Swiss Reinsurance Co.
Annual Report 2015

Plain-text annual report

Swiss Reinsurance Company Consolidated 2015 Annual Report Contents Group financial statements Income statement Statement of comprehensive income Balance sheet Statement of shareholder’s equity Statement of cash flow 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 Note 6 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) Note 7 Investments Note 8 Fair value disclosures Note 9 Derivative financial instruments Note 10 Disposals 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 Commitments and contingent liabilities Note 17 Variable interest entities Note 18 Restructuring provision Report of the statutory auditor 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 2 2 3 4 6 7 8 8 17 28 31 32 34 35 43 56 60 61 64 68 76 79 82 83 87 88 90 90 96 98 100 112 113 114 114 116 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 business Net realised investment gains/losses – non-participating business1 Net investment result – unit-linked and with-profit business 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 Note 2014 2015 3 3 7 7 7 3 3 3 12 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 26 139 145 2 787 1 028 42 57 30 198 –7 893 –8 559 –386 –5 865 –2 593 –553 –25 849 4 349 –524 3 825 –1 3 824 –68 3 756 1 Total impairments for the years ended 31 December were USD 35 million in 2014 and USD 51 million in 2015, of which USD 35 million and USD 51 million, respectively, were recognised in earnings. The accompanying notes are an integral part of the Group financial statements. 2 Swiss Reinsurance Company Consolidated 2015 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 investment 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 2014 2 966 2 721 3 –734 –291 4 665 –69 –1 4 595 2015 3 825 –1 843 –7 –876 –191 908 –68 –1 839 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 investment gains/losses1 741 4 846 –1 107 –1 018 3 462 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 The accompanying notes are an integral part of the Group financial statements. 2015 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 investment gains/losses1 3 462 –1 385 –1 201 743 1 619 Other-than- temporary impairment1 –3 –9 Foreign currency translation1,2 –4 261 –727 Adjustment from pension benefits3 –762 –309 Accumulated other comprehensive income –1 564 –2 430 2 –10 –149 –5 137 70 48 –953 –1 131 644 –4 481 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 2015 Annual Report 3 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 12 325 in 2014 and 10 839 in 2015 subject to securities lending and repurchase agreements) (amortised cost: 2014: 60 600; 2015: 59 137) Trading (including 645 in 2014 and 1 729 in 2015 subject to securities lending and repurchase agreements) Equity securities: Available-for-sale, at fair value (including 190 in 2014 and 439 in 2015 subject to securities lending and repurchase agreements) (cost: 2014: 1 975; 2015: 2 876) Trading Policy loans, mortgages and other loans Investment real estate Short-term investments, at fair value (including 2 025 in 2014 and 417 in 2015 subject to securities lending and repurchase agreements) Other invested assets Investments for unit-linked and with-profit business (equity securities trading: 894 in 2014 and 818 in 2015) Total investments Cash and cash equivalents (including 45 in 2014 and 181 in 2015 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 3 6 6 12 Note 7, 8, 9 2014 2015 65 127 61 134 2 219 2 896 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 3 091 68 3 832 1 550 4 662 7 861 818 85 912 5 398 670 9 747 4 523 10 668 5 084 1 721 3 756 112 5 269 2 331 Total assets 146 303 135 191 The accompanying notes are an integral part of the Group financial statements. 4 Swiss Reinsurance Company Consolidated 2015 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 2014: 344 052 565; 2015: 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 Foreign currency translation, net of tax Adjustment for pension and other 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 2014 2015 8 12 11 11 11 52 177 19 284 6 610 7 825 3 083 1 966 802 7 490 4 959 8 016 11 265 123 477 1 102 32 8 823 –10 3 462 –3 –4 261 –762 –1 564 14 421 22 804 22 22 826 49 718 16 779 5 358 8 044 3 041 1 858 272 6 771 4 105 8 964 9 674 114 584 1 102 32 8 730 –21 1 619 –10 –5 137 –953 –4 481 15 222 20 584 23 20 607 146 303 135 191 Swiss Reinsurance Company Consolidated 2015 Annual Report 5 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 investment gains/losses, net of tax Balance as of 1 January Changes during the period 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 period 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-kind 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 The accompanying notes are an integral part of the Group financial statements. 6 Swiss Reinsurance Company Consolidated 2015 Annual Report 2014 2015 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 1 102 1 102 32 32 8 823 16 –109 8 730 –10 –11 –21 3 462 –1 843 1 619 –3 –7 –10 –4 261 –876 –5 137 –762 –191 –953 14 421 3 824 –68 –2 955 15 222 20 584 22 1 23 20 607 Statement of cash flow For the years ended 31 December USD millions Cash flows from operating activities Net income attributable to common shareholder Add net income attributable to non-controlling interests Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items Net realised investment gains/losses 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 treaties Reinsurance recoverable on unpaid claims and policy benefits Other assets and liabilities, net Income taxes payable/recoverable Trading positions, net1,2 Net cash provided/used by operating activities Cash flows from investing activities Fixed income securities: Sales Maturities Purchases Net purchases/sales/maturities of short-term investments Equity securities: Sales Purchases Securities purchased/sold under agreement to resell/repurchase, net1 Cash paid/received for acquisitions/disposal and reinsurance transactions, net Net purchases/sales/maturities of other investments1,2 Net purchases/sales/maturities of investments held for unit-linked and with-profit business2 Net cash provided/used by investing activities Cash flows from financing activities Policyholder account balances, unit-linked and with-profit business:2 Deposits Withdrawals 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 2014 2015 2 896 1 322 –588 1 –1 092 557 972 –218 –58 –8 2 785 48 287 3 384 –59 378 6 545 5 985 –2 428 219 39 –572 76 2 157 6 –121 37 –1 501 32 –3 120 –4 667 275 –303 –28 5 883 5 855 3 756 1 455 –1 032 70 –200 927 654 –152 –478 319 4 320 39 166 3 721 –47 708 5 106 1 256 –2 010 –2 046 177 2 623 32 317 21 –93 200 –1 945 –2 –2 961 –4 780 –143 –314 –457 5 855 5 398 1 The Group reviewed the nature of certain items within the statement of cash flow. "Securities purchased/sold under agreement to resell/repurchase, net" were reclassified from the operating cash flow to the investing cash flow, and certain investment related cash flows were reclassified from "Trading positions, net" in the operating cash flow to "Net purchases/sales/maturities of other investments" in the investing cash flow. Comparatives are adjusted accordingly. 2 The Group changed the presentation of its investments related to unit-linked and with-profit business, and related deposits and withdrawals were reclassified from "Technical provisions, net" in the operating cash flow to "Policyholder account balances, unit-linked and with-profit business" in the financing cash flow. Comparatives are adjusted accordingly. Interest paid was USD 891 million and USD 652 million for years ended 31 December 2014 and 2015, respectively. Tax paid was USD 444 million and USD 981 million for the years ended 31 December 2014 and 2015, respectively. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2015 Annual Report 7 Financial Statements I Group Financial Statements Notes to the Group financial statements 1 Organisation and summary of significant accounting policies Nature of operations Swiss Reinsurance Company Ltd (“SRZ”) and its subsidiaries (collectively, the “Group”) are 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. 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. 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. 8 Swiss Reinsurance Company Consolidated 2015 Annual Report 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 judgement over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. As of 31 December 2015, 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 fixed income 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 2015 Annual Report 9 Financial Statements I Group 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. Short-term investments are measured at fair value with changes in fair value recognised in net income. 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, deposits and time deposits, and investments without readily determinable fair value (including limited partnership investments). Investments in limited partnerships where the Group’s interest equals or exceeds 3% are accounted for using the equity method. Investments in limited partnerships where the Group’s interest is below 3% and equity investments in corporate entities which are not publicly traded are accounted for at estimated fair value with changes in fair value recognised as unrealised gains/losses in shareholder’s equity. The Group enters into securities 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. Securities 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. 10 Swiss Reinsurance Company Consolidated 2015 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. 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. Swiss Reinsurance Company Consolidated 2015 Annual Report 11 Financial Statements I Group Financial Statements 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 judgement 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 judgements made by management, and therefore there can be no assurance that ultimate claims and claim adjustment expenses will not exceed the loss reserves currently established. These estimates are regularly reviewed, and adjustments for differences between estimates and actual payments for claims and for changes in estimates are reflected in income in the period in which the estimates are changed or payments are made. 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. 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. 12 Swiss Reinsurance Company Consolidated 2015 Annual Report 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 7. 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, the account also includes amounts arising from the application of the deposit method of accounting to ceded retrocession or reinsurance contracts. On the liability side, funds held under reinsurance treaties consist mainly of amounts arising from the application of the deposit method of accounting to inward insurance and reinsurance contracts. In addition, the account also includes amounts retained from ceded business written on a funds withheld basis. 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 2015 Annual Report 13 Financial Statements I Group Financial Statements Premiums Property and casualty reinsurance premiums are recorded when written and include an estimate for written premiums receivable at period end. Premiums earned are generally recognised in income over the contract period in proportion to the amount of reinsurance provided. Unearned premiums consist of the unexpired portion of reinsurance provided. Life reinsurance premiums are earned when due. Related policy benefits are recorded in relation to the associated premium or gross profits so that profits are recognised over the expected lives of the contracts. Life and health reinsurance premiums for group coverages are generally earned over the term of the coverage. For group contracts that allow experience adjustments to premiums, such premiums are recognised as the related experience emerges. 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 2015, the Group had a Leadership Performance Plan, stock option plans, restricted shares, an Employee Participation Plan, and a Global 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 15 March 2016. This is the date on which the financial statements are available to be issued. 14 Swiss Reinsurance Company Consolidated 2015 Annual Report Recent accounting guidance In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)”, an update to topic 323, “Investments — Equity Method and Joint Ventures”. The Low Income Housing Tax Credit, a program created under the US Tax Reform Act of 1986, offers US federal tax credits to investors that provide capital to facilitate the development, construction, and rehabilitation of low-income rental property. ASU 2014-01 modifies the conditions that must be met to present the pre-tax effects and related tax benefits of investments in qualified affordable housing projects as a component of income. Investors that do not qualify for “net” presentation under the new guidance will continue to account for such investments under the equity method or cost method, which results in losses recognised in pre-tax income and tax benefits recognised in income taxes. For investments that qualify for the “net” presentation of investment performance, the ASU introduces a “proportional amortization method” that can be elected to amortise the investment basis. The Group adopted ASU 2014-01 on 1 January 2015. The adoption did not have a material effect on the Group’s financial statements. In January 2014, the FASB issued ASU 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)”, an update to subtopic 310-40, “Receivables — Troubled Debt Restructurings by Creditors”. ASU 2014-04 applies to creditors who obtain physical possession resulting from an in substance repossession or foreclosure of residential real estate property collateralising a consumer mortgage loan in satisfaction of a receivable. Existing guidance requires a creditor to reclassify a collateralised mortgage loan with the result that the loan is derecognised and the collateral asset recognised when there has been in substance repossession or foreclosure by the creditor. The ASU provides additional guidance on when a creditor is considered to have received physical possession from an in substance repossession. The Group adopted ASU 2014-04 on 1 January 2015. The adoption did not have an effect on the Group’s financial statements. In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, an update to topics 205, “Presentation of Financial Statements” and 360, “Property, Plant and Equipment”. ASU 2014-08 amends the definition of a discontinued operation and requires entities to provide additional disclosures about disposal transactions that do not meet the discontinued-operations criteria. The new guidance eliminates two of the three existing criteria for classifying components of an entity as discontinued operations and instead requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The ASU also expands the discontinued operations classification to include disposals of equity method investments and acquired businesses held for sale. The ASU also requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial position. The Group is applying the new requirements on a prospective basis to transactions occurring after 1 January 2015. The adoption did not have an effect on the Group’s financial statements. In June 2014, the FASB issued ASU 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”, an update to topic 860, “Transfers and Servicing”. ASU 2014-11 requires entities to account for repurchase-to-maturity transactions as secured borrowings rather than as sales with forward repurchase agreements and eliminates previously issued accounting guidance on linked repurchase financing transactions. The ASU includes new disclosure requirements for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. These requirements of ASU 2014-11 were adopted on 1 January 2015 and the adoption did not have an effect on the Group’s financial statements. In addition, for transactions accounted for as secured borrowings, including repurchase agreements and securities lending transactions, the ASU requires entities to provide disclosures that disaggregate the related gross obligation by class of collateral pledged, disclose the remaining contractual maturity of the agreements and to provide information on the potential risks of these arrangements and related collateral pledged. In line with the specific effective date provided in the ASU, the Group adopted the new disclosure requirements for the interim period ending 30 June 2015 and applicable portions of the new disclosure requirements are provided in Note 7. In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”, an update to topic 718, “Compensation – Stock Compensation”. ASU 2014-12 states that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service period is a performance condition, and therefore, the target is not reflected in the estimation of the award’s grant date fair value. Compensation cost for such an award would be recognised over the required service period if it is probable that the performance condition will be achieved. The Group adopted ASU 2014-12 on 1 January 2015. The adoption did not have an effect on the Group’s financial statements. Swiss Reinsurance Company Consolidated 2015 Annual Report 15 Financial Statements I Group Financial Statements In August 2014, the FASB issued ASU 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”, an update to subtopic 310-40, “Receivables — Troubled Debt Restructurings by Creditors”. ASU 2014-14 affects creditors that hold government-guaranteed mortgage loans. The ASU requires that a mortgage loan be derecognised and that a separate other receivable be recognised upon foreclosure if specific conditions are met, including that the guarantee is not separable from the loan before foreclosure. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor. The Group adopted ASU 2014-14 on 1 January 2015. The adoption did not have an effect on the Group’s financial statements. In May 2015, the FASB issued ASU 2015-09, “Disclosures about Short-Duration Contracts”, an update to topic 944, “Financial Services — Insurance”. ASU 2015-09 requires an insurance entity to provide additional information about insurance liabilities, including information on the nature, amount, timing, and uncertainty of future cash flows related to insurance liabilities and the effect of those cash flows on the statement of comprehensive income. Requirements include disaggregated incurred and paid claims development information by accident year, on a net basis after risk mitigation, for at least the most recent 10 years with the periods preceding the current period considered required supplementary information. In addition, for each accident year presented in the claims development tables, an insurer has to provide disaggregated information about claim frequency (unless impracticable) and the amounts of incurred-but-not-reported (IBNR) liabilities plus the expected development on reported claims. Required disclosures also include a description of the methods for determining both IBNR and expected development on reported claims as well as information about any significant changes in methods and assumptions used in the computation of the liability for unpaid claims and claim adjustment expenses, including reasons for the changes and the impact of the changes on the most recent reporting period in the financial statements. All aforementioned disclosures have to be provided on an annual basis. In addition, insurance entities must disclose the roll-forward of the liability for unpaid claims and claim adjustment expenses in both interim and annual periods. The Group will adopt the annual disclosure requirements for the annual reporting period ending on 31 December 2016, and the interim disclosure requirements for the quarter ending on 31 March 2017. The Group has set up a project to implement the new requirements. In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities“, an update to subtopic 825-10, “Financial Instruments – Overall“. The ASU requires an entity to carry investments in equity securities, including other ownership interests and limited liability companies at fair value through net income, with the exception of equity method investments, investments that result in consolidation or investments for which the entity has elected the practicability exception to fair value measurement. The practicability exception can only be applied by certain entities and only to equity investments without a readily determinable fair value. Investments under the practicability exception will be subject to an indicator-based impairment test. For financial liabilities to which the fair value option has been applied, the ASU also requires an entity to separately present the change in fair value attributable to instrument-specific credit risk in other comprehensive income rather than in net income. Specific exceptions apply to this requirement. In addition, the ASU requires an entity to assess whether a valuation allowance is needed on a deferred tax asset (DTA) related to fixed income securities AFS in combination with the entity‘s other DTA‘s rather than separately from other DTAs. The ASU also introduces changes to disclosure requirements for financial instruments not measured at fair value and introduces new requirements for equity instruments where the practicability exception to fair value measurement is applied. The new requirements are effective for annual and interim periods beginning after 15 December 2017 with early adoption permitted for requirements relating to the presentation of the impact of instrument- specific credit risk on qualifying financial liabilities in other comprehensive income. The Group is currently assessing the impact of the new requirements. 16 Swiss Reinsurance Company Consolidated 2015 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. 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. 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 2015 Annual Report 17 Financial Statements I Group Financial Statements a) 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 business Net realised investment gains/losses – non-participating business Net investment result – unit-linked and with-profit business 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-controlling interests Interest on contingent capital instruments Net income/loss attributable to common shareholder Claims ratio in % Expense ratio in % Combined ratio in % Management expense ratio in % 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 18 Swiss Reinsurance Company Consolidated 2015 Annual Report Business segments – income statement For the year ended 31 December 2015 USD millions Revenues Premiums earned Fee income from policyholders Net investment income – non-participating business Net realised investment gains/losses – non-participating business Net investment result – unit-linked and with-profit business 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-controlling interests Interest on contingent capital instruments Net income/loss attributable to common shareholder Claims ratio in % Expense ratio in % Combined ratio in % Management expense ratio in % Operating margin in % Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 135 96 359 273 13 876 –1 –269 –326 –43 –443 –19 –1 101 –225 65 –160 –160 –160 15 090 10 914 49 1 097 1 331 445 310 45 16 677 –7 892 –3 836 –1 247 –262 –13 237 3 440 –443 2 997 –1 2 996 –19 2 977 52.3 33.7 86.0 42 5 12 651 –8 290 –60 –1 986 –903 –278 –11 517 1 134 –146 988 988 –49 939 7.3 9.9 26 139 145 2 787 1 028 42 57 30 198 –7 893 –8 559 –386 –5 865 –2 593 –553 –25 849 4 349 –524 3 825 –1 3 824 –68 3 756 –6 –6 6 6 0 0 0 0 Swiss Reinsurance Company Consolidated 2015 Annual Report 19 Financial Statements I Group Financial Statements Business segments – balance sheet As of 31 December 2014 USD millions Total assets 2015 USD millions Total assets Property & Casualty Reinsurance 80 745 Life & Health Reinsurance 57 121 Other 15 595 Consolidation –7 158 Total 146 303 Property & Casualty Reinsurance 78 176 Life & Health Reinsurance 55 703 Other 11 897 Consolidation –10 585 Total 135 191 20 Swiss Reinsurance Company Consolidated 2015 Annual Report This page is intentionally left blank. Swiss Reinsurance Company Consolidated 2015 Annual Report 21 Financial Statements I Group Financial Statements b) 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 expense 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 22 Swiss Reinsurance Company Consolidated 2015 Annual Report Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2015 USD millions Premiums earned Expenses Claims and claim adjustment expenses Acquisition costs Other expenses Total expenses before interest expenses Underwriting result Net investment income Net realised investment gains/losses Other revenues Interest expenses Income before income tax expense Claims ratio in % Expense ratio in % Combined ratio in % Property 6 092 Casualty 6 602 Specialty 2 396 Total 15 090 –2 567 –1 198 –689 –4 454 1 638 –4 139 –2 053 –401 –6 593 –1 186 –585 –157 –1 928 –7 892 –3 836 –1 247 –12 975 9 468 2 115 1 097 445 45 –262 3 440 52.3 33.7 86.0 42.1 31.0 73.1 62.7 37.2 99.9 49.5 31.0 80.5 Swiss Reinsurance Company Consolidated 2015 Annual Report 23 Financial Statements I Group Financial Statements c) Life & Health Reinsurance business segment – by line of business For the year 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/loss –66 397 331 Net realised investment gains/losses – non-participating business and excluding insurance-related derivatives Interest expenses Loss before income tax benefit 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. 24 Swiss Reinsurance Company Consolidated 2015 Annual Report Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2015 USD millions Revenues Premiums earned Fee income from policyholders Net investment income – non-participating Net investment income – unit-linked and with-profit Net realised investment gains/losses – unit-linked and with-profit Net realised investment gains/losses – insurance-related derivatives Other revenues Total revenues before non-participating realised gains/losses Expenses Life and health benefits Return credited to policyholders Acquisition costs Other expenses Total expenses before interest expenses Life Health Total 7 114 49 866 38 4 90 3 8 164 –5 563 –60 –1 258 –642 –7 523 3 800 465 42 2 4 309 –2 727 –728 –261 –3 716 10 914 49 1 331 38 4 132 5 12 473 –8 290 –60 –1 986 –903 –11 239 Operating income 641 593 1 234 Net realised investment gains/losses – non-participating business and excluding insurance-related derivatives Interest expenses Income before income tax expense Management expense ratio in % Operating margin1 in % 8.0 7.9 6.1 13.8 178 –278 1 134 7.3 9.9 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 2015 Annual Report 25 Financial Statements I Group Financial Statements d) Gross premiums earned and fee income from policyholders by geography Gross premiums earned and fee income from policyholders by regions for the years ended 31 December USD millions Americas Europe (including Middle East and Africa) Asia-Pacific Total Gross premiums earned and fee income from policyholders by country for the years ended 31 December USD millions United States United Kingdom China Australia Germany Canada Japan Switzerland Ireland France Republic of Korea Other Total 2014 11 865 9 952 7 556 29 373 2014 9 253 2 746 3 053 2 014 1 294 1 213 1 051 770 894 857 430 5 798 29 373 2015 12 748 9 049 6 437 28 234 2015 10 020 2 773 2 504 1 544 1 070 1 053 967 791 767 672 456 5 617 28 234 Gross premiums earned and fee income from policyholders are allocated by country based on the underlying contract. 26 Swiss Reinsurance Company Consolidated 2015 Annual Report This page is intentionally left blank. Swiss Reinsurance Company Consolidated 2015 Annual Report 27 Financial Statements I Group Financial Statements 3 Insurance information Premiums earned and fees assessed against policyholders For the year ended 31 December 2014 USD millions Premiums earned, thereof: Direct Reinsurance Ceded Net premiums earned Fee income from policyholders, thereof: Direct Reinsurance Ceded Net fee income Claims and claim adjustment expenses For the year ended 31 December 2014 USD millions Claims paid, thereof: Gross Ceded Net claims paid Property & Casualty Reinsurance Life & Health Reinsurance 16 556 –958 15 598 0 758 11 703 –1 249 11 212 54 –1 53 Property & Casualty Reinsurance Life & Health Reinsurance –10 749 1 168 –9 581 –9 357 1 161 –8 196 Change in unpaid claims and claim adjustment expenses; life and health benefits, thereof: Gross Ceded Net unpaid claims and claim adjustment expenses; life and health benefits 2 030 –942 1 088 –962 –36 –998 Other 36 156 –10 182 20 90 110 Other –501 12 –489 52 –1 51 Total 794 28 415 –2 217 26 992 20 144 –1 163 Total –20 607 2 341 –18 266 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 Ceded Net acquisition costs Property & Casualty Reinsurance Life & Health Reinsurance –3 588 206 –3 382 –2 682 193 –2 489 Other –49 –49 Total –6 319 399 –5 920 28 Swiss Reinsurance Company Consolidated 2015 Annual Report Premiums earned and fees assessed against policyholders For the year ended 31 December 2015 USD millions Premiums earned, thereof: Direct Reinsurance Ceded Net premiums earned Fee income from policyholders, thereof: Direct Reinsurance Ceded Net fee income Claims and claim adjustment expenses For the year ended 31 December 2015 USD millions Claims paid, thereof: Gross Ceded Net claims paid Property & Casualty Reinsurance Life & Health Reinsurance 15 614 –524 15 090 0 736 11 598 –1 420 10 914 50 –1 49 Property & Casualty Reinsurance Life & Health Reinsurance –9 665 815 –8 850 –9 629 1 168 –8 461 Change in unpaid claims and claim adjustment expenses; life and health benefits, thereof: Gross Ceded Net unpaid claims and claim adjustment expenses; life and health benefits 1 601 –643 958 145 26 171 Other 2 138 –5 135 5 91 96 Other –378 6 –372 104 –2 102 Total 738 27 350 –1 949 26 139 5 141 –1 145 Total –19 672 1 989 –17 683 1 850 –619 1 231 Claims and claim adjustment expenses; life and health benefits –7 892 –8 290 –270 –16 452 Acquisition costs For the year ended 31 December 2015 USD millions Acquisition costs, thereof: Gross Ceded Net acquisition costs Property & Casualty Reinsurance Life & Health Reinsurance –3 969 133 –3 836 –2 230 244 –1 986 Other –43 –43 Total –6 242 377 –5 865 Swiss Reinsurance Company Consolidated 2015 Annual Report 29 Financial Statements I Group Financial Statements Reinsurance assets and liabilities The reinsurance assets and liabilities as of 31 December were as follows: 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 2015 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 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 Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 2 872 2 051 39 366 1 652 3 032 9 653 15 472 1 368 14 1 715 1 307 3 990 –15 –16 4 523 5 084 49 718 16 779 5 358 Reinsurance recoverable on unpaid claims and policy benefits As of 31 December 2014 and 2015, the Group had a reinsurance recoverable of USD 5 346 million and USD 4 523 million, respectively. The concentration of credit risk is regularly monitored and evaluated. The reinsurance programme with Berkshire Hathaway and subsidiaries accounted for 70% of the Group’s reinsurance recoverable as of year-end 2014 and 69% as of year-end 2015. The Group cedes certain re/insurance contracts to affiliated companies within the Swiss Re Group, but outside the Swiss Reinsurance Company Ltd and its subsidiaries (please refer to Note 15). 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 2014 1 031 265 777 –61 2015 1 103 126 169 –36 30 Swiss Reinsurance Company Consolidated 2015 Annual Report 4 Premiums written For the years ended 31 December 2014 USD millions Gross premiums written, thereof: Direct Reinsurance Ceded Net premiums written 2015 USD millions Gross premiums written, thereof: Direct Reinsurance Ceded Net premiums written Property & Casualty Reinsurance Life & Health Reinsurance 16 678 –537 16 141 768 11 666 –1 243 11 191 Property & Casualty Reinsurance Life & Health Reinsurance 16 121 –418 15 703 748 11 547 –1 413 10 882 Other 36 156 –10 182 Other 2 138 –5 135 Total 804 28 500 –1 790 27 514 Total 750 27 806 –1 836 26 720 Swiss Reinsurance Company Consolidated 2015 Annual Report 31 Financial Statements I Group 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 2014 41 270 10 907 52 177 2015 39 366 10 352 49 718 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 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 2015 41 270 –3 632 –14 37 624 9 019 –1 222 27 7 824 –1 723 –7 167 –8 890 –1 766 1 377 36 169 2 857 340 39 366 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. 32 Swiss Reinsurance Company Consolidated 2015 Annual Report Prior-year development In 2015, claims development on prior years was driven by favourable experience on most lines of business. For property, there was positive development across all regions. Similarly, within casualty, liability showed a consistent level of releases across all regions. Favourable development on more recent accident years more than offset increases for asbestos and environmental losses. Following large commutations and positive claims experience, accident and health claims developed favourably. Adverse experience in motor was driven by unfavourable trends in the US and revisions to motor reserving models in Europe. For specialty, there was positive development across all lines of business. A summary of prior year claims development by lines of business is shown below: USD millions Line of business: Property Casualty Specialty Total 2014 –139 –158 –462 –759 2015 –455 –544 –223 –1 222 US asbestos and environmental claims exposure The Business Unit‘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 out of such 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 2015 the Business Unit Reinsurance carried net reserves for US asbestos and environmental liabilities equal to USD 1 903 million. During 2015, the business unit incurred net losses of USD 98 million and paid net against these liabilities of USD 147 million. Note that during 2015, USD 66 million of existing reserves were reclassified as asbestos following a detailed review of historic cedent accounts by our claims department. The above mentioned incurred amount (USD 98 million) does not show this amount as incurred during 2015. 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. Swiss Reinsurance Company Consolidated 2015 Annual Report 33 Financial Statements I Group Financial Statements 6 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) As of 31 December, the DAC were as follows: 2014 USD millions Opening balance as of 1 January Deferred Effect of acquisitions/disposals and retrocessions Amortisation Effect of foreign currency translation Closing balance as of 31 December 2015 USD millions Opening balance as of 1 January Deferred Effect of acquisitions/disposals and retrocessions Amortisation Effect of foreign currency translation Closing balance as of 31 December Property & Casualty Reinsurance 1 591 3 563 –3 332 –66 1 756 Property & Casualty Reinsurance 1 756 4 132 7 –3 793 –51 2 051 Life & Health Reinsurance 2 845 490 –28 –448 –136 2 723 Life & Health Reinsurance 2 723 1 053 2 –594 –152 3 032 Other –12 49 13 –49 1 Other 1 1 Total 4 424 4 102 –15 –3 829 –202 4 480 Total 4 480 5 185 9 –4 387 –203 5 084 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 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 1 451 –156 44 –45 Other 634 –33 4 2014 Total 2 085 –189 48 –45 Life & Health Reinsurance 1 294 –159 40 –41 1 294 605 1 899 1 134 2015 Total 1 899 –187 41 –41 9 1 721 Other 605 –28 1 9 587 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 10%, 10%, 9%, 9% and 8%. 34 Swiss Reinsurance Company Consolidated 2015 Annual Report 7 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 business 2014 2 098 74 158 144 102 47 170 36 108 591 3 528 –331 –10 3 187 2015 1 926 77 147 158 68 67 106 32 66 478 3 125 –328 –10 2 787 Dividends received from investments accounted for using the equity method were USD 171 million and USD 176 million for 2014 and 2015, 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 Net realised/unrealised gains/losses other investments Net realised/unrealised gains/losses on insurance-related activities Gain/loss related to sale of Aurora National Life Assurance Company Foreign exchange gains/losses Net realised investment gains/losses – non-participating business 2014 602 –210 564 –77 –35 45 120 –314 –360 –247 462 550 2015 611 –270 262 –51 –51 62 –31 116 99 9 272 1 028 Swiss Reinsurance Company Consolidated 2015 Annual Report 35 Financial Statements I Group Financial Statements 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 75 million and USD 42 million for 2014 and 2015, 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, a 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 Impact of foreign exchange movements Balance as of 31 December 2014 218 9 –75 –21 131 2015 131 27 –22 7 –10 –4 129 36 Swiss Reinsurance Company Consolidated 2015 Annual Report 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: 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 2015 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 Gross unrealised losses Other-than-temporary impairments recognised in other comprehensive income Estimated fair value 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 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 –2 –2 –4 Amortised cost or cost Gross unrealised gains Gross unrealised losses Other-than-temporary impairments recognised in other comprehensive income Estimated fair value 9 981 2 761 913 4 462 3 730 2 789 1 861 7 023 33 520 21 287 4 330 59 137 2 876 507 28 39 486 518 232 189 190 2 189 621 88 2 898 375 –94 –27 –11 –43 –13 –27 –16 –143 –374 –482 –32 –888 –160 10 394 2 762 941 4 905 4 235 2 994 2 034 7 070 35 335 21 416 4 383 61 134 3 091 –10 –3 –13 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. Swiss Reinsurance Company Consolidated 2015 Annual Report 37 Financial Statements I Group Financial Statements 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 2014 1 997 60 162 2 219 65 2015 2 710 52 134 2 896 68 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 2014 and 2015, these amounted to USD 894 million and USD 818 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 2014 and 2015, USD 9 781 million and USD 10 893 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 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 Amortised cost or cost 3 261 14 508 13 039 24 246 4 083 59 137 2015 Estimated fair value 3 309 14 695 13 364 25 631 4 135 61 134 Assets pledged As of 31 December 2015, investments with a carrying value of USD 5 844 million were on deposit with regulatory agencies in accordance with local requirements, and investments with a carrying value of USD 8 377 million were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries. As of 31 December 2014 and 2015, securities of USD 15 230 million and USD 13 605 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. Corresponding liabilities of USD 1 951 million and USD 995 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 2015, a real estate portfolio with a carrying value of USD 224 million serves as collateral for short-term senior operational debt of USD 250 million. Collateral accepted which the Group has the right to sell or repledge As of 31 December 2014 and 2015, the fair value of the equity securities, government and corporate debt securities received as collateral was USD 7 165 million and USD 10 732 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2014 and 2015 was USD 3 738 million and USD 6 125 million, respectively. The sources of the collateral are securities borrowing, reverse repurchase agreements and derivative transactions. 38 Swiss Reinsurance Company Consolidated 2015 Annual Report Offsetting of derivatives, financial assets and financial liabilities Offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows: 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 2015 USD millions Derivative financial instruments - assets Reverse repurchase agreements Securities borrowing Total Gross amounts of recognised financial assets 2 752 6 358 452 9 562 Collateral set off in the balance sheet –1 953 –3 000 –4 953 Net amounts of financial assets presented in the balance sheet 799 3 358 452 4 609 Related financial instruments not set off in the balance sheet –34 –3 351 –452 –3 837 2015 USD millions Derivative financial instruments - liabilities Repurchase agreements Securities lending Total Gross amounts of recognised financial liabilities –2 090 –2 844 –1 151 –6 085 Collateral set off in the balance sheet 1 477 2 475 525 4 477 Net amounts of financial liabilities presented in the balance sheet –613 –369 –626 –1 608 Related financial instruments not set off in the balance sheet 77 369 582 1 028 Net amount 702 0 0 702 Net amount –730 0 –126 –856 Net amount 765 7 0 772 Net amount –536 0 –44 –580 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. Swiss Reinsurance Company Consolidated 2015 Annual Report 39 Financial Statements I Group Financial Statements Recognised gross liability for the obligation to return collateral that the Group has the right to sell or repledge As of 31 December 2015, the gross amounts of liabilities related to repurchase agreements and securities lending by the class of securities transferred to third parties and by the remaining maturity are shown below. The liabilities are recognised for the obligation to return collateral that the Group has the right to sell or repledge. Remaining contractual maturity of the agreements Overnight and continuous Up to 30 days 30–90 days Greater than 90 days 2015 USD millions Repurchase agreements Debt securities issued by governments and government agencies Corporate debt securities Total repurchase agreements Securities lending Debt securities issued by governments and government agencies Total securities lending Gross amount of recognised liabilities for repurchase agreements and securities lending 370 3 373 217 217 2 136 24 2 160 0 176 176 501 501 Total 2 817 27 2 844 135 135 433 433 1 151 1 151 3 995 The programme is structured in a conservative manner within a clearly defined risk framework. Yield enhancement is conducted on a non-cash basis, thereby taking no re-investment risk. 40 Swiss Reinsurance Company Consolidated 2015 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 2014 and 2015. As of 31 December 2014 and 2015, USD 39 million and USD 126 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 12 million and USD 34 million, respectively, to declines in value for more than 12 months. 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 2015 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 Unrealised losses Fair value 12 months or more Unrealised losses Fair value Total Unrealised losses Fair value 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 Less than 12 months Unrealised losses Fair value 12 months or more Unrealised losses Fair value Total Unrealised losses Fair value 4 516 1 408 339 1 067 930 825 500 3 067 12 652 9 201 2 150 24 003 93 22 10 42 11 25 13 107 323 426 27 776 6 226 6 14 10 113 16 194 585 383 187 1 155 1 5 1 1 2 2 3 36 51 66 8 125 4 522 1 634 345 1 081 940 938 516 3 261 13 237 9 584 2 337 25 158 94 27 11 43 13 27 16 143 374 492 35 901 Swiss Reinsurance Company Consolidated 2015 Annual Report 41 Financial Statements I Group Financial Statements Mortgages, loans and real estate As of 31 December, 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 2014 241 1 248 2 419 881 2015 80 1 389 2 363 1 550 The fair value of the real estate as of 31 December 2014 and 2015 was USD 2 475 million and USD 3 205 million, respectively. The carrying value of policy loans, mortgages and other loans approximates fair value. Depreciation expense related to income-producing properties was USD 26 million and USD 36 million for 2014 and 2015, respectively. Accumulated depreciation on investment real estate totalled USD 539 million and USD 504 million as of 31 December 2014 and 2015, respectively. Substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies. 42 Swiss Reinsurance Company Consolidated 2015 Annual Report 8 Fair value disclosures Fair value, as defined by the Fair Value Measurements and Disclosures Topic, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements and Disclosures Topic requires all assets and liabilities that are measured at fair value to be categorised within the fair value hierarchy. This three-level hierarchy is based on the observability of the inputs used in the fair value measurement. The levels of the fair value hierarchy are defined as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the Group has the ability to access. Level 1 inputs are the most persuasive evidence of fair value and are to be used whenever possible. 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 2015, 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 Other. 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 2015 Annual Report 43 Financial Statements I Group Financial Statements Valuation techniques US government securities typically have quoted market prices in active markets and are categorised as level 1 instruments in the fair value hierarchy. Non-US government holdings are generally classified as level 2 instruments and are valued on the basis of the quotes provided by pricing services, which are subject to the Group’s pricing validation reviews and pricing vendor challenge process. Valuations provided by pricing vendors are generally based on the actual trade information as substantially all of the Group’s non-US government holdings are traded in transparent and liquid markets. 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. For both residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (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, judgements 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 level 1. Securities classified in level 1 are traded on public stock exchanges for which quoted prices are readily available. 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 of these investments are classified as level 3 due to the lack of observable prices and significant judgement required in valuation. Valuation of direct private equity investments requires significant management judgement 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). 44 Swiss Reinsurance Company Consolidated 2015 Annual Report The Group holds both exchange-traded and over-the-counter (OTC) interest rate, foreign exchange, credit and equity derivative contracts for hedging and trading purposes. The fair values of exchange-traded derivatives measured using observable exchange prices are classified in level 1. Long-dated contracts may require adjustments to the exchange-traded prices which would trigger reclassification to level 2 in the fair value hierarchy. OTC derivatives are generally valued by the Group based on the internal models, which are consistent with industry standards and practices, and use both observable (dealer, broker or market consensus prices, spot and forward rates, interest rate and credit curves and volatility indices) and unobservable inputs (adjustments for liquidity, inputs derived from the observable data based on the Group’s judgements 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 utilise 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 Asset Valuation Committee, endorsed by the Group Executive Committee, has a primary responsibility for governing and overseeing all of the Group’s asset and derivative valuation policies and operating parameters (including level 3 measurements). The Asset Valuation Committee delegates the responsibility for implementation and oversight of consistent application of the Groupʼs pricing and valuation policies to the Pricing and Valuation Committee. 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 the 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 2015 Annual Report 45 Financial Statements I Group 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: 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 held for proprietary investment purposes Equity securities backing unit-linked and with-profit business Short-term investments held for proprietary investment purposes Derivative financial instruments Interest rate contracts Foreign exchange contracts Equity contracts Credit contracts Other contracts Other invested assets Funds held by ceding companies2 Total assets at fair value Liabilities Derivative financial instruments Interest rate contracts Foreign exchange contracts 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 2 457 894 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 56 562 273 66 698 –3 110 –2 117 –407 –561 –2 –23 –864 –3 974 375 13 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 2 461 894 10 520 890 2 625 272 1 325 1 197 2 758 273 85 142 –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 The Group revised the scope of the fair value option disclosure to include certain assets held under three of its reinsurance agreements. These assets have been managed on a fair value basis since inception. 46 Swiss Reinsurance Company Consolidated 2015 Annual Report 2015 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 held for proprietary investment purposes Equity securities backing unit-linked and with-profit business Short-term investments held for proprietary investment purposes Derivative financial instruments Interest rate contracts Foreign exchange contracts Equity contracts Credit contracts Other contracts Other invested assets Funds held by ceding companies2 Total assets at fair value Liabilities Derivative financial instruments Interest rate contracts Foreign exchange contracts 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 10 695 52 997 338 10 695 3 148 818 1 795 22 6 16 579 17 057 –17 –5 –12 –812 –829 1 450 2 776 23 124 21 143 4 504 2 867 2 266 1 304 319 617 1 25 49 245 58 424 –1 576 –789 –201 –582 –4 –2 524 –4 100 325 13 11 464 –1 953 334 1 129 1 013 1 826 –1 953 –497 1 477 –38 –19 –440 –165 –1 474 –2 136 1 477 Total 64 030 12 145 2 776 23 124 21 468 4 517 3 159 818 4 662 799 1 310 319 967 2 154 1 641 245 75 354 –613 –794 –201 –632 –19 –444 –165 –4 810 –5 588 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 The Group revised the scope of the fair value option disclosure to include certain assets held under three of its reinsurance agreements. These assets have been managed on a fair value basis since inception. Swiss Reinsurance Company Consolidated 2015 Annual Report 47 Financial Statements I Group 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 was as follows: 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 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 619 1 7 10 –21 –227 –1 11 2 –1 –3 –4 –1 4 505 1 791 2 926 –994 –145 –1 656 –2 795 125 128 302 –39 44 28 –58 –24 42 –29 76 –523 –2 32 –130 –23 130 28 –605 –253 74 –135 –91 97 –31 263 0 0 –91 97 –31 0 0 –51 1 289 –52 2 218 537 –717 –3 –187 97 –1 559 94 –2 463 Closing balance as of 31 December 388 1 Transfers are recognised at the date of the event or change in circumstances that caused the transfer. 2015 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 Closing balance as of 31 December 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 388 4 537 1 289 2 218 –717 –187 –1 559 –2 463 4 –14 9 –46 –35 33 –1 338 –20 45 29 165 22 –1 8 –71 134 –441 70 7 –3 –72 15 –86 150 0 –490 –107 126 0 –10 1 65 –1 187 0 0 –10 1 65 –1 0 11 464 –13 1 013 –14 1 826 –497 –165 85 –1 474 85 –2 136 1 Transfers are recognised at the date of the event or change in circumstances that caused the transfer. 48 Swiss Reinsurance Company Consolidated 2015 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 2014 391 90 2015 216 47 Swiss Reinsurance Company Consolidated 2015 Annual Report 49 Financial Statements I Group 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 2014 Fair value 2015 Fair value 375 304 325 241 Valuation technique Unobservable input Range (weighted average) Corporate Spread Matrix Illiquidity premium Private placement credit tenant leases 71 51 Discounted Cash Flow Model Illiquidity premium 5 bps–186 bps (49 bps) 75 bps–175 bps (132 bps) 176 bps (n.a.) –60%–100% (20%)1 –60%–100% (20%)1 32 Discounted Cash Flow Model Valuation spread 396 396 –130 –46 334 334 –38 –38 –764 –605 Proprietary Option Model Correlation Proprietary Option Model Correlation –639 –567 Discounted Cash Flow Model Risk margin Volatility Lapse Mortality adjustment Withdrawal rate 4% (n.a.) 4%–42% 0.5%–33% –10%–0% 0%–90% Infrastructure loan Derivative equity contracts OTC equity option referencing correlated equity indices 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 1 Represents average input value for the reporting period. 50 Swiss Reinsurance Company Consolidated 2015 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 infrastructure loan is valuation spread. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Group’s 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. Swiss Reinsurance Company Consolidated 2015 Annual Report 51 Financial Statements I Group 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 2014 Fair value 657 344 33 203 1 237 2015 Fair value 550 135 31 203 919 Unfunded commitments 103 57 160 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: 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. Funds held by ceding companies For operational efficiencies, the Group elected the fair value option for funds held by the cedent under three of its reinsurance agreements. The assets are carried at fair value and changes in fair value are reported as a component of 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. 52 Swiss Reinsurance Company Consolidated 2015 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 Other invested assets of which at fair value pursuant to the fair value option Funds held by ceding companies of which at fair value pursuant to the fair value option1 Liabilities Liabilities for life and health policy benefits of which at fair value pursuant to the fair value option 2014 2015 7 353 50 12 173 273 –19 284 –187 7 861 92 10 668 245 –16 779 –165 1 The Group revised the scope of the fair value option disclosure to include certain assets held under three of its reinsurance agreements. These assets have been managed on a fair value basis since inception. 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 Other invested assets Funds held by ceding companies1 Liabilities for life and health policy benefits Total 2014 2 1 –41 –38 2015 4 7 21 32 1 The Group revised the scope of the fair value option disclosure to include certain assets held under three of its reinsurance agreements. These assets have been managed on a fair value basis since inception. Fair value changes from other invested assets and funds held by ceding companies are reported in “Net investment income - non-participating business”. Fair value changes from the GMDB reserves are shown in “Life and health benefits”. Swiss Reinsurance Company Consolidated 2015 Annual Report 53 Financial Statements I Group 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: 2014 USD millions Assets Policy loans Mortgage loans Other loans Investment real estate Total assets Liabilities Debt Total liabilities 2015 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) 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 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) 80 1 389 2 363 3 205 7 037 0 Total 80 1 389 2 363 3 205 7 037 –8 190 –8 190 –7 137 –7 137 –15 327 –15 327 Policy loans, other loans and certain mortgage loans are classified as level 3 measurements, as they do not have an active exit market. Some of these positions need 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. 54 Swiss Reinsurance Company Consolidated 2015 Annual Report This page is intentionally left blank. Swiss Reinsurance Company Consolidated 2015 Annual Report 55 Financial Statements I Group Financial Statements 9 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. 56 Swiss Reinsurance Company Consolidated 2015 Annual Report Total derivative financial instruments 141 750 4 420 –3 840 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 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 Amount offset Where a right of set-off exists Due to cash collateral Total net amount of derivative financial instruments 2015 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 83 942 12 924 20 173 450 21 491 139 980 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 –2 554 –976 890 2 554 415 –871 66 787 14 273 16 374 188 17 842 115 464 2 151 2 151 1 310 282 967 2 154 2 715 37 37 –794 –201 –632 –19 –444 –2 090 0 Notional amount assets/liabilities Fair value assets Fair value liabilities Carrying value assets/liabilities 503 –177 626 –11 –403 538 42 42 580 19 516 81 335 –17 –290 625 37 37 662 186 Total derivative financial instruments 117 615 2 752 –2 090 Amount offset Where a right of set-off exists Due to cash collateral Total net amount of derivative financial instruments –1 162 –791 799 1 162 315 –613 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 2014 and 2015. Swiss Reinsurance Company Consolidated 2015 Annual Report 57 Financial Statements I Group Financial Statements Non-hedging activities The Group primarily uses derivative financial instruments for risk management and trading strategies. Gains and losses of derivative financial instruments not designated as hedging instruments are recorded in “Net realised investment gains/losses — 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 2014 –207 49 –172 9 –358 –679 2015 68 433 –191 –5 212 517 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 2014 and 2015, 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. 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 Foreign exchange contracts Total gain/loss recognised in income Gains/losses on derivatives 2014 Gains/losses on hedged items Gains/losses on derivatives 2015 Gains/losses on hedged items 122 122 –120 –120 119 119 –119 –119 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 year ended 31 December 2014 and 2015, the Group recorded an accumulated net unrealised foreign currency remeasurement gain of USD 525 million and a gain of USD 1 075 million, respectively, in shareholder’s equity. These offset translation gains and losses on the hedged net investment. 58 Swiss Reinsurance Company Consolidated 2015 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 2014 and 2015 was approximately USD 1 866 million and USD 1 590 million, respectively. The maximum potential loss is based on the positive market replacement cost assuming non-performance of all counterparties, excluding cash collateral. Credit risk-related contingent features Certain derivative instruments held by the Group contain provisions that require its debt to maintain an investment-grade credit rating. If the Group’s credit rating were downgraded or no longer rated, the counterparties could request immediate payment, guarantee or an ongoing full overnight collateralisation on derivative instruments in net liability positions. The total fair value of derivative financial instruments containing credit risk-related contingent features amounted to USD 112 million and USD 51 million as of 31 December 2014 and 2015, respectively. For derivative financial instruments containing credit risk-related contingent features, the Group posted collateral of USD 6 million and nil as of 31 December 2014 and 2015, respectively. In the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD 51 million additional collateral would have had to be posted as of 31 December 2015. The total equals the amount needed to settle the instruments immediately as of 31 December 2015. Swiss Reinsurance Company Consolidated 2015 Annual Report 59 Financial Statements I Group Financial Statements 10 Disposals 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). Aurora primarily consists of bonds and policyholder liabilities. 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. In the second quarter of 2015, the Group completed the sale following the receipt of all necessary regulatory approvals. The purchase price included a cash payment of USD 184 million. The Group adjusted the initial loss on the transaction by a pre-tax gain of USD 9 million on a year to date basis. The gain was reflected in the “Net realised investment gains /losses – non-participating” in the income statement of the “Other” segment. The major classes of assets and liabilities held for sale as of 31 December 2014 and disposed in the second quarter of 2015 were as follows: 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 Total assets Liabilities Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Policyholder account balances Accrued expenses and other liabilities Total liabilities 2014 2015 3 456 157 6 23 37 6 7 1 3 693 15 1 494 1 151 292 2 952 3 496 154 1 19 33 9 8 1 3 721 22 1 479 1 130 315 2 946 60 Swiss Reinsurance Company Consolidated 2015 Annual Report 11 Debt and contingent capital instruments The Group enters into long- and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines short-term debt as debt having a maturity at the balance sheet date of not greater than one year and long-term debt as having a maturity of greater than one year. For subordinated debt positions, maturity is defined as the first optional redemption date (notwithstanding that optional redemption could be subject to regulatory consent). Interest expense is classified accordingly. The Group’s debt as of 31 December was as follows: USD millions Senior financial debt Senior operational debt Subordinated financial 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 2016 Due in 2017 Due in 2018 Due in 2019 Due in 2020 Due after 2020 Total carrying value 1 Balance was reclassified to short-term debt. 2014 3 925 1 034 4 959 2 659 713 4 990 2 903 11 265 16 224 18 135 2014 1 984 1 215 0 1 922 212 5 932 11 265 2015 2 285 751 1 069 4 105 2 880 467 3 607 2 720 9 674 13 779 15 327 2015 01 1 143 0 1 855 204 6 472 9 674 Swiss Reinsurance Company Consolidated 2015 Annual Report 61 Financial Statements I Group Financial Statements Senior long-term debt Instrument EMTN Senior notes1 Senior notes EMTN Senior notes1 EMTN Senior notes1 Senior notes Payment undertaking agreements Maturity 2017 2019 2022 2024 2026 2027 2030 2042 Various Total senior long-term debt as of 31 December 2015 Total senior long-term debt as of 31 December 2014 1 Assumed in the acquisition of GE Insurance Solutions. Subordinated long-term debt Issued in 2011 1999 2012 2014 1996 2015 2000 2012 various Currency CHF USD USD CHF USD CHF USD USD USD Nominal in millions 600 234 250 250 397 250 193 500 383 Interest rate 2.13% 6.45% 2.88% 1.00% 7.00% 0.75% 7.75% 4.25% various Book value in USD millions 599 263 248 248 508 251 274 489 467 3 347 3 372 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 813 537 204 GBP GBP AUD 1 845 500 300 4.87% 6.30% 7.64% 6 months BBSW+1.17% 2019 2017 2017 2007 AUD 450 2015 EUR 750 2.60% 2025 2 720 736 218 327 772 6 327 7 893 Maturity Instrument 2024 Subordinated contingent write-off loan note 2042 Subordinated fixed-to-floating rate loan note 2045 Subordinated contingent write-off securities Subordinated private placement (amortising, limited recourse) Subordinated perpetual loan note Subordinated perpetual loan note 2057 Issued in 2013 2012 2013 2007 2007 2007 Subordinated perpetual loan note Perpetual subordinated fixed-to-floating rate callable loan note Total subordinated long-term debt as of 31 December 2015 Total subordinated long-term debt as of 31 December 2014 62 Swiss Reinsurance Company Consolidated 2015 Annual Report 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 2014 110 16 293 231 650 2015 104 13 213 137 467 In addition to the above, interest expense on contingent capital instruments classified as equity was USD 69 million and USD 68 million for the years ended 31 December 2014 and 2015, respectively. Long-term debt issued in 2015 In January 2015, SRZ issued senior notes due 2027. The notes have a face value of CHF 250 million, with a fixed coupon of 0.75% per annum. In April 2015, SRZ issued EUR 750 million face amount of perpetual subordinated fixed-to-floating rate callable loan notes with a first optional redemption date on 1 September 2025. The notes bear interest through the first optional redemption date at 2.60% per annum. The notes were issued in connection with a concurrent exchange of part of the EUR 1 billion 5.252% Perpetual Subordinated Step-Up Loan Notes issued by SRZ. 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”. Swiss Reinsurance Company Consolidated 2015 Annual Report 63 Financial Statements I Group Financial Statements 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 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 liability for unrecognised tax benefits including interest and penalties Other, net Total 2014 706 77 –176 –55 –28 14 –197 54 395 2015 317 207 524 2015 913 265 –182 –52 –26 –315 –97 18 524 The Group reported a tax charge of USD 524 million on a pre-tax income of USD 4 349 million for 2015, compared to a charge of USD 395 million on a pre-tax income of USD 3 361 million for 2014. This translates into an effective tax rate in the current and prior year reporting periods of 12.0% and 11.8%, respectively. The higher tax rate in 2015 was largely driven by tax on profits earned in higher tax jurisdictions, tax benefit arising from a local statutory adjustment for the restructuring of subsidiaries and higher tax benefits from foreign currency translation differences between statutory and GAAP accounts. 64 Swiss Reinsurance Company Consolidated 2015 Annual Report Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows: USD millions Deferred tax assets Income accrued/deferred Technical provisions Pension provisions Benefit on loss carryforwards Currency translation adjustments Other Gross deferred tax asset Valuation allowance Unrecognised tax benefits offsetting benefits on loss carryforwards 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 2014 2015 247 583 257 3 517 367 898 5 869 –639 –24 5 206 –277 –877 –370 –694 –2 545 –1 188 –238 –185 –492 –6 866 –624 –7 490 265 665 309 3 072 321 1 225 5 857 –553 –35 5 269 –214 –894 –638 –868 –2 351 –496 –94 –269 –579 –6 403 –368 –6 771 Net deferred and other non-current taxes –2 284 –1 502 As of 31 December 2015, 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 3.9 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 2015, the Group had USD 9 223 million net operating tax loss carryforwards, expiring as follows: USD 26 million in 2018, USD 47 million in 2019, USD 12 million in 2020, USD 8 084 million in 2021 and beyond, and USD 1 054 million never expire. The Group also had capital loss carryforwards of USD 72 million, expiring 2020. Net operating tax losses of USD 1 388 million and net capital tax losses of USD 92 million were utilised during the period ended 31 December 2015. Income taxes paid in 2014 and 2015 were USD 444 million and USD 981 million, respectively. Swiss Reinsurance Company Consolidated 2015 Annual Report 65 Financial Statements I Group Financial Statements Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: USD millions Balance as of 1 January 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 2014 952 22 49 –137 –215 –84 –51 536 2015 536 34 113 –233 –97 –22 331 The amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 497 million and USD 327 million at 31 December 2014 and 2015, respectively. Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such expense in 2015 was USD 40 million (USD 19 million in 2014). As of 31 December 2014 and 2015, USD 112 million and USD 72 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2015 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 2015 presented in the table above excludes accrued interest and penalties (USD 72 million). During the year, certain tax positions and audits in Switzerland, France and Germany were effectively settled. The Group continually evaluates proposed adjustments by taxing authorities. The Group believes that it is reasonably possible (more than remote and less than likely) that the balance of unrecognised tax benefits could increase or decrease over the next 12 months due to settlements or expiration of statutes. However, quantification of an estimated range cannot be made at this time. The following table summarises jurisdictions and tax years that remain subject to examination: Australia Belgium Brazil Canada China Columbia Denmark France Germany Hong Kong India Ireland Israel Italy Japan Korea Luxembourg 2010 - 2015 2013 - 2015 2011 - 2015 2011 - 2015 Malaysia 2005 - 2015 Mexico 2013 - 2015 2011 - 2015 2008 - 2009, 2012 - 2015 2007 - 2015 2009 - 2015 2005 - 2015 2011 - 2015 2008 - 2015 2012 - 2015 Netherlands New Zealand Singapore Slovakia South Africa Spain Switzerland United Kingdom United States 2012 - 2015 2013 - 2015 2011 - 2015 2013 - 2015 2010 - 2015 2011 - 2015 2009 - 2015 2011 - 2015 2011 - 2015 2011 - 2015 2011 - 2015 2013 - 2015 2008, 2011 - 2015 2009 - 2015 66 Swiss Reinsurance Company Consolidated 2015 Annual Report This page intentionally left blank. Swiss Reinsurance Company Consolidated 2015 Annual Report 67 Financial Statements I Group 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. 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 0 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 68 Swiss Reinsurance Company Consolidated 2015 Annual Report 2015 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 3 684 111 42 Foreign plans 1 879 7 61 Other benefits 371 5 10 236 –189 26 2 –36 3 876 3 534 36 94 –189 26 2 –25 3 478 –398 –49 –60 2 –103 1 737 1 823 7 61 –60 1 –108 1 724 –13 –2 –16 –5 363 0 16 –16 0 –363 Amounts recognised in „Other assets“ and „Accrued expenses and other liabilities“ in the Group‘s balance sheet as of 31 December were as follows: 2014 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised 2015 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised Swiss plan –150 –150 Swiss plan –398 –398 Foreign plans 185 –3 –238 –56 Foreign plans 188 –3 –198 –13 Other benefits –15 –356 –371 Other benefits –15 –348 –363 Total 5 934 123 113 0 185 –265 26 2 2 –144 5 976 5 357 43 171 –265 26 1 2 –133 5 202 –774 Total 185 –18 –744 –577 Total 188 –18 –944 –774 Swiss Reinsurance Company Consolidated 2015 Annual Report 69 Financial Statements I Group Financial Statements Amounts recognised in accumulated other comprehensive income, gross of tax, as of 31 December were as follows: 2014 USD millions Net gain/loss Prior service cost/credit Total 2015 USD millions Net gain/loss Prior service cost/credit Total Swiss plan 897 –87 810 Swiss plan 1 134 –78 1 056 Foreign plans 323 1 324 Foreign plans 303 1 304 Other benefits –45 –77 –122 Other benefits –43 –67 –110 Components of net periodic benefit cost The components of pension and post-retirement cost for the years ended 31 December were as follows: 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 2015 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 100 76 –112 Foreign plans 7 76 –84 Other benefits 5 12 43 –5 1 103 19 –3 –2 13 –12 –11 –6 Swiss plan 111 42 –113 Foreign plans 7 61 –71 Other benefits 5 10 76 –9 2 109 17 14 –4 –10 1 Total 1 175 –163 1 012 Total 1 394 –144 1 250 Total 112 164 –196 50 –19 –1 110 Total 123 113 –184 89 –19 2 124 70 Swiss Reinsurance Company Consolidated 2015 Annual Report Other changes in plan assets and benefit obligations recognised in other comprehensive income for the years ended 31 December were as follows: 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 2015 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 418 –90 Foreign plans 60 –4 Other benefits 52 –43 5 290 393 –19 3 –19 21 34 12 11 75 69 Swiss plan 313 Foreign plans 15 Other benefits –2 –76 9 246 355 –17 –18 –20 –6 4 10 12 13 Total 530 –94 –50 19 0 –19 386 496 Total 326 0 –89 19 0 –18 238 362 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 2016 are USD 85 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 2016 are USD 4 million and USD 9 million, respectively. The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 5 469 million and USD 5 546 million as of 31 December 2014 and 2015, 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 2014 4 769 4 720 4 379 2015 4 881 4 840 4 282 Swiss Reinsurance Company Consolidated 2015 Annual Report 71 Financial Statements I Group Financial Statements Principal actuarial assumptions Assumptions used to determine obligations at the end of the year Discount rate Rate of compensation increase Assumptions used to determine net periodic pension costs for the year ended Discount rate Expected long-term return on plan assets Rate of compensation increase Assumed medical trend rates at year end Medical trend – initial rate Medical trend – ultimate rate Year that the rate reaches the ultimate trend rate Swiss plan Foreign plans weighted average Other benefits weighted average 2014 2015 2014 2015 2014 2015 1.1% 2.3% 2.3% 3.3% 2.3% 0.8% 2.0% 1.1% 3.3% 2.3% 3.4% 2.8% 4.4% 5.1% 3.2% 3.6% 2.8% 3.4% 4.2% 2.8% 2.7% 2.1% 2.7% 2.1% 3.5% 2.7% 2.1% 2.1% 6.0% 4.5% 2019 6.1% 4.6% 2020 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 2015: USD millions Effect on total of service and interest cost components Effect on post-retirement benefit obligation 1 percentage point increase 1 26 1 percentage point decrease –1 –22 72 Swiss Reinsurance Company Consolidated 2015 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 2014 and 2015 is as follows: Asset category Equity securities Debt securities Real estate Other Total Swiss plan allocation Foreign plans allocation 2014 2015 Target allocation 2014 2015 Target allocation 28% 46% 18% 8% 100% 26% 47% 21% 6% 100% 25% 47% 20% 8% 100% 27% 67% 0% 6% 100% 22% 71% 1% 6% 100% 22% 70% 1% 7% 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 6 million (0.1% of total plan assets) and USD 6 million (0.1 % of total plan assets) as of 31 December 2014 and 2015, 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 8 “Fair value disclosures”. Certain items reported as pension plan assets at fair value in the table below are not within the scope of Note 8, 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 8. Swiss Reinsurance Company Consolidated 2015 Annual Report 73 Financial Statements I Group Financial Statements As of 31 December, the fair values of pension plan assets by level of input were as follows: 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 2015 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) 9 976 –3 53 21 1 056 146 1 202 146 864 1 846 22 2 1 483 11 59 3 434 4 3 438 578 139 717 717 Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) 34 917 –9 129 19 1 090 71 1 161 149 775 1 890 16 1 4 384 9 79 3 307 –4 3 303 596 142 738 738 Total 155 864 1 846 22 2 1 1 459 –3 642 219 5 207 150 5 357 Total 183 775 1 890 16 1 4 1 301 –9 734 240 5 135 67 5 202 74 Swiss Reinsurance Company Consolidated 2015 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: 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 Impact of foreign exchange movements Closing balance as of 31 December 2015 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 Impact of foreign exchange movements Closing balance as of 31 December Real estate 631 Other assets 132 5 14 –4 –8 139 13 –66 578 Real estate 578 Other assets 139 10 12 –4 596 –13 17 6 –7 142 Total 763 5 14 9 –74 717 Total 717 –3 17 18 –11 738 Expected contributions and estimated future benefit payments The employer contributions expected to be made in 2016 to the defined benefit pension plans are USD 150 million and to the post-retirement benefit plan are USD 16 million. As of 31 December 2015, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: USD millions 2016 2017 2018 2019 2020 Years 2021–2025 Swiss plan 204 197 196 195 191 905 Foreign plans 61 65 67 70 72 385 Other benefits 16 16 17 18 19 104 Total 281 278 280 283 282 1394 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 2014 and in 2015 was USD 73 million and USD 70 million, respectively. Swiss Reinsurance Company Consolidated 2015 Annual Report 75 Financial Statements I Group 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 2014 and 2015, the Group had the share-based compensation plans described below. Total compensation cost for share-based compensation plans recognised in net income was USD 69 million and USD 56 million in 2014 and 2015, respectively. The related tax benefit was USD 15 million and USD 12 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 for the year ended 31 December 2015 is as follows: Outstanding as of 1 January Outstanding as of 31 December Exercisable as of 31 December Weighted average exercise price in CHF 84 82 82 Number of options 100 000 100 000 100 000 The weighted remaining contractual life is 0.3 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, 2014 and 2015. Restricted shares The Group granted 25 153 and 7 776 restricted shares to selected employees in 2014 and 2015, respectively. Moreover, as an alternative to the Group’s cash bonus programme, 302 260 and 288 125 shares were delivered during 2014 and 2015, 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 2015 is as follows: Non-vested at 1 January Granted Delivery of restricted shares Outstanding as of 31 December 1 Equal to the market price of the shares on the date of grant. Weighted average grant date fair value in CHF1 73 87 75 79 Number of shares 578 836 295 901 –343 719 531 018 76 Swiss Reinsurance Company Consolidated 2015 Annual Report Leadership Performance Plan The Leadership Performance Plan (LPP) awards are expected to be settled in shares, and the requisite service as well as the maximum contractual term are three years. For LPP 2014 and LPP 2015 awards an additional two-year holding period applies for all members of the Group EC and GMDs. At grant date the award is split equally into two underlying components - Restricted Share Units (RSUs) and Performance Share Units (PSUs). The RSUs are measured against a ROE performance condition and will vest within a range of 0–100%. The PSUs are based on relative total shareholder return, measured against a pre-defined group 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, a special dividend of CHF 4.15 for the LPP 2014, and a special dividend of CHF 3.00 for the LPP 2015 respectively) and the risk free rate based on the average of the 5-year US government bond rate taken monthly over each annual period in the performance period. This resulted in risk free rates between 1.0% and 3.1% for all LPP plans. For the year ended 31 December 2015, the outstanding units were as follows: RSUs Non-vested at 1 January Granted Forfeitures Vested Outstanding as of 31 December Grant date fair value in CHF PSUs Non-vested at 1 January Granted Forfeitures Vested Outstanding as of 31 December Grant date fair value in CHF LPP 2012 439 870 LPP 2013 334 650 LPP 2014 359 620 –1 610 –438 260 0 42.00 –4 790 –5 530 329 860 61.19 354 090 60.85 518 585 389 465 363 430 –1 900 –516 685 0 35.60 –5 585 –5 590 383 880 52.59 357 840 60.21 LPP 2015 327 875 –3 185 324 690 67.65 361 590 –3 510 358 080 61.37 Swiss Reinsurance Company Consolidated 2015 Annual Report 77 Financial Statements I Group Financial Statements Unrecognised compensation costs As of 31 December 2015, the total unrecognised compensation cost (net of forfeitures) related to non-vested, share-based compensation awards was USD 56 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 3 930 229 and 3 554 592 as of 31 December 2014 and 2015, 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 2014 and 2015, the Group contributed USD 8 million and USD 1 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 2014 and 2015, the Group contributed USD 7 million and USD 9 million to the plans and authorised 109 461 and 211 472 shares as of 31 December 2014 and 2015, respectively. 78 Swiss Reinsurance Company Consolidated 2015 Annual Report 15 Related parties The Group assumes and cedes certain re/insurance contracts from/to affiliated companies within the Swiss Re Group, but outside the Group. The Group also conducts various investing activities, including loans, funding agreements and derivatives, with affiliated companies in the Swiss Re Group. The Group enters into various financing activities where it borrows funds from affiliated companies in the Swiss Re Group. In addition, 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: 2014 USD millions Premiums earned Net investment income – non-participating business Net realised investment income – non-participating business Other revenues Total revenues Corporate Solutions –158 40 –34 11 –141 Claims and claim adjustment expenses Life and health benefits Acquisition costs Other expenses Interest expenses Total expenses –32 27 462 457 2015 USD millions Premiums earned Net investment income – non-participating business Net realised investment income – non-participating business Other revenues Total revenues Corporate Solutions 57 35 –16 13 89 Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Other expenses Interest expenses Total expenses 204 –6 472 670 Admin Re® 272 14 19 305 –231 –2 20 –213 Admin Re® 244 11 255 –240 –2 –1 17 –226 Other 32 11 –63 –20 –16 –13 –145 –31 –205 Other 10 –78 1 –67 –199 –36 –235 Total 146 65 –97 30 144 –48 –231 12 337 –31 39 Total 301 45 –94 25 277 204 –240 –2 –7 290 –36 209 Swiss Reinsurance Company Consolidated 2015 Annual Report 79 Financial Statements I Group Financial Statements 2014 USD millions Policy loans, mortgages and other loans Other invested assets Accrued investment income 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 Short-term debt Accrued expenses and other liabilities Total liabilities 2015 USD millions Policy loans, mortgages and other loans Other invested assets Accrued investment income 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 Policyholder account balances Unearned premiums Funds held under reinsurance treaties Reinsurance balances payable Short-term debt Accrued expenses and other liabilities Total liabilities Corporate Solutions Admin Re® 32 115 486 1 337 4 232 2 206 5 835 153 1 222 14 6 225 24 1 3 28 6 –22 42 26 Corporate Solutions Admin Re® 22 102 390 816 5 162 1 497 4 730 131 1 215 17 5 094 14 4 18 4 6 133 61 204 Other 1 902 29 4 11 7 6 1 959 31 18 1 6 3 802 1 632 5 490 Other 1 792 24 4 37 1 857 2 787 1 531 4 318 Total 1 902 61 4 150 486 1 338 11 241 4 193 5 872 –22 171 2 228 3 802 1 688 11 741 Total 1 792 46 4 116 390 816 5 203 3 372 4 734 6 133 131 1 215 2 787 1 609 9 616 Instrument Issued in Senior loan 2005 Senior loan 2008 2015 Senior loan Total short-term debt as of 31 December 2015 Maturity 2028 2028 2016 Currency GBP GBP USD Nominal in millions 100 240 2 285 Interest rate 1 month LIBOR 4.98% 3 month LIBOR +0.30% Book value in USD millions 147 355 2 285 2 787 80 Swiss Reinsurance Company Consolidated 2015 Annual Report As of 31 December 2014 and 2015, the Group’s investment in mortgages and other loans included USD 285 million and USD 287 million, respectively, of loans due from employees, and USD 210 million and USD 196 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates. In November 2015, SRZ entered into a subordinated funding facility with its parent company Swiss Re Ltd under which SRZ has the right, among others, to issue subordinated notes to Swiss Re Ltd of up to USD 700 million at any time before August 2030. For its various rights, SRZ owes Swiss Re Ltd an unconditional fixed commitment fee, payable in annual installments calculated as 5.80% on the total facility amount. Annually, SRZ receives a partial reimbursement of the commitment fee equal to 2.22% per annum on the undrawn facility amount. As of 31 December 2015, the facility was undrawn. Swiss Reinsurance Company Consolidated 2015 Annual Report 81 Financial Statements I Group Financial Statements 16 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 2016 2017 2018 2019 2020 After 2020 Total operating lease commitments Less minimum non-cancellable sublease rentals Total net future minimum lease commitments 2015 87 81 64 47 42 257 578 30 548 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 2014 68 0 68 2015 62 0 62 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 2015 were USD 1 342 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. 82 Swiss Reinsurance Company Consolidated 2015 Annual Report 17 Variable interest entities The Group enters into arrangements with variable interest entities (VIEs) in the normal course of business. The involvement ranges from being a passive investor to designing, structuring and managing the VIEs. The variable interests held by the Group arise as a result of the Group’s involvement in 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. Swiss Reinsurance Company Consolidated 2015 Annual Report 83 Financial Statements I Group Financial Statements Insurance-linked and credit-linked securitisations The insurance-linked and credit-linked securitisations transfer pre-existing insurance or credit risk to the capital markets through the issuance of insurance-linked or credit-linked securities. In insurance-linked securitisations, the securitisation vehicle assumes the insurance risk 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. 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. Debt financing vehicles Debt financing vehicles issue preference shares or loan notes to provide the Group with funding. The Group is partially exposed to the asset risk by holding equity rights or by protecting some of the assets held by the VIEs via guarantees or derivative contracts. The assets held by the VIEs consist primarily of investment-grade securities, but also structured products, hedge fund units and derivatives. The Group consolidates a debt financing vehicle as it has power over the investment management in the vehicle, which is considered to be the activity that most significantly impacts the entities’ economic performance. In addition, the Group absorbs the variability of the investment return so that both criteria for a controlling financial interest are met. 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. The Group did not provide financial or other support to any VIEs during 2015 that it was not previously contractually required to provide. 84 Swiss Reinsurance Company Consolidated 2015 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 Premiums and other receivables Deferred acquisition costs Deferred tax assets Other assets Total assets Unpaid claims and claim adjustment expenses Unearned premiums Reinsurance balances payable Deferred and other non-current tax liabilities Accrued expenses and other liabilities Long-term debt Total liabilities 2014 Carrying value Whereof restricted 4 200 95 2015 Carrying value Whereof restricted 3 876 88 4 200 95 16 25 38 19 16 4 409 3 876 88 26 147 42 34 9 38 8 4 268 147 42 34 9 38 4 234 25 38 19 4 377 Carrying value Whereof limited recourse 177 7 2 903 3 087 177 7 2 903 3 087 Carrying value 53 26 2 96 17 2 720 2 914 Whereof limited recourse 53 26 2 96 17 2 720 2 914 Swiss Reinsurance Company Consolidated 2015 Annual Report 85 Financial Statements I Group Financial Statements Non-consolidated VIEs The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs in which the Group held a variable interest but was not the primary beneficiary as of 31 December: USD millions Fixed income securities available-for-sale Policy loans, mortgages and other loans Other invested assets Total assets Accrued expenses and other liabilities Total liabilities 2014 69 84 880 1 033 167 167 2015 52 1 918 971 45 45 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 2014 Difference between exposure and liabilities Total assets Total liabilities Maximum exposure to loss1 2015 Difference between exposure and liabilities 70 35 845 83 1 033 68 1 683 –2 845 883 –2 82 85 167 68 1 683 – 845 798 – 52 2 146 771 971 52 1 777 –2 773 –2 1 44 45 52 1 776 – 773 – 1Maximum 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. 2The 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. 86 Swiss Reinsurance Company Consolidated 2015 Annual Report 18 Restructuring provision In 2015, the Group set up a provision of USD 12 million for restructuring costs, and released USD 2 million. The increase of the provision in the Property & Casualty Reinsurance business segment of USD 11 million is mostly related to 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: 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 2015 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 64 16 –3 –15 –5 57 Property & Casualty Reinsurance 57 11 –2 –28 –3 35 Other 0 0 Other 0 1 –1 0 Total 64 16 –3 –15 –5 57 Total 57 12 –2 –29 –3 35 Swiss Reinsurance Company Consolidated 2015 Annual Report 87 Financial Statements I Group Financial Statements Report of the statutory auditor Report of the statutory auditor to the General Meeting of Swiss Reinsurance Company Ltd Zurich Report of the statutory auditor on the consolidated financial statements As statutory auditor, we have audited the accompanying consolidated financial statements of Swiss Reinsurance Company Ltd and its subsidiaries (the “Company”), which comprise the consolidated balance sheet as of 31 December 2015, and the related consolidated income statement, statement of comprehensive income, statement of shareholder’s equity, statement of cash flow and notes (pages 2 to 87) for the year ended 31 December 2015. Board of Directors’ responsibility The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and the requirements of Swiss law. This responsibility includes designing, implementing, and maintaining an internal control system relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance 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 the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the 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 system. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at 31 December 2015, 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. 88 Swiss Reinsurance Company Consolidated 2015 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, 15 March 2016 Swiss Reinsurance Company Consolidated 2015 Annual Report 89 Financial Statements I Swiss Reinsurance Company Ltd Annual Report Swiss Reinsurance Company Ltd The management report follows the regulations as outlined in article 961c of the Swiss Code of Obligations. 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. In 2015, the Company employed a worldwide staff at an average of 4 018 full time equivalents. Financial year 2015 Net income for 2015 amounted to CHF 6 432 million, compared to CHF 1 666 million in the prior year. The financial year was impacted by an ongoing internal realignment of the legal entity structure of the Reinsurance Business Unit to strengthen its regional footprint. As a consequence, the Company sold its subsidiary European Reinsurance Company of Zurich Ltd and contributed its subsidiaries, Swiss Re America Holding Corporation and Swiss Re Europe Holdings S.A., to a newly established subsidiary Swiss Re Reinsurance Holding Company Ltd. The sale generated a one-off realised gain of CHF 6 383 million, which was partly offset by a value adjustment on the investment in Swiss Re America Holding Corporation of CHF 1 821 million prior to its contribution to Swiss Re Reinsurance Holding Company Ltd. The Life & Health Reinsurance result improved from a loss in the prior year of CHF 390 million to a gain of CHF 481 million in 2015. The improvement reflected primarily the gain from the recapture of pre-2004 US individual life business by Swiss Re Life & Health America Inc. The Property & Casualty Reinsurance result decreased from CHF 1 753 million to CHF 1 153 million in the current year, despite benign natural catastrophe losses in both years. The prior year benefited from reserve releases that were not repeated in 2015. 90 Swiss Reinsurance Company Ltd 2015 Annual Report Reinsurance result Reinsurance result amounted to CHF 1 634 million in 2015, compared to CHF 1 363 million in 2014. Premiums earned increased from CHF 10 311 million in 2014 to CHF 12 568 million in 2015. Excluding the effect of foreign exchange movements, total premiums earned amounted to CHF 12 684 million in 2015. Property and casualty premiums earned increased from CHF 6 793 million in 2014 to CHF 7 712 million in 2015. The increase was driven by renewed business previously written on Swiss Reinsurance America Corporation. Life and health premiums earned increased from CHF 3 518 million in 2014 to CHF 4 856 million in 2015. Prior to the accounting policy change for life and health portfolio transfers in 2015, as disclosed in the significant accounting principles, the consideration for the assumption or release of the liability for life and health policy benefits was accounted as premiums written. Applying the new accounting policy in 2014, life and health premiums earned would have amounted to CHF 4 775 million. Thus, the reported increase in the income statement resulted from non-recurring portfolio transfers in 2014, namely the novation of business to an affiliated company and management actions related to the pre-2004 US individual life business. This was partly offset by a portfolio entry related to a quota share increase of business assumed from an affiliated company. Other reinsurance revenues of CHF 1 209 million included primarily the gain from the recapture of pre-2004 US individual life business by Swiss Re Life & Health America Inc. and income from funds held by ceding companies related to life and health business. Claims paid and claim adjustment expenses net and change in unpaid claims net increased from CHF 7 564 million in 2014 to CHF 9 442 million in 2015. Excluding the effect of foreign exchange movements, total claims paid and claim adjustment expenses net and change in unpaid claims net amounted to CHF 9 370 million in 2015. Property and casualty claims paid and claim adjustment expenses net and change in unpaid claims net increased from CHF 3 166 million in 2014 to CHF 4 046 million in 2015, mainly driven by the renewed business previously written on Swiss Re America Corporation. Life and health claims paid and claim adjustment expenses net and change in unpaid claims net increased by CHF 998 million to CHF 5 396 million in 2015. The increase was mainly driven by the recapture of pre-2004 US individual life business in 2015, reflecting a payable to Swiss Re Life & Health America Inc. This impact was offset by the effect in life and health benefits net, due to the reserve release. Positive life and health benefits net of CHF 1 647 million were driven by the reserve release related to the recapture of the pre-2004 US individual life business by Swiss Re Life & Health America Inc. The prior year included the reserve release related to a novation of business to an affiliated company, partly offset by a non-recurring portfolio transfer, combined with higher volume retroceded from an affiliated company. The Company further strengthened its reserves by increasing the equalisation provision by CHF 344 million. Acquisition costs net increased from CHF 2 282 million to CHF 3 026 million in 2015, mainly related to volume increase of property and casualty business. Investment result Investment result amounted to CHF 5 833 million in 2015, compared to CHF 1 485 million in 2014. The increase reflected the realised gain on the sale of the subsidiary European Reinsurance Company of Zurich Ltd of CHF 6 383 million. In contrast, the year under review showed higher investment expenses, mostly driven by the value adjustment on the investment in Swiss Re America Holding Corporation of CHF 1 821 million and higher value adjustments on fixed income securities CHF 112 million. Swiss Reinsurance Company Ltd 2015 Annual Report 91 Financial Statements I Swiss Reinsurance Company Ltd Assets Total assets increased by 3% to CHF 90 263 million as of 31 December 2015, compared to the prior year. Excluding the effect of foreign exchange movements, total assets amounted to CHF 92 782 million as of 31 December 2015. Total investments increased by CHF 1 054 million to CHF 51 507 million as of 31 December 2015. The increase was mainly driven by the issuance of a loan to Swiss Re Reinsurance Holding Company Ltd of CHF 6 727 million, to fund the purchase of the subsidiary European Reinsurance Company of Zurich Ltd, partly offset by net repayments of intragroup loan assets of CHF 1 475 million. Thereof CHF 789 million was related to a cashless hybrid subordinated loan repayment against the current account payable with the same subsidiary. Further, investments in subsidiaries and affiliated companies decreased net by CHF 2 054 million, mostly as a result of the value adjustment on the investment in Swiss Re America Holding Corporation of CHF 1 821 million prior to its contribution to Swiss Re Reinsurance Holding Company Ltd. In addition, the decrease in short-term investments was mainly related to the funding of the partial repayment of credit facility drawdowns of CHF 963 million from and the dividend payment in cash to its parent company Swiss Re Ltd. Funds held by ceding companies decreased by CHF 1 383 million to CHF 13 639 million, mainly driven by the commutation of two large property and casualty treaties. Reinsurance recoverable on technical provisions retroceded decreased from CHF 8 871 million to CHF 7 996 million. This was driven by lower retroceded property and casualty business from the Company’s branches in Japan and Australia as well as higher retained business as a result of the 2012 expiry of a large retrocession treaty. The increase in other assets by CHF 3 464 million to CHF 5 715 million mainly reflected higher receivables from securities lending collateral and reverse repurchase transactions. Liabilities Total liabilities decreased by 1% to CHF 76 003 million as of 31 December 2015. Excluding the effect of foreign exchange movements, total liabilities amounted to CHF 79 084 million as of 31 December 2015. Technical provisions gross decreased by CHF 1 272 million to CHF 50 626 million as of 31 December 2015, mostly due to the strengthening of the Swiss francs against most major currencies, in particular Australian dollar, Great Britain pound and the Euro. Excluding the foreign exchange movements, unpaid claims gross increased by CHF 853 million, mainly due to the acquisition of a casualty run-off portfolio in the United Kingdom and the renewed business previously written on Swiss Re America Corporation. This impact was partly offset by the commutation of a large treaty and favourable claims development in affiliated companies. Liabilities for life and health policy benefits gross decreased by CHF 1 735 million, mainly due to the reserve release related to the recapture of pre-2004 US individual life business by Swiss Re Life & Health America Inc. In addition, the equalisation provision was increased by CHF 344 million in 2015. The decrease in debt from CHF 5 127 million as of 31 December 2014 to CHF 3 888 million as of 31 December 2015 was driven by a partial repayment of credit facility drawdowns from the parent company of CHF 963 million. Funds held under reinsurance treaties decreased by CHF 998 million, due to the strengthening of the Swiss francs against major currencies, in particular Canadian dollar. Excluding the effect of foreign exchange movement, funds held under reinsurance treaties decreased by CHF 353 million. This reflected mainly the novation of life and health business to an affiliated company. Other liabilities increased net by CHF 2 123 million to CHF 5 369 million as of 31 December 2015, mainly based on higher intragroup payables under securities lending agreements and securities sold under agreement to repurchase. This was partly offset by a net decrease in an intragroup current account payable of CHF 649 million, mostly driven by the cashless hybrid subordinated loan repayment of CHF 789 million with the same intragroup company. Shareholder’s equity Shareholder’s equity increased from CHF 10 707 million as of 31 December 2014 to CHF 14 260 million as of 31 December 2015. The increase reflected the net income for the financial year 2015 of CHF 6 432 million, partly offset by the dividend payment in cash of CHF 2 879 million to its parent company Swiss Re Ltd. 92 Swiss Reinsurance Company Ltd 2015 Annual Report Future prospects and business development Structural changes New legal entity structure in the Reinsurance Business Unit Over the coming years, the Reinsurance Business Unit intends to continue to align its legal entity structure to its regional footprint and further strengthen its presence in Asia. As a further step and following the legal entity restructuring in 2015, European Reinsurance Company of Zurich Ltd will novate its European business to the Company effective as of 1 January 2016, resulting in a one-off increase in the Company‘s assets and liabilities of approximatively CHF 8 billion. Transfer of employees and carve-out of Swiss Re Management Ltd The Company established in 2015 the subsidiary Swiss Re Management Ltd. Swiss Re Management Ltd and its subsidiaries and branches serve as the employing company for Swiss Re’s Group Functions employees located in Switzerland, the United Kingdom, India, Slovakia and the United States. The Swiss Re Management Ltd group will be transferred to the parent company Swiss Re Ltd by way of distribution of an ordinary dividend in-kind for the financial year 2015. The creation of Swiss Re Management Ltd and the establishment of a separate holding company structure for Swiss Re‘s Group Functions employees is part of Swiss Re‘s efforts to align its legal entity structure to the Swiss Re Group‘s operating model launched in 2012. It corresponds to best practice corporate governance and is intended to foster transparency and accountability. Together with related assets and liabilities, Swiss Re’s Group Functions employees in Switzerland employed by the Company were transferred to Swiss Re Management Ltd and Corporate Solutions employees in Switzerland employed by the Company were transferred to Swiss Re Corporate Solutions Ltd. This change of employing legal entities was effective as of 1 January 2016 and will not affect or alter the way Swiss Re conducts business or the way in which it operates with its clients. Macroeconomic environment The global economy is still expected to improve modestly in 2016 and 2017, with slightly higher growth in many regions, including the US, the UK and the Eurozone. Downside risks have increased along with market volatility. The main challenges are the tightening of monetary policy in the US, China’s transition from an investment- to a consumption-driven economy, low commodity prices and a plethora of political issues such as Middle East turmoil and associated refugee crisis, Ukraine and a possible Brexit. The biggest risks are a hard landing in China, followed by an emerging market crisis and a stagnation in Europe as a consequence of political paralysis. Property and Casualty business Market environment The reinsurance industry experienced in 2015 a fourth year of solid underwriting results, which benefited from reserve releases and below average natural catastrophe losses. However, reinsurance prices in property have been softening since mid-2013 and this trend has recently spilled over into other lines of business. In general, rates in casualty have been more stable than in property. Premium growth in the non-life reinsurance sector is expected to weaken in 2016 and 2017. Strategy and priorities The Company is committed to deliver long-term profitability and economic growth, in spite of a continued challenging property and casualty environment. Growth aspirations are focused on selected areas, with dedicated strategic initiatives in place, such as high-growth markets, casualty, regional and national clients and transactional growth. Additionally, differentiation continues to be key, through financial strength, client interaction model and a knowledge company approach. January renewals Similarly to the past several years, the January renewals in 2016 were completed under soft market conditions, characterised by abundant capacity and continued price erosion on most lines of business, especially in property. The Company has accomplished significant successes locally, due to active differentiation in new business and completion of new large transactions. Swiss Reinsurance Company Ltd 2015 Annual Report 93 Financial Statements I Swiss Reinsurance Company Ltd Life and Health Business Market environment Premiums in traditional life reinsurance globally are expected to increase only marginally over the next two years. Life reinsurers are likely to continue to seek non-traditional or less-developed areas of growth. In the next few years, many primary insurers might look for solutions to manage the capital strain that the macroeconomic environment and changes in regulation will inflict, creating potential new opportunities for reinsurers. Additionally, life reinsurers are increasingly developing solutions to take longevity risk from primary firms with annuity business, and from private and public pension plans. Strategy and priorities The Company remains focused on profitable growth, notably through the development of its health business and its business in high-growth markets. Following the current market trends towards non-traditional products, the Company continues to develop tailor-made solutions while remaining focused on traditional mortality business. Investments Strategy and priorities Financial investments are managed in accordance with Swiss Re‘s asset management policy and the Company‘s investment guidelines, which are intended to ensure compliance with regulatory requirements. The general principle governing investment management in the Company is the creation of economic value on the basis of returns relative to the liability benchmark, while adhering to the investment guidelines and the general prudence principle. The liability benchmark is determined by approximating an investable benchmark from projected liability cash flows. A cash benchmark is used for the economic surplus. Outlook In terms of economic outlook, the Company‘s baseline assumptions remain for the moderate global growth environment to continue in 2016, led by the US economy. The cyclical Eurozone recovery is also expected to carry on, but remain modest and uneven. Meanwhile, growth in China is set to slow further in 2016 amid the country‘s difficult transition to a more consumer- driven economy. Regarding the investment outlook for 2016, government bond yields are forecast to rise moderately. The preference remains for high-quality corporate credit, while maintaining a neutral outlook for equities in the longer-term. Due to the various downside risks, asset price volatility is expected to be elevated in 2016. 94 Swiss Reinsurance Company Ltd 2015 Annual Report Risk assessment The bodies and committees mentioned below belong to the Swiss Re Group as the identification, assessment and control of risk exposures of Swiss Reinsurance Company Ltd on a stand-alone basis is integrated in and covered by the Group risk management organisation and processes of the Swiss Re Group. The Board of Directors of Swiss Reinsurance Company Ltd is responsible for the company‘s overall risk tolerance. In this role they are advised by the Board of Directors of the Swiss Re Group, which is ultimately responsible for the Group’s governance principles and policies, including approval of the Group’s overall risk tolerance. It mainly performs risk oversight and governance through three committees: ̤ The Finance and Risk Committee defines the Group Risk Policy and reviews 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, and advises the Group EC, the Chairman or the respective Group Board Committees, in particular the Finance and Risk Committee, on significant matters arising in their area of responsibility. The Group CRO 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® (Life Capital since 1 January 2016) 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 in their respective areas. 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. This ensures 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 ̤ Maintaining the central risk governance framework The central risk management units also oversee Group liquidity and capital adequacy and maintain the Group frameworks for controlling these risks throughout Swiss Re. Group Risk Management is also in charge of actuarial reserving and monitoring of the reserve holdings of the Corporate Solutions and Admin Re® Business Units, 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 supported by the Group Internal Audit and Compliance units. Group Internal Audit performs independent, objective assessments of adequacy and effectiveness of internal control systems. It evaluates the execution of processes, including those within Risk Management. The 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. Swiss Reinsurance Company Ltd 2015 Annual Report 95 Financial Statements I Swiss Reinsurance Company Ltd Income statement Swiss Reinsurance Company Ltd For the years ended 31 December Income statement CHF millions Reinsurance Premiums written gross Premiums written retroceded Premiums written net Change in unearned premiums gross Change in unearned premiums retroceded Change in unearned premiums net Premiums earned Other reinsurance revenues Allocated investment return Total revenues from reinsurance business Claims paid and claim adjustment expenses gross Claims paid and claim adjustment expenses retroceded Claims paid and claim adjustment expenses net Change in unpaid claims gross Change in unpaid claims retroceded Change in unpaid claims net Life and health benefits gross Life and health benefits retroceded Life and health benefits net Claims and claim adjustment expenses and life and health benefits Change in equalisation provision Claims incurred Acquisition costs gross Acquisition costs retroceded Acquisition costs net Operating costs Acquisition and operating costs Other reinsurance expenses Total expenses from reinsurance business Note 2014 2015 15 608 –4 675 10 933 –288 –334 –622 10 311 923 387 11 621 –10 252 2 939 –7 313 –145 –106 –251 1 200 93 1 293 –6 271 –400 –6 671 –3 577 1 295 –2 282 –753 –3 035 –552 –10 258 17 448 –4 403 13 045 –518 41 –477 12 568 1 209 324 14 101 –11 244 2 825 –8 419 –475 –548 –1 023 1 515 132 1 647 –7 795 –344 –8 139 –4 350 1 324 –3 026 –847 –3 873 –455 –12 467 Reinsurance result 1 363 1 634 96 Swiss Reinsurance Company Ltd 2015 Annual Report CHF millions Investments Investment income Investment expenses Allocated investment return Investment result Other financial income and expenses Other financial income Other financial expenses Operating result Interest expenses on debt and subordinated liabilities Other income and expenses Other income Other expenses Income before income tax expense Income tax expense Net income Note 2 2014 2015 2 306 –434 –387 1 485 500 –1 093 8 575 –2 418 –324 5 833 456 –1 065 2 255 6 858 –78 –88 168 –275 2 070 –404 1 666 93 –348 6 515 –83 6 432 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2015 Annual Report 97 Financial Statements I Swiss Reinsurance Company Ltd Balance sheet Swiss Reinsurance Company Ltd As of 31 December Assets CHF millions Investments Investments in subsidiaries and affiliated companies Fixed income securities Loans Mortgages Equity securities Shares in investment funds Short-term investments Alternative investments Other investments Total investments Financial and reinsurance assets Assets in derivative financial instruments Funds held by ceding companies Cash and cash equivalents Reinsurance recoverable from unpaid claims Reinsurance recoverable from liabilities for life and health policy benefits Reinsurance recoverable from unearned premiums Reinsurance recoverable from provisions for profit commissions Reinsurance recoverable on technical provisions retroceded Tangible assets Deferred acquisition costs Intangible assets Premiums and other receivables from reinsurance Other receivables Other assets Accrued income Total financial and reinsurance assets Note 2014 2015 15 388 16 859 6 610 794 672 3 942 4 857 1 331 10 130 50 453 251 15 022 2 172 5 258 1 253 2 310 50 8 871 59 842 65 6 847 649 2 251 366 37 395 13 334 17 031 11 764 806 590 4 786 2 625 571 7 982 51 507 276 13 639 1 917 4 446 1 202 2 300 48 7 996 61 1 287 79 7 320 232 5 715 234 38 756 3 3 3 3 3 3 Total assets 87 848 90 263 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. 98 Swiss Reinsurance Company Ltd 2015 Annual Report Liabilities and shareholder’s equity CHF millions Liabilities Technical provisions gross Unpaid claims Liabilities for life and health policy benefits Unearned premiums Provisions for profit commissions Equalisation provision Total technical provisions gross Non-technical provisions Tax provisions Provision for currency fluctuation Other provisions Total non-technical provisions Debt Liabilities from derivative financial instruments Funds held under reinsurance treaties Reinsurance balances payable Other liabilities Accrued expenses Subordinated liabilities Total liabilities Shareholder’s equity Share capital Legal reserves from capital contributions Legal capital reserves Legal profit reserves Voluntary profit reserves Retained earnings brought forward Net income for the financial year Total shareholder’s equity Note 2014 2015 3 3 3 3 3 3 4 31 592 13 228 5 621 257 1 200 51 898 337 821 444 1 602 5 127 552 5 634 2 948 3 246 214 5 920 31 365 11 493 5 986 238 1 544 50 626 46 921 486 1 453 3 888 588 4 636 3 532 5 369 202 5 709 77 141 76 003 34 8 057 8 057 650 272 28 1 666 10 707 34 6 778 6 778 650 272 94 6 432 14 260 Total liabilities and shareholder’s equity 87 848 90 263 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2015 Annual Report 99 Financial Statements I Swiss Reinsurance Company Ltd Notes 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. 1 Significant accounting principles Basis of presentation On 1 January 2013, the new Swiss accounting and financial reporting legislation entered into force based on partial revisions of the Swiss Code of Obligations (SCO), which required implementation in 2015. Swiss Reinsurance Company Ltd adopted the new regulation for the financial statements 2015 and chose to adapt the presentation of the 2014 financial statements to be comparable with 2015. The Company is a reinsurance company and has, based on Art. 111b of the Ordinance on the supervision of private insurance companies (AVO), also to follow the Insurance Supervisory Ordinance-FINMA (AVO-FINMA), that took effect 15 December 2015. This AVO-FINMA contains specific guidance for presentation of the balance sheet, the income statement and the notes of insurance companies and overrides the general guidance of the SCO. With the first time application of the new regulation set in the SCO as well as in the AVO-FINMA, some of the prior year‘s information were amended in order to have the same sorting order for comparison reasons. Although the structure and some positions were amended, there was no restatement of prior year figures and as such the net income as well as the total shareholder‘s equity remained unchanged. Time period The 2015 financial year comprises the accounting period from 1 January 2015 to 31 December 2015. 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. Investments The following assets are carried at cost, less necessary and legally permissible depreciation: ̤ Investments in subsidiaries and affiliated companies ̤ Fixed income securities (other than zero-coupon bonds) ̤ Equity securities ̤ Shares in investment funds ̤ Alternative investments Subsequent recoveries of previously recorded downward value adjustments may be recognised up to the lower of cost or market value at the balance sheet date. The valuation rules prescribed by the Swiss Financial Market Supervisory Authority FINMA are observed. 100 Swiss Reinsurance Company Ltd 2015 Annual Report The Company‘s investments in subsidiaries and affiliated companies are summarised as a group for valuation purposes, when a close business link exists and a similarity in nature is given. Zero-coupon bonds reported under fixed income securities are measured at their amortised cost values. Loans and mortgages are carried at nominal value. Value adjustments are recorded where the expected recovery value is lower than the nominal value. 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. Assets in derivative financial instruments Assets in derivative financial instruments include reinsurance contracts or features embedded in reinsurance contracts that fulfil the characteristics of derivative financial instruments and are accounted based on the lower of cost or market principle. Funds held by ceding companies Funds held by ceding companies consist mainly of assets that belong to the Company but are withheld by the cedant due to regulatory or legal requirements, or to retain control over investments and reduce a potential credit risk. Assets are initially measured based on the consideration received. Subsequently the funds held by ceding companies are measured at the consideration received or market value of the underlying assets. 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. Reinsurance recoverable on technical provisions retroceded Reinsurance recoverable on technical provisions represents the retroceded part of the technical provisions. The respective accounting principle per technical provision category is described further under ”Technical provisions gross”. Tangible assets Tangible assets are carried at cost, less individually scheduled straight-line depreciation over their useful lives. Items of minor value are not capitalised. 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 are fully amortised. 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 life of software. Premiums and other receivables from reinsurance Premiums and other receivables from reinsurance are carried at nominal value after deduction of known credit risks if applicable. The position mainly consists of receivables from insurance companies and brokers. 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 rights in connection with securities lending collateral and reverse repurchase transactions, which are carried at nominal value. Swiss Reinsurance Company Ltd 2015 Annual Report 101 Financial Statements I Swiss Reinsurance Company Ltd Technical provisions gross Unpaid claims are recognised 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. Liabilities and consideration in connection with portfolio transfers are established through the respective lines in the income statement. Outstanding claims and liabilities are recorded as change in unpaid claims and life and health benefits, with the consideration being recognised as claims paid. The impact on unearned premiums is established through the change in unearned premiums, with the respective consideration accounted as premiums written. Any profit or loss on the portfolio transfer is reflected in other reinsurance revenues or other reinsurance expenses, respectively. For property and casualty transfers of retroactive treaties, the initial set up of assets and liabilities is accounted 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 the tax provision in accordance with tax regulations. 102 Swiss Reinsurance Company Ltd 2015 Annual Report Debt Debt is 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. 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. The position mainly consists of payables to insurance companies and brokers. Other liabilities Other liabilities include rights in connection with repurchase agreements and securities lending transactions, which are held at redemption value. Subordinated liabilities Subordinated liabilities are held at redemption values. 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 as deposit arrangements. Deposit amounts are adjusted for payments received and made, as well as for amortisation or accretion of interest. Allocated investment return The allocated investment return contains the calculated interest generated on the investments covering the technical provisions. The interest rate reflects the currency-weighted, five-year average yield on five-year government bonds. Management expenses Overall management expenses are allocated to the reinsurance business, the investment business and to other expenses on an imputed basis. Foreign exchange 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. Change in accounting policy The Company revised its accounting policy for the presentation of the income statement in connection with life and health portfolio transfers. In previous years, the consideration for life and health policy benefits was accounted as premiums written. As of 1 January 2015, the consideration is accounted as claims paid. Any profit or loss on the portfolio transfer is reflected in other reinsurance revenues or other reinsurance expenses, respectively. Swiss Reinsurance Company Ltd 2015 Annual Report 103 Financial Statements I Swiss Reinsurance Company Ltd 2 Investment result CHF millions Investment income Investments in subsidiaries and affiliated companies Fixed income securities Loans Mortgages Equity securities Shares in investment funds Short-term investments Alternative investments Other investments Income from investment services Investment income CHF millions Investment expenses Investments in subsidiaries and affiliated companies Fixed income securities Loans Equity securities Shares in investment funds Short-term investments Alternative investments Other investments Investment management expenses Investment expenses Allocated investment return Investment result Income 21 656 125 7 19 192 43 132 367 108 1 303 Value readjustments Realised gains 1 112 – – 9 35 – 19 54 – 176 6 383 224 – – 107 64 4 314 382 – 7 096 Expenses Value adjustments Realised losses – – – – – – – – –156 –156 –1 821 –189 –8 –30 –36 – –28 –64 – –2 112 – –55 – –59 – –1 –35 –36 – –150 2015 Total 6 405 992 125 7 135 291 47 465 803 108 8 575 2015 Total –1 821 –244 –8 –89 –36 –1 –63 –100 –156 –2 418 –324 5 833 104 Swiss Reinsurance Company Ltd 2015 Annual Report CHF millions Investment income Real Estate Investments in subsidiaries and affiliated companies Fixed income securities Loans Mortgages Equity securities Shares in investment funds Short-term investments Alternative investments Other investments Income from investment services Investment income CHF millions Investment expenses Investments in subsidiaries and affiliated companies Fixed income securities Loans Equity securities Shares in investment funds Short-term investments Alternative investments Other investments Investment management expenses Investment expenses Allocated investment return Investment result Income 0 319 702 117 10 36 4 43 172 219 103 1 506 Value readjustments Realised gains – – – – – – – – – – – – 0 1 178 – – 331 150 2 138 290 – 800 Expenses Value adjustments Realised losses – – – – – – – – –170 –170 –5 –76 –2 –26 – – –57 –57 – –166 –1 –57 – –37 –1 –2 0 –3 – –98 2014 Total 0 320 880 117 10 367 154 45 310 509 103 2 306 2014 Total –6 –133 –2 –63 –1 –2 –57 –60 –170 –434 –387 1 485 Swiss Reinsurance Company Ltd 2015 Annual Report 105 Financial Statements I Swiss Reinsurance Company Ltd 3 Assets and liabilities from reinsurance CHF millions Deferred acquisition costs Premiums and other receivables from reinsurance Deferred expenses on retroactive reinsurance policies2 Unpaid claims Liabilities for life and health policy benefits Unearned premiums Provisions for profit commissions Equalisation provision Reinsurance balances payable Gross 1 547 6 446 4 31 592 13 228 5 621 257 1 200 1 820 Retro –705 401 –30 –5 2581 –1 2531 –2 3101 –501 – 1 128 2014 Net 842 6 847 –26 26 334 11 975 3 311 207 1 200 2 948 Gross 2 044 6 713 331 31 365 11 493 5 986 238 1 544 1 876 Retro –757 607 –26 –4 4461 –1 2021 –2 3001 –481 – 1 656 2015 Net 1 287 7 320 305 26 919 10 291 3 686 190 1 544 3 532 1 Reported under "Reinsurance recoverable on technical provisions retroceded" on page 98. 2 Reported under "Other assets" on page 98. 4 Change in shareholder’s equity CHF millions Shareholder’s equity 1.1.2014 Allocations relating to the dividend paid Dividend for the financial year 2013 Net income for the financial year Shareholder’s equity 31.12.2014 Shareholder’s equity 1.1.2015 Allocations relating to the dividend paid Dividend for the financial year 2014 Net income for the financial year Shareholder’s equity 31.12.2015 Share capital 34 Legal capital reserves 8 057 Legal profit reserves 650 Voluntary profit reserves 928 2 100 –2 756 Retained earnings brought forward 37 –9 Net income for the financial year 2 091 –2 091 34 34 8 057 8 057 –1 279 650 650 272 272 2 879 –2 879 34 6 778 650 272 28 28 66 94 1 666 1 666 1 666 –1 666 6 432 6 432 Total shareholder’s equity 11 797 – –2 756 1 666 10 707 10 707 – –2 879 6 432 14 260 5 Share capital and major shareholder 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. As of 31 December 2015 and 2014, the Company was a fully owned subsidiary of Swiss Re Ltd. 6 Contingent liabilities Swiss Reinsurance Company Ltd has issued a number of guarantees to several of its subsidiaries and affiliated companies 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 1 000 million (2014: CHF 896 million) of debt issued by certain affiliated companies and letter of credit facilities benefiting various subsidiaries and affiliated companies of which no amount was utilised as of 31 December 2015 and 2014, 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 subsidiary, unless waived by the counterparties. 106 Swiss Reinsurance Company Ltd 2015 Annual Report 7 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. Further, 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 8 Security deposits 2014 16 851 18 112 34 963 2015 15 887 18 155 34 042 To secure the technical provisions at the 2015 balance sheet date, securities with a book value of CHF 13 017 million (2014: CHF 14 048 million) were deposited in favour of ceding companies, of which CHF 4 584 million (2014: CHF 4 603 million) referred to affiliated companies. 9 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 2015, total commitments remaining uncalled were CHF 885 million (2014: CHF 1 313 million). In November 2015, the Company entered into a subordinated funding facility with its parent company Swiss Re Ltd under which the Company has the right, among others, to issue subordinated notes to Swiss Re Ltd of up to USD 700 million at any time before August 2030. For its various rights, the Company owes Swiss Re Ltd an unconditional fixed commitment fee, payable in annual instalments calculated as 5.80% on the total facility amount. Annually, the Company receives a partial reimbursement of the commitment fee equal to 2.22% per annum on the undrawn facility amount. As of 31 December 2015, the facility was undrawn. 10 Leasing contracts Total off-balance-sheet commitments from operating leases for the next five years and there after are as follows: CHF millions 2015 2016 2017 2018 2019 After 2020 Total operating leases, net 2014 25 23 19 15 9 13 104 2015 – 24 20 16 9 17 86 These operating lease commitments pertain to the non-cancellable contract periods and refer primarily to office and apartment space rented by the Company. In addition, a financial lease of IT hardware with a net book value of CHF 4 million was recognised on the Company‘s 2014 balance sheet, which was fully repaid in 2015. Swiss Reinsurance Company Ltd 2015 Annual Report 107 Financial Statements I Swiss Reinsurance Company Ltd 11 Investments in subsidiaries and affiliated companies As of 31 December 2015 and 2014, Swiss Reinsurance Company Ltd held the following direct and material indirect investments in subsidiaries and affiliated companies: As of 31 December 2015 Elips Life AG European Finance Reinsurance Company Ltd Gasper Funding Corporation SCP de Milo S.à.r.l. Swiss Brokers México, Intermediario de Reaseguro, S.A. de C.V. Swiss Re Australia Ltd Swiss Re Life & Health Australia Limited Swiss Re Brasil Resseguros S.A. Swiss Re GB Limited Swiss Re Services Limited Swiss Re Investments Ltd Swiss Re Life and Health Africa Limited Swiss Re Management Ltd Swiss Re Private Equity Partners SGP Limited Swiss Re Reinsurance Holding Company Ltd European Reinsurance Company of Zurich Ltd Swiss Re America Holding Corporation Swiss Re Capital Markets Corporation Swiss Re Financial Products Corporation Swiss Re Life & Health America Holding Company Swiss Re Treasury (US) Corporation Swiss Reinsurance America Corporation Swiss Re Europe Holdings S.A. Swiss Re Europe S.A. Swiss Re Germany AG Swiss Re Treasury (Belgium) N.V. Swiss Re Services India Private Ltd Swiss Re Shared Services (India) Private Ltd Swiss Re Treasury (UK) Plc Swiss Reinsurance America Corporation - Escritório de Representação no Brasil Ltda Swiss Reinsurance Company Ltd - Escritório de Representação no Brasil Ltda Swiss Re Finance Limited Vietnam National Reinsurance Corporation Country Liechtenstein Barbados Barbados Luxembourg Mexico Australia Australia Brazil United Kingdom (UK) United Kingdom (UK) Switzerland South Africa Switzerland Cayman Islands Switzerland Switzerland United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) Luxembourg Luxembourg Germany Belgium India India United Kingdom (UK) City Triesen Bridgetown Bridgetown Luxembourg Mexico City Sydney Sydney São Paulo London London Zurich Cape Town Adliswil George Town Zurich Zurich Wilmington New York Wilmington Wilmington Wilmington Armonk Luxembourg Luxembourg Munich Brussels Mumbai Bangalore London % Equity interest 100% 100% 100% 100% 100% 100% 100% 99% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 94% 100% 100% 100% 100% % Voting interest 100% 100% 100% 100% 100% 100% 100% 99% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 94% 100% 100% 100% 100% Brazil São Paulo Brazil Cayman Islands Vietnam São Paulo George Town Hanoi 20% 93% 65% 25% 20% 93% 100% 25% 108 Swiss Reinsurance Company Ltd 2015 Annual Report As of 31 December 2014 Eastern Foreshore Investments Limited Elips Life AG European Finance Reinsurance Company Ltd Gasper Funding Corporation SCP de Milo S.à.r.l. Swiss Brokers México, Intermediario de Reaseguro, S.A. de C.V. Swiss Re Australia Ltd Swiss Re Life & Health Australia Limited Swiss Re Brasil Resseguros S.A. Swiss Re GB Limited Swiss Re Services Limited Swiss Re Investments Ltd Swiss Re Life and Health Africa Limited Swiss Re Private Equity Partners SGP Limited European Reinsurance Company of Zurich Ltd Swiss Re America Holding Corporation Swiss Re Capital Markets Corporation Swiss Re Financial Products Corporation Swiss Re Life & Health America Holding Company Swiss Re Treasury (US) Corporation Swiss Reinsurance America Corporation Swiss Re Europe Holdings S.A. Swiss Re Europe S.A. Swiss Re Germany AG Swiss Re Treasury (Belgium) N.V. Swiss Re Services India Private Ltd Swiss Re Shared Services (India) Private Ltd Swiss Re Treasury (UK) Plc Swiss Reinsurance America Corporation - Escritório de Representação no Brasil Ltda Swiss Reinsurance Company Ltd - Escritório de Representação no Brasil Ltda Swiss Re Finance Limited Vietnam National Reinsurance Corporation Swiss Re Holdings (Canada) Inc. Swiss Re Serviços de Consultoria em Seguros e Resseguros Ltda Beijing Prestige Health Consulting Services Company Limited "Auf Walthersburg" Aarau Country South Africa Liechtenstein Barbados Barbados Luxembourg Mexico Australia Australia Brazil United Kingdom (UK) United Kingdom (UK) Switzerland South Africa Cayman Islands Switzerland United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) Luxembourg Luxembourg Germany Belgium India India United Kingdom (UK) City Cape Town Triesen Bridgetown Bridgetown Luxembourg Mexico City Sydney Sydney São Paulo London London Zurich Cape Town George Town Zurich Wilmington New York Wilmington Wilmington Wilmington Armonk Luxembourg Luxembourg Munich Brussels Mumbai Bangalore London % Equity interest 100% 100% 100% 100% 100% 100% 100% 100% 99% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 94% 100% 100% 100% 100% % Voting interest 100% 100% 100% 100% 100% 100% 100% 100% 99% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 94% 100% 100% 100% 100% Brazil São Paulo 20% 20% Brazil Cayman Islands Vietnam Canada Brazil China Switzerland São Paulo George Town Hanoi Toronto São Paulo Beijing Aarau 93% 65% 25% 100% 100% 100% 33% 93% 100% 25% 100% 100% 100% 33% Swiss Reinsurance Company Ltd 2015 Annual Report 109 Financial Statements I Swiss Reinsurance Company Ltd 12 Debt and subordinated liabilities The Company had outstanding debt and subordinated liabilities at the 2015 balance sheet date of CHF 9 597 million (2014: CHF 11 047 million). Thereof CHF 7 236 million (2014: CHF 9 494 million) were due within one to five years and CHF 2 361 million (2014: CHF 1 553 million) were due after five years. As of 31 December 2015, the following public placed debentures were outstanding: Instrument Subordinated bond1 Subordinated bond Senior bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Senior bond Subordinated bond1 Senior bond Issued in 2006 2012 2011 2007 2007 2012 2013 2007 2013 2012 2014 2015 2015 Currency EUR CHF CHF AUD AUD USD USD GBP CHF EUR CHF EUR CHF Nominal in millions 292 320 600 300 450 750 750 500 175 500 250 750 250 Interest rate 5.252% 7.250% 2.125% 7.635% 3.538% 8.250% 6.375% 6.302% 7.500% 6.625% 1.000% 2.600% 0.750% Maturity/ First call in 2016 2017 2017 2017 2017 2018 2019 2019 2020 2022 2024 2025 2027 Book value CHF millions 318 320 600 218 328 750 750 738 175 544 250 816 250 1 In April 2015, the Company issued EUR 750 million face amount of perpetual subordinated fixed-to-floating rate callable loan notes with a first optional redemption date on 1 September 2025. The notes bear interest through the first optional redemption date at 2.60% per annum. The notes were issued in connection with a concurrent exchange of part of the EUR 1 billion 5.252% perpetual subordinated step-up loan notes issued by the Company. 13 Deposit arrangements The following balances were related to deposit accounted reinsurance contracts: CHF millions Other reinsurance revenues Claims paid and claim adjustment expenses gross Claims paid and claim adjustment expenses retroceded Operating costs Other reinsurance expenses Funds held by ceding companies Premiums and other receivables from reinsurance Reinsurance balances payable 14 Claims on and obligations towards affiliated companies CHF millions Loans Assets in derivative financial instruments Funds held by ceding companies Premiums and other receivables from reinsurance Other receivables Other assets Debt Liabilities from derivative financial instruments Funds held under reinsurance treaties Reinsurance balances payable Other liabilities Subordinated liabilities 110 Swiss Reinsurance Company Ltd 2015 Annual Report 2014 176 18 –13 –4 –135 728 867 1 759 2014 6 499 247 9 502 1 698 85 188 3 777 372 5 487 1 059 2 112 747 2015 109 2 2 –3 –99 58 1 735 2 000 2015 11 751 – 8 946 2 145 32 1 827 2 788 347 4 507 1 988 4 229 752 15 Release of undisclosed reserves In the year under report, undisclosed reserves on investments or on provisions were released by a net amount of CHF 949 million (2014: no net release). 16 Obligations towards employee pension fund As of 31 December 2015, other liabilities included CHF 4 million (2014: CHF 6 million) payable to the employee pension fund. 17 Personnel information As of 31 December 2015, the Company employed a worldwide staff at an average of 4 018 (2014: 3 956) full time equivalents. Personnel expenses for the 2015 financial year amounted to CHF 1 079 million (2014: CHF 1 027 million). 18 Management fee contribution In 2015, management expenses of CHF 710 million (2014: CHF 775 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”. 19 Auditor‘s fees In 2015, the Swiss Re Group incurred total auditor’s fees of CHF 35 million and additional fees of CHF 5 million, of which CHF 17 million (2014: CHF 16 million) and CHF 3 million (2014: CHF 4 million), respectively, were accounted for at the Company level. Swiss Reinsurance Company Ltd 2015 Annual Report 111 Financial Statements I Swiss Reinsurance Company Ltd Proposal for allocation of disposable profit The Board of Directors proposes to the Annual General Meeting of the Company, to be held on 30 March 2016, to approve the following allocation and payments of a cash dividend of USD 2 900 million, which must not exceed CHF 3 200 million, translated into CHF at spot rate on the settlement date, and a dividend in-kind of Swiss Re Management Ltd of CHF 100 million. The cash dividend and the dividend in-kind are paid to its sole shareholder Swiss Re Ltd out of voluntary profit reserves on 22 April 2016. In order to comply with the Swiss Code of Obligations, dividends paid in foreign currencies must meet the capital protection requirements in CHF. In addition, maximum amounts in CHF must be approved by the Annual General Meeting. The Board of Directors proposes to set this maximum amount to CHF 3 200 million, which shall be fully funded from the disposable profit as presented in the table below. As such the effective cash dividend amount, translated into CHF at spot rate on the settlement date, must not exceed CHF 3 200 million. This threshold of CHF 3 200 million is presented in the below table and reflects the maximum amount in CHF to be paid. Retained earnings CHF millions Retained earnings brought forward Net income for the financial year Disposable profit Allocation to voluntary profit reserves Retained earnings after allocation Legal reserves from capital contributions CHF millions Legal reserves from capital contributions brought forward Allocation to voluntary profit reserves in connection with the ordinary cash dividend Legal reserves from capital contributions after allocation to voluntary profit reserves 1 The 2014 figure was recalculated based on the final cash dividend converted into CHF at spot rate on the settlement date. Voluntary profit reserves CHF millions Voluntary profit reserves brought forward Allocation from retained earnings Voluntary profit reserves before allocation of legal reserves from capital contributions, proposed cash dividend and dividend in-kind Allocation from legal reserves from capital contributions Proposed cash dividend (maximal amount in CHF of the proposed dividend in USD translated into CHF) Proposed dividend in-kind of Swiss Re Management Ltd Voluntary profit reserves after allocation of legal reserves from capital contributions, proposed cash dividend and dividend in-kind 2014 28 1 666 1 694 –1 600 94 2014 8 057 –1 2791 6 778 2014 272 1 600 1 872 1 2792 –2 8792 – 2015 94 6 432 6 526 –6 500 26 2015 6 778 – 6 778 2015 272 6 500 6 772 – –3 2001 –100 272 3 472 1 The translation into CHF at spot rate on the settlement date may result in a lower cash dividend by a respective amount on the settlement date. 2 The 2014 figures were recalculated based on the final cash dividend converted into CHF at spot rate on the settlement date. Zurich, 15 March 2016 112 Swiss Reinsurance Company Ltd 2015 Annual Report 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 (the “Company”), which comprise the income statement, balance sheet and notes (pages 96 to 111), for the year ended 31 December 2015. 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 Association. 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 judgement, 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 Company’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 Company’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 2015 comply with Swiss law and the Company’s Articles of Association. 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 Association. We recommend that the financial statements submitted to you be approved. PricewaterhouseCoopers Ltd Alex Finn Audit expert Auditor in charge Zurich, 15 March 2016 Bret Griffin Swiss Reinsurance Company Ltd 2015 Annual Report 113 Financial Statements I Swiss Reinsurance Company Ltd Cautionary note on forward-looking statements Certain statements and illustrations contained herein are forward-looking. These statements (including as to plans, objectives, targets and trends) 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, capital or liquidity positions or prospects to be materially different from any future results of operations, financial condition, solvency ratios, capital or liquidity positions or prospects expressed or implied by such statements. 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; 114 Swiss Reinsurance Company Ltd 2015 Annual Report  ̤ uncertainties in estimating future claims for purposes of financial reporting, particularly with respect to large natural catastrophes, as significant uncertainties may be involved in estimating losses from such events and preliminary estimates may be subject to change as new information becomes available; ̤ the frequency, severity and development of insured claim events; ̤ acts of terrorism and acts of war; ̤ mortality, morbidity and longevity experience; ̤ policy renewal and lapse rates; ̤ extraordinary events affecting the Group’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events; ̤ current, pending and future legislation and regulation affecting the Group or its ceding companies; ̤ legal actions or regulatory investigations or actions, including those in respect of industry requirements or business conduct rules of general applicability; ̤ changes in accounting standards; ̤ significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions; ̤ changing levels of competition; and ̤ operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks. These factors are not exhaustive. The Group operates in a continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance on forward-looking statements. The Group undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Swiss Reinsurance Company Consolidated 2015 Annual Report 115 Financial Statements I Group Financial Statements Note on risk factors General impact of adverse market conditions The operations of Swiss Reinsurance Company Ltd (“Swiss Re”) and its subsidiaries (the “Group”) as well as its investment returns are subject to market volatility and macro-economic factors, which are outside of the Group’s control and are often inter-related. Despite signs of moderate increase in global growth forecasts and positive macro-economic trends in the United States, growth forecasts among the principal global economies remain uneven and uncertain, and that uncertainty has been compounded by significant volatility in equity, currency and commodities markets. Slower growth rates in China, together with the actions taken on its currency, and drastic reductions in the price of oil, together with volatility in foreign currency and investment markets caused by interest rate action in the United States; continued concerns over the implications of austerity-driven economic policies in Europe and the ability of the European Union to address significant ongoing structural challenges; concerns over a possible exit of the United Kingdom from the European Union; deceleration in GDP growth and other negative trends in emerging markets; and geopolitical instability, reflecting the political and military situations in the Middle East and North Africa, the rise of the Islamic State, concerns over further terrorist attacks across the globe and the political, economic and social crises caused by massive waves of migration into and through Europe, have contributed to downward pressure on the capital markets and, in turn, on market capitalization of many listed companies, call into question the likelihood of continued recovery of the global economies and are beginning to raise the spectre of another global recession. With fewer options available to policymakers and concerns generally over the absence of realistic confidence-building measures, and with heightened risk that volatility or depressed conditions in one sector, one market, one country or one region could have far broader implications, volatility can be expected to continue. Further adverse developments or the continuation of adverse trends that in turn have a negative impact on financial markets and economic conditions could limit our ability to access the capital markets and bank funding markets, could adversely affect the ability of counterparties to meet their obligations to us and could adversely affect the confidence of the ultimate buyers of insurance. 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 the Group’s overall results, make it difficult to determine the value of certain assets in the Group’s portfolio and/or make it difficult to acquire suitable investments to meet the Group’s risk and return criteria. Regulatory changes Swiss Re and its subsidiaries operate in a highly regulated environment and are subject to applicable regulation in each of the jurisdictions in which they conduct business, particularly Switzerland, the United States, the United Kingdom, Luxembourg and Germany. The regulatory regimes to which members of the Group are subject have changed significantly in recent years and are expected to continue to evolve as a result of global efforts following the credit crisis. Although early regulatory efforts following the credit crisis 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 companies, the European Insurance and Occupational Pensions Authority (the 116 Swiss Reinsurance Company Consolidated 2015 Annual Report “EIOPA”), which has the power to overrule national regulators in certain circumstances. In addition, Swiss Re is subject to the Swiss Solvency Test, and, through its legal entities organized in the European Economic Area, Solvency II, which entered into force on 1 January 2016. The Group is also monitoring the impact of the Swiss Federal Act on Financial Market Infrastructure (which became effective 1 January 2016 and introduced 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 or its securities. 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 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. Swiss Reinsurance Company Consolidated 2015 Annual Report 117 Financial Statements I Group Financial Statements 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. 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 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. 118 Swiss Reinsurance Company Consolidated 2015 Annual Report 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 also has unfunded capital commitments in its private equity and hedge fund investments, which could result in funding obligations at a time when it is subject to liquidity constraints. In addition, the Group has potential collateral requirements in connection with a number of reinsurance arrangements, the amounts of which may be material and the meeting of which could require the Group to liquidate cash equivalents or other securities. The Group manages liquidity and funding risks by focusing on the liquidity stress that is likely to result from extreme capital markets scenarios or from extreme loss events or combinations of the two. Generally, the ability to meet liquidity needs could be adversely impacted by factors that the Group cannot control, such as market dislocations or interruptions, adverse economic conditions, severe disruption in the financial and worldwide credit markets and the related increased constraints on the availability of credit; changes in interest rates, foreign exchange rates and credit spreads; or by perceptions among market participants of the extent of the Group’s liquidity needs. The Group may not be able to secure new sources of liquidity or funding, should projected or actual liquidity fall below levels it requires. The ability to meet liquidity needs through asset sales may be constrained by market conditions and the related stress on valuations, and 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 parties to whom the Group has retroceded risk, and such risk could be exacerbated to the extent any such exposures are concentrated. Swiss Reinsurance Company Consolidated 2015 Annual Report 119 Financial Statements I Group Financial Statements 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 judgements, 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 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 and malfeasance, such as undertaking or facilitating cyber attacks on internal systems. 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. 120 Swiss Reinsurance Company Consolidated 2015 Annual Report Insurance, operational and other risks As part of the Group’s ordinary course operations, the Group is subject to a variety of risks, including risks that reserves may not adequately cover future claims and benefits, risks that catastrophic events (including hurricanes, windstorms, floods, earthquakes, acts of terrorism, man-made disasters such as industrial accidents, explosions, and fires, and pandemics) may expose the Group to unexpected large losses (and related uncertainties in estimating future claims in respect of such events); changes in the insurance industry that affect ceding companies, particularly those that further increase their sensitivity to counterparty risk; competitive conditions (including as a result of consolidation and the availability of significant levels of alternative capacity); cyclicality of the industry; risks related to emerging claims and coverage issues (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. Any of the foregoing, as well the occurrence of future risks that the Group’s risk management procedures fail to identify or anticipate, could have a material adverse effect on the Group, and could also give rise to reputational risk. 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. Swiss Reinsurance Company Consolidated 2015 Annual Report 121 Financial Statements I Group Financial Statements 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. 122 Swiss Reinsurance Company Consolidated 2015 Annual Report 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 © 2016 Swiss Re. All rights reserved. 

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