –5 491 –979 –470 –225 –1 674 –7 884 –2 761 –1 541 –12 186 Underwriting result 1 924 –125 557 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 % 48.1 24.2 72.3 66.4 35.9 102.3 43.9 31.1 75.0 2 356 1 098 184 61 –207 3 492 54.2 29.6 83.8 24  Swiss Reinsurance Company Consolidated 2014 Annual Report Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2014  USD millions Premiums earned Expenses Claims and claim adjustment expenses Acquisition costs Other expenses Total expenses before interest expenses Property 6 783 Casualty 6 437 Specialty 2 378 Total 15 598 –3 013 –1 049 –669 –4 731 –4 513 –1 831 –355 –6 699 –967 –502 –151 –1 620 –8 493 –3 382 –1 175 –13 050 Underwriting result 2 052 –262 758 2 548 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 % 1 076 699 69 –255 4 137 54.5 29.2 83.7 44.4 25.3 69.7 70.1 34.0 104.1 40.6 27.5 68.1 Swiss Reinsurance Company Consolidated 2014 Annual Report  25 Financial Statements I Notes to the Financial Statements c) Life & Health Reinsurance business segment – by line of business  For the years ended 31 December 2013  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 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 6 678 56 915 39 210 –123 7 775 –5 216 –286 –1 207 –636 –7 345 3 289 527 6 3 822 –2 859 –491 –241 –3 591 9 967 56 1 442 39 210 –117 11 597 –8 075 –286 –1 698 –877 –10 936 Operating income 430 231 661 Net realised investment gains/losses – non-participating and excluding insurance- related derivatives Interest expenses Income before income tax expenses Management expense ratio in % Operating margin1 in % 8.3 5.7 6.3 6.0 386 –544 503 7.6 5.8 1  Operating margin is calculated as operating income divided by total operating revenues. Total operating revenues are total revenues excluding unit-linked and with-profit  revenues. 26  Swiss Reinsurance Company Consolidated 2014 Annual Report Life & Health Reinsurance business segment – by line of business  For the years ended 31 December 2014  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 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 7 166 53 944 37 38 121 8 359 –5 890 –99 –1 808 –628 –8 425 4 046 600 –7 4 639 –3 304 –681 –257 –4 242 11 212 53 1 544 37 38 114 12 998 –9 194 –99 –2 489 –885 –12 667 Operating income –66 397 331 Net realised investment gains/losses – non-participating and excluding insurance- related derivatives Interest expenses Income before income tax expenses Management expense ratio in % Operating margin1 in % 7.7 –0.8 5.5 8.6 –369 –438 –476 6.9 2.6 1  Operating margin is calculated as operating income divided by total operating revenues. Total operating revenues are total revenues excluding unit-linked and with-profit  revenues. Swiss Reinsurance Company Consolidated 2014 Annual Report  27 Financial Statements I Notes to the 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 China United Kingdom Australia Germany Canada Japan Ireland France Switzerland Italy Other Total 2013 12 239 10 414 6 250 28 903 2013 9 476 2 255 2 520 1 987 1 284 1 296 844 812 1 642 545 549 5 693 28 903 2014 11 865 9 952 7 556 29 373 2014 9 253 3 053 2 746 2 014 1 294 1 213 1 051 894 857 770 486 5 742 29 373 Gross premiums earned and fee income from policyholders are allocated by country based on the underlying contract. 28  Swiss Reinsurance Company Consolidated 2014 Annual Report This page intentionally left blank Swiss Reinsurance Company Consolidated 2014 Annual Report  29 Financial Statements I Notes to the Financial Statements 3  Insurance information Premiums earned and fees assessed against policyholders For the year ended 31 December 2013  USD millions Premiums earned, thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Premiums earned before retrocession to external parties Retrocession to external parties Net premiums earned Fee income from policyholders, thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Gross fee income before retrocession to external parties Retrocession to external parties Net fee income Property & Casualty   Reinsurance Life & Health  Reinsurance 16 912 28 16 940 –2 398 14 542 0 624 10 735 11 359 –1 392 9 967 57 57 –1 56 Other 288 181 –28 441 –45 396 21 85 106 106 Total 912 27 828 0 28 740 –3 835 24 905 21 142 0 163 –1 162 30  Swiss Reinsurance Company Consolidated 2014 Annual Report Premiums earned and fees assessed against policyholders For the year ended 31 December 2014  USD millions Premiums earned, thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Premiums earned before retrocession to external parties Retrocession to external parties Net premiums earned Fee income from policyholders, thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Gross fee income before retrocession to external parties Retrocession to external parties Net fee income Property & Casualty   Reinsurance Life & Health  Reinsurance Other Total 16 556 16 556 –958 15 598 0 758 11 703 12 461 –1 249 11 212 54 54 –1 53 36 156 192 –10 182 20 90 110 110 794 28 415 0 29 209 –2 217 26 992 20 144 0 164 –1 163 Swiss Reinsurance Company Consolidated 2014 Annual Report  31 Financial Statements I Notes to the Financial Statements Claims and claim adjustment expenses For the year ended 31 December 2013  USD millions Claims paid, thereof: Gross claims paid to external parties Intra-group transactions (assumed and ceded) Claims before receivables from retrocession to external parties Retrocession to external parties Net claims paid Change in unpaid claims and claim adjustment expenses;   life and health benefits, thereof: Gross - with external parties Intra-group transactions (assumed and ceded) Unpaid claims and claim adjustment expenses; life and health  benefits before impact of retrocession to external parties Retrocession to external parties Net unpaid claims and claim adjustment expenses;   life and health benefits Property & Casualty   Reinsurance Life & Health  Reinsurance –11 947 –6 –11 953 1 826 –10 127 3 096 –12 3 084 –841 2 243 –8 894 –4 –8 898 1 230 –7 668 –365 4 –361 –46 –407 Other –629 10 –619 27 –592 –49 8 –41 20 –21 Total –21 470 0 –21 470 3 083 –18 387 2 682 0 2 682 –867 1 815 Claims and claim adjustment expenses; life and health benefits –7 884 –8 075 –613 –16 572 Acquisition costs For the year ended 31 December 2013  USD millions Acquisition costs, thereof: Property & Casualty   Reinsurance Life & Health  Reinsurance Other Total Gross acquisition costs with external parties Intra-group transactions (assumed and ceded) Acquisition costs before impact of retrocession to external  parties Retrocession to external parties Net acquisition costs –3 485 –8 –3 493 732 –2 761 –2 007 –2 007 309 –1 698 –8 8 10 10 –5 500 0 –5 500 1 051 –4 449 32  Swiss Reinsurance Company Consolidated 2014 Annual Report Claims and claim adjustment expenses For the year ended 31 December 2014  USD millions Claims paid, thereof: Gross claims paid to external parties Intra-group transactions (assumed and ceded) Claims before receivables from retrocession to external parties Retrocession to external parties Net claims paid Change in unpaid claims and claim adjustment expenses;   life and health benefits, thereof: Gross – with external parties Intra-group transactions (assumed and ceded) Unpaid claims and claim adjustment expenses; life and health  benefits before impact of retrocession to external parties Retrocession to external parties Net unpaid claims and claim adjustment expenses;   life and health benefits Property & Casualty   Reinsurance Life & Health  Reinsurance –10 749 1 –10 748 1 167 –9 581 2 030 –3 2 027 –939 1 088 –9 357 –1 –9 358 1 162 –8 196 –962 3 –959 –39 –998 Other –501 –501 12 –489 52 52 –1 51 Total –20 607 0 –20 607 2 341 –18 266 1 120 0 1 120 –979 141 Claims and claim adjustment expenses; life and health benefits –8 493 –9 194 –438 –18 125 Acquisition costs For the year ended 31 December 2014  USD millions Acquisition costs, thereof: Gross acquisition costs with external parties Intra-group transactions (assumed and ceded) Acquisition costs before impact of retrocession to external  parties Retrocession to external parties Net acquisition costs Property & Casualty   Reinsurance Life & Health  Reinsurance –3 588 –2 682 –3 588 206 –3 382 –2 682 193 –2 489 Other –49 –49 –49 Total –6 319 0 –6 319 399 –5 920 Swiss Reinsurance Company Consolidated 2014 Annual Report  33 Financial Statements I Notes to the Financial Statements Reinsurance assets and liabilities The reinsurance assets and liabilities as of 31 December were as follows: 2013  USD millions Assets Reinsurance recoverable on unpaid claims and  policy benefits Deferred acquisition costs Liabilities Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Policyholder account balances 2014  USD millions Assets Reinsurance recoverable on unpaid claims and  policy benefits Deferred acquisition costs Liabilities Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Policyholder account balances Property & Casualty   Reinsurance Life & Health  Reinsurance Other Consolidation Total 4 752 1 591 45 578 1 756 2 845 9 869 17 392 1 595 193 –12 941 2 932 5 095 –47 –50 6 654 4 424 56 338 20 324 6 690 Property & Casualty   Reinsurance Life & Health  Reinsurance Other Consolidation Total 3 648 1 756 41 233 1 689 2 723 10 177 16 442 1 473 25 1 784 2 842 5 137 –16 –17 5 346 4 480 52 177 19 284 6 610 Reinsurance recoverable on unpaid claims and policy benefits As of 31 December 2013 and 2014, the Group had a reinsurance recoverable of USD 6 654 million and USD 5 346 million,  respectively. The concentration of credit risk is regularly monitored and evaluated. The reinsurance programme with Berkshire  Hathaway and subsidiaries accounted for 72% of the Group’s reinsurance recoverable as of year-end 2013 and 70% as of   year-end 2014. Reinsurance receivables Reinsurance receivables as of 31 December were as follows: USD millions Premium receivables invoiced Receivables invoiced 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 2013 1143 361 1 270 –70 2014 1 031 265 777 –61 34  Swiss Reinsurance Company Consolidated 2014 Annual Report 4  Premiums written For the years ended 31 December 2013  USD millions Gross premiums written, thereof: Direct Reinsurance Intra-group transactions (assumed) Gross premiums written Intra-group transactions (ceded) Gross premiums written before retrocession  to external parties Retrocession to external parties Net premiums written 2014  USD millions Gross premiums written, thereof: Direct Reinsurance Intra-group transactions (assumed) Gross premiums written Intra-group transactions (ceded) Gross premiums written before retrocession  to external parties Retrocession to external parties Net premiums written Property & Casualty   Reinsurance Life & Health  Reinsurance Other Consolidation Total 17 548 46 17 594 17 594 –1 437 16 157 643 10 712 11 355 11 355 –1 383 9 972 321 174 495 –46 449 –49 400 964 28 434 0 29 398 0 29 398 –2 869 26 529 –46 –46 46 0 Property & Casualty   Reinsurance Life & Health  Reinsurance Other Consolidation Total 16 678 768 11 666 16 678 12 434 16 678 –537 16 141 12 434 –1 243 11 191 36 156 192 192 –10 182 804 28 500 0 29 304 0 29 304 –1 790 27 514 0 Swiss Reinsurance Company Consolidated 2014 Annual Report  35 Financial Statements I Notes to the Financial Statements 5  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 2013 45 756 10 582 56 338 2014 41 270 10 907 52 177 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 Net balance as of 1 January 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 Net balance as of 31 December Reinsurance recoverable Deferred expense on retroactive reinsurance Balance as of 31 December  2013 48 650 –5 702 –229 42 719 8 954 –1 282 151 7 823 –1 717 –8 438 –10 155 220 220 40 827 4 873 56 45 756 2014 45 756 –4 873 –56 40 827 9 189 –759 17 8 447 –1 796 –7 797 –9 593 –2 142 85 37 624 3 632 14 41 270 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. 36  Swiss Reinsurance Company Consolidated 2014 Annual Report Prior-year development In 2014, claims development on prior years was driven by favourable experience in all lines of business. For property, releases on  recent years more than offset increases for the earthquakes in New Zealand. Within casualty, favourable experience in liability  across all regions more than offset increases for asbestos and environmental losses and increases elsewhere in the portfolio.  Unfavourable experience in motor in France and UK were offset by good claims experience in other countries. In addition,  releases in accident & health due to positive experience combined with some favourable commutations contributed to the overall  improvement on casualty. Favourable development in engineering contributed to the overall reserve releases on specialty lines  due to a reassessment of reserves relating to Spain and France combined with very good claims experience. A summary of prior year claims development by lines of business is shown below: USD millions Line of business: Property Casualty Specialty Total  2013 –397 –468 –417 –1 282 2014 –139 –158 –462 –759 US asbestos and environmental claims exposure 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 to  other Swiss Re Group Companies, in particular in the area of US asbestos and environmental liability. At the end of 2014, the Reinsurance business unit carried net reserves for US asbestos and environmental liabilities equal to  USD 1 886 million. During 2014, the Group incurred net losses of USD 263 million and paid net against these liabilities  USD 162 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. Swiss Reinsurance Company Consolidated 2014 Annual Report  37 Financial Statements I Notes to the Financial Statements 6  Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) As of 31 December, the DAC were as follows: 2013  USD millions Opening balance as of 1 January 2013 Deferred Effect of acquisitions/disposals and retrocessions Amortisation Effect of foreign currency translation  Closing balance as of 31 December 2013 2014  USD millions Opening balance as of 1 January 2014 Deferred Effect of acquisitions/disposals and retrocessions Amortisation Effect of foreign currency translation  Closing balance as of 31 December 2014 Property & Casualty  Reinsurance 1 103 3 217 –2 710 –19 1 591 Property & Casualty  Reinsurance 1 591 3 563 –3 332 –66 1 756 Life & Health  Reinsurance 2 713 491 57 –397 –19 2 845 Life & Health  Reinsurance 2 845 490 –28 –448 –136 2 723 Other –5 –18 9 2 –12 Other –12 49 13 –49 1 Total 3 811 3 690 57 –3 098 –36 4 424 Total 4 424 4 102 –15 –3 829 –202 4 480 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 31 December, the PVFP was as follows: USD millions Opening balance as of 1 January 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 as of 31 December Life & Health  Reinsurance 1 358 206 –151 35 3 1 451 Other 628 –30 10 4 22 634 2013 Total 1 986 176 –141 39 3 22 2 085 Life & Health  Reinsurance 1 451 –156 44 –45 Other 634 –33 4 1 294 605 2014 Total 2 085 0 –189 48 –45 0 1 899 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 7%, 7%, 7%, 7% and 6%. 38  Swiss Reinsurance Company Consolidated 2014 Annual Report 7  Assets held for sale In the fourth quarter of 2014, the Group entered into an agreement to sell Aurora National Life Assurance Company (Aurora), a  US subsidiary, to Reinsurance Group of America, Incorporated (RGA).   The preliminary purchase price includes a cash payment of USD 183 million, subject to finalisation at closing. An expected pre- tax loss of USD 247 million (including the impact of net unrealised gains and shadow loss reserve that will be reclassified from  equity into the income statement) on the disposition of the net assets was recognised in the fourth quarter of 2014. The sale will  only be effective upon the receipt of all required regulatory approvals, which is expected in the second quarter of 2015. The  definitive purchase price will be adjusted at closing of the transaction based upon the difference in yields of the transferred  investments and a representative basket of investments.  Aurora primarily consists of bonds and policyholder liabilities. The expected loss on the disposition of the net assets has been  reflected in “Net realised investment gains/losses - non-participating” in the 2014 income statement of the “Other” segment.  This loss will be adjusted principally, for the definitive purchase price to be determined as of the closing of the transaction.  The major classes of assets and liabilities held for sale as of 31 December 2014 are listed below. USD millions Assets Fixed income securities available-for-sale Policy loans, mortgages and other loans Short-term investments Cash and cash equivalents Accrued investment income Premiums and other receivables Reinsurance recoverable  on unpaid claims and policy benefits Other assets held for sale Total assets Liabilities Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Policyholder account balances Accrued expenses and other liabilities held for sale Total liabilities 2014 3 456 157 6 23 37 6 7 1 3 693 15 1 494 1 151 292 2 952 Swiss Reinsurance Company Consolidated 2014 Annual Report  39   Financial Statements I Notes to the Financial Statements 8  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 2013 1 932 118 100 139 100 82 193 45 150 613 3 472 –343 –9 3 120 2014 2 098 74 158 144 102 47 170 36 108 591 3 528 –331 –10 3 187 Dividends received from investments accounted for using the equity method were USD 117 million and USD 171 million for  2013 and 2014, 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 activities Loss related to sale of Aurora National Life Assurance Company1 Foreign exchange gains/losses Net realised investment gains/losses – non-participating 1  Please refer to Note 7 “Assets held for sale” for more information. 2013 857 –623 233 –37 –34 –4 –38 296 –256 33 427 2014 602 –210 564 –77 –35 45 120 –314 –360 –247 462 550 40  Swiss Reinsurance Company Consolidated 2014 Annual Report Investment result – unit-linked and with-profit business The net investment result on unit-linked and with-profit business credited to policyholders amounted to gains of USD 249 million   and USD 75 million for 2013 and 2014, respectively, mainly originating from gains/losses on equity securities.  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 the  present value of 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 by integrating forward-looking evaluation of collateral  performance drivers, including default rates, prepayment rates and loss severities, and deal-level features, such as credit  enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset  class, product type and security-level differences in historical and expected performance. For corporate bonds and hybrid debt  instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecasted  economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. Expected  cash flows resulting from these analyses are discounted, and the present value is compared to the amortised cost basis to  determine the credit component of other-than-temporary impairments. A reconciliation of other-than-temporary impairments related to credit losses recognised in earnings was as follows: USD millions Balance as of 1 January 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  Balance as of 31 December 2013 295 1 –52 9 –35 218 2014 218 9 –75 –21 131 Swiss Reinsurance Company Consolidated 2014 Annual Report  41 Financial Statements I Notes to the 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: 2013  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 Mortgage- and asset-backed securities Fixed income securities available-for-sale    Equity securities available-for-sale  2014  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 Mortgage- and asset-backed securities Fixed income securities available-for-sale    Equity securities available-for-sale  Amortised cost  or cost Gross   unrealised   gains Other-than-temporary  impairments  recognised in other  comprehensive  income Gross  unrealised  losses 4 717 3 554 731 7 659 2 797 4 047 2 434 6 359 32 298 21 032 5 444 58 774 4 594 102 35 6 83 309 86 99 135 855 739 232 1 826 761 –152 –74 –37 –324 –64 –37 –11 –269 –968 –441 –60 –1 469 –61 –3 –5 –8 Amortised cost  or cost Gross   unrealised   gains Other-than-temporary  impairments  recognised in other  comprehensive  income Gross  unrealised  losses 9 994 2 989 825 4 750 2 619 4 314 2 654 7 014 35 159 20 489 4 952 60 600 1 975 904 46 68 743 621 358 311 320 3 371 1 335 170 4 876 472 –4 –23 –2 –1 –1 –29 –18 –108 –186 –139 –20 –345 –51 –2 –2 –4 Estimated   fair value 4 667 3 515 700 7 418 3 042 4 096 2 522 6 225 32 185 21 327 5 611 59 123 5 294 Estimated   fair value 10 894 3 012 891 5 492 3 239 4 643 2 947 7 226 38 344 21 683 5 100 65 127 2 396 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 also presented in the “Other-than-temporary impairments recognised in other comprehensive income”  column. 42  Swiss Reinsurance Company Consolidated 2014 Annual Report Investments trading The carrying amounts of 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 2013 1 202 132 188 1 522 615 2014 1 997 60 162 2 219 65 Investments held for unit-linked and with-profit business The carrying amounts of investments held for unit-linked business consist of equity securities trading. As of 31 December 2013  and 2014, these amounted to USD 988 million and USD 894 million, respectively. Maturity of fixed income securities available-for-sale The amortised cost or cost and estimated fair values of investments in fixed income securities available-for-sale 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 2013 and 2014, USD 9 792  million and USD 9 781 million, respectively, of fixed income securities  available-for-sale 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 2 373 15 358 10 829 24 967 5 247 58 774 2013 Estimated   fair value 2 358 15 569 10 951 24 832 5 413 59 123 Amortised   cost or cost 3 221 13 972 13 843 24 787 4 777 60 600 2014 Estimated   fair value 3 233 14 327 14 562 28 081 4 924 65 127 Assets pledged As of 31 December 2014, investments with a carrying value of USD 7 060 million were on deposit with regulatory agencies in  accordance with local requirements, and investments with a carrying value of USD 8 788 million were placed on deposit or  pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries. As of 31 December 2013 and 2014, securities of USD 14 419 million and USD 15 230 million, respectively, were transferred to  third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. Corresponding  liabilities of USD 1 991 million and USD 1 951 million, respectively, were recognised in accrued expenses and other liabilities for  the obligation to return collateral that the Group has the right to sell or repledge. As of 31 December 2014, a real estate portfolio with a carrying value of USD 230 million serves as collateral for short-term  senior operational debt of USD 503 million. Collateral accepted which the Group has the right to sell or repledge As of 31 December 2013 and 2014, the fair value of the equity securities, the government and corporate debt securities  received as collateral was USD 7 816 million and USD 7 165 million, respectively. Of this, the amount that was sold or repledged  as of 31 December 2013 and 2014 was USD 4 921 million and USD 3 738 million respectively. The sources of the collateral are  securities borrowing, reverse repurchase agreements and derivative transactions. Swiss Reinsurance Company Consolidated 2014 Annual Report  43   Financial Statements I Notes to the Financial Statements Offsetting of derivatives, financial assets and financial liabilities Offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows: 2013  USD millions Derivative financial instruments - assets Reverse repurchase agreements Securities borrowing Total Gross amounts of   recognised   financial assets 4 133 3 953 Collateral set off   in the balance sheet –2 877 –1 811 8 086 –4 688 Net amounts of  financial   assets presented   in the balance sheet 1 256 2 142 0 3 398 Related financial   instruments not set off   in the balance sheet –380 –2 142 –2 522 2013  USD millions Derivative financial instruments - liabilities Repurchase agreements Securities lending Total Gross amounts of   recognised   financial liabilities –4 108 –2 009 –1 792 –7 909 Collateral set off   in the balance sheet 2 656 1 811 4 467 Net amounts of  financial   liabilities presented   in the balance sheet –1 452 –198 –1 792 –3 442 Related financial   instruments not set off   in the balance sheet 157 198 1 655 2 010 2014  USD millions Derivative financial instruments - assets Reverse repurchase agreements Securities borrowing Total Gross amounts of   recognised   financial assets 4 420 3 254 87 7 761 Collateral set off   in the balance sheet –3 530 –1 303 –4 833 Net amounts of  financial   assets presented   in the balance sheet 890 1 951 87 2 928 Related financial   instruments not set off   in the balance sheet –188 –1 951 –87 –2 226 2014  USD millions Derivative financial instruments - liabilities Repurchase agreements Securities lending Total Gross amounts of   recognised   financial liabilities –3 840 –1 353 –1 901 –7 094 Collateral set off   in the balance sheet 2 969 1 003 300 4 272 Net amounts of  financial   liabilities presented   in the balance sheet –871 –350 –1 601 –2 822 Related financial   instruments not set off   in the balance sheet 141 350 1 475 1 966 Net amount 876 0 0 876 Net amount –1 295 0 –137 –1 432 Net amount 702 0 0 702 Net amount –730 0 –126 –856 Collateral pledged or received between two counterparties with a master netting arrangement in place, but not subject to  balance sheet netting is disclosed at fair value. The fair values represent the gross carrying value amounts at the reporting date  for each financial instrument received or pledged by the Group. Management believes that master netting agreements provide  for legally enforceable set-off in the event of default, which substantially reduces credit exposure. Upon occurrence of an event of  default the non-defaulting party may set off the obligation against collateral received regardless if offset on balance sheet prior to  the defaulting event. The net amounts of the financial assets and liabilities presented on the balance sheet were recognised in  “Other Invested Assets”, and “Accrued Expenses and Other Liabilities”, respectively. 44  Swiss Reinsurance Company Consolidated 2014 Annual Report 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 2013 and  2014. As of 31 December 2013 and 2014, USD 58 million and USD 39 million, respectively, of the gross unrealised loss on  equity securities available-for-sale relates to declines in value for less than 12 months and USD 3 million and USD 12 million,  respectively, to declines in value for more than 12 months. 2013  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 Mortgage- and asset-backed securities Total   2014  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 Mortgage- and 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 2 342 2 105 522 5 838 801 1 630 492 3 137 16 867 9 264 1 549 27 680 152 69 37 324 62 33 9 193 879 400 40 1 319 49 2 11 199 47 643 951 344 542 1 837 5 2 4 2 76 89 44 25 158 2 342 2 154 524 5 838 812 1 829 539 3 780 17 818 9 608 2 091 29 517 Less than 12 months 12 months or more 152 74 37 324 64 37 11 269 968 444 65 1 477 Total Fair value Unrealised losses Fair value Unrealised losses Fair value Unrealised losses 1 501 965 66 53 254 816 308 1 263 5 226 3 273 1 356 9 855 3 12 1 1 1 26 17 71 132 88 11 231 63 462 16 2 67 15 826 1 451 985 276 2 712 1 11 1 3 1 37 54 53 11 118 1 564 1 427 82 53 256 883 323 2 089 6 677 4 258 1 632 12 567 4 23 2 1 1 29 18 108 186 141 22 349 Swiss Reinsurance Company Consolidated 2014 Annual Report  45 Financial Statements I Notes to the Financial Statements Mortgages, loans and real estate As of 31 December 2013 and 2014, 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 2013 257 1 069 3 014 820 2014 241 1 248 2 419 881 The fair value of the real estate as of 31 December 2013 and 2014 was USD 2 546 million and USD 2 475 million, respectively.   The carrying value of policy loans, mortgages and other loans approximates fair value.  Depreciation expense related to income-producing properties was USD 25 million and USD 26 million for 2013 and 2014,  respectively. Accumulated depreciation on investment real estate totalled USD 577 million and USD 539 million as of  31 December 2013 and 2014, respectively. Substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies. 46  Swiss Reinsurance Company Consolidated 2014 Annual Report 9  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 (e.g. 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 (e.g. 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 (OTC) 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 2014, 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 on the lowest level input that is  significant to the determination of the fair value. Swiss Reinsurance Company Consolidated 2014 Annual Report  47 Financial Statements I Notes to the 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 mortgage- and asset-backed securities 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 asset-backed securities (ABS) for which there are no significant observable inputs are developed using benchmarks to  similar transactions or indices. The two primary categories of mortgage- and asset-backed securities are residential mortgage- backed securities (RMBS) and commercial mortgage-backed securities (CMBS). 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. Mortgage- and asset-backed securities also 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 invested assets” 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 the 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).  48  Swiss Reinsurance Company Consolidated 2014 Annual Report The Group holds both exchange-traded and (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 the Black-Scholes type option pricing model and 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 can 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.  Governance around level 3 fair valuation The Senior Risk Committee, chaired by the Group Chief Risk Officer, has a primary responsibility for governing and overseeing all  of the Groupʼs asset and derivative valuation policies and operating parameters (including level 3 measurements). The Senior  Risk Committee delegates the responsibility for implementation and oversight of consistent application of the Groupʼs pricing  and valuation policies to the Pricing and Valuation Committee. The Pricing and Valuation Committee, which is a joint Risk Management & Finance management control committee, is  responsible for the implementation and consistent application of the pricing and valuation policies. 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 Valuation Risk Management 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 Management 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 through the vendor- and model-based valuations,  the results of which are also subject to the IPV process.  Swiss Reinsurance Company Consolidated 2014 Annual Report  49 Financial Statements I Notes to the Financial Statements Assets and liabilities measured at fair value on a recurring basis As of 31 December, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: 2013  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 Mortgage- and asset-backed securities Equity securities Equity securities backing unit-linked and   with-profit business Equity securities held for proprietary   investment purposes Derivative financial instruments Interest rate contracts Foreign exchange contracts Derivative equity contracts Credit contracts Other contracts Other invested 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 4 182 55 844 619 4 182 6 332 988 5 344 31 8 23 1 476 12 021 –14 –14 –1 634 –1 648 1 204 3 530 24 471 20 852 5 787 554 554 3 597 2 377 267 842 18 93 210 60 205 –3 100 –2 127 –428 –527 –11 –7 –1 271 –4 371 607 12 11 11 505 401 28 76 1 791 2 926 –2 877 –2 877 –994 2 656 –190 –38 –766 –145 –1 656 –2 795 2 656 Total 60 645 5 386 3 530 24 471 21 459 5 799 6 897 988 5 909 1 256 2 385 267 1 266 46 169 3 477 72 275 –1 452 –2 127 –428 –731 –49 –773 –145 –4 561 –6 158 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. 50  Swiss Reinsurance Company Consolidated 2014 Annual Report 2014  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 Mortgage- and asset-backed securities Equity securities Equity securities backing unit-linked and   with-profit business Equity securities held for proprietary   investment purposes Short-term investments held for proprietary   investment purposes2 Derivative financial instruments Interest rate contracts Foreign exchange contracts Derivative equity contracts Credit contracts Other contracts Other invested 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   identical assets  and liabilities   (Level 1) active markets for   Significant other  observable  inputs  (Level 2) Significant   unobservable  inputs  (Level 3) Impact of   netting1 10 974 55 984 388 10 974 3 351 894 2 457 4 484 40 40 907 19 756 –13 –5 –8 –1 035 –1 048 1 419 3 028 24 920 21 368 5 249 6 036 3 843 2 625 272 889 1 56 562 66 425 –3 110 –2 117 –407 –561 –2 –23 –864 –3 974 375 13 4 4 396 141 1 289 2 218 –130 –10 –577 –187 –1 559 –2 463 537 –3 530 –3 530 –717 2 969 2 969 Total 67 346 12 393 3 028 24 920 21 743 5 262 3 355 894 2 461 10 520 890 2 625 272 1 325 1 197 2 758 84 869 –871 –2 122 –407 –699 –12 –600 –187 –3 458 –4 516 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  2  In the first quarter 2014, the Group changed the valuation of short-term investments from amortized cost to fair value. There is no material impact to net income, total assets  termination of any one contract. or shareholder’s equity. Assets and liabilities measured at fair value on a recurring basis As of 31 December, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: 2013  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 Mortgage- and asset-backed securities Equity securities Equity securities backing unit-linked and   with-profit business Equity securities held for proprietary   investment purposes Derivative financial instruments Interest rate contracts Foreign exchange contracts Derivative equity contracts Credit contracts Other contracts Other invested 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   identical assets  and liabilities   (Level 1) active markets for   Significant other  observable  inputs  (Level 2) Significant   unobservable  inputs  (Level 3) Impact of   netting1 4 182 55 844 619 4 182 6 332 988 5 344 31 8 23 1 476 12 021 –14 –14 –1 634 –1 648 1 204 3 530 24 471 20 852 5 787 554 554 3 597 2 377 267 842 18 93 210 60 205 –3 100 –2 127 –428 –527 –11 –7 –1 271 –4 371 607 12 11 11 505 401 28 76 1 791 2 926 –190 –38 –766 –145 –1 656 –2 795 –2 877 –2 877 2 656 –994 2 656 Total 60 645 5 386 3 530 24 471 21 459 5 799 6 897 988 5 909 1 256 2 385 267 1 266 46 169 3 477 72 275 –1 452 –2 127 –428 –731 –49 –773 –145 –4 561 –6 158 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. 2014  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 Mortgage- and asset-backed securities Equity securities Equity securities backing unit-linked and   with-profit business Equity securities held for proprietary   investment purposes Short-term investments held for proprietary   investment purposes2 Derivative financial instruments Interest rate contracts Foreign exchange contracts Derivative equity contracts Credit contracts Other contracts Other invested 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 10 974 55 984 388 10 974 3 351 894 2 457 4 484 40 40 907 19 756 –13 –5 –8 –1 035 –1 048 1 419 3 028 24 920 21 368 5 249 6 036 3 843 2 625 272 889 1 56 562 66 425 –3 110 –2 117 –407 –561 –2 –23 –864 –3 974 375 13 4 4 537 –3 530 396 141 1 289 2 218 –3 530 –717 2 969 –130 –10 –577 –187 –1 559 –2 463 2 969 Total 67 346 12 393 3 028 24 920 21 743 5 262 3 355 894 2 461 10 520 890 2 625 272 1 325 1 197 2 758 84 869 –871 –2 122 –407 –699 –12 –600 –187 –3 458 –4 516 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  In the first quarter 2014, the Group changed the valuation of short-term investments from amortized cost to fair value. There is no material impact to net income, total assets  or shareholder’s equity. Swiss Reinsurance Company Consolidated 2014 Annual Report  51 Financial Statements I Notes to the Financial Statements Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December, the reconciliation of the fair values of assets and liabilities measured on  a recurring basis using significant unobservable inputs were as follows: 2013  USD millions Assets and liabilities Balance as of 1 January Fixed  income   securities  Equity   securities Derivative   assets Other   invested   assets Total   assets Derivative   liabilities Liabilities for  life and  health policy  benefits Accrued  expenses  and other  liabilities Total   liabilities 637 74 1 010 2 071 3 792 –2 865 –272 –1 625 –4 762 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 –2 –2 54 –37 –31 1 –329 57 –273 1 721 131 1 852 –64 25 99 –233 –67 8 342 –568 134 –280 27 1 791 6 421 99 –902 –98 134 –280 27 2 926 –62 212 0 0 –62 212 0 0 0 –994 –4 –145 –31 –1 656 –35 –2 795 Closing balance as of 31 December 619 11 505 1  Transfers are recognised at the date of the event or change in circumstances that caused the transfer.  2014  USD millions Assets and liabilities Balance as of 1 January 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 619 1 7 10 –21 –227 –1 Closing balance as of 31 December 388 Fixed  income   securities  Equity   securities Derivative   assets Other   invested   assets Total   assets Derivative   liabilities Liabilities for  life and  health policy  benefits Accrued  expenses  and other  liabilities Total  liabilities 11 2 –1 –3 –4 –1 4 505 1 791 2 926 –994 –145 –1 656 –2 795 125 –29 76 –523 –2 32 –130 44 28 –58 –24 42 128 302 –39 –23 130 28 –605 –253 74 –135 –91 97 –31 263 0 0 –91 97 –31 0 0 537 –51 1 289 –52 2 218 –717 –3 –187 97 –1 559 94 –2 463 1  Transfers are recognised at the date of the event or change in circumstances that caused the transfer.  52  Swiss Reinsurance Company Consolidated 2014 Annual Report Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable  inputs (level 3) The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) for  the years ended 31 December were as follows: 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 2013 1 579 1 437 2014 391 90 Swiss Reinsurance Company Consolidated 2014 Annual Report  53 Financial Statements I Notes to the Financial Statements Quantitative information about level 3 fair value measurements Unobservable inputs for major level 3 assets and liabilities as of 31 December were as follows: USD millions Assets Corporate debt securities Private placement corporate debt 2013  Fair value 2014  Fair value 607 341 375 304 Valuation technique Unobservable input Range  (weighted average) Corporate Spread Matrix Illiquidity premium 15 bps–186 bps  (64 bps) 75 bps–175 bps   (98 bps) Private placement credit tenant leases 68 71 Discounted Cash Flow Model Illiquidity premium Derivative equity contracts OTC equity option referencing correlated  equity indices 401 401 396 396 Proprietary Option Model Correlation –20 %–100 % (40 %)1 Liabilities Derivative equity contracts OTC equity option referencing correlated  equity indices Other derivative contracts and liabilities for  life and health policy benefits Variable annuity and  fair valued GMDB contracts –190 –49 –130 –46 –911 –764 Proprietary Option Model Correlation –20%–100% (40%)1 –677 –639 Discounted Cash Flow Model Risk margin Volatility Lapse Mortality adjustment Withdrawal rate Lapse Mortality adjustment 4% (n.a.) 4%–42% 0.5%–33% –10%–0% 0%–90% 3%–10% 80% (n.a.) Embedded derivatives in Mod-Co and  Coinsurance with Funds Withheld treaties 1 Represents average input value for the reporting period. –125 –22 Discounted Cash Flow Model 54  Swiss Reinsurance Company Consolidated 2014 Annual Report 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 private placement corporate debt securities  and private placement credit tenant leases is illiquidity premium. A significant increase (decrease) in this input in isolation would  result in a significantly lower (higher) fair value measurement.  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 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. A 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. A 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, a significant increase (decrease) in the mortality  adjustment rate (i.e. increase (decrease) in mortality, respectively) in isolation would result in a decrease (increase) in fair value   of the Group’s liability. For the latter, a 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. Swiss Reinsurance Company Consolidated 2014 Annual Report  55 Financial Statements I Notes to the Financial Statements Other invested assets measured at net asset value Other invested assets measured at net asset value as of 31 December, respectively, were as follows: USD millions Private equity funds Hedge funds Private equity direct Real estate funds Total 2013  Fair value 687 749 68 231 1 735 2014  Fair value 657 344 33 203 1 237 Unfunded  commitments 224 74 298 Redemption frequency  (if currently eligible) non-redeemable redeemable1 non-redeemable non-redeemable Redemption   notice period n.a. 45-95 days2 n.a. n.a. 1  The redemption frequency varies by position. 2  Cash distribution can be delayed for an extended period depending on the sale of the underlyings. The hedge fund investments employ a variety of strategies, including global macro, relative value, event-driven and long/short  equity across various asset classes. 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 available-for-sale 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. Over the first six months  of 2014, these equity securities got redeemed. Other invested assets The Group elected the fair value option for certain investments classified as equity method investees within other invested assets  in the balance sheet. The Group applied the fair value option, as the investments are managed on a fair value basis. The changes  in fair value of these elected investments are recorded in earnings. 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. 56  Swiss Reinsurance Company Consolidated 2014 Annual Report 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 were as follows: USD millions Assets Equity securities trading held for proprietary investment purposes of which at fair value pursuant to the fair value option Other invested assets 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 2013 2014 615 544 9 233 57 65 0 7 353 50 –20 324 –145 –19 284 –187 Changes in fair values for items measured at fair value pursuant to election of the fair value option Gains /losses included in earnings for items measured at fair value pursuant to election of the fair value option including foreign  exchange impact for the years ended 31 December were as follows: USD millions Equity securities trading held for proprietary investment purposes Other invested assets Liabilities for life and health policy benefits Total 2013 35 18 125 178 2014 2 2 –41 –37 Fair value changes from equity securities trading are reported in “Net realised investment gains /losses - non-participating  business”. Fair value changes from other invested assets are reported in “Net investment income - non-participating business”.  Fair value changes from the GMDB reserves are shown in “Life and health benefits”. Swiss Reinsurance Company Consolidated 2014 Annual Report  57 Financial Statements I Notes to the Financial Statements Assets and liabilities not measured at fair value but for which the fair value is disclosed Assets and liabilities not measured at fair value but for which the fair value is disclosed as of 31 December, were as follows: 2013  USD millions Assets Policy loans Mortgage loans Other loans Investment real estate Total assets Liabilities Debt Total liabilities 2014  USD millions Assets Policy loans Mortgage loans Other loans Investment real estate Total assets Liabilities Debt Total liabilities Significant other  observable inputs  (Level 2) Significant   unobservable  inputs (Level 3) 257 1 069 3 014 2 546 6 886 0 Total 257 1 069 3 014 2 546 6 886 –9 703 –9 703 –10 998 –10 998 –20 701 –20 701 Significant other  observable inputs  (Level 2) Significant   unobservable  inputs (Level 3) 241 1 248 2 419 2 475 6 383 0 Total 241 1 248 2 419 2 475 6 383 –9 441 –9 441 –8 694 –8 694 –18 135 –18 135 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.   58  Swiss Reinsurance Company Consolidated 2014 Annual Report This page intentionally left blank Swiss Reinsurance Company Consolidated 2014 Annual Report  59 Financial Statements I Notes to the Financial Statements 10 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 set-off in the event of default, which substantially reduces credit exposure. 60 Swiss Reinsurance Company Consolidated 2014 Annual Report Total derivative financial instruments 146 265 4 133 –4 108 Fair values and notional amounts of derivative financial instruments As of 31 December, the fair values and notional amounts of the derivatives outstanding were as follows: Notional amount assets/liabilities Fair value assets Fair value liabilities Carrying value assets/liabilities 2013 USD millions Derivatives not designated as hedging instruments Interest rate contracts Foreign exchange contracts Equity contracts Credit contracts Other contracts Total  Derivatives designated as hedging instruments Foreign exchange contracts Total  Amount offset Where a right of set-off exists Due to cash collateral Total net amount of derivative financial instruments 2014  USD millions Derivatives not designated as hedging instruments Interest rate contracts Foreign exchange contracts Equity contracts Credit contracts Other contracts Total  Derivatives designated as hedging instruments Foreign exchange contracts Total  83 250 15 580 20 111 2 676 23 176 144 793 1 472 1 472 2 385 252 1 266 46 169 4 118 15 15 –2 127 –417 –731 –49 –773 –4 097 –11 –11 –2 353 –524 1 256 2 353 303 –1 452 Notional amount assets/liabilities Fair value assets Fair value liabilities Carrying value assets/liabilities 83 942 12 924 20 173 450 21 491 138 980 2 770 2 770 2 625 223 1 325 1 197 4 371 49 49 –2 122 –400 –699 –12 –600 –3 833 –7 –7 258 –165 535 –3 –604 21 4 4 25 –196 503 –177 626 –11 –403 538 42 42 580 19 Total derivative financial instruments 141 750 4 420 –3 840 Amount offset Where a right of set-off exists Due to cash collateral Total net amount of derivative financial instruments –2 554 –976 890 2 554 415 –871 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 2013 and 2014. Swiss Reinsurance Company Consolidated 2014 Annual Report 61 Financial Statements I Notes to the 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 — non-participating business” in the income statement. For the years ended 31 December, 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 contracts Foreign exchange contracts Equity contracts Credit contracts Other contracts Total gain/loss recognised in income 2013 –223 –584 –962 –71 1 731 –109 2014 –207 49 –172 9 –358 –679 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 2013 and 2014, the following hedging relationships were outstanding: Fair value hedges The Group enters into foreign exchange swaps to reduce the exposure to foreign exchange volatility for certain of its issued debt positions and fixed income securities. Previously, the Group has entered into interest rate swaps to reduce the exposure to interest rate volatility. These derivative instruments are designated as hedging instruments in qualifying fair value hedges. Gains and losses on derivative financial instruments designated as fair value hedging instruments are recorded in “Net realised investment gains/losses — non-participating business” in the income statement. For the years ended 31 December, the gains and losses attributable to the hedged risks were as follows: USD millions Fair value hedging relationships Interest rate contracts Foreign exchange contracts Total gain/loss recognised in income Gains/losses on derivatives 2013 Gains/losses on hedged items Gains/losses on derivatives 2014 Gains/losses on hedged items –240 2 –238 255 –1 254 122 122 –120 –120 Hedges of the net investment in foreign operations The Group designates derivative and 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 2013 and 2014, the Group recorded an accumulated net unrealised foreign currency remeasurement loss of USD 57 million and a gain of USD 525 million, respectively, in shareholder’s equity. These offset translation gains and losses on the hedged net investment. 62 Swiss Reinsurance Company Consolidated 2014 Annual Report Maximum potential loss In consideration of the rights of set-off and the qualifying master netting arrangements with various counterparties, the maximum potential loss as of 31 December 2013 and 2014 was approximately USD 1 780 million and USD 1 866 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 features1 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 305 million and USD 112 million as of 31 December 2013 and 2014, respectively. For derivative financial instruments containing credit risk-related contingent features, the Group posted collateral of USD 2 million and USD 6 million as of 31 December 2013 and 2014, respectively. In the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD 106 million additional collateral would have had to be posted as of 31 December 2014. The total equals the amount needed to settle the instruments immediately as of 31 December 2014. Credit derivatives written/sold In 2013, the Group has substantially completed the unwinding and de-risking activities and reduced its exposure in credit derivatives written/sold which decreased the related notional amount and fair values materially. As of 31 December 2014, the Group had no significant exposure in credit derivatives written/sold. The maximum potential payout, which is based on notional values, as of 31 December 2013 and 2014 was USD 640 million and nil, respectively. 1 During 2014 the Group revised the disclosure on contracts that contain credit-risk related contingent features. The revision had no impact on net income and shareholder’s equity of the Group. Swiss Reinsurance Company Consolidated 2014 Annual Report 63 Financial Statements I Notes to the Financial Statements 11 Debt and contingent capital instruments The Group enters into long- and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines short-term debt as debt having a maturity at the balance sheet date of not greater than one year and long-term debt as having a maturity of greater than one year. 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-term debt – financial and operational debt Senior financial debt Senior operational debt Subordinated financial debt Subordinated operational debt Long-term debt – financial and operational debt Total carrying value Total fair value Maturity of long-term debt As of 31 December, long-term debt as reported above had the following maturities: USD millions Due in 2015 Due in 2016 Due in 2017 Due in 2018 Due in 2019 Due after 2019 Total carrying value 1 Balance was reclassified to short-term debt. 2013 2 896 3 096 5 992 3 233 708 5 367 5 414 14 722 20 714 20 701 2013 730 2 151 1 341 0 1 981 8 519 14 722 2014 3 925 1 034 4 959 2 659 713 4 990 2 903 11 265 16 224 18 135 2014 01 1 984 1 215 0 1 922 6 144 11 265 64 Swiss Reinsurance Company Consolidated 2014 Annual Report Senior long-term debt Instrument EMTN Senior notes1 Senior notes EMTN Senior notes1 Senior notes1 Senior notes Payment undertaking agreements Maturity 2017 2019 2022 2024 2026 2030 2042 Various Total senior long-term debt as of 31 December 2014 Total senior long-term debt as of 31 December 2013 Issued in 2011 1999 2012 2014 1996 2000 2012 various 1 Assumed in the acquisition of GE Insurance Solutions. Subordinated long-term debt Maturity 2024 2042 2045 2057 Instrument Subordinated contingent write-off loan note Subordinated fixed-to-floating rate loan note Subordinated contingent write-off securities Subordinated private placement (amortising, limited recourse) Subordinated perpetual loan note Subordinated perpetual loan note Subordinated perpetual loan note Subordinated perpetual loan note Issued in 2013 2012 2013 2007 2006 2006 2007 2007 Currency CHF USD USD CHF USD USD USD USD Nominal in millions 600 234 250 250 397 193 500 579 Interest rate 2.13% 6.45% 2.88% 1.00% 7.00% 7.75% 4.25% various Book value in USD millions 601 272 249 250 519 279 489 713 3 372 3 941 Currency USD EUR CHF Nominal in millions 750 500 175 Interest rate 6.38% 6.63% 7.50% first call in 2019 2022 2020 Book value in USD millions 829 597 212 GBP EUR USD GBP AUD 1 862 1 000 752 500 300 4.83% 5.25% 6.85% 6.30% 7.64% 6 months BBSW +1.17% 2016 2016 2019 2017 2017 2 903 1 209 752 778 245 368 7 893 10 781 Subordinated perpetual loan note 2007 AUD 450 Total subordinated long-term debt as of 31 December 2014 Total subordinated long-term debt as of 31 December 2013 Swiss Reinsurance Company Consolidated 2014 Annual Report 65 Financial Statements I Notes to the Financial Statements Interest expense on long-term debt and contingent capital instruments 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  2013 148 49 286 246 729 2014 110 16 293 231 650 Interest expense on contingent capital instruments was USD 67 million and USD 69 million for the years ended 31 December 2013 and 2014, respectively. Long-term debt issued in 2014 In September 2014, SRZ issued 10-year senior notes maturing in 2024. The notes have a face value of CHF 250 million, with a fixed coupon of 1% per annum. Contingent capital instruments In February 2012, SRZ issued a perpetual subordinated instrument 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, SRZ 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 through at market conversion using the retrospective five-day volume weighted average share price with a 3% discount or within six months following a solvency event at a pre-set floor price (CHF 26 for the instrument with face value of CHF 320 million and USD 32 for the instrument with face value of USD 750 million, respectively). These instruments are referred to in these financial statements as “contingent capital instruments”. 66 Swiss Reinsurance Company Consolidated 2014 Annual Report 12 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 2013 578 –359 219 2014 1 002 –607 395 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 Basis differences in subsidiaries Change in statutory tax rates Change in liability for unrecognised tax benefits including interest and penalties Other, net Total  2013 775 6 –8 –121 –312 –152 47 –196 180 219 2014 706 77 –176 –55 –28 14 0 –197 54 395 The Group reported a tax charge of USD 395 million on a pre-tax income of USD 3 361 million for 2014, compared to a charge of USD 219 million on a pre-tax income of USD 3 691 million for 2013. This translates into an effective tax rate in the current and prior-year reporting periods of 11.8% and 5.9%, respectively. The higher tax rate in the current year results from the impact of tax on profits earned in higher tax jurisdictions and lower one-off tax benefits, partially offset by a higher tax benefit from foreign currency translation. The particularly low effective tax rate in 2013 was also driven by the conclusion of audits, rulings and revised tax opinions. Swiss Reinsurance Company Consolidated 2014 Annual Report 67 Financial Statements I Notes to the 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 Unrealized gains in income Other Gross deferred tax asset Valuation allowance Unrecognised tax benefits offsetting benefits on loss carryforwards1 Total deferred tax assets 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 tax liabilities Liability for unrecognised tax benefits including interest and penalties Total deferred and other non-current tax liabilities 2013 2014 442 759 175 3 216 505 16 658 5 771 –748 5 023 –377 –627 –199 –708 –2 450 –364 –408 –123 –568 –5 824 –1 089 –6 913 247 583 257 3 517 367 47 851 5 869 –639 –24 5 206 –277 –877 –370 –694 –2 545 –1 188 –238 –185 –492 –6 866 –624 –7 490 Net deferred and other non-current taxes –1 890 –2 284 1 The Group updated its unrecognised tax benefits presentation. Unrecognised tax benefits is now presented as a reduction to deferred tax assets when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. This change is applied prospectively. As of 31 December 2014, the aggregate amount of temporary differences associated with investment in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognised amount to approximately USD 3.8 billion. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules. As of 31 December 2014, the Group had USD 10 559 million net operating tax loss carryforwards, expiring as follows: USD 27 million in 2018, USD 47 million in 2019, USD 9 123 million in 2020 and beyond, and USD 1 362 million never expire. The Group also had capital loss carryforwards of USD 714 million, expiring as follows: USD 81 million in 2019 and USD 633 million never expire. Net operating tax losses of USD 672 million and net capital tax losses of USD 43 million were utilised during the period ended 31 December 2014. Income taxes paid in 2013 and 2014 were USD 352 million and USD 444 million, respectively. 68 Swiss Reinsurance Company Consolidated 2014 Annual Report 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 Additions based on tax positions related to the current year Additions for tax positions related to the prior years Reductions for tax positions of current year Reductions for tax positions of prior years Settlements Other (including foreign currency translation) Balance as of 31 December 2013 1 214 101 88 –20 –367 –83 19 952 2014 952 22 49 –137 –215 –84 –51 536 The amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 718 million and USD 497 million at 31 December 2013 and 2014, respectively. Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such expense in 2014 was USD 19 million (USD 128 million in 2013). As of 31 December 2013 and 2014, USD 137 million and USD 112 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2014 is included within the deferred and other non-current taxes section reflected above and in the balance sheet. The balance of gross unrecognised tax benefits as of 31 December 2014 presented in the table above excludes accrued interest and penalties of USD 112 million. During the year, certain tax positions and audits in Switzerland, France, Germany, Canada and Japan 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. 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 Brasil Canada China Denmark France Germany Hong Kong India Ireland Israel Italy Japan 2010 - 2014 2010 - 2014 2010 - 2014 2008 - 2014 2005 - 2014 2010 - 2014 2008 - 2014 2007 - 2014 2008 - 2014 2005 - 2014 2010 - 2014 2008 - 2014 2009 - 2014 2009 - 2014 Korea Luxembourg Malaysia Mexico Netherlands New Zealand Singapore Slovakia South Africa Spain Switzerland United Kingdom United States 2013 - 2014 2010 - 2014 2013 - 2014 2009 - 2014 2010 - 2014 2009 - 2014 2008 - 2014 2009 - 2014 2011 - 2014 2010 - 2014 2011 - 2014 2008, 2011 - 2014 2009 - 2014 Swiss Reinsurance Company Consolidated 2014 Annual Report 69 Benefit obligation as of 1 January 2014 USD millions Service cost Interest cost Amendments Actuarial gains/losses Benefits paid Employee contribution Acquisitions/disposals/additions Effect of settlement, curtailment and termination 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 settlement, curtailment and termination Effect of foreign currency translation Fair value of plan assets as of 31 December Funded status Swiss plan 3 530 Foreign plans Other benefits 100 76 –90 587 –129 27 1 –418 3 684 3 660 281 101 –129 27 1 –407 3 534 –150 1 805 7 76 193 –60 –4 –24 –114 1 879 1 742 217 65 –60 –24 –117 1 823 –56 341 5 12 52 –17 –22 371 17 –17 0 –371 Total 5 676 112 164 –90 832 –206 27 –4 –23 –554 5 934 5 402 498 183 –206 27 0 –23 –524 5 357 –577 Financial Statements I Notes to the Financial Statements 13 Benefit plans Defined benefit pension plans and post-retirement benefits The Swiss Re 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 Swiss Re 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. 2013 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 settlement, curtailment and termination 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 settlement, curtailment and termination Effect of foreign currency translation Fair value of plan assets as of 31 December Funded status Swiss plan 3 691 118 72 Foreign plans 1 774 7 69 Other benefits 382 6 11 –338 –137 26 1 97 3 530 3 213 221 227 –137 26 1 109 3 660 130 –8 –60 23 1 805 1 569 99 111 –60 23 1 742 –63 –47 –15 4 341 15 –15 0 –341 Total 5 847 131 152 0 –393 –212 26 0 1 124 5 676 4 782 320 353 –212 26 0 1 132 5 402 –274 70 Swiss Reinsurance Company Consolidated 2014 Annual Report 13 Benefit plans Defined benefit pension plans and post-retirement benefits The Swiss Re 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 Swiss Re 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. Benefit obligation as of 1 January 2013 USD millions Service cost Interest cost Amendments Actuarial gains/losses Benefits paid Employee contribution Acquisitions/disposals/additions Effect of settlement, curtailment and termination 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 settlement, curtailment and termination Effect of foreign currency translation Fair value of plan assets as of 31 December Funded status Swiss plan 3 691 Foreign plans Other benefits 118 72 –338 –137 26 1 97 3 530 3 213 221 227 –137 26 1 109 3 660 130 1 774 7 69 –8 –60 23 1 805 1 569 99 111 –60 23 1 742 –63 382 6 11 –47 –15 4 341 15 –15 0 –341 Total 5 847 131 152 0 –393 –212 26 0 1 124 5 676 4 782 320 353 –212 26 0 1 132 5 402 –274 2014 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 settlement, curtailment and termination 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 settlement, curtailment and termination Effect of foreign currency translation Fair value of plan assets as of 31 December Funded status Swiss plan 3 530 100 76 –90 587 –129 27 1 –418 3 684 3 660 281 101 –129 27 1 –407 3 534 –150 Foreign plans 1 805 7 76 Other benefits 341 5 12 193 –60 –4 –24 –114 1 879 1 742 217 65 –60 –24 –117 1 823 –56 52 –17 –22 371 17 –17 0 –371 Amounts recognised in the balance sheet, as of 31 December were as follows: 2013 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised 2014 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised Swiss plan 130 130 Swiss plan –150 –150 Foreign plans 44 –2 –105 –63 Foreign plans 185 –3 –238 –56 Other benefits –16 –325 –341 Other benefits –15 –356 –371 Total 5 676 112 164 –90 832 –206 27 –4 –23 –554 5 934 5 402 498 183 –206 27 0 –23 –524 5 357 –577 Total 174 –18 –430 –274 Total 185 –18 –744 –577 Swiss Reinsurance Company Consolidated 2014 Annual Report 71 Financial Statements I Notes to the Financial Statements Amounts recognised in accumulated other comprehensive income, gross of tax, as of 31 December were as follows: 2013 USD millions Net gain/loss Prior service cost/credit Total 2014 USD millions Net gain/loss Prior service cost/credit Total Swiss plan 522 –2 520 Swiss plan 897 –87 810 Foreign plans 301 2 303 Foreign plans 323 1 324 Other benefits –109 –88 –197 Other benefits –45 –77 –122 Components of net periodic benefit cost The components of pension and post-retirement cost for the years ended 31 December were as follows: 2013 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 2014 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 118 72 –102 Foreign plans 7 69 –76 Other benefits 6 11 57 1 146 17 17 –6 –10 1 Swiss plan 100 76 –112 Foreign plans 7 76 –84 Other benefits 5 12 43 –5 1 103 19 –3 –2 13 –12 –11 –6 Total 714 –88 626 Total 1 175 –163 1 012 Total 131 152 –178 68 –10 1 164 Total 112 164 –196 50 –19 –1 110 72 Swiss Reinsurance Company Consolidated 2014 Annual Report Other changes in plan assets and benefit obligations recognised in other comprehensive income for the years ended 31 December were as follows: 2013 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 2014 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 Swiss plan –457 Foreign plans –31 Other benefits –46 –57 –514 –368 –17 6 –42 –25 6 10 –30 –29 Swiss plan 418 –90 Foreign plans 60 –4 Other benefits 52 –43 5 290 393 –19 3 –19 21 34 12 11 75 69 Total –534 0 –68 10 0 6 –586 –422 Total 530 –94 –50 19 0 –19 386 496 The estimated net loss and prior service credit for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2015 are USD 87 million and USD 9 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 2015 are USD 4 million and USD 10 million, respectively. The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 5 235 million and USD 5 469 million as of 31 December 2013 and 2014, 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 2013 592 591 490 2014 4 769 4 720 4 379 Swiss Reinsurance Company Consolidated 2014 Annual Report 73 Financial Statements I Notes to the 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 2013 2014 2013 2014 2013 2014 2.3% 2.3% 2.0% 3.3% 2.3% 1.1% 2.3% 2.3% 3.3% 2.3% 4.4% 3.2% 4.1% 4.9% 3.1% 3.4% 2.8% 4.4% 5.1% 3.2% 3.5% 2.1% 2.7% 2.1% 3.1% 3.5% 3.4% 2.1% 6.0% 4.5% 2018 6.0% 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 2014: 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 74 Swiss Reinsurance Company Consolidated 2014 Annual Report 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 2013 and 2014 is as follows: Asset category Equity securities Debt securities Real estate Other Total Swiss plan allocation Foreign plans allocation 2013 2014 Target allocation 2013 2014 Target allocation 27% 41% 19% 13% 100% 28% 46% 18% 8% 100% 26% 48% 20% 6% 100% 33% 60% 1% 6% 100% 27% 67% 0% 6% 100% 26% 71% 1% 2% 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 7 million (0.1% of total plan assets) and USD 6 million (0.1 % of total plan assets) as of 31 December 2013 and 2014, 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 9 “Fair value disclosures”. Certain items reported as pension plan assets at fair value in the table below are not within the scope of Note 9, 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 9. Swiss Reinsurance Company Consolidated 2014 Annual Report 75 Financial Statements I Notes to the Financial Statements As of 31 December, the fair values of pension plan assets by level of input were as follows: 2013 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 2014 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) 2 562 136 752 1 647 21 1 5 573 17 61 3 213 3 213 1 030 16 54 136 1 236 190 1 426 631 132 763 763 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) 9 9 976 –3 53 21 1 056 146 1 202 2 881 146 864 1 846 22 2 1 483 11 59 3 434 4 3 438 578 139 717 717 Total 2 562 136 752 1 647 21 1 5 1 603 16 702 329 5 212 190 5 402 Total 2 890 155 864 1 846 22 2 1 1 459 –3 642 219 5 207 150 5 357 76 Swiss Reinsurance Company Consolidated 2014 Annual Report 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: 2013 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 2014 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 572 Other assets 125 31 11 17 631 1 4 –1 3 132 Real estate 631 Other assets 132 5 14 –4 –8 139 13 –66 578 Total 697 32 4 10 0 20 763 Total 763 5 14 9 0 –74 717 Expected contributions and estimated future benefit payments The employer contributions expected to be made in 2015 to the defined benefit pension plans are USD 233 million and to the post-retirement benefit plan are USD 15 million. As of 31 December 2014, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: USD millions 2015 2016 2017 2018 2019 Years 2020–2024 Swiss plan 198 194 187 188 186 886 Foreign plans 60 65 68 70 73 395 Other benefits 15 16 17 18 19 102 Total 273 275 272 276 278 1 383 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 2013 and in 2014 was USD 69 million and USD 73 million, respectively. Swiss Reinsurance Company Consolidated 2014 Annual Report 77 Financial Statements I Notes to the Financial Statements 14 Share-based payments Since 2012 compensation arrangements are part of Swiss Re Group arrangements. Compensation awards for the Group, including those granted prior to 2012, settle in shares of Swiss Re Ltd. Performance measures of the compensation awards are measured at the Swiss Re Group level. As of 31 December 2013 and 2014, the Group had the share-based compensation plans described below. Total compensation cost for share-based compensation plans recognised in net income was USD 121 million and USD 69 million in 2013 and 2014, respectively. The related tax benefit was USD 26 million and USD 15 million, respectively. Stock option plans No options were granted under stock option plans from 2007 onwards. 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: 2014 Outstanding as of 1 January Outstanding as of 31 December  Exercisable as of 31 December  Weighted average exercise price in CHF 89 84 84 Number of options 100 000 100 000 100 000 The weighted remaining contractual life is 1.4 years and all stock options outstanding are also exercisable. The fair value of each option grant was estimated on the date of grant using a binomial option-pricing model. The underlying strike price for the outstanding option series has been adjusted for the special dividend payout in 2013 and 2014. Restricted shares The Group granted 10 458 and 25 153 restricted shares to selected employees in 2013 and 2014, respectively. Moreover, as an alternative to the Group’s cash bonus programme, 295 535 and 302 260 shares were delivered during 2013 and 2014, 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 2014 is as follows: Non-vested at 1 January Granted Delivery of restricted shares Outstanding as of 31 December  1 Equals the market price of the shares on the date of grant. Weighted average grant date fair value in CHF1 67 81 73 73 Number of shares 528 974 327 413 –277 551 578 836 78 Swiss Reinsurance Company Consolidated 2014 Annual Report 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 is three years and the final payment, if any, occurs at the end of this performance measurement period. The plans include 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 will depend on whether the performance targets have been achieved over the plan period. The fair values of the plans are based on stochastic models which consider the likelihood of achieving performance targets and the impact of dividends. The 2010 LTI grant was settled in shares in March 2013. The payout factor was 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. The 2011 LTI grant was settled in shares in March 2014. The payout factor was 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 39.39. For the year ended 31 December 2014, no units were outstanding: Non-vested at 1 January Forfeitures Vested 1 Outstanding as of 31 December  1 Refers to the number of units before the application of the payout factor. LTI 2011 873 795 –855 –872 940 0 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 are expected to be settled in shares, and the requisite service as well as the maximum contractual term are three years. For the LPP 2014 an additional two-year holding period applies for all Group EC and GMB members. At grant date the award is split equally into two underlying components - Restricted Share Units (RSU) and Performance Share Units (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. The fair value assumptions included in the grant valuation are based on market estimates for dividends (and an additional special dividend of CHF 4.00 for the LPP 2013, respectively a special dividend of CHF 4.15 for the LPP 2014) and the risk free rate based on the average of the 5-year US government rate taken monthly over each annual period in the performance period. This resulted in risk free rates between 1.0% and 3.1% for LPP 2012, LPP 2013 and LPP 2014. For the year ended 31 December 2014, the outstanding units were as follows: Non-vested at 1 January Granted Forfeitures Outstanding as of 31 December  Grant date fair value in CHF RSU 458 640 –18 770 439 870 42.00 LPP 2012 PSU 540 720 –22 135 518 585 35.60 RSU 350 205 –15 555 334 650 61.19 LPP 2013 PSU 407 565 –18 100 389 465 52.59 RSU 364 280 –4 660 359 620 60.85 LPP 2014 PSU 368 145 –4 715 363 430 60.21 Swiss Reinsurance Company Consolidated 2014 Annual Report 79 Financial Statements I Notes to the Financial Statements Unrecognised compensation costs As of 31 December 2014, the total unrecognised compensation cost (net of forfeitures) related to non-vested, share-based compensation awards was USD 61 million and the weighted average period over which that cost is expected to be recognised is 1.8 years. The number of shares authorised for the Group’s share-based payments to employees was 5 538 418 and 3 930 229 as of 31 December 2013 and 2014, respectively. The Group’s policy is to ensure that sufficient treasury shares are available at all times to settle future share-based compensation plans. Employee Participation Plan The 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. From 2013 onwards, the Employee Participation Plan was discontinued and no more options were issued. In 2013 and 2014, the Group contributed USD 29 million and USD 8 million, respectively. Global Share Participation Plan  In June 2013, the Swiss Re Group introduced the Global Share Participation Plan, which is a share purchase plan that was rolled out globally for the benefit of employees of companies within the Swiss Re Group. The Group makes a financial contribution to participants in the Plan, by matching the commitment that they make during the plan cycle with additional Swiss Re Ltd shares. If the employee is still employed by the Group at the end of a plan cycle, the employee will receive an additional number of shares equal to 30% of the total number of purchased and dividend shares held at that time. In 2013, the Group contributed USD 3 million and USD 7 million to the plans and authorised 28 218 and 109 461shares as of 31 December 2013 and 2014, respectively. 80 Swiss Reinsurance Company Consolidated 2014 Annual Report 15 Related parties Insurance activities The Group assumes and cedes certain re/insurance contracts from/to affiliated companies within the Swiss Re Group, but outside the Group, resulting in the following related party transactions on the income statement and balance sheet: For the year ended 31 December 2013 USD millions Premiums earned Fee income from policyholders Net investment income – non-participating Other revenues Total revenues Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Total expenses As of 31 December 2013 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 –256 Admin Re® 254 74 –182 301 57 358 Corporate Solutions 30 471 1 413 –49 337 2 202 6 209 77 379 6 665 27 281 –213 –2 –215 Admin Re® 105 24 2 131 8 6 14 Other 86 86 –46 –35 –81 Other 4 7 11 48 19 2 69 Total 84 0 74 27 185 255 –213 0 20 62 Total 139 495 1 415 –42 337 2 344 6 265 6 96 2 379 6 748 Swiss Reinsurance Company Consolidated 2014 Annual Report 81 Financial Statements I Notes to the Financial Statements For the year ended 31 December 2014 USD millions Premiums earned Fee income from policyholders Net investment income – non-participating Other revenues Total revenues Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Total expenses As of 31 December 2014 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 –158 Admin Re® 272 43 –115 –32 27 –5 Corporate Solutions 115 486 1 337 4 180 2 122 5 835 153 1 222 6 211 9 281 –231 –2 –233 Admin Re® 24 1 25 6 –22 –16 Other 32 32 –16 –13 –29 Other 11 7 18 31 18 1 6 56 Total 146 0 43 9 198 –48 –231 0 12 –267 Total 150 486 1 338 11 180 2 165 5 872 –22 171 2 228 6 251 82 Swiss Reinsurance Company Consolidated 2014 Annual Report 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 2013 USD millions Net investment income/loss – non-participating Net realised investment gains/losses – non-participating As of 31 December 2013 USD millions Policy loans, mortgages and other loans Other invested assets Accrued investment income Accrued expenses and other liabilities For the year ended 31 December 2014 USD millions Net investment income/loss – non-participating Net realised investment gains/losses – non-participating As of 31 December 2014 USD millions Policy loans, mortgages and other loans Other invested assets Accrued investment income Accrued expenses and other liabilities Corporate Solutions Corporate Solutions Admin Re® 44 Admin Re® 646 24 Corporate Solutions –3 –34 Admin Re® 14 Corporate Solutions Admin Re® 32 2 26 Other 5 17 Other 530 34 4 Other 3 11 Other 343 29 4 Total 49 17 Total 1 176 34 24 4 Total 14 –23 Total 343 61 0 32 Swiss Reinsurance Company Consolidated 2014 Annual Report 83 Financial Statements I Notes to the Financial Statements 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 2013 USD millions Net investment income/loss – non-participating Net realised investment gains/losses – non-participating Interest expense Corporate Solutions Admin Re® As of 31 December 2013 USD millions Policy loans, mortgages and other loans Accrued investment income Short-term debt Accrued expenses and other liabilities Corporate Solutions Admin Re® For the year ended 31 December 2014 USD millions Net investment income/loss – non-participating Net realised investment gains/losses – non-participating Interest expense Corporate Solutions Admin Re® As of 31 December 2014 USD millions Policy loans, mortgages and other loans Accrued investment income Short-term debt Accrued expenses and other liabilities Corporate Solutions Admin Re® Other 7 –67 –37 Other 1 6561 51 2 757 1 6651 Other 8 –74 –31 Other 1 5591 41 3 802 1 5671 Total 7 –67 –37 Total 1 656 5 2 757 1 665 Total 8 –74 –31 Total 1 559 4 3 802 1 567 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. Instrument Issued in Senior loan 2005 Senior loan 2008 Senior loan 2014 Senior loan 2014 Total short-term debt as of 31 December 2014 Maturity 2028 2028 2015 2015 Currency GBP GBP USD USD Interest rate Nominal in millions 1 month LIBOR 100 240 4.98% 400 3 months LIBOR +0.15% 2 871 3 months LIBOR +0.15% Book value in USD millions 156 375 400 2 871 3 802 84 Swiss Reinsurance Company Consolidated 2014 Annual Report 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 2013 USD millions Net investment income/loss – non-participating Other revenues Other expenses As of 31 December 2013 USD millions Other assets Accrued expenses and other liabilities For the year ended 31 December 2014 USD millions Net investment income/loss – non-participating Other revenues Other expenses As of 31 December 2014 USD millions Other assets Accrued expenses and other liabilities Corporate Solutions Admin Re® Other 11 450 Corporate Solutions 169 125 9 17 Admin Re® 37 –124 Other 8 89 Corporate Solutions Admin Re® Other 11 462 10 20 Corporate Solutions 52 12 Admin Re® 3 16 –145 Other 6 61 Total 0 20 343 Total 214 214 Total 0 21 337 Total 61 89 As of 31 December 2013 and 2014, the Group’s investment in mortgages and other loans included USD 304 million and USD 285 million, respectively, of loans due from employees, and USD 233 million and USD 210 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates. Swiss Reinsurance Company Consolidated 2014 Annual Report 85 Financial Statements I Notes to the Financial Statements 16  Significant subsidiaries and equity investees  Significant subsidiaries and equity investees Europe Belgium Swiss Re Treasury (Belgium) N.V., Brussels Germany Swiss Re Germany AG, Unterföhring bei München Liechtenstein Elips Life AG, Triesen Elips Versicherungen AG, Triesen 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 Switzerland European Reinsurance Company of Zurich Ltd, Zurich Swiss Re Investments Ltd, Zurich United Kingdom Swiss Re Capital Markets Limited, London Swiss Re Services Limited, London 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 Bermuda Ark Insurance Holdings Limited, Hamilton CORE Reinsurance Company Limited, Hamilton Swiss Re Global Markets Limited, Hamilton Method of consolidation full f   e    equity fv  fair value 1  Net asset value instead of share capital 86  Swiss Reinsurance Company Consolidated 2014 Annual Report Currency Share capital  (millions) Affiliation in % as of  31.12.2014 Method of  consolidation Significant subsidiaries and equity investees Currency Share capital  Affiliation in % as of  (millions) 31.12.2014 Method of  consolidation Swiss Re Brasil Resseguros S.A., Sao Paulo BRL 194 EUR EUR CHF CHF EUR EUR EUR EUR CHF CHF USD GBP USD USD USD USD USD USD USD 382 45 12 5 105 350 0 10 397 312 1 60 2 5 1 17 0 6 0 0 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 14 100 100 f f f f f f f f f f f f f f f f fv f f Brazil United States Aurora National Life Assurance Company, Wethersfield Facility Insurance Corporation, Austin Facility Insurance Holding Corporation, Dallas Pillar Re Holdings, LLC, New York Sterling Re Inc., Burlington Swiss Re America Holding Corporation, Wilmington Swiss Re Capital Markets Corporation, New York Swiss Re Financial Markets Corporation, Wilmington 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 Swiss Re Life and Health Africa Limited, Cape Town Swiss Re Australia Ltd, Sydney Swiss Re Life & Health Australia Limited, Sydney Africa South Africa Asia-Pacific Australia China Vietnam USD USD USD USD USD USD USD USD  USD USD USD USD USD USD USD USD USD ZAR AUD AUD 21 2 116 368 10 3 1 0 0 0 0 0 0 0 4 0 9 0 2 845 980 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 5 25 f f f f f f f f f f f f f f f f f f f f f fv e Alltrust Insurance Company of China Limited, Shanghai CNY 2 178 Vietnam National Reinsurance Corporation, Hanoi VND 1 008 277 16  Significant subsidiaries and equity investees  Significant subsidiaries and equity investees Currency Share capital  Affiliation in % as of  (millions) 31.12.2014 Method of  consolidation Europe Belgium Germany Swiss Re Treasury (Belgium) N.V., Brussels Swiss Re Germany AG, Unterföhring bei München Liechtenstein Elips Life AG, Triesen Elips Versicherungen AG, Triesen 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 Switzerland European Reinsurance Company of Zurich Ltd, Zurich Swiss Re Investments Ltd, Zurich United Kingdom Swiss Re Capital Markets Limited, London Swiss Re Services Limited, London 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 Bermuda Ark Insurance Holdings Limited, Hamilton CORE Reinsurance Company Limited, Hamilton Swiss Re Global Markets Limited, Hamilton EUR EUR CHF CHF EUR EUR EUR EUR CHF CHF USD GBP USD USD USD USD USD USD USD 105 350 0 10 397 382 45 12 5 312 1 60 2 5 1 17 0 6 0 0 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 14 100 100 f f f f f f f f f f f f f f f f f f fv Significant subsidiaries and equity investees Brazil Swiss Re Brasil Resseguros S.A., Sao Paulo United States Aurora National Life Assurance Company, Wethersfield Facility Insurance Corporation, Austin Facility Insurance Holding Corporation, Dallas Pillar Re Holdings, LLC, New York Sterling Re Inc., Burlington Swiss Re America Holding Corporation, Wilmington Swiss Re Capital Markets Corporation, New York Swiss Re Financial Markets Corporation, Wilmington 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 Africa South Africa Swiss Re Life and Health Africa Limited, Cape Town Asia-Pacific Australia Swiss Re Australia Ltd, Sydney Swiss Re Life & Health Australia Limited, Sydney China Alltrust Insurance Company of China Limited, Shanghai Vietnam Vietnam National Reinsurance Corporation, Hanoi Currency Share capital  (millions) Affiliation in % as of  31.12.2014 Method of  consolidation BRL 194 USD USD USD USD USD USD USD USD  USD USD USD USD USD USD USD USD USD 3 1 0 0 21 0 0 0 2 116 0 0 4 368 0 9 0 10 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 ZAR 2 100 AUD AUD 845 980 CNY 2 178 VND 1 008 277 100 100 5 25 f f f f f f f f f f f f f f f f f f f f f fv e Swiss Reinsurance Company Consolidated 2014 Annual Report  87 Financial Statements I Notes to the Financial Statements 17  Commitments and contingent liabilities Leasing commitments As part of its normal business operations, the Group enters into a number of lease agreements. As of 31 December, such  agreements, which are operating leases, total the following obligations for the next five years and thereafter: USD millions 2015 2016 2017 2018 2019 After 2019 Total operating lease commitments Less minimum non-cancellable sublease rentals Total net future minimum lease commitments 2014 78 75 68 54 39 264 578 42 536 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 2013 63 –1 62 2014 68 0 68 Other commitments As a participant in limited and other 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 2014 were USD 1 657 million. The Group enters into a number of contracts in the ordinary course of reinsurance and financial services business which, if the  Group’s credit rating and/or defined statutory measures decline to certain levels, would require the Group to post collateral or  obtain guarantees. The contracts typically provide alternatives for recapture of the associated business. Legal proceedings In the normal course of business operations, the Group is involved in various claims, lawsuits and regulatory matters. In the  opinion of management, the disposition of these matters is not expected to have a material adverse effect on the Group’s  business, consolidated financial position or results of operations. 88  Swiss Reinsurance Company Consolidated 2014 Annual Report 18  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 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. 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 from a sponsor through insurance or derivative contracts. In credit-linked securitisations, the securitisation  vehicle assumes the credit risk from a sponsor 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, in  which case maximum loss equals to the Group’s investment balance.   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.  Life and health funding vehicles The Group participates in certain structured transactions that retrocede longevity and mortality risks to captive reinsurers with an  aim to provide regulatory capital credit to a transaction sponsor through creation of funding notes by a funding vehicle which is  generally considered a VIE. The Group’s participation in these transactions is generally limited to providing contingent funding  support via a financial contract to a funding vehicle, which represents a potentially significant variable interest. The Group does  not have power to direct activities of the funding vehicles and therefore is not a primary beneficiary of the funding vehicles in  these transactions. The Group’s maximum exposure in these transactions equals either the total contract notional or funding  notes issued by the vehicle, depending on the specific contractual arrangements.  Swiss Reinsurance Company Consolidated 2014 Annual Report  89 Financial Statements I Notes to the Financial Statements 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, it 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. Investment vehicles 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. 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. The Group did not provide financial or other support to any VIEs during 2014 that it was not previously contractually required to  provide. 90  Swiss Reinsurance Company Consolidated 2014 Annual Report 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 Short-term investments  Other invested assets  Cash and cash equivalents  Accrued investment income  Deferred tax assets Other assets  Total assets Deferred and other non-current tax liabilities Short-term debt  Accrued expenses and other liabilities  Long-term debt  Total liabilities 2013 Carrying value Whereof restricted 6 490 61 2014 Carrying value Whereof restricted 4 200 95 6 490 61 8 162 60 17 6 798 4 200 95 16 25 38 19 16 4 409 162 60 6 773 25 38 19 4 377 Carrying value Whereof limited  recourse Carrying value 177 Whereof limited  recourse 177 62 20 5 414 5 496 62 20 5 414 5 496 7 2 903 3 087 7 2 903 3 087 Swiss Reinsurance Company Consolidated 2014 Annual Report  91 Financial Statements I Notes to the 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 Policy loans mortgages and other loans  Other invested assets Total assets  Short-term debt Accrued expenses and other liabilities Total liabilities 2013 71 15 966 1 052 417 422 839 2014 69 84 880 1 033 167 167 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 Life and health funding  vehicles Swaps in trusts Investment vehicles Other Total Total assets Total   liabilities  Maximum   exposure to loss1 2013 Difference be- tween exposure  and liabilities 72 18 96 853 13 1 052 284 555 839 90 792 –2 853 910 –2 90 792 – 853 355 – Total assets 70 35 845 83 1 033 Total   liabilities Maximum   exposure to loss1 2014 Difference  between   exposure  and liabilities 68 68 1 683 –2 845 883 –2 1 683 – 845 798 – 82 85 167 1 Maximum exposure to loss is the loss the Group would absorb from a variable interest in a VIE in the event that all of the assets of the VIE are deemed worthless. 2 The maximum exposure to loss for swaps in trusts cannot be meaningfully quantified due to their derivative character. 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 are recognised for certain debt financing VIEs when losses occur. To date, the respective  debt financing VIEs have not incurred any losses. Liabilities of USD 85 million recognised for the “Other” category relate mainly  to a guarantee granted. 92  Swiss Reinsurance Company Consolidated 2014 Annual Report 19  Restructuring provision In 2014, the Group set up a provision of USD 16 million for restructuring costs, and released USD 3 million. The increase of the provision in the Property & Casualty Reinsurance business segment of USD 16 million is mostly 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: 2013                                                                                                                                     USD millions Balance as of 1 January  Increase in provision Release of provision Costs incurred Balance as of 31 December 2014                                                                                                                                 USD millions Balance as of 1 January  Increase in provision Release of provision Costs incurred Effect of foreign currency translation Balance as of 31 December Property & Casualty   Reinsurance 32 46 –2 –12 64 Property & Casualty   Reinsurance 64 16 –3 –15 –5 57 Life & Health  Reinsurance 1 –1 0 Life & Health  Reinsurance 0 0 Total 33 46 –2 –13 64 Total 64 16 –3 –15 –5 57 Swiss Reinsurance Company Consolidated 2014 Annual Report  93 Financial Statements I Notes to the Financial Statements 20  Risk assessment Risk management bodies and functions Swiss Re’s Board of Directors is ultimately responsible for the Group’s governance principles and policies. It mainly performs risk  oversight and governance through three committees:  ̤ The Finance and Risk Committee reviews the Group Risk Policy and risk capacity limits, monitors adherence to risk tolerance,  and reviews top risk issues and exposures.  ̤ The Investment Committee reviews the financial risk analysis methodology and valuation related to each asset class and ensures  that the relevant management processes and controlling mechanisms are in place.  ̤ The Audit Committee oversees internal controls and compliance procedures. The Group Executive Committee (Group EC) is responsible for developing and implementing Swiss Re’s Group-wide risk  management framework. It also sets and monitors risk capacity limits, oversees the economic value management framework,  determines product policy and underwriting standards, and manages regulatory interactions and legal obligations. The Group EC  has delegated various risk management responsibilities to the Group Chief Risk Officer (CRO) as well as to the Business Units. The Group CRO, 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. He leads the Group Risk Management function, which is responsible for risk oversight and control across Swiss Re.  The Group Risk Management function is comprised of central risk management units providing shared services, along with  dedicated teams for the Reinsurance, Corporate Solutions, and Admin Re® Business Units. The three Business Unit risk teams are led by dedicated Chief Risk Officers, who report directly to the Group CRO and have a  secondary reporting line to their respective Business Unit CEO. The Business Unit CROs are responsible for risk oversight in their  respective Business Unit, as well as for establishing proper risk governance to ensure efficient risk identification, assessment and  control. They are supported by functional, regional and legal entity CROs, who are responsible for overseeing risk management  issues that arise at regional or legal entity level. While the risk management organisation is closely aligned to the business organisation in order to ensure effective risk oversight,  all embedded teams and CROs remain part of the Group Risk Management function under the Group CRO, thus ensuring their  independence as well as a consistent Group-wide approach to overseeing and controlling risks. The central risk management units support the CROs at Group, Business Unit and lower levels in discharging their oversight  responsibilities. They do so by providing services such as:  ̤ Financial risk management  ̤ Specialised risk category expertise and accumulation control  ̤ Risk modelling and analytics  ̤ Regulatory relations management,   ̤ Developing the central risk governance framework The central departments also oversee Group liquidity and capital adequacy and maintain the Group frameworks for controlling  these risks throughout Swiss Re. The monitoring of reserves for the three Business Units is provided by a dedicated Actuarial Control Unit within Risk Management.  In addition, actuarial management for Corporate Solutions and Admin Re® is part of Risk Management, whereas in Reinsurance  the setting of the reserves is performed by valuation actuaries within the P&C and L&H Business Management units. Risk management activities are also supported by our Group Internal Audit and Compliance units. Group Internal Audit performs  independent, objective assessments of adequacy and effectiveness of internal control systems. It evaluates execution processes  of Swiss Re, including those within Risk Management. Our Compliance function oversees Swiss Re’s compliance with applicable  laws, regulations, rules, and the Group’s Code of Conduct. In addition, it assists the Board of Directors, the Group EC and  management in identifying, mitigating and managing compliance risks.  94  Swiss Reinsurance Company Consolidated 2014 Annual Report This page intentionally left blank Swiss Reinsurance Company Consolidated 2014 Annual Report  95 General Information | Report of the statutory auditor 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 We have audited the accompanying consolidated financial statements of Swiss Reinsurance Company Ltd and its subsidiaries,  which comprise the consolidated balance sheet as of 31 December 2014, and the related consolidated income statement,  statement of comprehensive income, statement of shareholders’ equity, statement of cash flow and notes (pages 4 to 94) for the  year then ended. Board of Directors’ responsibility for the consolidated financial statements 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 the design, implementation, and maintenance of internal control relevant to the  preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to  fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on the 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 about 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 our 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, we  consider internal control relevant to the Company’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 Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies  used and the reasonableness of significant accounting estimates made by management, 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 referred to above present fairly, in all material respects, the financial position  of Swiss Reinsurance Company Ltd and its subsidiaries at 31 December 2014, and the results of their operations and their cash  flows for the year then ended in accordance with accounting principles generally accepted in the United States of America and  comply with Swiss law. 96  Swiss Reinsurance Company Ltd 2014 Annual Report 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 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 Alex Finn  Audit expert Auditor in charge Bret Griffin  Zurich, 17 March 2015  Swiss Reinsurance Company Ltd 2014 Annual Report  97 Financial statements I Swiss Reinsurance Company Ltd 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 Unit. The Company is a   wholly-owned subsidiary of Swiss Re Ltd, the ultimate parent company domiciled in Zurich, Switzerland. Financial year 2014 Net income for 2014 amounted to CHF 1 666 million, compared to CHF 2 091 million in the prior year. The financial year under review showed an increased reinsurance result, compared to prior year. The increase was driven by the  improvement of the Life & Health Reinsurance result by CHF 1 264 million to a loss of CHF 390 million for the financial year  2014, reflecting various portfolio transactions, which are recognised through the respective lines in the income statement. The  prior year was negatively impacted from one-off transactions, notably the recapture of pre-2004 US individual life business,  which was originally retroceded by Swiss Re Life & Health America Inc. to Berkshire Hathaway and reserving assumption  updates. The current year life and health result benefited from a novation to an affiliated company, partly offset by management  actions including a partial recapture to improve the profitability in respect of the pre-2004 US individual life business. The result  from Property & Casualty Reinsurance decreased by CHF 158 million to a gain of CHF 1 753 million in the financial year 2014,  due to slightly higher loss and cost ratios but despite increased reinsurance retrocessions from other affiliated companies,  following the expiry of a major quota share agreement. The lower investment result, compared to prior year, was mainly due to less dividend income received from subsidiaries and  lower realised gains on sale of investments. Reinsurance result Reinsurance result amounted to CHF 1 363 million in 2014, compared to CHF 257 million in 2013. Premiums earned decreased from CHF 10 493 million in 2013 to CHF 10 311 million in 2014. Excluding the effect of foreign  exchange movements, total premiums earned amounted to CHF 10 519 million in 2014. Property and casualty premiums earned increased from CHF 6 139 million in 2013 to CHF 6 793 million in 2014. The increase  was driven by the expiry of a major quota share agreement at year-end 2012, resulting in higher net retained business. The quota  share expiry also resulted in higher reinsurance retrocessions from other Swiss Re Group companies.  Life and health premiums earned decreased from CHF 4 354 million in 2013 to CHF 3 518 million in 2014. The decrease was  driven by novation of business to an affiliated company and the partial recapture of pre-2004 US individual life business as part  of the management actions in the current year. The prior year was impacted by the initial portfolio entry of a new intragroup  retrocession treaty with Swiss Re Life & Health America Inc., related to pre-2004 US individual life business. These impacts were  partly offset by a portfolio transfer, combined with higher volume retroceded from an affiliated company in 2014, and by new  external business written in late 2013, which generated higher premiums earned in the year under review. Claims and claim adjustment expenses increased from CHF 6 302 million in 2013 to CHF 7 564 million in 2014. Excluding the  effect of foreign exchange movements, total claims and claim adjustment expenses amounted to CHF 7 712 million in 2014. Property and casualty claims and claim adjustment expenses increased from CHF 2 724 million in 2013 to CHF 3 166 million in  2014. The increase was mainly due to the expiry of a major quota share agreement at year-end 2012, resulting in higher net  retained business. The current year experienced higher man-made losses compared to 2013, but it was a benign year 2014 in  respect to large natural catastrophe events. In line with the prior year, the Company further strengthened its reserves by  increasing the equalisation provision by CHF 400 million. Life and health claims and claim adjustment expenses increased by CHF 820 million to CHF 4 398 million in 2014, driven mainly  by external treaties signed in late 2013. Positive life and health benefits of CHF 1 293 million reflected a novation of business to an affiliated company. The prior year  benefits of an expense of CHF 2 578 million were negatively impacted by the initial portfolio entry of the retrocession treaty with  Swiss Re Life & Health America Inc. and reserving assumption updates. The current year’s positive life and health benefits were  partly offset by a portfolio transfer, combined with higher volume retroceded from an affiliated company. 98  Swiss Reinsurance Company Ltd 2014 Annual Report Investment result Investment result amounted to CHF 1 388 million in 2014, compared to CHF 2 638 million in 2013. Excluding the effect of  foreign exchange movements, investment result amounted to CHF 1 328 million in 2014 Investment income decreased by CHF 4 641 million to CHF 2 778 million, mainly due to a dividend received in 2013 from a  subsidiary in liquidation. The current year additionally showed lower valuation readjustments on derivative financial instruments  related to the life and health variable annuity business and lower realised gains on sale of fixed income securities and shares in  investment funds. Investment expenses decreased by CHF 3 352 million to CHF 1 003 million in 2014, reflecting the prior year valuation  adjustment on a subsidiary in liquidation, following its dividend payment. The year under review benefitted from lower valuation  adjustments on derivative financial instruments related to the hedge of the life and health variable annuity business and on fixed  income securities. Result from other income and expenses Other net expenses, which remained materially unchanged compared to prior year, primarily included interest expenses on  publicly issued debt and trademark license fees, partly offset by realised foreign exchange gains. Assets Total assets increased by 4% to CHF 78 977 million as of 31 December 2014, compared to the prior year. Excluding the effect of  foreign exchange movements, total assets amounted to CHF 74 455 million as of 31 December 2014. Total investments decreased by CHF 1 960 million to CHF 50 704 million as of 31 December 2014. The decrease mainly  resulted from sales in relation with the funding of the ordinary dividend to the parent company, the asset transfer related to  novation of reinsurance business to an affiliated company and the partial recapture of US individual life business as well as the  reduction of a current account credit balance. The decrease was partly offset by liquidity generated by the reinsurance business,  the strengthening of the US dollar against the Swiss francs and the invested cash from the increase of a loan credit facility. Premiums and other receivables from reinsurance increased by CHF 1 606 million to CHF 6 847 million as of  31 December 2014, reflecting higher business volume for both, Life & Health Reinsurance and Property & Casualty Reinsurance,  due to new business written and a change in intragroup reinsurance programme. Funds held by ceding companies increased by CHF 2 615 million to CHF 15 022 million, driven by a change of a property and  casualty treaty with an affiliated company, resulting in a funds withheld structure as well as the strengthening of the US dollar  against the Swiss francs. The increase was partly offset by the release in connection with novation of life and health business to  an affiliated company. The increase in other assets by CHF 368 million to CHF 2 251 million was mostly driven by securities lending collateral and  reverse repurchase transactions. Liabilities Total liabilities increased by 6% to CHF 68 270 million as of 31 December 2014. Excluding the effect of foreign exchange  movements, total liabilities amounted to CHF 63 910 million as of 31 December 2014. Technical provisions increased by CHF 3 210 million to CHF 43 027 million as of 31 December 2014, driven by strengthening of  the US dollar against the Swiss francs. Unpaid claims were additionally impacted by the commutation of a property and casualty treaty and by negative developments  for the prior year’s claims for natural catastrophe events. Life and health unpaid claims increased mainly as a result of a change in  a quota share agreement with an affiliated company. Liabilities for life and health benefits decreased, mainly driven by novation  of business to an affiliated company and the partial recapture of US individual life business. In addition, the equalisation provision  was increased by CHF 400 million in 2014. The increase in debt from CHF 9 518 million as of 31 December 2013 to CHF 11 047 million as of 31 December 2014 was  driven by additional drawdowns of a credit facility from the parent company. Swiss Reinsurance Company Ltd 2014 Annual Report  99 Financial statements I Swiss Reinsurance Company Ltd Funds held under reinsurance treaties increased by CHF 1 174 million, reflecting mainly the increase in casualty business  retroceded to an affiliated company and the increase of value of life and health funds withheld liabilities due to interest changes. Other liabilities decreased by CHF 1 740 million to CHF 3 246 million as of 31 December 2014, mainly affected by the decrease  of the current account credit balance with an affiliated company. Higher intragroup payables under securities lending  agreements and securities sold under agreement to repurchase partially offset the decrease. Shareholder’s equity Shareholder’s equity decreased from CHF 11 797 million as of 31 December 2013 to CHF 10 707 million as of  31 December 2014. The decrease reflected the ordinary dividend in cash of CHF 2 756 million, partly offset by the net income for 2014 of  CHF 1 666 million. 100  Swiss Reinsurance Company Ltd 2014 Annual Report 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 Notes  2   2013 2014 3 10 493 –6 302 –2 578 –400 –1 604 1 141 –919 426 257 7 419 –4 355 –426 2 638 40 –481 269 –473 –645 2 250 –159 2 091 10 311 –7 564 1 293 –400 –2 282 371 –753 387 1 363 2 778 –1 003 –387 1 388 26 –456 170 –421 –681 2 070 –404 1 666 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2014 Annual Report  101                                               Financial statements I Swiss Reinsurance Company Ltd Balance sheet Swiss Reinsurance Company Ltd As of 31 December Assets CHF millions Non-current assets Investments Investments in subsidiaries and affiliated companies Loans to subsidiaries and affiliated companies Mortgages and other loans Equity securities Fixed income securities Shares in investment funds 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 2013 2014 15 336 6 874 792 1 524 16 317 3 372 6 379 1 716 354 52 664 63 41 15 388 6 499 905 672 16 859 3 942 4 857 1 331 251 50 704 59 65 52 768 50 828 5 241 12 407 604 2 194 442 1 883 380 6 847 15 022 842 2 172 649 2 251 366 23 151 28 149 75 919 78 977 4 4 4 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. 102  Swiss Reinsurance Company Ltd 2014 Annual Report                                               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 Legal reserves from capital contributions Other reserves Retained earnings brought forward Net income for the financial year Total shareholder’s equity Total liabilities and shareholder’s equity Notes 2013 2014 5 5 5 6 24 255 12 135 2 459 168 800 39 817 57 858 540 1 455 6 100 3 418 9 518 4 460 2 901 756 4 986 229 26 334 11 975 3 311 207 1 200 43 027 337 821 444 1 602 6 524 4 523 11 047 5 634 2 948 552 3 246 214 64 122 68 270 34 650 8 057 928 37 2 091 34 650 8 057 272 28 1 666 11 797 10 707 75 919 78 977 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2014 Annual Report  103                                             Financial statements I Swiss Reinsurance Company Ltd Notes Swiss Reinsurance Company Ltd 1  Significant accounting principles Basis of presentation On 1 January 2013, new Swiss accounting and financial reporting legislation entered into force based on partial revisions of the  Swiss Code of Obligations. Based on the transitional provisions, the new provisions have to be implemented for annual accounts  from the 2015 financial year onwards, at the latest. The Swiss Reinsurance Company Ltd’s financial statements 2014 have still  been prepared based on the accounting provisions of the Swiss Code of Obligations in effect until 31 December 2012. Time period The 2014 financial year comprises the accounting period from 1 January 2014 to 31 December 2014. 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 in foreign  currencies 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 investments 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:  ̤ Investments in subsidiaries and affiliated companies  ̤ Equity securities  ̤ Fixed income securities (other than zero-coupon bonds)  ̤ Shares in investment 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 measured 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 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. 104  Swiss Reinsurance Company Ltd 2014 Annual Report Tangible assets 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 measured at cost less straight-line  amortisation over the estimated useful live of software. Deferred acquisition costs Deferred acquisition costs consist principally of commissions and are related to the generation of new reinsurance business.  Property and casualty deferred acquisition costs are generally amortised in proportion to premiums earned. Life and health  deferred acquisition costs will run-off on a prudent basis, typically linearly in a shorter term than the liabilities. The amortisation  schedule can also be determined to be in line with the expected profits of the business so no statutory profits are shown until the  deferred acquisition costs is fully amortised. 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 gross  premium valuation or the cedant-reported information. 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 using assumptions based on estimates of own experience drawn from internal studies.  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 on 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 the reinsurance treaty level, with the exception of a prudent allowance for deferred  acquisition costs on financing treaties. 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 for property and casualty business 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. Swiss Reinsurance Company Ltd 2014 Annual Report  105 Financial statements I Swiss Reinsurance Company Ltd 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. Non-technical provisions The provision for currency fluctuation comprises the net effect of foreign exchange gains and losses arising from the yearly  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 is insufficient to absorb  net foreign exchange losses for the financial year, the provision for currency fluctuation is reduced to zero and the excess foreign  exchange loss 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  generally not realised until expiration or settlement of the contract and are deferred respectively. 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 hedging instruments 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. 106  Swiss Reinsurance Company Ltd 2014 Annual Report Foreign exchange transaction gains and losses Foreign exchange gains and losses arising from foreign exchange transactions are recognised in the income statement and  reported net 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. Swiss Reinsurance Company Ltd 2014 Annual Report  107 Financial statements I 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 16 223 –756 15 467 –10 681 1 994 –8 687 Retro –5 195 221 –4 974 3 069 –684 2 385 2013 Net 11 028 –535 10 493 –7 612 1 310 –6 302 Gross 15 608 –288 15 320 –10 252 –145 –10 397 Life and health benefits –1 649 –929 –2 578 1 200 Change in equalisation provision –400  – –400 –400 Fixed commissions Profit commissions Acquisition costs Other reinsurance income and expenses Result from deposits Other reinsurance result Operating costs Allocated investment return Reinsurance result –2 664 –226 –2 890 192 819 1 011 1 219 67 1 286 –95 225 130 –1 445 –159 –1 604 –3 344 –233 –3 577 171 694 865 97 1 044 1 141 –919 426 257 Retro –4 675 –334 –5 009 2 939 –106 2 833 93 – 1 247 48 1 295 –91 –403 –494 2014 Net 10 933 –622 10 311 –7 313 –251 –7 564 1 293 –400 –2 097 –185 –2 282 80 291 371 –753 387 1 363 108  Swiss Reinsurance Company Ltd 2014 Annual Report 3  Investment result CHF millions Income from real estate Income from subsidiaries and affiliated companies Income from equity securities Income from fixed income securities, mortgages and other loans Income from shares in investment funds 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 2013 107 3 413 30 720 30 1 61 133 80 1 566 1 278 7 419 –4 –226 –3 768 –357 –4 355 –426 2 638 4  Assets from reinsurance CHF millions Premiums and other receivables from reinsurance Funds held by ceding companies Deferred acquisition costs Assets from reinsurance Gross 5 417 12 407 1 325 19 149 Retro –176 – –721 –897 2013 Net 5 241 12 407 604 18 252 Gross 6 446 15 022 1 547 23 015 Retro 401 – –705 –304 2014 0 436 36 712 4 4 43 172 103 424 844 2 778 –5 –170 –637 –191 –1 003 –387 1 388 2014 Net 6 847 15 022 842 22 711 Swiss Reinsurance Company Ltd 2014 Annual Report  109 Financial statements I Swiss Reinsurance Company Ltd 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 Gross 29 309 13 268 4 988 215 800 – 1 681 50 261 Retro –5 054 –1 133 –2 529 –47 – 4 460 1 220 –3 083 2013 Net 24 255 12 135 2 459 168 800 4 460 2 901 47 178 Gross 31 592 13 228 5 621 257 1 200 – 1 820 53 718 Retro –5 258 –1 253 –2 310 –50 – 5 634 1 128 –2 109 6  Change in shareholder’s equity 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 Net income 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 2014 are disclosed on page 115. 2013 12 342 –1 831 –805 2 091 11 797 –2 756 9 041 2014 Net 26 334 11 975 3 311 207 1 200 5 634 2 948 51 609 2014 11 797 –2 756 – 1 666 10 707 –3 0001 7 707 110  Swiss Reinsurance Company Ltd 2014 Annual Report 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 896 million (2013: CHF 3 027 million) of debt issued by certain subsidiaries and letter of credit facilities benefiting various subsidiaries and affiliated companies of which no amount was utilised as of 31 December 2014 and 2013, respectively. In the context with the establishment of a new real estate subsidiary of Swiss Reinsurance Company Ltd in 2013 and hence following the Merger Act article 75 the Company remains liable for claims arising before this transaction for a period of three years by a joint-and-several liability with a new subsidiary, unless waived by the counterparties. 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 2014, total commitments remaining uncalled were CHF 1 313 million (2013: CHF 1 360 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 2014 2015 2016 2017 2018 After 2019 Total operating leases, net 2013 24 19 16 13 12 12 96 2014 – 25 23 19 15 22 104 These commitments pertain to the non-cancellable contract periods and refer primarily to office and apartment space rented by the Company. As of 31 December 2014, financial lease of IT hardware was recognised on the balance sheet with a value of CHF 4 million (2013: CHF 9 million). 10 Security deposits To secure the technical provisions at the 2014 balance sheet date, securities with a value of CHF 14 048 million (2013: CHF 16 057 million) were deposited in favour of ceding companies, of which CHF 4 603 million (2013: CHF 5 399 million) referred to affiliated companies. Swiss Reinsurance Company Ltd 2014 Annual Report 111 Financial statements I 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 Fire insurance value of tangible assets 2013 11 461 10 505 21 966 2014 15 517 18 112 33 629 As of 31 December 2014, the insurance value of tangible assets amounted to CHF 170 million (2013: CHF 169 million). 13 Obligations towards employee pension fund As of 31 December 2014, other liabilities included CHF 6 million (2013: CHF 127 million) payable to the employee pension fund. 14 Public placed debentures As of 31 December 2014, the following public placed debentures were outstanding: Instrument Senior bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Senior bond Senior bond Senior bond Senior bond Senior bond Senior bond Issued in 2014 2013 2013 2012 2012 2012 2011 2010 2007 2007 2007 2006 Currency CHF CHF USD CHF USD EUR CHF CHF GBP AUD AUD EUR Nominal in millions 250 175 750 320 750 500 600 500 500 300 450 1000 Interest rate 1.000% 7.500% 6.375% 7.250% 8.250% 6.625% 2.125% 2.000% 6.302% 7.635% 2.815% 5.252% Maturity/ First call in 2024 2020 2019 2017 2018 2022 2017 2015 2019 2017 2017 2016 Book value CHF millions 250 175 745 320 745 601 600 500 775 244 366 1202 112 Swiss Reinsurance Company Ltd 2014 Annual Report 15 Investments in subsidiaries Details on the Company’s subsidiaries are disclosed on pages 86 to 87. 16 Share capital The share capital of the Company amounted to CHF 34 million. It is divided into 344 052 565 registered shares, each with a nominal value of CHF 0.10. The shares were fully paid-in and held directly by Swiss Re Ltd. 17 Deposit arrangements The following balances were related to deposit accounted reinsurance contracts: CHF millions Reinsurance result Premiums and other receivables from reinsurance Funds held by ceding companies Reinsurance balances payable 18 Claims on and obligations towards affiliated companies 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 19 Release of undisclosed reserves 2013 77 177 652 1 005 2013 865 6 906 369 164 3 418 4 279 1 253 4 021 2014 42 867 728 1 759 2014 1 698 9 502 85 188 4 523 5 487 1 059 2 112 In the year under report, no net undisclosed reserves on investments or on provisions were released (2013: CHF 1 147 million). 20 Major shareholders As of 31 December 2014 and 2013, the Company was a fully owned subsidiary of Swiss Re Ltd. 21 Conditional capital and authorised capital As of 31 December 2014, 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. Swiss Reinsurance Company Ltd 2014 Annual Report 113 Financial statements I Swiss Reinsurance Company Ltd Authorised capital The Board of Directors is authorised to increase the share capital of the Company at any time up to 25 March 2015 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). Joint provision for conditional capital for Equity-Linked Financing Instruments and for the above-mentioned authorised capital The total of registered shares issued from the authorised capital, where the existing shareholders’ subscription rights were excluded, and from the shares issued from conditional capital, where the existing shareholders’ advance subscription rights on the Equity-Linked Financing Instruments were excluded, may not exceed 74 000 000 registered shares up to 25 March 2015. 22 Personnel information As of 31 December 2014, Swiss Reinsurance Company Ltd employed a worldwide staff of 4 310 (2013: 4 173). Personnel expenses for the 2014 financial year amounted to CHF 1 027 million (2013: CHF 1 252 million). 23 Management fee contribution In 2014, management expenses of CHF 775 million (2013: CHF 806 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”. 24 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 94. 114 Swiss Reinsurance Company Ltd 2014 Annual Report Proposal for allocation of disposable profit The Board of Directors proposes to the Annual General Meeting of the Company, to be held on 9 April 2015, to approve the following allocations and payment of an ordinary cash dividend of USD 3 000 million, which must not exceed CHF 3 000 million, translated into CHF at spot rate on the settlement date. The ordinary cash dividend is paid to its sole shareholder Swiss Re Ltd out of other reserves. In order to comply with the Swiss Code of Obligations, dividends must meet the capital protection requirements in CHF. In addition, it requires also that maximum amounts must be approved by the Annual General Meeting. For 2014, the Board of Directors proposes to set this maximum amount to CHF 3 000 million. This CHF 3 000 million shall be funded by CHF 1 600 million from the retained earnings and by maximum CHF 1 400 million from the legal reserves from capital contributions as in the tables below. As such the effective reclassification out of the legal reserves from capital contributions and the effective ordinary cash dividend, translated into CHF at spot rate on the settlement date, must not exceed CHF 1 400 million and CHF 3 000 million respectively. In the below tables these thresholds of CHF 1 400 million and CHF 3 000 million, respectively, are presented and reflect the maximum amounts in CHF to be reclassified or paid out. The effective CHF amounts, translated into CHF at spot rate on the settlement date, will not exceed the below stated figures in CHF. Retained earnings CHF millions Retained earnings brought forward Net income for the financial year Disposable profit Allocation to other reserves Retained earnings after allocation Legal reserves from capital contributions CHF millions Legal reserves from capital contributions brought forward Allocation to other reserves Legal reserves from capital contributions before proposed allocation to other reserves Proposed allocation to other reserves in connection with the ordinary cash dividend Legal reserves from capital contributions after proposed allocation to other reserves 2013 37 2 091 2 128 –2 100 28 2013 8 057 – 8 057 – 8 057 2014 28 1 666 1 694 –1 600 94 2014 8 057 – 8 057 –1 4001 6 657 1 The Board of Directors proposes to the Annual General Meeting of the Company, to be held on 9 April 2015, to approve an allocation of legal reserves from capital contribu- tions to other reserves of maximal CHF 1 400 million based on the proposed ordinary cash dividend of USD 3 000 million to its sole shareholder Swiss Re Ltd. In order to comply with the Swiss Code of Obligations the proposed ordinary cash dividend, translated into CHF at spot rate on the settlement date, must not exceed CHF 3 000 million which may result in a lower reclassification of legal reserves from capital contributions to other reserves by a respective amount on the settlement date. Other reserves CHF millions Other reserves brought forward Allocation from retained earnings Effective allocation from legal reserves from capital contributions Effective ordinary cash dividend paid (translated into CHF at spot rate on settlement date) Dividend in-kind of Swiss Re Principal Investments Company Ltd Other reserves before proposed allocation of legal reserves from capital contributions and ordinary cash dividend Proposed allocation from legal reserves from capital contribution Proposed cash dividend (maximal amount in CHF of the proposed dividend in USD translated into CHF) Other reserves after proposed allocation of legal reserves from capital contributions and ordinary cash dividend 2013 1 733 2 100 – –2 756 –8051 272 – – 272 2014 272 1 600 – – – 1 872 1 4002 –3 0002 272 1 The dividend in-kind was resolved by the Extraordinary General Meeting on 25 March 2013. 2 The Board of Directors proposes to the Annual General Meeting of the Company, to be held on 9 April 2015, to approve an allocation of legal reserves from capital contribu- tions to other reserves of maximal CHF 1 400 million and the payment of an ordinary cash dividend of USD 3 000 million to its sole shareholder Swiss Re Ltd out of other reserves on 21 April 2015. In order to comply with the Swiss Code of Obligations the proposed ordinary cash dividend, translated into CHF at spot rate on the settlement date, must not exceed CHF 3 000 million which may result in a lower reclassification of legal reserves from capital contributions to other reserves and a lower ordinary cash dividend by a respective amount on the settlement date. Zurich, 17 March 2015 Swiss Reinsurance Company Ltd 2014 Annual Report 115 Financial statements I Swiss Reinsurance Company Ltd 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 101 to 114), for the year ended 31 December 2014. 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 2014 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 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, 17 March 2015 Bret Griffin 116 Swiss Reinsurance Company Ltd 2014 Annual Report 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: ̤ instability affecting the global financial system and developments related thereto; ̤ 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; ̤ the cyclicality of the reinsurance industry; ̤ uncertainties in estimating reserves; Swiss Reinsurance Company Ltd 2014 Annual Report 117 General Information | Cautionary note on forward-looking statements ̤ 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. 118 Swiss Reinsurance Company Ltd 2014 Annual Report Note on risk factors General impact of adverse market conditions Pessimistic global growth forecasts, particularly in respect of Europe, and heightened volatility due to the constraints inherent in current monetary policies of the world’s principal central banks, among other factors, highlight the continued uncertainties around the post-crisis recovery and the risks that the world economy continues to face, notwithstanding positive macro-economic trends in the United States. The International Monetary Fund recently reduced its forecast for global economic growth and reports that the risk of a recession and deflation in the eurozone has risen sharply. In the European Union, it remains unclear whether proposals for a single resolution mechanism and other components of a banking union in the European Union, as well as actions of the European Central Bank, will create the conditions necessary for increased bank lending and greater economic growth. Uncertainty around economic growth could be compounded by domestic political considerations in various EU member states. Countries in emerging market regions in Asia and Latin America recently have experienced deceleration in GDP growth. Policy uncertainty and volatile, negative or uncertain economic conditions in developed markets could also adversely impact economies in Asia and Latin America, undermining business confidence. Periods of economic upheaval could also result in sudden government actions such as imposition of capital, price or currency controls, or changes in legal and regulatory requirements. Political or geopolitical developments, and international responses thereto, also can have an adverse impact on global financial markets and economic conditions. Further adverse developments or the continuation of adverse trends that in turn have a negative impact on financial markets and economic conditions could limit the ability of Swiss Reinsurance Company Ltd (“Swiss Re”) and its subsidiaries (collectively, the “Group”) to access the capital markets and bank funding markets, and could adversely affect the ability of counterparties to meet their obligations. Any such developments and trends could also have an adverse effect on the Group’s investment results, which in the current low interest rate environment and soft insurance cycle could have a material adverse effect on overall results. Regulatory changes The Group is regulated in a number of jurisdictions in which it conducts business. New legislation as well as changes to existing legislation have been proposed and/ or recently adopted in a number of jurisdictions that are expected to alter, in a variety of ways, the manner in which the financial services industry is regulated. Although it is difficult to predict which proposals will become law and when and how new legislation ultimately will be implemented by regulators (including in respect of the extraterritorial effect of reforms), it is likely that significant aspects of existing regulatory regimes governing financial services will change. These may include changes as to which governmental bodies regulate financial institutions, changes in the way financial institutions generally are regulated, increased regulatory capital requirements, 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. Although early regulatory efforts following the credit crisis in 2008 were focused primarily on banking institutions, there has been a noticeable trend in recent years to extend the scope of reforms and oversight beyond such institutions to cover insurance and reinsurance operations. Legislative initiatives directly impacting the Group’s industry include the establishment of a pan-European regulator for insurance Swiss Reinsurance Company Ltd 2014 Annual Report 119 General Information | Note on risk factor companies, the European Insurance and Occupational Pensions 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 will enter into force on 1 January 2016. The Group is also monitoring the proposed Swiss Federal Act on Financial Market Infrastructure (which will introduce new regulations for over-the-counter derivatives trading in line with international standards) and the proposed Swiss Federal Financial Services Act and Financial Institutions Act (which contain rules for financial services providers that are based on the EU Markets in Financial Instruments Directive (“MiFID”) regulations). 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 as provisions in the proposed European Market Infrastructure Regulation and proposed changes to 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 (SIFI) under the framework for systemically important financial institutions developed by the Financial Stability Board, or as a systemically important non-bank financial company by the Financial Stability Oversight Council (the FSOC) in the United States. Separately, the International Association of Insurance Supervisors, an international body that represents insurance regulators and supervisors, published a methodology for identifying global systemically important insurers (“G-SIIs”) and on a framework for supervision of internationally active insurance groups. Initial designation of insurers as G-SIIs took place in July 2013, and initial designation of reinsurers as G-SIIs has been postponed pending further development of the methodology due by November 2015, to be applied in 2016. If and when reinsurers are included in the list of G-SIIs, the Group could be so designated. Were the Group to be designated as a G-SII, it could be subject to one or both of the resulting regimes, once implemented, including capital standards under both regimes (the Basic Capital Requirement for G-SIIs and the Insurance Capital Standard for Internationally Active Insurance Groups (“IAIGs”)). In addition, the Group ultimately will be subject to oversight of its Swiss regulator in respect of recovery and resolution planning. Significant policy decisions on a range of regulatory changes that could affect the Group and its operations remain undecided. 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 120 Swiss Reinsurance Company Ltd 2014 Annual Report these changes could apply to the Group and its operations. These changes, or inconsistencies between the various regimes that apply to the Group, 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. In general, a low interest rate environment, such as the one experienced in recent years, poses significant challenges to the insurance and reinsurance industries, with earnings capacity under stress unless lower investment returns from fixed income assets can be offset by lower combined ratios or higher returns from other asset classes. Economic weakness, fiscal tightening and monetary policies are keeping government yields low, which impacts investment yields and affects the profitability of life savings products with interest rate guarantees. 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 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 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. Credit risk 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 Swiss Reinsurance Company Ltd 2014 Annual Report 121 General Information | Note on risk factor 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 re/insurance obligations, and that this would continue to be the case following the occurrence of any foreseeable 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 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 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 is exposed to the risk of defaults, or concerns about defaults, by its counterparties. Securities 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 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 122 Swiss Reinsurance Company Ltd 2014 Annual Report 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. Certain larger reinsurance contracts contain terms that would allow the ceding companies to cancel the contract if the Group’s ratings or those of its subsidiaries are downgraded beyond a certain threshold. Moreover, a decline in ratings could 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 potentially resulting in a need for additional liquidity. As a ratings decline could also have a material adverse impact on the Group’s costs of borrowing or ability to access the capital markets, the adverse implications of a downgrade could be more severe. 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, including those in respect of market abuse, bribery, money laundering, trade sanctions and data protection and privacy. The Group also is subject to audits and challenges from time to time by tax authorities, which could result in increases in tax costs, changes to internal structures and interest and penalties. The Group could be subject to risks arising from alleged, or Swiss Reinsurance Company Ltd 2014 Annual Report 123 General Information | Note on risk factor 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 operations, the Group is subject to a variety of risks, including risks that reserves may not adequately cover future claims and benefits; risks that catastrophic events (including hurricanes, windstorms, floods, earthquakes, acts of terrorism, man-made disasters such as industrial accidents, explosions, and fires, and pandemics) may expose the Group to unexpected large losses (and related uncertainties in estimating future claims in respect of such events); changes in the insurance industry that affect ceding companies, particularly those that further increase their sensitivity to counterparty risk; competitive conditions (including as a result of consolidation and the availability of alternative capacity); 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, or attacks directed at, the Group’s 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, which actual data could deviate from the estimates. In addition, particularly with respect to large natural catastrophes, it may be difficult to estimate losses, and preliminary estimates may be subject to a high degree of uncertainty and change as new information becomes available. Deterioration in market conditions could have an adverse impact on assumptions used for financial reporting purposes, which could affect possible impairment of present value of future profits, fair value of assets and liabilities, deferred acquisition costs or goodwill. To the extent that management’s estimates or assumptions prove to be incorrect, it could have a material impact on underwriting results (in the case of risk models) or on reported financial condition or results of operations, and such impact could be material. 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. 124 Swiss Reinsurance Company Ltd 2014 Annual Report Risks related to the Swiss Re corporate structure Following the realignment of the corporate structure of Swiss Re Ltd (“SRL”) in 2012, the asset base, liquidity position, capital profile and other characteristics of the Group of relevance to its counterparties changed. Swiss Re is a wholly owned subsidiary of SRL and the Group represents only two of the four principal operating segments of the SRL group. Capital, funding, reserve and cost allocations are made at the SRL level across the four operating segments based principally on business plans as measured against U.S. GAAP and Economic Value Management metrics. Decisions at the SRL level in respect of the broader group could have an adverse impact on the Group’s financial condition, including its capital and liquidity levels, as well as on its SST ratio. As part of SRL’s focus on efficient capital allocation, the Group expects to be paying dividends to SRL. Decisions on dividends payable by each of the operating segments, including the Group, are made at the SRL level based on legal, capital and liquidity considerations. While further changes to the overall SRL group structure may not have a financial statement impact on an SRL consolidated basis, they would impact the Group to the extent that operations are transferred into or from the Group, or as a result of intra- group transactions to the extent the Group is a counterparty to any such transactions. The process of optimizing the structure as between SRL and its operating segments will continue to evolve over time. Swiss Reinsurance Company Ltd 2014 Annual Report 125 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 © 2015 Swiss Re. All rights reserved. 03/15, xxx en 

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