Swiss Reinsurance Co.
Annual Report 2016

Plain-text annual report

Swiss Reinsurance Company Consolidated 2016 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 Debt and contingent capital instruments Note 11 Income taxes Note 12 Benefit plans Note 13 Share-based payments Note 14 Related parties Note 15 Commitments and contingent liabilities Note 16 Variable interest entities Note 17 Disposals Note 18 Subsequent events 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 50 51 59 70 74 76 80 88 90 94 95 99 100 102 108 108 114 116 118 130 131 136 136 138 Financial Statements I Group financial statements Income statement For the years ended 31 December USD millions Revenues Gross premiums written Net premiums written Change in unearned premiums 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 business Other revenues Total revenues Expenses Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Operating expenses2 Total expenses before interest expenses Income before interest and income tax expense Interest expenses2 Income before income tax expense Income tax expense Net income before attribution of non-controlling interests Income/loss 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 2015 2016 4 4 3 3 7 7 7 3 3 3 11 28 556 26 720 –581 26 139 145 2 787 1 028 42 57 30 198 –7 893 –8 559 –386 –5 865 –2 538 –25 241 4 957 –608 4 349 –524 3 825 –1 3 824 –68 3 756 31 667 29 715 –722 28 993 129 2 728 1 592 15 41 33 498 –10 299 –9 560 –358 –6 382 –2 473 –29 072 4 426 –581 3 845 –648 3 197 –18 3 179 –68 3 111 1 Total impairments for the years ended 31 December of USD 51 million in 2015 and USD 71 million in 2016, respectively, were fully recognised in earnings. 2 Letter of credit fees of USD 55 million for the year ended 31 December 2015 have been reclassified from “Operating expenses“ to “Interest expenses“. The accompanying notes are an integral part of the Group financial statements. 2 Swiss Reinsurance Company Consolidated 2016 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 Other comprehensive income attributable to non-controlling interests 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 2015 3 825 –1 843 –7 –876 –191 908 –68 –1 839 2016 3 197 451 5 –125 –46 3 3 485 –68 –21 3 396 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 2016 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 Unrealised investment gains/losses1 1 619 1 178 –512 –215 2 070 Other-than- temporary impairment1 –3 –9 Foreign currency translation –4 261 –727 Adjustment from pension benefits2 –762 –309 Accumulated other comprehensive income –1 564 –2 430 2 –10 –149 –5 137 70 48 –953 –1 131 644 –4 481 Other-than- temporary impairment1 –10 5 Foreign currency translation –5 137 –58 Adjustment from pension benefits2 –953 –113 Accumulated other comprehensive income –4 481 1 012 2 –2 –5 –67 –5 262 60 7 –999 –450 –277 –4 196 1 Reclassification adjustment included in net income is presented in “Net realised investment gains/losses – non-participating business“. 2 Reclassification adjustment included in net income is presented in “Operating expenses“. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2016 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 (including 10 839 in 2015 and 9 056 in 2016 subject to securities lending and repurchase agreements) (amortised cost: 2015: 59 137; 2016: 60 490) Trading (including 1 729 in 2015 and 1 871 in 2016 subject to securities lending and repurchase agreements) Equity securities: Available-for-sale (including 439 in 2015 and 19 in 2016 subject to securities lending and repurchase agreements) (cost: 2015: 2 876; 2016: 2 063) Trading Policy loans, mortgages and other loans Investment real estate Short-term investments (including 417 in 2015 and 1 798 in 2016 subject to securities lending and repurchase agreements) Other invested assets Investments for unit-linked business (equity securities trading: 818 in 2015 and 548 in 2016) Total investments Cash and cash equivalents (including 181 in 2015 and 747 in 2016 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 11 Note 7, 8, 9 2015 2016 61 134 63 250 2 896 2 695 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 2 258 60 4 618 1 711 7 527 7 217 548 89 884 5 830 657 10 987 4 083 8 854 5 756 1 543 3 663 125 4 922 2 307 Total assets 135 191 138 611 The accompanying notes are an integral part of the Group financial statements. 4 Swiss Reinsurance Company Consolidated 2016 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 2015: 344 052 565; 2016: 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 2015 2016 8 11 10 10 10 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 51 073 17 629 5 653 8 653 2 315 1 774 452 6 631 3 697 10 315 7 805 115 997 1 102 32 8 695 –19 2 070 –5 –5 262 –999 –4 196 15 339 20 953 1 661 22 614 135 191 138 611 Swiss Reinsurance Company Consolidated 2016 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 period1 Transactions with non-controlling interests Income attributable to non-controlling interests Comprehensive income Balance as of period end Total equity 2015 2016 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 1 102 1 102 32 32 8 730 –55 20 8 695 –21 2 –19 1 619 451 2 070 –10 5 –5 –5 137 –125 –5 262 –953 –46 –999 15 222 3 179 –68 –2 994 15 339 20 953 23 866 751 18 3 1 661 22 614 1 As of 1 January 2016 the Group adopted the new accounting guidance, ASU 2015-02 “Amendments to the Consolidation Analysis”, which required the additional inclusion of non-controlling interests of USD 866 million. The accompanying notes are an integral part of the Group financial statements. 6 Swiss Reinsurance Company Consolidated 2016 Annual Report Statement of cash flow For the years ended 31 December USD millions Cash flows from operating activities Net income attributable to common shareholder Add net income attributable to non-controlling interests Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash 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, net 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, net 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, net Cash paid/received for acquisitions/disposal and reinsurance transactions, net Net purchases/sales/maturities of other investments Net purchases/sales/maturities of investments held for unit-linked business Net cash provided/used by investing activities Cash flows from financing activities Policyholder account balances, unit-linked business: Deposits Withdrawals Issuance/repayment of long-term debt Issuance/repayment of short-term debt Purchase/sale of shares in Swiss Re Ltd Transactions with non-controlling interests 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 2015 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 2016 3 111 18 380 –1 575 88 1 914 1 005 408 –43 115 –26 5 395 32 233 3 422 –36 665 –2 957 2 497 –1 380 763 1 060 135 –892 13 –170 –91 –1 471 2 733 –3 004 –3 988 515 –83 432 5 398 5 830 Interest paid was USD 709 million and USD 741 million (thereof USD 57 million and USD 51 million for letter of credit fees) for the years ended 31 December 2015 and 2016, respectively. Tax paid was USD 981 million and USD 515 million for the years ended 31 December 2015 and 2016, respectively. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2016 Annual Report 7 Financial Statements I Notes to the 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 Life Capital. 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 2016 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 2016, 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. 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. Swiss Reinsurance Company Consolidated 2016 Annual Report 9 Financial Statements I Notes to the Group financial statements 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. 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. 10 Swiss Reinsurance Company Consolidated 2016 Annual Report 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 PVFP, which could be positive or negative, 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. 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. Swiss Reinsurance Company Consolidated 2016 Annual Report 11 Financial Statements I Notes to the Group financial statements 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, which are presented in a separate line item on the face of the balance sheet. Amounts assessed against policyholders for mortality, administration and surrender are shown as fee income. Amounts credited to policyholders are shown as interest credited to policyholders. Investment income and realised investment gains and losses allocable to policyholders are included in net investment income and net realised investment gains/losses except for unit-linked business which is presented in a separate line item on the face of the income statement. For unit-linked contracts, the investment risk is borne by the policyholder. 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. 12 Swiss Reinsurance Company Consolidated 2016 Annual Report 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. 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. Swiss Reinsurance Company Consolidated 2016 Annual Report 13 Financial Statements I Notes to the Group financial statements 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 2016, the Group had a Leadership Performance Plan, stock option plans, restricted shares, and a Global Share Participation Plan. These plans are described in more detail in Note 13. The Group accounts for share-based payment transactions with employees using the fair value method. Under the fair value method, the fair value of the awards is recognised in earnings over the vesting period. For share-based compensation plans which are settled in cash, compensation costs are recognised as liabilities, whereas for equity-settled plans, compensation costs are recognised as an accrual to additional paid-in capital within shareholder’s equity. Shares in Swiss Re Ltd Shares in Swiss Re Ltd are reported at cost in shareholder’s equity. Subsequent events Subsequent events for the current reporting period have been evaluated up to 15 March 2017. This is the date on which the financial statements are available to be issued. Recent accounting guidance In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers”, which creates topic 606, “Revenue from Contracts with Customers”. ASU 2014-09 outlines the principles that an entity should follow to provide useful information about the amount, timing and uncertainty of revenue and cash flows arising from contracts with its customers. The standard requires an entity to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Insurance contracts and financial instruments are not in the scope of the new standard. The new requirements are effective for annual and interim periods beginning after 15 December 2017, and may be applied retrospectively to each prior period presented or with a cumulative effect adjustment to retained earnings as of the date of initial application. The Group is currently assessing the impact of the new requirements. In August 2014, the FASB issued ASU 2014-13, “Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity – a consensus of the FASB Emerging Issues Task Force”, an update to topic 810, “Consolidation”. The ASU applies to entities that are required to consolidate a collateralised financing entity (CFE) under the variable interest entity (VIE) consolidation guidance when the entity measures all financial assets and financial liabilities of the CFE at fair value, with changes in fair value recorded in earnings. Before the ASU became effective, if an entity would measure the fair value of assets and liabilities separately following applicable US GAAP rules, the aggregate fair value might have differed. The new guidance allows the use of the more observable of the fair value of the financial assets or the fair value of the financial liabilities of the CFE to measure both. The Group adopted ASU 2014-13 on 1 January 2016. The adoption did not have a material effect on the Group’s financial statements. In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, an update to subtopic 205-40, “Presentation of Financial Statements – Going Concern”. The ASU requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are available to be issued. When management identifies such conditions or events, footnote disclosures need to be provided on the relevant conditions and events identified and on whether management’s plans to mitigate those conditions or events will alleviate the substantial doubt. The Group adopted ASU 2014-15 as of year-end 2016. The adoption did not have an impact on the Group’s financial statements. In November 2014, the FASB issued ASU 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity – a consensus of the FASB Emerging Issues Task Force”, an update to topic 815, “Derivatives and Hedging”. The ASU provides guidance on how to assess whether or not a derivative embedded in an instrument in the legal form of a share must be bifurcated and accounted for separately from its host contract. Entities are required to use “the whole instrument approach” to determine whether the nature of the host contract in a hybrid 14 Swiss Reinsurance Company Consolidated 2016 Annual Report instrument issued in the form of a share is more akin to debt or to equity. Under this approach, an issuer or investor considers all stated and implied substantive terms and features of a hybrid instrument when determining the nature of the host contract. No single term or feature will necessarily determine the nature of the host contract. The Group adopted ASU 2014-16 on 1 January 2016. The adoption did not have a material effect on the Group’s financial statements. In January 2015, the FASB issued ASU 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”, an update to subtopic 225-20, “Income Statement–Extraordinary and Unusual Items”. The ASU eliminates the separate presentation of extraordinary items, net of tax and the related earnings per share. Extraordinary items were events and transactions that were distinguished by their unusual nature and by the infrequency of their occurrence. The ASU does not affect the requirement to disclose material items that are unusual in nature or infrequently occurring. The Group adopted ASU 2015-01 on 1 January 2016 on a prospective basis. The adoption did not have a material effect on the Group’s financial statements. In February 2015, the FASB issued ASU 2015-02, “Consolidation: Amendments to the Consolidation Analysis”, an amendment to topic 810, “Consolidation”. ASU 2015-02 (i) eliminates the indefinite deferral of the consolidation requirements for certain investment companies and similar entities, (ii) modifies how to evaluate partnerships and other entities under the VIE framework, (iii) eliminates the presumption that a general partner should consolidate a limited partnership, (iv) modifies consolidation analysis, particularly for decision-maker fee arrangements and related party relationships, (v) excludes from the scope of consolidation assessment the entities that are, or operate similar to, money market funds registered under the US Investment Company Act of 1940. The Group adopted ASU 2015-02 on 1 January 2016 following the modified retrospective method. The modified retrospective method does not require the restatement of prior periods. The adoption did not have a material effect on the Group’s financial statements; however, it led to an increase in VIEs disclosed in Note 16 Variable interest entities. In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, an update to subtopic 835-30, “Interest – Imputation of Interest”. The ASU changes the presentation of debt issuance costs in financial statements by requiring that an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortisation of the costs is reported as interest expense. The Group adopted ASU 2015-03 on 1 January 2016 on a prospective basis. The adoption did not have an impact on the Group’s financial statements. In May 2015, the FASB issued ASU 2015-07, “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”, an amendment to topic 820, “Fair Value Measurement”. ASU 2015-07 removes the requirement to categorise within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The Group adopted ASU 2015-07 on 1 January 2016 and removed investments for which fair values are measured using the net asset value per share practical expedient from the fair value hierarchy as of the adoption date. The amended disclosures are provided in Note 8 Fair value disclosures. 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 adopted the annual disclosure requirements as of year-end 2016 which are provided in Note 5. The Group will adopt the interim disclosure requirements for the half-year ending on 30 June 2017. In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”, an amendment to topic 805, “Business Combinations”. ASU 2015-16 is on adjustments to provisional amounts from business combinations during the measurement periods. It requires that an acquirer recognises such adjustments in the reporting period in which the adjustment amounts are determined. Further, the ASU requires that the acquirer records, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortisation, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The Group adopted this guidance on 1 January 2016. The adoption did not have an effect on the Group’s financial statements. Swiss Reinsurance Company Consolidated 2016 Annual Report 15 Financial Statements I Notes to the Group financial statements 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 DTAs 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. In February 2016, the FASB issued ASU 2016-02 “Leases“, which creates topic 842, “Leases“. The core principle of topic 842 is that a lessee should recognise the assets and liabilities that arise from leases. A lessee should recognise in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing the right to use the underlying asset for the lease term. This accounting treatment applies to finance leases and operating leases. The accounting applied by a lessor is largely unchanged from that applied under the current guidance. The new requirements are effective for the Group for annual and interim periods beginning after 15 December 2018. Early application of the Update is permitted. The Group is currently assessing the impact of the new requirements. In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses”, an update to topic 326, “Financial Instruments – Credit Losses”. ASU 2016-13 replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses. The standard requires for financial instruments that are measured at amortised cost and available- for-sale debt securities that an entity recognises as an allowance its estimate of expected credit losses. This standard is effective for the Group for annual and interim periods beginning after 15 December 2020. Early adoption for interim and annual periods after 15 December 2018 is permitted. The Group is currently assessing the impact of the new requirements. In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory”, an update to topic 740, “Income Taxes”. This ASU amends the current guidance which prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This new standard requires that an entity should recognise the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new requirements are effective for the Group for annual and interim periods beginning after 15 December 2017. The Group is currently assessing the impact of the new requirements. 16 Swiss Reinsurance Company Consolidated 2016 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, the primary life and health insurance business, 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 2016 Annual Report 17 Financial Statements I Notes to the Group financial statements a) Business segments – income statement For the year ended 31 December 2015 USD millions Revenues Gross premium written Net premiums written Change in unearned premiums 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 business Other revenues Total revenues Expenses Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Operating expenses2,3 Total expenses before interest expenses Income/loss before interest and income tax expense/benefit Interest expenses2 Income/loss before income tax expense/ benefit Income tax expense/benefit Net income/loss before attribution of non-controlling interests Income/loss 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 % Net operating margin in % Property & Casualty Reinsurance Life & Health Reinsurance1 Other1 Consolidation Total –356 –6 –6 0 –6 6 0 0 0 0 28 556 26 720 –581 26 139 145 2 787 1 028 42 57 30 198 –7 893 –8 559 –386 –5 865 –2 538 –25 241 4 957 –608 4 349 –524 3 825 –1 3 824 –68 3 756 16 121 15 703 –613 15 090 11 942 10 529 38 10 567 49 1 097 1 330 311 42 4 12 303 –8 012 –60 –1 965 –774 –10 811 1 492 –323 1 169 –152 1 017 445 45 16 677 –7 892 –3 836 –1 198 –12 926 3 751 –272 3 479 –451 3 028 –1 849 488 –6 482 96 360 272 14 1 224 –1 –547 –326 –64 –566 –1 504 –280 –19 –299 79 –220 3 027 1 017 –220 –220 –19 3 008 52.3 33.4 85.7 22.5 –49 968 6.5 12.2 –22.9 16.4 1 As of 1 January 2016, the primary life and health insurance business (individual and group) is reported in the segment “Other” instead of the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. 2 Letter of credit fees of USD 45 million in Life & Health Reinsurance and USD 10 million in Property & Casualty Reinsurance have been reclassified from “Operating expenses” to “Interest expenses”. 3 The Group’s new internal service cost framework resulted in a reallocation of operating expenses to “Other” from the business segments. Comparative information for 2015 has been adjusted accordingly. 18 Swiss Reinsurance Company Consolidated 2016 Annual Report Business segments – income statement For the year ended 31 December 2016 USD millions Revenues Gross premium written Net premiums written Change in unearned premiums 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 business Other revenues Total revenues Expenses Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Operating expenses Total expenses before interest expenses Income/loss before interest and income tax expense/benefit Interest expenses Income before income tax expense/benefit Income tax expense/benefit Net income before attribution of non-controlling interests Income/loss attributable to non-controlling interests Net income after attribution of non-controlling interests Interest on contingent capital instruments Net income attributable to common shareholder Claims ratio in % Expense ratio in % Combined ratio in % Management expense ratio in % Net operating margin in % Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 18 173 17 768 –760 17 008 985 770 37 18 800 –10 301 –4 405 –1 204 –15 910 2 890 –293 2 597 –479 2 118 1 2 119 –19 2 100 60.5 33.0 93.5 15.4 12 801 11 459 27 11 486 41 1 279 232 15 5 13 058 –8 963 –39 –1 943 –763 –11 708 1 350 –301 1 049 –193 856 856 –49 807 6.0 10.4 997 488 11 499 88 493 590 2 1 672 2 –597 –319 –34 –506 –1 454 218 –19 199 24 223 –19 204 204 –304 31 667 29 715 –722 28 993 129 –29 2 728 1 592 15 41 33 498 –10 299 –9 560 –358 –6 382 –2 473 –29 072 4 426 –581 3 845 –648 3 197 –18 3 179 –68 3 111 –3 –32 0 –32 32 0 0 0 0 13.0 13.2 Swiss Reinsurance Company Consolidated 2016 Annual Report 19 Financial Statements I Notes to the Group financial statements Business segments – balance sheet As of 31 December 2015 USD millions Total assets2 Property & Casualty Reinsurance 78 207 Life & Health Reinsurance1 55 337 Other1 12 851 Consolidation –11 204 Total 135 191 1 As of 1 January 2016, the primary life and health insurance business (individual and group) is reported in the segment “Other” instead of the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. 2 The Group’s new internal service cost framework resulted in a reallocation of operating expenses to “Other” from the business segments. The resulted impact on the balance sheet has been adjusted accordingly for the comparative information 2015. 2016 USD millions Total assets Property & Casualty Reinsurance 79 263 Life & Health Reinsurance 55 957 Other 14 029 Consolidation –10 638 Total 138 611 20 Swiss Reinsurance Company Consolidated 2016 Annual Report This page intentionally left blank. Swiss Reinsurance Company Consolidated 2016 Annual Report 21 Financial Statements I Notes to the Group financial statements b) Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2015 USD millions Revenues Gross premiums written Net premiums written Change in unearned premiums Premiums earned Net investment income Net realised investment gains/losses Other revenues Total revenues Expenses Claims and claim adjustment expenses Acquisition costs Operating expenses1,2 Total expenses before interest expenses Income before interest and income tax expense Interest expenses1 Income before income tax expense Claims ratio in % Expense ratio in % Combined ratio in % Property Casualty Specialty Unallocated Total 6 751 6 436 –344 6 092 6 802 6 767 –165 6 602 2 568 2 500 –104 2 396 6 092 6 602 2 396 –2 567 –1 198 –664 –4 429 1 663 1 663 42.1 30.6 72.7 –4 139 –2 053 –385 –6 577 25 25 62.7 36.9 99.6 –1 186 –585 –149 –1 920 476 476 49.5 30.6 80.1 1 097 445 45 1 587 0 1 587 –272 1 315 16 121 15 703 –613 15 090 1 097 445 45 16 677 –7 892 –3 836 –1 198 –12 926 3 751 –272 3 479 52.3 33.4 85.7 1 Letter of credit fees of USD 10 million in Property & Casualty Reinsurance have been reclassified from “Operating expenses” to “Interest expenses”. 2 The Group’s new internal service cost framework resulted in a reallocation of operating expenses to the segment “Other” from the Property & Casualty Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. 22 Swiss Reinsurance Company Consolidated 2016 Annual Report Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2016 USD millions Revenues Gross premiums written Net premiums written Change in unearned premiums Premiums earned Net investment income Net realised investment gains/losses Other revenues Total revenues Expenses Claims and claim adjustment expenses Acquisition costs Operating expenses Total expenses before interest expenses Income/loss before interest and income tax expense Interest expenses Income/loss before income tax expense Claims ratio in % Expense ratio in % Combined ratio in % Property Casualty Specialty Unallocated Total 6 815 6 499 153 6 652 8 874 8 833 –830 8 003 2 484 2 436 –83 2 353 6 652 8 003 2 353 –3 745 –1 351 –665 –5 761 891 891 56.3 30.3 86.6 –5 466 –2 468 –385 –8 319 –316 –316 68.3 35.6 103.9 –1 090 –586 –154 –1 830 523 523 46.4 31.4 77.8 985 770 37 1 792 0 1 792 –293 1 499 18 173 17 768 –760 17 008 985 770 37 18 800 –10 301 –4 405 –1 204 –15 910 2 890 –293 2 597 60.5 33.0 93.5 Swiss Reinsurance Company Consolidated 2016 Annual Report 23 Financial Statements I Notes to the Group financial statements c) Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2015 USD millions Revenues Gross premiums written Net premiums written Change in unearned premiums 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 business Other revenues Total revenues Expenses Life and health benefits Return credited to policyholders Acquisition costs Operating expenses2, 3 Total expenses before interest expenses Income before interest and income tax expense Interest expenses2 Income/loss before income tax expense Management expense ratio in % Net operating margin4 in % Life Health Unallocated Total1 8 333 7 048 36 7 084 49 865 89 42 2 8 131 –5 539 –60 –1 260 –547 –7 406 725 725 6.8 9.0 3 609 3 481 2 3 483 465 42 2 3 992 –2 473 –705 –227 –3 405 587 587 5.7 14.7 11 942 10 529 38 10 567 49 1 330 311 42 4 12 303 –8 012 –60 –1 965 –774 –10 811 1 492 –323 1 169 6.5 12.2 180 180 0 180 –323 –143 1 As of 1 January 2016, the primary life and health insurance business (individual and group) is reported in the segment “Other” instead of the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. 2 Letter of credit fees of USD 45 million in Life & Health Reinsurance have been reclassified from “Operating expenses” to “Interest expenses”. 3 The Group’s new internal service cost framework resulted in a reallocation of operating expenses to the segment “Other” from the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. 4 Net operating margin is calculated as “Income before interest and income tax expense” divided by “Total revenues” excluding “Net investment result – unit-linked business”. 24 Swiss Reinsurance Company Consolidated 2016 Annual Report Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2016 USD millions Revenues Gross premiums written Net premiums written Change in unearned premiums 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 business Other revenues Total revenues Expenses Life and health benefits Return credited to policyholders Acquisition costs Operating expenses Total expenses before interest expenses Income before interest and income tax expense Interest expenses Income/loss before income tax expense Management expense ratio in % Net operating margin1 in % Life Health Unallocated Total 9 026 7 773 5 7 778 41 828 21 15 5 8 688 –6 093 –39 –1 237 –536 –7 905 783 783 6.2 9.0 3 775 3 686 22 3 708 451 –4 4 155 –2 870 –706 –227 –3 803 352 352 5.5 8.5 12 801 11 459 27 11 486 41 1 279 232 15 5 13 058 –8 963 –39 –1 943 –763 –11 708 1 350 –301 1 049 6.0 10.4 215 215 0 215 –301 –86 1 Net operating margin is calculated as “Income before interest and income tax expense” divided by “Total revenues” excluding “Net investment result – unit-linked business”. Swiss Reinsurance Company Consolidated 2016 Annual Report 25 Financial Statements I Notes to the Group financial statements d) Gross premiums earned and fee income from policyholders by geography Gross premiums earned and fee income from policyholders by regions for the years ended 31 December USD millions Americas Europe (including Middle East and Africa) Asia-Pacific Total Gross premiums earned and fee income from policyholders by country for the years ended 31 December USD millions United States United Kingdom China Australia Japan Germany Canada Switzerland Ireland France Republic of Korea Other Total 2015 12 748 9 049 6 437 28 234 2015 10 020 2 773 2 504 1 544 967 1 070 1 053 791 767 672 456 5 617 28 234 2016 14 377 9 742 6 946 31 065 2016 11 904 3 036 2 401 1 823 1 094 1 044 1 009 940 812 652 482 5 868 31 065 Gross premiums earned and fee income from policyholders are allocated by country based on the underlying contract. 26 Swiss Reinsurance Company Consolidated 2016 Annual Report This page intentionally left blank. Swiss Reinsurance Company Consolidated 2016 Annual Report 27 Financial Statements I Notes to the Group financial statements 3 Insurance information Premiums earned and fees assessed against policyholders For the year ended 31 December 2015 USD millions Premiums earned, thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Premiums earned before retrocession to external parties Retrocession to external parties Net premiums earned Fee income from policyholders, thereof: Direct Reinsurance Ceded Net fee income Property & Casualty Reinsurance Life & Health Reinsurance1 15 614 15 614 –524 15 090 0 39 11 597 351 11 987 –1 420 10 567 50 –1 49 Claims and claim adjustment expenses For the year ended 31 December 2015 USD millions Claims paid, thereof: Gross claims paid to external parties Intra-group transactions (assumed and ceded) Claims before receivables from retrocession to external parties Retrocession to external parties Net claims paid Change in unpaid claims and claim adjustment expenses; life and health benefits, thereof: Gross - with external parties Intra-group transactions (assumed and ceded) Unpaid claims and claim adjustment expenses; life and health benefits before impact of retrocession to external parties Retrocession to external parties Net unpaid claims and claim adjustment expenses; life and health benefits Property & Casualty Reinsurance Life & Health Reinsurance1 –9 665 –9 665 815 –8 850 1 601 1 601 –643 958 –9 145 –242 –9 387 1 168 –8 219 215 –34 181 26 207 Other1 699 139 –351 487 –5 482 5 91 96 Other1 –862 242 –620 6 –614 34 34 68 –2 66 Total 738 27 350 0 28 088 –1 949 26 139 5 141 –1 145 Total –19 672 0 –19 672 1 989 –17 683 1 850 0 1 850 –619 1 231 Claims and claim adjustment expenses; life and health benefits –7 892 –8 012 –548 –16 452 Acquisition costs For the year ended 31 December 2015 USD millions Acquisition costs, thereof: Property & Casualty Reinsurance Life & Health Reinsurance1 Gross acquisition costs with external parties Intra-group transactions (assumed and ceded) Acquisition costs before impact of retrocession to external parties Retrocession to external parties Net acquisition costs –3 969 –3 969 133 –3 836 –2 138 –71 –2 209 244 –1 965 Other1 –135 71 –64 –64 Total –6 242 0 –6 242 377 –5 865 1 As of 1 January 2016, the primary life and health insurance business (individual and group) is reported in the segment “Other” instead of the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. 28 Swiss Reinsurance Company Consolidated 2016 Annual Report Premiums earned and fees assessed against policyholders For the year ended 31 December 2016 USD millions Premiums earned, thereof: Direct Reinsurance Intra-group transactions (assumed and ceded) Premiums earned before retrocession to external parties Retrocession to external parties Net premiums earned Fee income from policyholders, thereof: Direct Reinsurance Ceded Net fee income Claims and claim adjustment expenses For the year ended 31 December 2016 USD millions Claims paid, thereof: Gross claims paid to external parties Intra-group transactions (assumed and ceded) Claims before receivables from retrocession to external parties Retrocession to external parties Net claims paid Change in unpaid claims and claim adjustment expenses; life and health benefits, thereof: Gross – with external parties Intra-group transactions (assumed and ceded) Unpaid claims and claim adjustment expenses; life and health benefits before impact of retrocession to external parties Retrocession to external parties Net unpaid claims and claim adjustment expenses; life and health benefits Property & Casualty Reinsurance Life & Health Reinsurance 17 474 17 474 –466 17 008 0 45 12 446 352 12 843 –1 357 11 486 41 41 Other 799 172 –352 619 –120 499 88 88 Total 844 30 092 0 30 936 –1 943 28 993 0 129 0 129 Property & Casualty Reinsurance Life & Health Reinsurance Other Total –9 242 –9 242 536 –8 706 –1 218 –1 218 –377 –1 595 –10 234 –275 –10 509 1 205 –9 304 –1 014 275 –739 53 –686 387 –29 358 –17 341 11 29 40 51 91 –20 490 0 –20 490 1 794 –18 696 –820 0 –820 –343 –1 163 Claims and claim adjustment expenses; life and health benefits –10 301 –8 963 –595 –19 859 Acquisition costs For the year ended 31 December 2016 USD millions Acquisition costs, thereof: Property & Casualty Reinsurance Life & Health Reinsurance Gross acquisition costs with external parties Intra-group transactions (assumed and ceded) Acquisition costs before impact of retrocession to external parties Retrocession to external parties Net acquisition costs –4 530 –4 530 125 –4 405 –2 095 –58 –2 153 210 –1 943 Other –107 58 –49 15 –34 Total –6 732 0 –6 732 350 –6 382 Swiss Reinsurance Company Consolidated 2016 Annual Report 29 Financial Statements I Notes to the Group financial statements Reinsurance assets and liabilities The reinsurance assets and liabilities as of 31 December were as follows: 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 2016 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 Reinsurance1 Other1 Consolidation1 Total 2 872 2 051 39 366 1 652 3 020 9 468 15 472 1 368 188 13 1 073 1 308 3 990 –189 –189 –1 4 523 5 084 49 718 16 779 5 358 Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 2 449 2 280 39 753 1 580 3 465 10 288 15 431 1 566 264 11 1 240 2 202 4 087 –210 –208 –4 4 083 5 756 51 073 17 629 5 653 1 As of 1 January 2016, the primary life and health insurance business (individual and group) is reported in the segment “Other” instead of the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. Reinsurance recoverable on unpaid claims and policy benefits As of 31 December 2015 and 2016, the Group had a reinsurance recoverable of USD 4 523 million and USD 4 083 million, respectively. The concentration of credit risk is regularly monitored and evaluated. The reinsurance programme with Berkshire Hathaway and subsidiaries accounted for 69% of the Group’s reinsurance recoverable as of year-end 2015 and 67% as of year-end 2016. The Group cedes certain re/insurance contracts to affiliated companies within the Swiss Re Group, but outside of Swiss Reinsurance Company Ltd and its subsidiaries (please refer to Note 14). 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 2015 1 103 126 169 –36 2016 1 204 103 137 –35 30 Swiss Reinsurance Company Consolidated 2016 Annual Report 4 Premiums written For the years ended 31 December 2015 USD millions Gross premiums written, thereof: Direct Reinsurance Intra-group transactions (assumed) Gross premiums written Intra-group transactions (ceded) Gross premiums written before retrocession to external parties Retrocession to external parties Net premiums written 2016 USD millions Gross premiums written, thereof: Direct Reinsurance Intra-group transactions (assumed) Gross premiums written Intra-group transactions (ceded) Gross premiums written before retrocession to external parties Retrocession to external parties Net premiums written Property & Casualty Reinsurance Life & Health Reinsurance1 Other1 Consolidation1 Total 16 121 16 121 16 121 –418 15 703 40 11 546 356 11 942 11 942 –1 413 10 529 710 139 849 –356 493 –5 488 750 27 806 0 28 556 0 28 556 –1 836 26 720 –356 –356 356 0 Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 18 173 18 173 18 173 –405 17 768 45 12 452 304 12 801 12 801 –1 342 11 459 825 172 997 –304 693 –205 488 870 30 797 0 31 667 0 31 667 –1 952 29 715 –304 –304 304 0 1 As of 1 January 2016, the primary life and health insurance business (individual and group) is reported in the segment “Other” instead of the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. Swiss Reinsurance Company Consolidated 2016 Annual Report 31 Financial Statements I Notes to the Group financial statements 5 Unpaid claims and claim adjustment expenses A reconciliation of the opening and closing reserve balances for unpaid claims and claim adjustment expenses for the 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 20151 52 177 –3 986 –14 48 177 17 501 –1 008 27 16 520 –6 785 –10 898 –17 683 –2 463 1 625 46 176 3 202 340 49 718 2016 49 718 –3 202 –340 46 176 21 622 –842 –26 20 754 –7 265 –11 433 –18 698 –1 265 1 058 48 025 2 837 211 51 073 1 The Group has adjusted its presentation of the reconciliation to include both non-life and life and health business lines for the current and the comparative reporting period. 32 Swiss Reinsurance Company Consolidated 2016 Annual Report Prior-year development Non-life claims development during 2016 on prior years continued to be driven by favourable experience on most lines of business. Property includes adverse development from the New Zealand earthquakes that occurred in 2010 and 2011. Casualty includes adverse development on US asbestos and environmental claims, while the more recent years were in some cases strengthened in view of the unfavourable prevailing market conditions. Within specialty, the main reserve releases came from marine and engineering business lines. For life and health lines of business, claims development on prior year business was driven by adverse claim experience across a number of lines of business and geographies. In particular, the UK critical illness portfolio strengthened reserves following adverse trends. This was partially offset by Canadian mortality and disability portfolios which had reserve releases following positive claims experience. Claims development related to prior years also includes an element of interest accretion for unpaid claims reported at the estimated present value. A summary of prior-year net claims and claim adjustment expenses development by lines of business is shown below: USD millions Line of business: Property Casualty Specialty Life and health Total 2015 –455 –544 –223 214 –1 008 2016 –231 –370 –362 121 –842 Swiss Reinsurance Company Consolidated 2016 Annual Report 33 Financial Statements I Notes to the Group financial statements 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 2016 the Business Unit Reinsurance carried net reserves for US asbestos and environmental liabilities equal to USD 1 759 million. During 2016, the Business Unit incurred net losses of USD 16 million and paid net against these liabilities of USD 160 million. Estimating ultimate asbestos and environmental liabilities is particularly complex for a number of reasons relating in part to the long period between exposure and manifestation of claims, and in part to other factors, which include risks and lack of predictability inherent in complex litigation, changes in projected costs to resolve, and in the projected number of asbestos and environmental claims, the effect of bankruptcy protection, insolvencies, and changes in the legal, legislative and regulatory environment. As a result, the Group believes that projection of exposures for asbestos and environmental claims is subject to far less predictability relative to non-environmental and non-asbestos exposures. Management believes that its reserves for asbestos and environmental claims are appropriately established based upon known facts and the current state of the law. However, reserves are subject to revision as new information becomes available and as claims develop. Additional liabilities may arise for amounts in excess of reserves, and the Group’s estimate of claims and claim adjustment expenses may change. Any such additional liabilities or increases in estimates cannot be reasonably estimated in advance but could result in charges that could be material to operating results. The Business Unit maintains an active commutation strategy to reduce exposure. When commutation payments are made, the traditional “survival ratio” is artificially reduced by premature payments which should not imply a reduction in reserve adequacy. 34 Swiss Reinsurance Company Consolidated 2016 Annual Report Short duration contract unpaid claims and claim adjustment expenses Basis of presentation for claims development information This section of the note provides claims development information on an accident year basis. Claims development information and information on reserves for claims relating to insured events that have occurred but have not yet been reported or not enough reported (“IBNR”) are generally presented by line of business for individually significant categories. Starting from a line of business split, additional aggregation or disaggregation is provided where appropriate, necessary and practicable (“disaggregation categories”). For instance, Reinsurance liability and motor lines of business are further disaggregated into proportional and non-proportional treaty types to provide more specific information on claims development whereas specialty is shown as one distinct category. In the Property & Casualty Reinsurance segment, all contracts that transfer significant insurance risk are included in scope to the extent they can be allocated to a disaggregation category. For many reinsurance contracts, proportional contracts in particular, ceding companies do not report losses by accident year. In these cases, the Group has allocated reported losses by underwriting year to accident year to produce the accident year tables. Similarly, IBNR is calculated on an underwriting year basis and then the liabilities are allocated to accident years. In the Life & Health Reinsurance segment, contracts classified as short duration include group life business, certain types of disability and long-term care contracts, group accident, health coverage including critical illness and medical expenses. The Group provides claims development information for Life & Health Reinsurance where reported accident year information is available and there is potential for claims development. This primarily applies to the Group’s disability lines classified as short duration. This business is generally considered to have relatively higher claims estimation uncertainty than other life and health lines such as group life, due to longer claims development periods. Amounts shown in the claims development tables are net of external retrocession and retrocession between business segments to the extent a retrocession program can be allocated to a disaggregation category. Ceded retroactive reinsurance is not included in the claims development table if it cannot be allocated on a reasonable basis to the disaggregation categories used to present claims development information. Claims development information and information on IBNR reserves are shown on a nominal basis, also for cases where the Group discounts claims liabilities for measurement under US GAAP. Information is shown per accident year and by reporting period. The number of years shown in the claims development tables differs by business segment: For Property & Casualty Reinsurance, the Group discloses data for ten accident years and reporting periods. For the Life & Health Reinsurance long tail category, the Group discloses data for nine accident years and reporting periods. Disclosure of ten years of information is impracticable for all lines of business contained in this category as the Group historically has not used accident-year based information for reserving purposes in all income protection business lines. The current reporting period estimate of net claims liabilities for accident years older than the number of years shown in the claims development tables is presented as a total after disclosure of cumulative paid claims. The information presented in claims development tables is presented at current balance sheet foreign exchange rates as of the date of these financial statements to permit an analysis of claims development excluding the impact of foreign exchange movements. Some of the information provided in the following tables, is Required Supplementary Information (RSI) under US GAAP. Therefore it does not form part of these consolidated audited financial statements. Claims development information for all periods except the current reporting period and any information derived from it – including average annual percentage payout of claims incurred – is considered RSI and is identified as RSI in the tables presented. Swiss Reinsurance Company Consolidated 2016 Annual Report 35 Financial Statements I Notes to the Group financial statements Methodology for determining the presented amounts of liabilities for IBNR claims The liability for unpaid claims and claim adjustment expenses is based on an estimate of the ultimate cost of settling the claims based on both information reported to us by ceding companies and internal estimates. Non-life re/insurance contracts Cedents report their case reserves and their estimated IBNR to the Group. The Group develops and recognises its own estimate of IBNR claims, which includes circumstances in which the cedent has not reported any claims to the Group or where the Group’s estimate of reserves needed to cover reported claims differs from the amounts reported by cedents. Reserving is done on portfolio or contract level depending on the features of the contract: For business reviewed on a portfolio level, the expected ultimate losses are set for most lines and types of business based on analysis performed using standard actuarial techniques. In general, contracts are aggregated into portfolios by combining contracts with similar features. In most cases, these standard actuarial techniques encompass a number of loss development factor techniques applied to claim tables of paid and reported losses. Other actuarial techniques may be applicable to specific categories. For instance, the analysis of frequency and severity could be applied in all disaggregation categories. Life contingency techniques for projecting regular payments related to bodily injury claims could be applied to motor proportional, motor non-proportional, liability proportional, liability non-proportional and accident and health. In some cases, techniques specific to the projection of future payments for specific risks such as asbestos or pollution claims are applied to both proportional and non-proportional liability claims (see also separate section ”US asbestos and environmental claims exposure” on page 34). Contract-level reserving is based on standard actuarial techniques but requires more detailed contract, pricing, claim and exposure information than required for the business reviewed on a portfolio level. In addition, the following applies to all non-life re/insurance business: ̤ For the most recent underwriting years, reliance may be made on the Group’s costing and underwriting functions for the initial estimates of claims, although the initial reserving estimates may differ from these pricing estimates if there is good reason to believe losses are likely to emerge higher or lower, and in light of the limited claims experience to date. Reviews of those initial estimates are performed regularly, forming a basis for adjustments on both the current and prior underwriting years. ̤ The reserving process considers any information available in respect of either a specific case or a large loss event and the impact of any unusual features in the technical accounting of information provided by cedents. Life and health re/insurance contracts For the Life & Health Reinsurance long tail business, the liability for IBNR claims includes provision for ”not yet reported claims” expected to have been incurred in respect of both already processed and not yet processed reinsurance accounts and generally includes provisions for the cost of claims that currently are within their deferred period. The IBNR reserving calculations have been made using appropriate techniques, such as chain ladder and/or Bornhuetter-Ferguson approaches, depending upon the level of detail available and the assumed level of development of the claim. For certain lines of business, IBNR claims reserves include reported but not admitted claims, allowing for expected rates of decline for these claims. 36 Swiss Reinsurance Company Consolidated 2016 Annual Report Claims frequency information Claims frequency information is not available for the disaggregation categories of Property & Casualty Reinsurance, as cedents do not report claims frequency information to the Group for most of the assumed reinsurance contract types. These contracts are to be found in all disaggregation categories presented. Life & Health Reinsurance reports claims frequency information based on individual incidence. The number of reported claims is the actual number of claims booked. For Group income protection business, claims with multiple payments in a year are counted as one claim with the corresponding amount annualised. Claims that are reported but not admitted are included in the claim count. Swiss Reinsurance Company Consolidated 2016 Annual Report 37 Financial Statements I Notes to the Group financial statements Property & Casualty Reinsurance – Property Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 2 233 2008 2 167 2 617 RSI 2009 2 219 2 228 2 221 2010 2 181 2 090 2 241 2 489 2011 2 087 2 008 2 122 2 439 4 240 2012 2 121 2 006 2 079 2 314 4 308 2 637 2013 2 129 2 026 2 059 2 334 4 126 2 466 3 038 2014 2 127 2 017 2 056 2 423 4 187 2 273 3 050 2 681 Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 447 2008 1 364 541 RSI 2009 1 897 1 389 494 2010 2 002 1 689 1 512 394 2011 2 049 1 811 1 817 1 491 662 2012 2 071 1 936 1 917 1 783 2 347 243 2013 2 088 1 969 1 965 1 891 3 141 1 551 536 2014 2 093 1 984 1 987 2 089 3 582 1 938 1 936 465 All liabilities before 2007 Liabilities for claims and claim adjustment expenses, net of reinsurance Thereof IBNR –7 –14 1 –5 123 14 –3 57 405 2 044 2 615 2015 2 122 2 017 2 053 2 466 4 143 2 231 2 880 2 525 2 781 2015 2 094 1 989 1 996 2 243 3 870 2 055 2 425 1 677 467 2016 2 110 2 014 2 056 2 577 4 139 2 202 2 799 2 351 2 720 3 842 26 810 2016 2 095 1 990 2 006 2 390 3 972 2 097 2 614 2 052 1 632 633 21 481 125 5 454 Average annual percentage payout of incurred claims by age, net of reinsurance Years Property (RSI) 1 2 18.7% 46.9% 3 17.1% 4 6.1% 5 4.6% 6 2.4% 7 1.9% 8 0.3% 9 0.0% 10 0.0% The liability for unpaid claims for property in Property & Casualty Reinsurance shows positive development on most recent years. Claims in accident year 2011 were at a high level due to several large natural catastrophes including the earthquake and tsunami in Japan, the earthquakes in Christchurch, New Zealand, and floods in Thailand. The negative development on accident year 2010 in calendar year 2016 was driven by a deterioration in loss estimates for the 2010 New Zealand earthquake. Negative IBNRs can be a feature for claims arising from Property exposure due to overestimated case reserves. 38 Swiss Reinsurance Company Consolidated 2016 Annual Report Property & Casualty Reinsurance – Liability, proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 1 464 2008 1 551 1 131 RSI 2009 1 482 1 112 762 2010 1 621 1 175 894 831 2011 1 519 1 240 1 008 975 633 2012 1 418 1 136 964 914 689 511 2013 1 382 1 033 958 894 714 594 719 2014 1 347 1 092 928 886 658 550 742 984 Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 –6 2008 107 67 2009 334 140 –18 2010 498 286 125 30 2011 806 451 278 157 4 RSI 2012 921 535 400 315 106 13 2013 1 000 651 513 405 178 112 15 2014 1 053 758 619 512 247 178 124 24 All liabilities before 2007 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2015 1 350 1 090 939 889 616 522 749 974 1 251 2015 1 084 876 668 607 332 236 229 155 35 2016 1 346 1 108 948 878 613 495 745 986 1 299 1 705 10 123 Thereof IBNR 45 88 90 148 139 115 238 518 872 1 398 3 651 2016 1 117 928 714 656 378 289 343 288 207 47 4 967 596 5 752 Years Liability, proportional (RSI) 1 5 2.0% 13.6% 14.6% 12.6% 13.2% 2 4 3 6 9.7% 7 6.6% 8 6.5% 9 3.5% 10 2.5% The increase in incurred losses from accident year 2013 to 2016 is driven by volume increases of business written. In view of current market conditions the loss ratios for accident year 2015 were increased. In line with the Group’s policy, cash flows under loss portfolio transfers are reported through claims paid. For longer tail lines and depending on the business volume written, timing of cash flows can lead to net inward payments across the whole portfolio in the first development year of the contract for some accident years. Swiss Reinsurance Company Consolidated 2016 Annual Report 39 Financial Statements I Notes to the Group financial statements Property & Casualty Reinsurance – Liability, non-proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 798 2008 787 676 RSI 2009 762 718 509 2010 718 668 520 511 2011 631 544 430 427 393 2012 582 502 428 393 422 322 Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 –4 2008 27 6 RSI 2009 71 29 –2 2010 127 101 21 4 2011 213 131 41 11 3 2012 254 164 64 34 9 –1 All liabilities before 2007 Liabilities for claims and claim adjustment expenses, net of reinsurance 2013 537 469 387 368 457 340 399 2013 287 191 102 51 64 11 1 2014 529 437 354 346 419 301 380 425 2014 309 233 164 86 109 35 11 1 2015 523 412 329 325 376 273 346 429 1 709 2015 333 252 186 103 135 52 36 8 0 Thereof IBNR 71 67 43 70 95 104 161 265 351 368 1 595 2016 537 391 315 317 343 252 291 398 1 747 571 5 162 2016 345 280 194 122 143 83 59 40 87 13 1 366 5 891 9 687 Average annual percentage payout of incurred claims by age, net of reinsurance Years Liability, non-proportional (RSI) 1 0.5% 2 3 4.2% 10.3% 4 8.4% 5 11.2% 6 8.4% 7 7.5% 8 3.8% 9 5.8% 10 2.2% The increase in incurred losses for accident year 2015 compared to other years is due to an increase in volume of business written. Liabilities before 2007 include reserves for historic US Asbestos and Environmental losses. In line with the Group’s policy, cash flows under loss portfolio transfers are reported through claims paid. For longer tail lines and depending on the business volume written, timing of cash flows can lead to net inward payments across the whole portfolio in the first development year of the contract for some accident years. 40 Swiss Reinsurance Company Consolidated 2016 Annual Report Property & Casualty Reinsurance – Accident & Health Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 457 2008 486 385 RSI 2009 490 412 343 2010 453 400 367 271 2011 439 411 344 223 225 2012 431 419 339 229 245 311 Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 46 2008 142 51 RSI 2009 231 157 32 2010 265 208 135 25 2011 294 247 190 83 48 2012 309 263 215 114 119 72 All liabilities before 2007 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2013 409 408 336 217 242 321 334 2013 321 274 232 128 140 167 51 2014 396 406 327 215 234 306 342 297 2014 329 282 245 137 150 192 132 30 Thereof IBNR 0 84 31 34 33 40 62 100 151 286 821 2015 390 405 322 217 237 297 329 329 428 2015 337 289 250 143 159 208 172 100 60 2016 379 410 314 209 231 294 320 322 426 587 3 492 2016 343 294 256 147 163 218 195 142 134 73 1 965 3 125 4 652 Years Accident & Health (RSI) 1 3 14.4% 26.6% 13.9% 2 4 7.2% 5 4.8% 6 3.1% 7 2.2% 8 1.9% 9 1.7% 10 1.6% The 2007 accident year includes the run-off of business written by entities acquired as part of the acquisition of General Electric Insurance Solutions during 2006. This business was not renewed. The increase in incurred losses for accident years 2015 and 2016 compared to previous accident years is due to an increase in the volume of workers’ compensation written. Swiss Reinsurance Company Consolidated 2016 Annual Report 41 Financial Statements I Notes to the Group financial statements Property & Casualty Reinsurance – Motor, proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 802 2008 716 707 2009 831 573 640 2010 825 569 637 570 RSI 2011 832 640 700 631 972 2012 836 670 724 667 966 1 427 2013 825 646 711 673 938 1 419 1 502 2014 824 644 717 669 915 1 416 1 477 1 902 Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 182 2008 562 322 2009 737 526 158 2010 767 599 391 195 2011 775 577 580 439 260 RSI 2012 784 588 613 522 651 460 2013 790 587 624 556 830 1 065 559 2014 796 599 653 581 850 1 218 1 132 816 All liabilities before 2007 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance Thereof IBNR –8 5 –17 –4 –17 44 30 26 219 1 190 1 468 2015 826 632 715 684 927 1 393 1 483 1 869 1 877 2015 800 603 669 612 879 1 265 1 308 1 482 781 2016 825 632 713 684 926 1 384 1 459 1 869 1 881 2 445 12 818 2016 803 606 676 627 898 1 295 1 354 1 699 1 413 812 10 183 316 2 951 Years Motor, proportional (RSI) 1 3 34.2% 37.9% 15.7% 2 4 2.6% 5 2.2% 6 2.3% 7 1.8% 8 0.8% 9 0.5% 10 0.4% Increase in the incurred losses from accident year 2010 onward is driven by new business volume across all regions. Proportional motor business includes both longer tailed liability business and shorter tailed hull business. The negative IBNRs are due to overestimated case reserves, mainly on the German business and 2011 includes the effects of an outwards proportional contract in inwards non-proportional business. 42 Swiss Reinsurance Company Consolidated 2016 Annual Report Property & Casualty Reinsurance – Motor, non-proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 401 2008 414 399 RSI 2009 402 469 360 2010 369 412 373 313 2011 366 317 270 277 387 2012 380 331 272 272 423 321 Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 9 2008 49 16 RSI 2009 83 83 0 2010 114 121 37 6 2011 136 126 55 22 –8 2012 152 148 66 48 20 3 All liabilities before 2007 Liabilities for claims and claim adjustment expenses, net of reinsurance 2013 379 329 257 259 408 337 414 2013 175 165 79 66 55 24 7 2014 372 322 262 251 405 317 435 392 2014 186 176 93 82 77 49 80 5 Thereof IBNR 85 52 78 43 114 101 123 161 217 345 1 319 2015 379 318 256 244 391 303 438 424 375 2015 192 186 103 98 101 84 142 58 –1 2016 376 313 254 236 385 305 423 420 396 455 3 563 2016 199 195 113 111 115 109 187 101 33 8 1 171 2 557 4 949 Average annual percentage payout of incurred claims by age, net of reinsurance Years Motor, non-proportional (RSI) 1 1.3% 2 3 11.8% 10.2% 4 7.1% 5 6.5% 6 5.1% 7 4.8% 8 3.4% 9 2.2% 10 1.9% Claims development in non-proportional motor business is considered long-tailed as it is dominated by liability exposures leading to bodily injury claims which pay out for the lifetime of the claimant. For accident year 2011, negative claims paid in the first year are due to the commutation of external retrocession on acquired retroactive business. In line with the Group’s policy, cash flows under loss portfolio transfers are reported through claims paid. For longer tail lines and depending on the business volume written, timing of cash flows can lead to net inward payments across the whole portfolio in the first development year of the contract for some accident years. Swiss Reinsurance Company Consolidated 2016 Annual Report 43 Financial Statements I Notes to the Group financial statements Property & Casualty Reinsurance – Specialty Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 1 686 2008 1 690 2 021 RSI 2009 1 897 2 025 1 489 2010 1 773 1 952 1 621 1 198 2011 1 771 1 906 1 442 1 210 1 259 2012 1 718 1 860 1 375 1 158 1 239 933 2013 1 700 1 829 1 347 1 136 1 157 991 1 065 2014 1 682 1 811 1 325 1 117 1 078 1 012 994 1 085 Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2007 151 2008 587 246 RSI 2009 1 101 800 204 2010 1 273 1 280 639 193 2011 1 369 1 423 884 455 162 2012 1 437 1 534 983 642 549 122 2013 1 489 1 597 1 055 741 760 430 145 2014 1 518 1 640 1 111 817 860 661 407 172 All liabilities before 2007 Liabilities for claims and claim adjustment expenses, net of reinsurance 2015 1 678 1 818 1 308 1 084 1 125 996 956 1 081 1 208 2015 1 539 1 667 1 148 931 909 750 585 402 133 2016 1 672 1 804 1 292 1 064 1 123 997 923 983 1 195 1 266 12 319 Thereof IBNR 20 31 21 27 42 52 79 165 369 840 1 646 2016 1 553 1 692 1 171 952 946 806 693 581 379 141 8 914 661 4 066 Average annual percentage payout of incurred claims by age, net of reinsurance Years Specialty (RSI) 1 13.9% 2 28.1% 3 21.7% 4 9.2% 5 5.8% 6 5.2% 7 2.6% 8 1.7% 9 1.3% 10 0.8% This category includes credit and surety business, which was adversely affected by the financial crisis in 2007–2008. The category also includes several individual large losses on marine, aviation and space lines, including the Costa Concordia claims event. 44 Swiss Reinsurance Company Consolidated 2016 Annual Report Cumulative number of reported claims (in nominals) 3 068 4 105 4 451 6 105 8 298 10 269 11 021 11 825 2 327 61 469 Thereof IBNR 14 21 27 48 47 78 108 183 317 843 Life & Health Reinsurance, long tail Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total 2008 91 2009 88 152 2010 88 157 188 2011 87 149 190 215 2012 90 150 185 224 266 2013 103 150 209 284 356 480 RSI Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Reporting year 2008 5 2009 21 7 RSI 2010 38 36 8 2011 49 55 40 19 2012 57 68 62 61 27 2013 64 77 80 99 86 37 All liabilities before 2008 Liabilities for Life and Health claims and claim adjustment expenses, net of reinsurance 2014 106 173 209 296 359 471 470 2014 68 84 93 123 138 120 32 2015 102 171 221 310 383 469 428 401 2015 72 90 104 144 176 183 107 35 2016 109 173 195 288 348 434 407 433 419 2 806 2016 76 98 114 164 208 244 195 105 13 1 217 272 1 861 Average annual percentage payout of incurred claims by age, net of reinsurance Years Life & Health Reinsurance, long tail (RSI) 1 2 3 4 5 6 7 8 9 6.1% 16.6% 14.6% 10.0% 7.1% 5.8% 4.1% 4.1% 3.7% In the reporting year 2013, the Group significantly strengthened IBNR claims liabilities in Australia for some lines of business. In addition, for 2009, 2013 and 2014 the effect of business volume increase is discernible as well. Swiss Reinsurance Company Consolidated 2016 Annual Report 45 Financial Statements I Notes to the Group financial statements Reconciliation of gross liability for unpaid claims and claim adjustment expenses The following table reconciles the Group’s net outstanding liabilities to the gross liabilities for unpaid claims and claim adjustment expenses. The net outstanding liabilities correspond to the total liabilities for unpaid claims and claim adjustment expenses, net of reinsurance for each disaggregation category. Other short duration contract lines includes reserves for business that is not material to the Group and where accident year information is not available. For Life & Health Reinsurance, in certain markets, cedents do not provide sufficient information to reinsurers to split claims incurred and claims paid by accident year. This is based on existing market practice. For these markets, an assessment of available information from other sources was made along with investigating approximations that could be used to provide claims development information by accident year. However, these alternate sources and estimates, based on currently available data and methods, could not be used to generate meaningful and representative accident year information and therefore have been excluded from disclosure. Other short duration contract lines also contain other treaties from Property & Casualty Reinsurance which could not be allocated on a consistent basis to disaggregation categories or specific accident years. Unallocated reinsurance recoverable on unpaid claims includes reinsurance recoverables which cannot be allocated on a reasonable basis to disaggregation categories used to present claims development information. For details on consolidation please refer to Note 2. 46 Swiss Reinsurance Company Consolidated 2016 Annual Report For the year ended 31 December 2016: USD millions Net outstanding liabilities Property & Casualty Reinsurance: Property Liability, proportional Liability, non-proportional Accident & Health Motor, proportional Motor, non-proportional Specialty Life & Health Reinsurance, long tail Total net undiscounted outstanding liabilities excluding other short duration contract lines and before unallocated reinsurance recoverable Discounting impact on (Life & Health Reinsurance) short duration contracts Impacts of acquisition accounting Total net discounted outstanding liabilities excluding other short duration contract lines and before unallocated reinsurance recoverable Other short duration contract lines Unallocated reinsurance recoverables on unpaid claims Total net discounted outstanding short duration liabilities Allocated reinsurance recoverables on unpaid claims Property & Casualty Reinsurance: Property Liability, proportional Liability, non-proportional Accident & Health Motor, proportional Motor, non-proportional Specialty Life & Health Reinsurance (short tail and short-duration lines of business) Impact of acquisition accounting Other short duration contract lines Unallocated reinsurance recoverables on unpaid claims Total short duration reinsurance recoverables on outstanding liabilities Exclusions Unallocated claim adjustment expenses Long duration contracts Total other reconciling items Total unpaid claims and claim adjustment expenses 2016 5 454 5 752 9 687 4 652 2 951 4 949 4 066 1 861 39 372 –241 –571 38 560 2 167 –394 40 333 378 426 364 247 87 237 286 –139 260 394 2 540 614 7 586 8 200 51 073 Swiss Reinsurance Company Consolidated 2016 Annual Report 47 Financial Statements I Notes to the Group financial statements Discounting information The following disclosure covers the discounting impact for the disaggregation categories included in the claims development information. Discounting information for Life & Health Reinsurance long tail as of 31 December: USD millions Carrying amount of discounted claims Aggregate amount of the discount Interest accretion1 Range of interest rates 2015 1 158 –281 24 2.5%–3.7% 2016 1 117 –241 27 3.1%–3.6% 1 Interest accretion is shown as part of “Life and health benefits” in the income statement. Please refer to Note 1 for more details about the Group’s discounting approach for unpaid claims and claim adjustment expenses. 48 Swiss Reinsurance Company Consolidated 2016 Annual Report This page intentionally left blank. Swiss Reinsurance Company Consolidated 2016 Annual Report 49 Financial Statements I Notes to the 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: 2015 USD millions Opening balance as of 1 January Effect of change in Group structure1 Deferred Effect of acquisitions/disposals and retrocessions Amortisation Effect of foreign currency translation Closing balance 2016 USD millions Opening balance as of 1 January Deferred Amortisation Effect of foreign currency translation Closing balance Property & Casualty Reinsurance 1 756 4 132 7 –3 793 –51 2 051 Property & Casualty Reinsurance 2 051 4 629 –4 379 –21 2 280 Life & Health Reinsurance1 2 723 –12 1 018 2 –560 –151 3 020 Life & Health Reinsurance 3 020 893 –312 –136 3 465 Other1 1 12 35 –34 –1 13 Other 13 34 –36 11 Total 4 480 0 5 185 9 –4 387 –203 5 084 Total 5 084 5 556 –4 727 –157 5 756 1 As of 1 January 2016, the primary life and health insurance business (individual and group) is reported in the “Other” segment instead of the Life & Health Reinsurance segment. Comparative information for 2015 has been adjusted accordingly. 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 change in unrealised gains/ losses Effect of foreign currency translation Closing balance Life & Health Reinsurance 1 294 –159 40 –41 1 134 Other 605 –28 1 9 587 2015 Total 1 899 –187 41 9 –41 1 721 Life & Health Reinsurance 1 134 –132 36 –72 966 Other 587 –45 34 1 577 2016 Total 1 721 –177 70 1 –72 1 543 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%, 8% and 8%. 50 Swiss Reinsurance Company Consolidated 2016 Annual Report 7 Investments Investment income Net investment income by source (excluding unit-linked 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 2015 1 926 77 147 158 68 67 106 32 66 478 3 125 –328 –10 2 787 2016 1 886 70 188 184 42 69 30 21 113 452 3 055 –318 –9 2 728 Dividends received from investments accounted for using the equity method were USD 176 million and USD 118 million for 2015 and 2016, respectively, Realised gains and losses Realised gains and losses for fixed income, equity securities and other investments (excluding unit-linked 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 Foreign exchange gains/losses Net realised investment gains/losses – non-participating business 2015 611 –270 262 –51 –51 62 –31 116 108 272 1 028 2016 590 –161 292 –96 –71 121 –14 32 22 877 1 592 Swiss Reinsurance Company Consolidated 2016 Annual Report 51 Financial Statements I Notes to the Group financial statements Investment result – unit-linked business The net investment result on unit-linked business credited to policyholders amounted to gains of USD 42 million and USD 15 million for 2015 and 2016, 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 2015 131 27 –22 7 –10 –4 129 2016 129 12 –44 7 –6 –4 94 52 Swiss Reinsurance Company Consolidated 2016 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: 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 Australia Other Total Corporate debt securities Mortgage- and asset-backed securities Fixed income securities available-for-sale Equity securities available-for-sale 2016 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 Australia 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 9 981 2 761 913 4 462 3 730 2 789 1 861 1 532 5 491 33 520 21 287 4 330 59 137 2 876 507 28 39 486 518 232 189 21 169 2 189 621 88 2 898 375 –94 –27 –11 –43 –13 –27 –16 –3 –140 –374 –482 –32 –888 –160 10 394 2 762 941 4 905 4 235 2 994 2 034 1 550 5 520 35 335 21 416 4 383 61 134 3 091 –10 –3 –13 Amortised cost or cost Gross unrealised gains Gross unrealised losses Other-than-temporary impairments recognised in other comprehensive income Estimated fair value 11 409 3 298 993 3 815 3 729 2 849 1 804 1 905 5 607 35 409 21 130 3 951 60 490 2 063 381 21 48 662 515 324 240 18 202 2 411 938 68 3 417 276 –183 –52 –14 –77 –24 –15 –10 –4 –89 –468 –158 –26 –652 –81 11 607 3 267 1 027 4 400 4 220 3 158 2 034 1 919 5 720 37 352 21 910 3 988 63 250 2 258 –5 –5 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 2016 Annual Report 53 Financial Statements I Notes to the Group financial statements Investments trading The carrying amounts of fixed income securities and equity securities classified as trading (excluding unit-linked 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 business Equity securities trading – non-participating business 2015 2 710 52 134 2 896 68 2016 2 538 45 112 2 695 60 Investments held for unit-linked business The carrying amounts of investments held for unit-linked business consist of equity securities trading. As of 31 December 2015 and 2016, these amounted to USD 818 million and USD 548 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 2015 and 2016, USD 10 893 million and USD 11 913 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 3 261 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 Amortised cost or cost 4 879 14 951 14 009 23 020 3 631 60 490 2016 Estimated fair value 4 920 15 223 14 448 24 994 3 665 63 250 Assets pledged As of 31 December 2016, investments with a carrying value of USD 6 236 million were on deposit with regulatory agencies in accordance with local requirements, and investments with a carrying value of USD 11 389 million were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries. As of 31 December 2015 and 2016, securities of USD 13 605 million and USD 13 491 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. Corresponding liabilities of USD 995 million and USD 1 010 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 2016, a real estate portfolio with a carrying value of USD 219 million serves as collateral for a credit facility allowing the Group to withdraw funds up to CHF 650 million. Collateral accepted which the Group has the right to sell or repledge As of 31 December 2015 and 2016, the fair value of the equity securities, government and corporate debt securities received as collateral was USD 10 732 million and USD 11 453 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2015 and 2016 was USD 6 125 million and USD 7 255 million, respectively. The sources of the collateral are securities borrowing, reverse repurchase agreements and derivative transactions. 54 Swiss Reinsurance Company Consolidated 2016 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: 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 Net amount 765 7 0 772 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 –536 0 –44 –580 2016 USD millions Derivative financial instruments – assets Reverse repurchase agreements Securities borrowing Total Gross amounts of recognised financial assets 2 640 7 023 483 10 146 Collateral set off in the balance sheet –1 580 –3 986 –314 –5 880 Net amounts of financial assets presented in the balance sheet 1 060 3 037 169 4 266 Related financial instruments not set off in the balance sheet –3 037 –169 –3 206 Net amount 1 060 0 0 1 060 2016 USD millions Derivative financial instruments – liabilities Repurchase agreements Securities lending Total Gross amounts of recognised financial liabilities –2 348 –3 991 –1 319 –7 658 Collateral set off in the balance sheet 1 568 3 461 839 5 868 Net amounts of financial liabilities presented in the balance sheet –780 –530 –480 –1 790 Related financial instruments not set off in the balance sheet 8 527 454 989 Net amount –772 –3 –26 –801 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 it has been 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 2016 Annual Report 55 Financial Statements I Notes to the 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 and 2016, 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. 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 2016 USD millions Repurchase agreements Debt securities issued by governments and government agencies Total repurchase agreements Securities lending Debt securities issued by governments and government agencies Corporate debt securities Equity securities Total securities lending Gross amount of recognised liabilities for repurchase agreements and securities lending Overnight and continuous Up to 30 days Remaining contractual maturity of the agreements Greater than 90 days 30–90 days Total 370 3 373 217 217 2 136 24 2 160 0 176 176 501 501 135 135 433 433 2 817 27 2 844 1 151 1 151 3 995 Overnight and continuous Up to 30 days Remaining contractual maturity of the agreements Greater than 90 days 30–90 days Total 219 219 237 13 18 268 3 023 3 023 415 415 334 334 3 991 3 991 367 258 426 367 258 426 1 288 13 18 1 319 5 310 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. 56 Swiss Reinsurance Company Consolidated 2016 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 2015 and 2016. As of 31 December 2015 and 2016, USD 126 million and USD 44 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 34 million and USD 37 million, respectively, to declines in value for more than 12 months. 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 Australia Other Total Corporate debt securities Mortgage- and asset-backed securities Total 2016 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 Australia 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 Fair value Total Unrealised losses 4 516 1 408 339 1 067 930 825 500 1 059 2 008 12 652 9 201 2 150 24 003 93 22 10 42 11 25 13 3 104 323 426 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 1 059 2 202 13 237 9 584 2 337 25 158 94 27 11 43 13 27 16 3 140 374 492 35 901 Less than 12 months Unrealised losses Fair value 12 months or more Unrealised losses Fair value Fair value Total Unrealised losses 5 570 2 490 332 1 331 1 637 1 321 703 442 2 509 16 335 5 773 1 391 23 499 183 52 12 67 22 15 10 2 73 436 134 21 591 14 8 56 6 100 123 236 543 316 170 1 029 0 2 10 2 0 2 16 32 24 10 66 5 570 2 504 340 1 387 1 643 1 421 703 565 2 745 16 878 6 089 1 561 24 528 183 52 14 77 24 15 10 4 89 468 158 31 657 Swiss Reinsurance Company Consolidated 2016 Annual Report 57 Financial Statements I Notes to the 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 business) were as follows: USD millions Policy loans Mortgage loans Other loans Investment real estate 2015 80 1 389 2 363 1 550 2016 86 1 947 2 585 1 711 The fair value of mortgage loans as of 31 December 2015 and 2016 was USD 1 389 million and USD 1 950 million, respectively. The fair value of other loans as of 31 December 2015 and 2016 was USD 2 363 million and USD 2 596 million, respectively. The fair value of the real estate as of 31 December 2015 and 2016 was USD 3 205 million and USD 3 362 million, respectively. The carrying value of policy loans approximates fair value. Depreciation expense related to income-producing properties was USD 36 million and USD 42 million for 2015 and 2016, respectively. Accumulated depreciation on investment real estate totalled USD 504 million and USD 525 million as of 31 December 2015 and 2016, respectively. Substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies. 58 Swiss Reinsurance Company Consolidated 2016 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 2016, 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 2016 Annual Report 59 Financial Statements I Notes to the Group financial statements Valuation techniques US government securities typically have quoted market prices in active markets and are categorised as level 1 instruments in the fair value hierarchy. Non-US government holdings are generally classified as level 2 instruments and are valued on the basis of the quotes provided by pricing services, which are subject to the Group’s pricing validation reviews and pricing vendor challenge process. Valuations provided by pricing vendors are generally based on the actual trade information as substantially all of the Group’s non-US government holdings are traded in 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. 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 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). These investments are included under investments measured at net asset value as a practical expedient. 60 Swiss Reinsurance Company Consolidated 2016 Annual Report The Group holds both exchange-traded and OTC interest rate, foreign exchange 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 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. Governance around level 3 fair valuation The Asset Valuation Committee, endorsed by the Swiss Re 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 2016 Annual Report 61 Financial Statements I Notes to the 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: 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 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 companies 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 Total 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 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. 62 Swiss Reinsurance Company Consolidated 2016 Annual Report 2016 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 business Short-term investments held for proprietary investment purposes Derivative financial instruments Interest rate contracts Foreign exchange contracts Equity contracts Other contracts Other invested assets Funds held by ceding companies Total assets at fair value Liabilities Derivative financial instruments Interest rate contracts Foreign exchange contracts Equity contracts Other contracts Quoted prices in active markets for identical assets and liabilities (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Investments measured at net asset value as a practical expedient Impact of netting1 11 332 54 265 348 11 332 2 317 548 3 742 18 14 4 266 18 223 –3 –3 1 542 3 307 23 709 21 614 4 093 3 785 2 163 964 766 433 183 225 60 621 –1 905 –685 –651 –569 Total 65 945 12 874 3 307 23 709 21 955 4 100 2 318 548 7 527 1 060 978 766 778 118 1 336 225 78 959 –780 –688 –651 –608 –401 –144 –5 704 –6 628 341 7 1 459 –1 580 341 118 160 968 –1 580 –440 1 568 –39 –401 –144 –1 236 –1 820 1 568 727 727 Liabilities for life and health policy benefits Accrued expenses and other liabilities Total liabilities at fair value –384 –387 –4 084 –5 989 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. Swiss Reinsurance Company Consolidated 2016 Annual Report 63 Financial Statements I Notes to the Group financial statements Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December, the reconciliation of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs was as follows: 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 7 –3 –72 15 11 464 –71 134 –441 70 –13 1 013 –86 150 0 –490 –107 126 0 –14 1 826 –10 1 65 –1 –497 –165 85 –1 474 187 0 0 –10 1 65 –1 0 85 –2 136 1 Transfers are recognised at the date of the event or change in circumstances that caused the transfer. 2016 USD millions Assets and liabilities Balance as of 1 January Impact of Accounting Standards Updates1 Realised/unrealised gains/losses: Included in net income Included in other comprehensive income Purchases Issuances Sales Settlements Transfers into level 32 Transfers out of level 32 Impact of foreign exchange movements Closing balance as of 31 December 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 338 11 464 1 013 1 826 –497 –165 –1 474 –2 136 –895 –895 18 –18 3 199 20 1 5 –20 –15 6 –10 1 459 6 42 –2 10 4 160 2 162 0 –58 –70 16 –16 –2 968 –81 20 –76 –5 –440 1 –144 238 –1 236 0 219 0 0 –81 20 –76 –5 0 239 –1 820 3 –5 115 –36 –55 –6 –6 348 1 Impact of ASU 2015-07. Please refer to Note 1 for more details. 2 Transfers are recognised at the date of the event or change in circumstances that caused the transfer. 64 Swiss Reinsurance Company Consolidated 2016 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 2015 216 47 2016 222 88 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 Private placement credit tenant leases Infrastructure loans 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. 2015 Fair value 2016 Fair value Valuation technique Unobservable input Range (weighted average) 325 241 51 32 334 334 –38 –38 –605 –567 341 177 Corporate Spread Matrix 48 Discounted Cash Flow Model 116 Discounted Cash Flow Model Credit spread 62 bps–661 bps (172 bps) 75 bps–175 bps (132 bps) Valuation spread 98 bps–230 bps (150 bps) Illiquidity premium 341 341 –39 –39 –545 Proprietary Option Model Correlation –45%–100% (27.5%)1 Proprietary Option Model Correlation –45%–100% (27.5%)1 –500 Discounted Cash Flow Model Risk margin Volatility Lapse Mortality adjustment Withdrawal rate 4% (n.a.) 4%–42% 0.5%–33% –10%–0% 0%–90% Swiss Reinsurance Company Consolidated 2016 Annual Report 65 Financial Statements I Notes to the Group financial statements Sensitivity of recurring level 3 measurements to changes in unobservable inputs The significant unobservable input used in the fair value measurement of the Group’s private placement corporate debt securities is credit spread. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Group’s private placement credit tenant leases is illiquidity premium. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Group’s infrastructure loans is valuation spread. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Group’s 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 the 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. 66 Swiss Reinsurance Company Consolidated 2016 Annual Report Other invested assets measured at net asset value Other invested assets measured at net asset value as of 31 December were as follows: USD millions Private equity funds Hedge funds Private equity direct Real estate funds Total 2015 Fair value 550 135 31 203 919 2016 Fair value 431 106 1 189 727 Unfunded commitments Redemption frequency (if currently eligible) 89 non-redeemable redeemable1 non-redeemable 49 non-redeemable 138 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: 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. Swiss Reinsurance Company Consolidated 2016 Annual Report 67 Financial Statements I Notes to the Group financial statements Assets and liabilities measured at fair value pursuant to election of the fair value option Pursuant to the election of the fair value option for the items described, the balances as of 31 December 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 option Liabilities Liabilities for life and health policy benefits of which at fair value pursuant to the fair value option 2015 2016 7 861 92 10 668 245 –16 779 –165 7 217 108 8 854 225 –17 629 –144 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 companies Liabilities for life and health policy benefits Total 2015 4 7 21 32 2016 –18 6 20 8 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”. 68 Swiss Reinsurance Company Consolidated 2016 Annual Report 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: 2015 USD millions Assets Policy loans Mortgage loans Other loans Investment real estate Total assets Liabilities Debt Total liabilities 2016 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) 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 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) 86 1 950 2 596 3 362 7 994 0 Total 86 1 950 2 596 3 362 7 994 –6 900 –6 900 –6 370 –6 370 –13 270 –13 270 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, whilst the fair value of some other positions do not differ materially from the carrying amount. Considering these circumstances for these positions, the Group presents the carrying amount as an approximation for the fair value. For certain commercial mortgage loans and infrastructure loans, which are included in mortgage loans and other loans respectively, the fair value can be estimated using discounted cash flow models which are based on discount curves and spread inputs that require management’s judgement. 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. Swiss Reinsurance Company Consolidated 2016 Annual Report 69 Financial Statements I Notes to the 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. 70 Swiss Reinsurance Company Consolidated 2016 Annual Report Total derivative financial instruments 117 615 2 752 –2 090 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 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 Amount offset Where a right of set-off exists Due to cash collateral Total net amount of derivative financial instruments 2016 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 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 –1 162 –791 799 1 162 315 –613 43 013 19 542 12 333 15 822 90 710 10 019 10 019 978 348 778 118 2 222 418 418 –688 –572 –608 –401 –2 269 –79 –79 Notional amount assets/liabilities Fair value assets Fair value liabilities Carrying value assets/liabilities 516 81 335 –17 –290 625 37 37 662 186 290 –224 170 –283 –47 339 339 292 280 Total derivative financial instruments 100 729 2 640 –2 348 Amount offset Where a right of set-off exists Due to cash collateral Total net amount of derivative financial instruments –1 122 –458 1 060 1 122 446 –780 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 2015 and 2016. Swiss Reinsurance Company Consolidated 2016 Annual Report 71 Financial Statements I Notes to the Group financial statements Non-hedging activities The Group primarily uses derivative financial instruments for risk management and trading strategies. Gains and losses of derivative financial instruments not designated as hedging instruments are recorded in “Net realised investment gains/losses — 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 gains/losses recognised in income 2015 68 433 –191 –5 212 517 2016 –16 –121 –164 8 150 –143 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 2015 and 2016, 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 gains/losses recognised in income Gains/losses on derivatives 2015 Gains/losses on hedged items Gains/losses on derivatives 2016 Gains/losses on hedged items 119 119 –119 –119 250 250 –250 –250 Hedges of the net investment in foreign operations The Group designates derivative and non-derivative monetary financial instruments as hedging the foreign currency exposure of its net investment in certain foreign operations. For the years ended 31 December 2015 and 2016, the Group recorded an accumulated net unrealised foreign currency remeasurement gain of USD 1 075 million and a gain of USD 1 311 million, respectively, in shareholder’s equity. These offset translation gains and losses on the hedged net investment. 72 Swiss Reinsurance Company Consolidated 2016 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 2015 and 2016 was approximately USD 1 590 million and USD 1 518 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 51 million and USD 79 million as of 31 December 2015 and 2016, respectively. For derivative financial instruments containing credit risk-related contingent features, the Group posted collateral of nil as of 31 December 2015 and 2016, respectively. In the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD 79 million additional collateral would have had to be posted as of 31 December 2016. The total equals the amount needed to settle the instruments immediately as of 31 December 2016. Swiss Reinsurance Company Consolidated 2016 Annual Report 73 Financial Statements I Notes to the Group financial statements 10 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 2017 Due in 2018 Due in 2019 Due in 2020 Due in 2021 Due after 2021 Total carrying value 1 Balance was reclassified to short-term debt. 2015 2 285 751 1 069 4 105 2 880 467 3 607 2 720 9 674 2016 2 734 420 543 3 697 2 249 423 2 884 2 249 7 805 13 779 15 327 11 502 13 270 2015 1 143 0 1 855 204 210 6 262 9 674 2016 01 0 1 666 195 209 5 735 7 805 74 Swiss Reinsurance Company Consolidated 2016 Annual Report Senior long-term debt Instrument Maturity Senior notes1 2019 Senior notes 2022 EMTN 2024 Senior notes1 2026 EMTN 2027 Senior notes1 2030 Senior notes 2042 Various Payment undertaking agreements Total senior long-term debt as of 31 December 2016 Total senior long-term debt as of 31 December 2015 1 Assumed in the acquisition of GE Insurance Solutions. Subordinated long-term debt Maturity 2024 2042 2045 2057 Instrument Subordinated contingent write-off loan note Subordinated fixed-to-floating rate loan note Subordinated contingent write-off securities Subordinated private placement (amortising, limited recourse) Subordinated perpetual loan note Perpetual Subordinated Fixed-to-Floating Rate Callable Loan Note Total subordinated long-term debt as of 31 December 2016 Total subordinated long-term debt as of 31 December 2015 Issued in 1999 2012 2014 1996 2015 2000 2012 various Currency USD USD CHF USD CHF USD USD USD Nominal in millions 234 250 250 397 250 193 500 353 Interest rate 6.45% 2.88% 1.00% 7.00% 0.75% 7.75% 4.25% various Book value in USD millions 254 249 245 497 247 268 489 423 2 672 3 347 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 795 522 195 Issued in 2013 2012 2013 2007 2007 GBP GBP 1 819 500 4.92% 6.30% 2019 2015 EUR 750 2.60% 2025 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 2015 104 13 213 137 467 In addition to the above, interest expense on contingent capital instruments classified as equity was USD 68 million and USD 68 million for the years ended 31 December 2015 and 2016, respectively. Long-term debt issued in 2016 No long-term debt was issued in the year ended 31 December 2016. 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 an “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 2016 Annual Report 75 2 250 617 754 5 133 6 327 2016 100 10 156 122 388 Financial Statements I Notes to the Group financial statements 11 Income taxes The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: USD millions Current taxes Deferred taxes Income tax expense 2015 317 207 524 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 Statutory rate change Change in liability for unrecognised tax benefits including interest and penalties Other, net Total 2015 913 265 –182 –52 –26 –315 –97 18 524 2016 613 35 648 2016 807 125 –27 –24 –210 –2 46 –112 45 648 The Group reported a tax charge of USD 648 million on a pre-tax income of USD 3 845 million for 2016, compared to a charge of USD 524 million on a pre-tax income of USD 4 349 million for 2015. This translates into an effective tax rate in the current and prior year reporting periods of 16.9% and 12.0%, respectively. The tax rate in 2016 was largely driven by benefits from the effective settlement of tax audits in certain jurisdictions and releases of valuation allowance on net operating losses partially offset by tax on profits earned in higher tax jurisdictions. The lower rate in 2015 was largely driven by a tax benefit arising from a local statutory accounting adjustment for restructuring of subsidiaries and higher tax benefits from foreign currency translation differences between statutory and US GAAP accounts. 76 Swiss Reinsurance Company Consolidated 2016 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 2015 2016 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 –6 771 320 613 340 2 607 271 1 132 5 283 –339 –22 4 922 –191 –546 –120 –909 –2 726 –641 –250 –444 –589 –6 416 –215 –6 631 Net deferred and other non-current taxes –1 502 –1 709 As of 31 December 2016, 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 1.8 billion. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules. As of 31 December 2016, the Group had USD 7 978 million net operating tax loss carryforwards, expiring as follows: USD 25 million in 2018, USD 47 million in 2019, USD 13 million in 2020, USD 7 580 million in 2021 and beyond, and USD 313 million never expire. The Group also had capital loss carryforwards of USD 41 million, expiring as follow: USD 36 million in 2020, USD 5 million in 2021. Net operating tax losses of USD 1 297 million and net capital tax losses of USD 31 million were utilised during the period ended 31 December 2016. Income taxes paid in 2015 and 2016 were USD 981 million and USD 515 million, respectively. Swiss Reinsurance Company Consolidated 2016 Annual Report 77 Financial Statements I Notes to the Group financial statements Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: USD millions Balance as of 1 January Additions based on tax positions related to current year Additions based on tax positions related to prior years Reductions for tax positions of prior years Statute expiration Settlements Other (including foreign currency translation) Balance as of 31 December 2015 536 34 113 –233 –97 –22 331 2016 331 36 20 –101 –44 –53 189 The amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 327 million and USD 188 million at 31 December 2015 and 2016, respectively. Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such expense in 2016 was USD 23 million (USD 40 million in 2015). As of 31 December 2015 and 2016, USD 72 million and USD 48 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2016 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 2016 presented in the table above excludes accrued interest and penalties (USD 48 million). During the year, certain tax positions and audits in Switzerland, Germany, Italy, France and the United States 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 Denmark France Germany Hong Kong India Ireland Israel Italy Japan Korea Luxembourg 2010–2016 2011–2016 2011–2016 Malaysia 2011–2016 Mexico 2007–2016 2012–2016 2008,2012–2016 2014–2016 2010–2016 2004–2016 2012–2016 2008–2016 2012–2016 2012–2016 Netherlands New Zealand Singapore Slovakia South Africa Spain Switzerland United Kingdom United States 2013–2016 2012–2016 2013–2016 2011–2016 2012–2016 2009–2016 2013–2016 2012–2016 2011–2016 2011–2016 2013–2016 2008, 2011–2016 2011–2016 78 Swiss Reinsurance Company Consolidated 2016 Annual Report This page intentionally left blank. Swiss Reinsurance Company Consolidated 2016 Annual Report 79 Financial Statements I Notes to the Group financial statements 12 Benefit plans Defined benefit pension plans and post-retirement benefits SRZ is a wholly owned subsidiary of Swiss Re Ltd. Swiss Re Ltd is the ultimate parent company of the Swiss Re Group. SRZ and its subsidiaries sponsor various pension plans, in which the Group and affiliated companies participate. Employers 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. 2015 USD millions Benefit obligation as of 1 January Service cost Interest cost 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 Employers 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 42 236 –189 26 2 –36 3 876 3 534 36 94 –189 26 2 –25 3 478 –398 Foreign plans 1 879 7 61 –49 –60 Other benefits 371 5 10 –2 –16 2 –103 1 737 1 823 7 61 –60 1 –108 1 724 –13 –5 363 0 16 –16 0 –363 Total 5 934 123 113 185 –265 26 2 2 –144 5 976 5 357 43 171 –265 26 1 2 –133 5 202 –774 The measurement date of these plans is 31 December for each year presented. 80 Swiss Reinsurance Company Consolidated 2016 Annual Report 2016 USD millions Benefit obligation as of 1 January Service cost Interest cost 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 Employers 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 3 876 113 31 71 –139 25 1 –62 3 916 3 478 128 95 –139 25 1 –56 3 532 –384 Foreign plans 1 737 7 60 192 –59 Other benefits 363 5 10 9 –16 –118 1 819 1 724 188 54 –59 –136 1 771 –48 –2 369 16 –16 0 –369 Amounts recognised in “Other assets” and “Accrued expenses and other liabilities” in the Group‘s balance sheet as of 31 December were as follows: 2015 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised 2016 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised Swiss plan –398 –398 Swiss plan –384 –384 Foreign plans 188 –3 –198 –13 Foreign plans 140 –3 –185 –48 Other benefits –15 –348 –363 Other benefits –15 –354 –369 Total 5 976 125 101 272 –214 25 0 1 –182 6 104 5 202 316 165 –214 25 0 1 –192 5 303 –801 Total 188 –18 –944 –774 Total 140 –18 –923 –801 Swiss Reinsurance Company Consolidated 2016 Annual Report 81 Financial Statements I Notes to the Group financial statements Amounts recognised in accumulated other comprehensive income, gross of tax, as of 31 December were as follows: 2015 USD millions Net gain/loss Prior service cost/credit Total 2016 USD millions Net gain/loss Prior service cost/credit Total Swiss plan 1 134 –78 1 056 Swiss plan 1 114 –69 1 045 Foreign plans 303 1 304 Foreign plans 345 1 346 Other benefits –43 –67 –110 Other benefits –30 –58 –88 Total 1 394 –144 1 250 Total 1 429 –126 1 303 Components of net periodic benefit cost For the years ended 31 December, the components of pension and post-retirement cost for the Group and affiliated companies were as follows: 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 2016 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 111 42 –113 Foreign plans 7 61 –71 Other benefits 5 10 76 –9 2 109 17 14 –4 –10 1 Swiss plan 113 31 –113 Foreign plans 7 60 –66 Other benefits 5 10 76 –9 1 99 9 10 –4 –9 2 Total 123 113 –184 89 –19 2 124 Total 125 101 –179 81 –18 1 111 82 Swiss Reinsurance Company Consolidated 2016 Annual Report For the years ended 31 December, other changes in plan assets and benefit obligations recognised in other comprehensive income for the Group and affiliated companies were as follows: 2015 USD millions Net gain/loss 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 2016 USD millions Net gain/loss 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 313 Foreign plans 15 Other benefits –2 –76 9 246 355 –17 –18 –20 –6 4 10 12 13 Swiss plan 56 Foreign plans 70 Other benefits 9 –76 9 –11 88 –9 –19 42 52 4 9 22 24 Total 326 –89 19 0 –18 238 362 Total 135 –81 18 0 –19 53 164 The Group and affiliated companies’ 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 2017 are USD 91 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 2017 are USD 2 million and USD 9 million, respectively. The Group and affiliated companies’ accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 5 546 million and USD 5 665 million as of 31 December 2015 and 2016, respectively. Pension plans with an accumulated benefit obligation in excess of plan assets for the Group and affiliated companies as of 31 December were as follows: USD millions Projected benefit obligation Accumulated benefit obligation Fair value of plan assets 2015 4 881 4 840 4 282 2016 4 938 4 901 4 367 Swiss Reinsurance Company Consolidated 2016 Annual Report 83 Financial Statements I Notes to the Group financial statements Principal actuarial assumptions Assumptions used to determine obligations at the end of the year Discount rate Rate of compensation increase Assumptions used to determine net periodic pension costs for the year ended Discount rate Expected long-term return on plan assets Rate of compensation increase Assumed medical trend rates at year end Medical trend – initial rate Medical trend – ultimate rate Year that the rate reaches the ultimate trend rate Swiss plan Foreign plans weighted average Other benefits weighted average 2015 2016 2015 2016 2015 2016 0.8% 2.0% 0.6% 1.8% 3.6% 2.8% 3.0% 2.9% 2.7% 2.1% 2.4% 2.1% 1.1% 3.3% 2.3% 0.8% 3.3% 2.0% 3.4% 4.2% 2.8% 3.6% 3.9% 2.8% 2.7% 2.7% 2.1% 2.1% 6.1% 4.6% 5.1% 3.8% 2020 2021 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 2016: USD millions Effect on total of service and interest cost components Effect on post-retirement benefit obligation 1 percentage point increase 1 27 1 percentage point decrease –1 –23 84 Swiss Reinsurance Company Consolidated 2016 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 2015 and 2016 is as follows: Asset category Equity securities Debt securities Real estate Other Total Swiss plan allocation Foreign plans allocation 2015 2016 Target allocation 2015 2016 Target allocation 26% 47% 21% 6% 100% 27% 44% 22% 7% 100% 25% 47% 20% 8% 100% 22% 71% 1% 6% 100% 19% 48% 0% 33% 100% 19% 50% 1% 30% 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 7 million (0.1% of total plan assets) as of 31 December 2015 and 2016, 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 2016 Annual Report 85 Financial Statements I Notes to the Group financial statements As of 31 December, the fair values of pension plan assets by level of input were as follows: 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) 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 2016 USD millions Assets Fixed income securities: Debt securities issued by 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) Investments measured at net asset value as practical expedient 28 1 004 1 032 94 1 126 145 314 1 792 26 4 6 338 –6 514 3 133 –2 3 131 9 97 612 718 718 328 328 328 Total 183 775 1 890 16 1 4 1 301 –9 734 240 5 135 67 5 202 Total 173 314 1 801 26 4 6 1 439 –6 612 842 5 211 92 5 303 86 Swiss Reinsurance Company Consolidated 2016 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: 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 Transfers in and/or out of level 3 Impact of foreign exchange movements Closing balance as of 31 December 2016 USD millions Balance as of 1 January Realised/unrealised gains/losses: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases, issuances and settlements Transfers in and/or out of level 3 Impact of foreign exchange movements Closing balance as of 31 December Real estate 578 Other assets 139 10 12 –4 596 –13 17 6 –7 142 Real estate 596 Other assets 142 17 8 –9 612 –14 13 21 –53 –3 106 Total 717 –3 17 18 0 –11 738 Total 738 3 13 29 –53 –12 718 Expected contributions and estimated future benefit payments The employers contributions expected to be made by the Group and affiliated companies in 2017 to the defined benefit pension plans are USD 148 million and to the post-retirement benefit plans are USD 15 million. As of 31 December 2016, the projected benefit payments for the Group and affiliated companies, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: USD millions 2017 2018 2019 2020 2021 Years 2022–2026 Swiss plan 196 193 186 185 180 847 Foreign plans 60 63 66 68 70 378 Other benefits 15 15 16 17 18 101 Total 271 271 268 270 268 1326 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 2015 and in 2016 was USD 70 million and USD 65 million, respectively. Swiss Reinsurance Company Consolidated 2016 Annual Report 87 Financial Statements I Notes to the Group financial statements 13 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 2015 and 2016, the Group had the share-based compensation plans described below. Total compensation cost for share-based compensation plans recognised in net income was USD 56 million and USD 13 million in 2015 and 2016, respectively. The related tax benefit was USD 12 million and USD 3 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 2016 is as follows: Outstanding as of 1 January Options sold Outstanding as of 31 December Exercisable as of 31 December Weighted average exercise price in CHF 82 82 Number of options 100 000 –100 000 0 0 The total intrinsic value of the options sold was CHF 1 million. The fair value of the 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 7 776 and 30 477 restricted shares to selected employees in 2015 and 2016, respectively. Moreover, as an alternative to the Group’s cash bonus programme, 288 125 and 114 083 shares were delivered during 2015 and 2016, 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 2016 is as follows: Non-vested at 1 January Effect of change in Group structure2 Granted Delivery of restricted shares Forfeited Outstanding as of 31 December Weighted average grant date fair value in CHF1 79 81 88 78 62 88 Number of shares 531 018 –168 419 144 560 –339 103 –11 420 156 636 1 Equal to the market price of the shares on the date of grant. 2 Reflects moves of employees from SRZ consolidated Group to other wholly owned subsidiaries of Swiss Re Ltd as part of the set-up of Group service companies as of 1 January 2016. 88 Swiss Reinsurance Company Consolidated 2016 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, LPP 2015 and LPP 2016 awards an additional two-year holding period applies for all members of the Group EC and other key executives. 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 (for LPP 2013, LPP 2014 and LPP 2015) and the average of the 10-year US government bond rate (for LPP 2016) taken monthly over each year 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 2016, the outstanding units were as follows: RSUs Non-vested at 1 January Effect of change in Group structure1 Granted Forfeitures Other2 Vested Outstanding as of 31 December Grant date fair value in CHF PSUs Non-vested at 1 January Effect of change in Group structure1 Granted Forfeitures Other2 Vested Outstanding as of 31 December Grant date fair value in CHF LPP 2013 329 860 LPP 2014 354 090 –198 285 LPP 2015 324 690 –192 080 –1 235 –11 655 142 915 60.85 –1 480 –10 730 120 400 67.65 –329 860 0 61.19 383 880 357 840 –200 365 358 080 –211 805 –1 250 –11 770 144 455 60.21 –1 635 –11 830 132 810 61.37 –383 880 0 52.59 LPP 2016 171 062 –2 211 –31 230 137 621 67.91 232 091 –2 999 –42 376 186 716 50.04 1 Reflects moves of employees from SRZ consolidated Group to other wholly owned subsidiaries of Swiss Re Ltd as part of the set-up of Group service companies as of 1 January 2016. 2 Reflects moves of employees from SRZ consolidated Group to other wholly owned subsidiaries of Swiss Re Ltd. Unrecognised compensation costs As of 31 December 2016, the total unrecognised compensation cost (net of forfeitures) related to non-vested, share-based compensation awards was USD 23 million and the weighted average period over which that cost is expected to be recognised is 1.9 years. The number of shares authorised for the Group’s share-based payments to employees was 3 554 592 and 1 549 684 as of 31 December 2015 and 2016, respectively. The Group’s policy is to ensure that sufficient treasury shares are available at all times to settle share-based compensation plans. 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 2015 and 2016, the Group contributed USD 9 million and USD 4 million to the plans and authorised 211 472 and 178 233 shares as of 31 December 2015 and 2016, respectively. Swiss Reinsurance Company Consolidated 2016 Annual Report 89 Financial Statements I Notes to the Group financial statements 14 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: 2015 USD millions Gross premiums written Net premiums written Change in unearned premiums Premiums earned Net investment income – non-participating business Net realised investment income – non-participating business Other revenues Total revenues Claims and claim adjustment expenses Life and health benefits Interest credited to policyholders Acquisition costs Operating expenses Interest expenses Total expenses 2016 USD millions Gross premiums written Net premiums written Change in unearned premiums Premiums earned Net investment income – non-participating business Net realised investment income – non-participating business Other revenues Total revenues Claims and claim adjustment expenses Life and health benefits Interest credited to policyholders Acquisition costs Operating expenses Interest expenses Total expenses Corporate Solutions 311 96 –39 57 35 –16 13 89 204 –6 472 670 Corporate Solutions 312 149 –35 114 9 –22 10 111 202 –20 61 243 Life Capital 244 244 244 11 255 –240 –2 –1 17 –226 Life Capital 242 242 242 4 43 10 299 –203 18 –1 21 3 –162 Other 10 –78 1 –67 –199 –36 –235 Other 10 –77 1 –66 –1 400 –101 –1 501 Total 555 340 –39 301 45 –94 25 277 204 –240 –2 –7 290 –36 209 Total 554 391 –35 356 23 –56 21 344 202 –203 18 –21 –1 318 –98 –1 420 90 Swiss Reinsurance Company Consolidated 2016 Annual Report 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 2016 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 Corporate Solutions Life Capital 22 102 390 816 5 162 1 497 4 730 131 1 215 17 5 094 14 4 18 4 6 133 61 204 Corporate Solutions Life Capital 12 72 293 713 2 306 1 398 3 943 141 32 128 3 4 247 70 22 21 113 11 19 232 262 Other 1 792 24 4 37 1 857 2 787 1 531 4 318 Other 1 573 4 4 13 1 594 2 564 1 678 4 242 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 Total 1 573 86 4 94 293 713 2 340 3 105 3 954 19 141 32 128 2 564 1 913 8 751 Instrument Issued in Senior Loan 2005 Senior Loan 2008 Senior Loan 2016 Senior Loan 2016 2016 Senior Loan Total short-term debt as of 31 December 2016 Maturity 2028 2028 2018 2018 2018 Currency GBP GBP USD USD USD Nominal in millions 100 240 1 485 337 322 Interest rate 1mLIBOR+0.00% 4.98% 3mLIBOR+0.65% 3mLIBOR+0.65% 3mLIBOR+0.65% Book value in USD millions 124 296 1 485 337 322 2 564 Swiss Reinsurance Company Consolidated 2016 Annual Report 91 Financial Statements I Notes to the Group financial statements As of 31 December 2015 and 2016, the Group’s investment in mortgages and other loans included USD 287 million and USD 292 million, respectively, of loans due from employees, and USD 196 million and USD 184 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates. 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 2016 and 2015, the facility was undrawn. In April 2016, 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 400 million at any time before February 2036. For its various rights, the Company owes Swiss Re Ltd an unconditional fixed commitment fee, payable in annual instalments calculated as 6.10% on the total facility amount. Annually, the Company receives a partial reimbursement of the commitment fee equal to 2.13% per annum on the undrawn facility amount. As of 31 December 2016, the facility was undrawn. In June 2016, 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 800 million at any time before August 2032. For its various rights, the Company owes Swiss Re Ltd an unconditional fixed commitment fee, payable in annual instalments calculated as 5.68% on the total facility amount. Annually, the Company receives a partial reimbursement of the commitment fee equal to 1.95% per annum on the undrawn facility amount. As of 31 December 2016, the facility was undrawn. 92 Swiss Reinsurance Company Consolidated 2016 Annual Report This page intentionally left blank. Swiss Reinsurance Company Consolidated 2016 Annual Report 93 Financial Statements I Notes to the Group financial statements 15 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 2017 2018 2019 2020 2021 After 2021 Total operating lease commitments 2016 27 23 21 20 20 165 276 Minimum rentals for all operating leases (except those with terms of a month or less that were not renewed) for the years ended 31 December 2015 and 2016 were USD 62 million and USD 29 million, respectively. 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 2016 were USD 1 044 million. The Group entered into a real estate construction contract. The commitments under the contract amount to USD 92 million over the next 4 years. 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, results of operations or cash flows. 94 Swiss Reinsurance Company Consolidated 2016 Annual Report 16 Variable interest entities The adoption of ASU 2015-02 as of 1 January 2016 led to an increase in the number of variable interest entities (VIEs), mainly due to the evaluation of partnerships and investment funds. The Group enters into arrangements with 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 primarily as a result of the Group’s involvement in certain insurance-linked securitisations, life and health funding transactions, swaps in trusts, debt financing, investment, senior commercial mortgage and infrastructure loans as well as other entities, which meet the definition of a VIE. When analysing whether the entity is a VIE, 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 is assessed for consolidation under the VIE section of the Consolidation Topic. The party that has a controlling financial interest is called a primary beneficiary and consolidates the VIE. The party 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 the entity’s losses 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. For all its variable interests in VIEs, the Group assesses whether it has a controlling financial interest in these entities and, thus, is the primary beneficiary. 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. Additionally, the Group assesses if it has the obligation to absorb losses or if it has the right to receive benefits of the VIE that could potentially be significant to the entity. If both criteria are met, the Group has a controlling financial interest in the VIE and consolidates the entity. The Group monitors changes to the facts and circumstances of the existing involvement with legal entities to determine whether they require reconsideration of the entity’s designation as a VIE or voting interest entity. For VIEs, the Group reassesses regularly the primary beneficiary determination. Insurance-linked securitisations The insurance-linked securitisations transfer pre-existing insurance risk to investors through the issuance of insurance-linked securities. In insurance-linked securitisations, the securitisation vehicle assumes the insurance risk from a sponsor through insurance or derivative contracts. The securitisation vehicle generally retains the issuance proceeds as collateral, which consists of investment-grade securities. The Group does not have potentially significant variable interest in these vehicles and therefore is not a primary beneficiary. Typically, the variable interests held by the Group arise through ownership of insurance-linked securities, in which case the Group’s maximum loss equals the principal amount of the securities held by the Group. Swiss Reinsurance Company Consolidated 2016 Annual Report 95 Financial Statements I Notes to the Group financial statements 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 separate 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 with a funding vehicle, which represents a potentially significant variable interest in the funding vehicle. 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 outstanding balance of the funding notes issued by the vehicle, depending on the specific contractual arrangements. Swaps in trusts The Group provides interest rate and foreign exchange risk hedges to certain asset securitisation trusts which qualify as VIEs. As the Group’s involvement 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 The Group consolidates a debt-financing vehicle created to collateralise reinsurance coverage provided by the Group. The Group manages the asset portfolio in the vehicle and absorbs the variability of the investment return of the vehicle’s portfolio thereby satisfying both criteria for a controlling financial interest: power over activities most significant to the vehicle’s economic performance and significant economic interest. Investment vehicles The Group’s variable interests in investment partnerships arise through ownership of the limited partner interests. Many investment partnerships are VIEs under ASU 2015-02, because the limited partners as a group lack kick-out or participating rights. The Group does not hold the general partner interest in the limited partnerships and therefore does not direct investment activities of the entity. 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 investment vehicles decrease. The Group’s maximum exposure to loss equals the Group’s share of the investment. The Group is a passive investor in structured securitisation vehicles issuing residential and commercial mortgage-backed securities (RMBS and CMBS, respectively) and other asset-backed securities (ABS). The Group’s investments in RMBS, CMBS and other ABS are passive in nature and do not obligate the Group to provide any financial or other support to the issuer entities. By design, RMBS, CMBS and ABS securitisation entities are not adequately capitalised and therefore considered VIEs. The Group is not the primary beneficiary, because it does not have power to direct most significant activities. These investments are accounted for as available-for-sale as described in the investment note 7 and are not included in the tables below. The Group consolidates an investment vehicle, because the Group holds the entire interest in the entity and makes investment decisions related to the entity. The investment vehicle is a VIE under ASU 2015-02, because it is structured as an umbrella company comprised of multiple sub-funds. The majority of the investments held in this vehicle are accounted for as available-for- sale and are disclosed in the investment note and not included in the tables below. Investment vehicles (unit-linked business) Additionally, the Group invests on behalf of the policyholders as a passive investor in a variety of investment funds across various jurisdictions. By design, many of these funds meet a VIE definition. While the Group may have a potentially significant variable interest in some of these entities due to its share of the fund’s total net assets, it never has power over the fund’s investment decisions, or unilateral kick-out rights relative to the decision maker. The Group is not exposed to losses in the aforementioned investment vehicles, as the investment risk is borne by the policyholder. 96 Swiss Reinsurance Company Consolidated 2016 Annual Report Senior commercial mortgage and infrastructure loans The Group also invests in structured commercial mortgage and infrastructure loans, which are held for investment. The commercial mortgage loans are made to non-recourse special purpose entities collateralised with commercial real estate. The entities are adequately capitalised and generally structured as voting interest entities. Occasionally, the borrower entities can be structured as limited partnerships where the limited partners do not have kick-out or participating rights, which results in the VIE designation. The infrastructure loans are made to non-recourse special purpose entities collateralised with infrastructure project assets. Some borrower entities may have insufficient equity investment at risk, which results in the VIE designation. The Group does not have power over the activities most significant to the aforementioned borrower entities designated as VIEs and therefore does not consolidate them. The Group’s maximum exposure to loss from its investments equals the loan outstanding amount. Other The Group consolidates a vehicle providing reinsurance to its members, because it serves as a decision maker over the entity’s investment and underwriting activities, as well as provides retrocession for the majority of the vehicle’s insurance risk and receives performance-based fees. Additionally, the Group is obligated to provide the vehicle with loans in case of a deficit. The vehicle is a VIE, primarily because its total equity investment at risk is insufficient and the members lack decision-making rights. The Group did not provide financial or other support to any VIEs during 2016 that it was not previously contractually required to provide. Consolidated VIEs The following table shows the total assets and liabilities on the Group’s balance sheet relating to VIEs of which the Group is the primary beneficiary as of 31 December: USD millions Fixed income securities available-for-sale 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 2015 3 876 88 26 147 42 34 9 38 8 4 268 53 26 2 96 17 2 720 2 914 2016 3 715 128 22 33 33 9 94 8 4 042 65 25 6 213 14 2 249 2 572 The assets of the consolidated VIEs may only be used to settle obligations of these VIEs and to settle any investors’ ownership liquidation requests. There is no recourse to the Group for the consolidated VIEs’ liabilities. The assets of the consolidated VIEs are not available to the Group’s creditors. Swiss Reinsurance Company Consolidated 2016 Annual Report 97 Financial Statements I Notes to the Group financial statements Non-consolidated VIEs The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs in which the Group held a variable interest but was not the primary beneficiary as of 31 December: USD millions Fixed income securities available-for-sale Equity securities available-for-sale Policy loans, mortgages and other loans Other invested assets Investments for unit-linked business Total assets Accrued expenses and other liabilities Total liabilities 2015 52 1 918 971 45 45 2016 415 466 764 1 419 163 3 227 78 78 The following table shows the Group’s assets, liabilities representing variable interests and maximum exposure to loss related to the VIEs in which the Group held a variable interest but was not the primary beneficiary as of 31 December: USD millions Insurance-linked securitisations Life and health funding vehicles Swaps in trusts Investment vehicles Investment vehicles for unit-linked business Commercial mortgage / infrastructure loans Total Total liabilities 1 44 Total assets 52 2 146 771 2015 Maximum exposure to loss1 52 1 777 –2 773 971 45 –2 Total assets 336 2 164 1 728 163 834 3 227 Total liabilities 1 77 78 2016 Maximum exposure to loss1 331 1 948 –2 1 729 – 834 –2 1 Maximum exposure to loss is the loss the Group would absorb from a variable interest in a VIE in the event that all of the assets of the VIE are deemed worthless. 2 The maximum exposure to loss for swaps in trusts cannot be meaningfully quantified due to their derivative character. The assets and liabilities for the swaps in trusts represent the positive and negative fair values of the derivatives the Group has entered into with the trusts. 98 Swiss Reinsurance Company Consolidated 2016 Annual Report 17 Disposals Aurora National Life Assurance Company 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. 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. Swiss Reinsurance Company Consolidated 2016 Annual Report 99 Financial Statements I Notes to the Group financial statements 18 Subsequent events In January 2017, the Group sold three primary life and health insurance carriers to Swiss Re Life Capital Ltd. The sale is in line with the changes presented to the segmental reporting from 1 January 2016 onwards. Based on the year-end 2016 balance sheet, the assets and liabilities transferred to Life Capital amounted to approximately USD 1.9 billion and USD 1.9 billion, respectively. 100 Swiss Reinsurance Company Consolidated 2016 Annual Report This page intentionally left blank. Swiss Reinsurance Company Consolidated 2016 Annual Report 101 Report of the statutory auditor Report of the statutory auditor to the General Meeting of Swiss Reinsurance Company Ltd Zurich Report of the statutory auditor on the consolidated financial statements As statutory auditor, we have audited the consolidated financial statements of Swiss Reinsurance Company Ltd and its subsidiaries (the ‘Company’), which comprise the consolidated balance sheet as of 31 December 2016, and the related consolidated income statement, statement of comprehensive income, statement of shareholder’s equity, statement of cash flow and notes (pages 2 to 100) for the year ended 31 December 2016. 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 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 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 accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company at 31 December 2016, 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. Other matter Accounting principles generally accepted in the United States of America require that the supplementary information based on the requirements of ASU 2015-09, Disclosures about Short-Duration Contracts, on pages 38 to 45 be presented to supplement the consolidated financial statements. Such information, although not part of the consolidated financial statements, is required by the Financial Accounting Standards Board, which considers it an essential part of financial reporting for placing the consolidated financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the consolidated financial statements and other knowledge we obtained during our audit of the consolidated financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 102 Swiss Reinsurance Company Consolidated 2016 Annual Report Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Unobservable or interpolated inputs used for the valuation of certain level 2 and 3 investments Key audit matter Given the ongoing market volatility and macroeconomic uncertainty, investment valuation continues to be an area of inherent risk. The risk is not the same for all investment types and is greatest for those listed below, where the investments are more difficult to value because quoted prices are not always available: ̤ Fixed income securitised products ̤ Fixed income mortgage and asset-backed securities ̤ Private placements ̤ Private equity ̤ Derivatives — equity funds ̤ Derivatives — credit contracts ̤ Derivatives — rates ̤ Other derivatives and insurance-related financial products How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls of the valuation models for level 2 and 3 investments, including the Company’s independent price verification process. In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Evaluating the methodology and assumptions, in particular, the yield curves, discounted cash flows, perpetual growth rates and liquidity premiums used in the valuation models. ̤ Comparing the assumptions used against appropriate benchmarks and investigating significant differences. ̤ Testing the operation of data integrity and change management controls relating to the models. ̤ Engaging our own valuation experts to perform independent valuations, where applicable. On the basis of the work performed, we consider the assumptions used by management to be appropriate and that the investments classified as level 2 and 3 are properly valued as of 31 December 2016. Swiss Reinsurance Company Consolidated 2016 Annual Report 103 Valuation of actuarially determined Property & Casualty (‘P&C’) loss reserves Key audit matter The valuation of actuarially determined P&C loss reserves involves a high degree of subjectivity and complexity. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses at a given date. The Company uses a range of actuarial methodologies and methods to estimate these provisions. Actuarially determined P&C loss reserves require significant judgement relating to certain factors and assumptions. Among the most significant reserving assumptions are the A-priori loss ratios, which typically drive the estimates of P&C loss reserves for the most recent contract years. Other assumptions include, but are not limited to, interest rates, inflation trends, claims trends, regulatory decisions, historical claims information and the growth of exposure. In particular, ‘long tail’ lines of business (for example, Liability, US Asbestos and Environmental, Motor Liability and Workers’ Compensation) are generally more difficult to project. This is due to the protracted period over which claims can be reported as well as the fact that claims settlements are often less frequent but of higher impact. They are also subject to greater uncertainties than claims relating to ‘short-tail’ business. Long-tailed lines of business generally rely on many assumptions based on experts’ judgement. How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls relating to the application of the actuarial methodology, data collection and analysis, as well as the processes for determining the assumptions used by management in the valuation of actuarially determined P&C loss reserves. In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Testing the completeness and accuracy of underlying data utilised by the Company’s actuaries in estimating P&C loss reserves. ̤ Applying IT audit techniques to analyse claims through the recalculation of claims triangles. ̤ Involving PwC’s internal actuarial specialists to test independently management’s estimates of P&C loss reserves, and evaluating the reasonableness of the methodology and assumptions used by comparing them with recognised actuarial practices and by applying our industry knowledge and experience. ̤ Performing independent projections of selected product lines. For these product lines, we compared our calculations of projected reserves with those of the Company taking into account the available corroborating and contrary evidence and challenging management’s assumptions as appropriate. ̤ Assessing the process and related judgements of Moreover, not all natural catastrophe events and/or significant man-made losses can be modelled using traditional actuarial methodologies, which increases the degree of judgement needed in establishing reserves for these events. management in relation to natural catastrophes and other large losses, including using our industry knowledge to assess the reasonableness of market loss estimates and other significant assumptions. ̤ Performing sensitivity testing and evaluating the appropriateness of any significant adjustments made by management to P&C loss reserve estimates. On the basis of the work performed, we consider that the methodology, assumptions and underlying data used in the valuation of actuarially determined P&C loss reserves to be reasonable and in line with financial reporting requirements and accepted industry practice. 104 Swiss Reinsurance Company Consolidated 2016 Annual Report Valuation of actuarially determined Life & Health (L&H) reserves Key audit matter The Company’s valuation of liabilities for L&H policy benefits and policyholder account balances involves complex judgements about future events affecting the business. Actuarial assumptions selected by the Company with respect to interest rates, investment returns, mortality, morbidity, lapse in coverage, longevity, persistency, expenses, stock market volatility and future policyholder behaviour may result in material impacts on the valuation of L&H reserves. The methodology and methods used can also have a material impact on the valuation of actuarially determined L&H reserves. The valuation of actuarially determined L&H reserves depends on the use of complex models. The Company continues to migrate actuarial data and models from legacy systems and/or spreadsheets to new actuarial modelling systems. At the same time, management is validating models to ensure that new models are fit for use. Moving from one modelling platform to another is a complex and time-consuming process, frequently taking several years. Any resulting adjustments to reserves need to be assessed in terms of appropriateness and classified as changes in estimates or as an out-of-period adjustment. How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls relating to the application of actuarial methodology, data collection and analysis, as well as the processes for determining the assumptions used by management in the valuation of actuarially determined L&H reserves. In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Testing the completeness and accuracy of the underlying data by vouching against the source documentation. ̤ Testing the migration of actuarial data from legacy systems and/or spreadsheets to the new actuarial systems for completeness and accuracy. ̤ Performing independent model validation procedures, including detailed testing of models, independent recalculations and back testing. ̤ Involving our own life insurance actuarial specialists to test the methodology and assumptions used by management, with particular consideration of industry studies, the Company’s experience and management’s liability adequacy test procedures. ̤ Challenging the Company’s methodology and methods, focusing on changes to L&H actuarial methodology and methods during the year, by applying our industry knowledge and experience to check whether the methodology and methods are consistent with recognised actuarial practices and reporting requirements. On the basis of the work performed, we consider that the methodology, assumptions and underlying data used in the valuation of actuarially determined L&H reserves to be reasonable and in line with financial reporting requirements and accepted industry practice. Valuation of uncertain tax items – initial probability assessment Key audit matter The Company is carrying a provision for uncertain tax items on its books. The valuations of these items are based on management’s estimates and ‘more-likely-than-not’ tax assessments. Fluctuations in the estimates of uncertain tax items have an impact (through income tax expense) on the results. How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls of the completeness of the uncertain tax items and management’s assessment of them. In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Critically reviewing the ‘more-likely-than-not’ tax assessments to evaluate the Company’s judgements and estimates of the probabilities and the amounts. ̤ Assessing how the Company had considered new information or changes in tax law or case law, and assessing the Company’s judgement of how these impact the Company’s position or measurement of the required provision. Swiss Reinsurance Company Consolidated 2016 Annual Report 105 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 2017 106 Swiss Reinsurance Company Consolidated 2016 Annual Report This page intentionally left blank. Swiss Reinsurance Company Consolidated 2016 Annual Report 107 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 2016, the Company employed a worldwide staff at an average of 1 846 full time equivalents. Financial year 2016 Following the legal entity restructuring in 2015, Swiss Re Asia Ltd, formerly European Reinsurance Company of Zurich Ltd, novated its European intragroup business to the Company effective as of 1 January 2016. The novation was performed at Swiss statutory book values resulting in a one-off increase in the Company‘s assets and liabilities of CHF 8 048 million without impacting the net income at inception. In addition, the Company successfully increased its transactional business, notably in the US, with the completion of a casualty quota share treaty and the assumption of in-force life blocks of business. Net income amounted to CHF 875 million in 2016, compared to CHF 6 432 million in 2015. The prior year was significantly impacted by the legal entity restructuring. The Company sold its subsidiary Swiss Re Asia Ltd to Swiss Re Reinsurance Holding Company Ltd and generated a one-off realised gain of CHF 6 383 million in 2015, 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. This net impact mainly led to the higher investment result of CHF 5 833 million in 2015, compared to CHF 787 million in 2016. 108 Swiss Reinsurance Company Ltd 2016 Annual Report Reinsurance result Reinsurance result amounted to CHF 1 238 million in 2016, compared to CHF 1 634 million in 2015. The Life & Health Reinsurance result experienced a loss of CHF 284 million, compared to a gain of CHF 481 million in 2015, reflecting mainly the decline of interest rates leading to an increase in reserves. The business volume increase was driven by the novated European treaties and transactional business. The Property & Casualty Reinsurance result increased from CHF 1 153 million to CHF 1 522 million in 2016, due to the novated European business and solid underwriting results, partly offset by a higher large loss burden, compared to the prior year, and a lower contribution from positive prior-year developments. Property and casualty premiums earned increased from CHF 7 712 million in 2015 to CHF 11 237 million in 2016. The increase was driven by the novated European business, which impacted all lines of business, especially property, motor and casualty, and by large and tailored transactions in the US and Europe. Life and health premiums earned increased from CHF 4 856 million in 2015 to CHF 6 343 million in 2016. Higher premiums earned were stemming from large transactions in the US and in Asia and the novated European business. Property and casualty claims paid and claim adjustment expenses net and change in unpaid claims net increased from CHF 4 046 million to CHF 6 667 million in 2016, mostly reflecting business volume growth. In addition, the Company has experienced a higher loss burden in 2016, with more large property and agriculture losses. Further, prior-year developments have been less favourable than in 2015, especially in motor and casualty. Life and health benefits net changed from a gain of CHF 1 647 million to a loss of CHF 3 653 million in 2016, mainly due to the assumptions of large in-force life blocks of business in the US and the set-up of reserves for the novation of the European business. The prior year was impacted by the reserve release for the one-off recapture of reinsurance treaties. These movements were offset in life and health claims paid and claim adjustment expenses net and change in unpaid claims net, which decreased by CHF 3 674 million in 2016. The lower expenses were primarily driven by the considerations received in 2016, respectively paid in 2015, for the aforementioned transactions. In addition, life and health benefits net increased due to the decline in interest rates in 2016, primarily in Europe and in Japan. Acquisition costs net increased from CHF 3 026 million in 2015 to CHF 4 150 million in 2016, mainly related to the business volume increase in Europe and in the Americas, especially for casualty and life and health. Investment result Investment income decreased from CHF 8 575 million to CHF 1 779 million in 2016. The decrease was driven by lower realised gains on investments in subsidiaries and affiliated companies of CHF 6 381 million, mostly related to the sale of its subsidiary Swiss Re Asia Ltd to Swiss Re Reinsurance Holding Company Ltd which generated a one-off realised gain of CHF 6 383 million in 2015. The decrease in realised gains on and income from alternative investments were primarily driven by the sale of private equities to a subsidiary in 2015. In addition, the prior year benefited from the distribution of retained income from shares in investment funds. Investment expenses decreased from CHF 2 418 million to CHF 695 million in 2016. The decrease was mainly related to lower value adjustments on subsidiaries and affiliated companies of CHF 1 640 million, primarily reflecting the non-recurring value adjustment on the investment in Swiss Re America Holding Corporation of CHF 1 821 million in 2015 prior to its contribution to Swiss Re Reinsurance Holding Company Ltd. Higher realised losses in equity securities and alternative investments in 2015 were mainly due to the vesting of a share based compensation plan and the sale of private equities to a subsidiary, respectively. In 2016, higher value adjustments on fixed income securities were driven by market deterioration. Other income and expenses The decrease in other net expenses from CHF 255 million in 2015 to CHF 158 million in 2016 was mainly related to lower net realised foreign exchange losses. Swiss Reinsurance Company Ltd 2016 Annual Report 109 Financial Statements I Swiss Reinsurance Company Ltd Financial Statements I Swiss Reinsurance Company Ltd Assets Total assets increased from CHF 90 263 million as of 31 December 2015 to CHF 101 291 million as of 31 December 2016. Total investments increased from CHF 51 507 million to CHF 54 295 million in 2016. The increase was mainly due to the transfer of shares in investment funds from Swiss Re Asia Ltd of CHF 4 142 million in connection with the novation of the European business to the Company. This was partly offset by net repayments of intragroup loans of CHF 3 008 million, primarily from Swiss Re Reinsurance Holding Company Ltd, which were mainly reinvested in short-term investments. Assets in derivative financial instruments increased from CHF 276 million to CHF 1 108 million in 2016, mainly as a result of the transfer of hedge instruments in connection with the life and health variable annuities business by US subsidiaries to the Company. The transferred assets mainly consisted of foreign exchange swaps and forwards and other derivative financial instruments on equity securities. Funds held by ceding companies increased from CHF 13 639 million to CHF 18 840 million in 2016, mainly as a result of large casualty and life and health transactions in the US and the novated European business. Reinsurance recoverable on technical provisions retroceded increased from CHF 7 996 million to CHF 8 708 million in 2016. This was due to higher retroceded property and casualty business from the Company’s branches in Japan and Canada, experiencing large natural catastrophe events and increased life and health business retroceded from the Company’s Beijing branch. Premiums and other receivables from reinsurance increased from CHF 7 320 million to CHF 8 473 million in 2016, reflecting the higher business volume stemming from the novated European treaties and transactional business. Liabilities Total liabilities increased from CHF 76 003 million as of 31 December 2015 to CHF 89 089 million as of 31 December 2016. Technical provisions gross increased from CHF 50 626 million to CHF 64 322 million in 2016, mainly driven by the novated European business. In addition, unpaid claims increased due to a higher loss burden in property and casualty and life and health policy benefits as a consequence of lower interest rates combined with higher business volume stemming from large transactions. Liabilities in derivative financial instruments increased from CHF 588 million to CHF 1 877 million in 2016, mainly as a result of the transfer of hedge instruments in connection with the life and health variable annuities business by US subsidiaries to the Company. The transferred liabilities mainly consisted of foreign exchange swaps and forwards and other derivative financial instruments on equity securities. Funds held under reinsurance treaties decreased from CHF 4 636 million to CHF 3 789 million in 2016, due to a restructuring of the intragroup retrocession between the Company’s Beijing branch and Swiss Re Asia Ltd. Other liabilities increased from CHF 5 369 million to CHF 6 396 million in 2016, mainly reflecting higher intragroup payables under securities lending agreements and securities sold under agreement to repurchase. The decrease in subordinated liabilities of CHF 1 170 million to CHF 4 539 million in 2016 was mainly driven by the repayment of an intragroup hybrid loan and the maturity of an external subordinated debt. Shareholder’s equity Shareholder’s equity decreased from CHF 14 260 million as of 31 December 2015 to CHF 12 202 million as of 31 December 2016. The decrease reflected the dividend payment in cash of CHF 2 833 million and the dividend in-kind of Swiss Re Management Ltd of CHF 100 million, partly offset by the net income for the financial year 2016 of CHF 875 million. 110 Swiss Reinsurance Company Ltd 2016 Annual Report Future prospects and business development Large transaction In order to further align the management view and legal entity structure, the Company will transfer risks allocated to the Life Capital Business Unit to an affiliated company via novation and retrocession transactions, effective as of 1 January 2017, at Swiss statutory book values. For the retrocession, the Company sets up a reinsurance recoverable on technical provisions retroceded and funds held under reinsurance treaties, respectively, which will lead to an increase of assets and liabilities. This increase will be partly offset by a release of the technical provisions gross and the transfer of corresponding assets for the novated business. The net impact of the aforementioned will result in a one-off increase in the Company’s assets and liabilities of approximatively CHF 4.2 billion without impacting the net income at inception. Property & Casualty Reinsurance business Market environment In 2016, the non-life reinsurance industry experienced a fifth year of strong, albeit lower, underwriting results. Reinsurance prices have continued to soften during 2016, but at a slower pace. Global premiums in non-life reinsurance are expected to grow in 2017 in real terms, based on increasing cessions from emerging markets. Advanced markets premium growth will reflect a moderation in rate pressures, slowing growth in the primary market and accelerating inflation. Strategy and priorities While natural catastrophe property rates still experienced pressure due to relatively low loss occurrence and abundant capital in the markets, rate decreases have started to slow down. The Company deployed less natural catastrophe capacity and will continue to do so where price levels fall below the Company’s return hurdles. Specialty lines experienced rate pressure with notable differences by lines of business and markets. Casualty rates overall remained more stable with varying trends based on market and product. The Company will continue to pursue its successful differentiation strategy while focusing on the bottom line under current market conditions. This means that the Company supports key partners and expects they will also reflect the support in differential terms. This positions the Company to access the business it wants and achieves above average rates. Life & Health Reinsurance business Market environment Global premiums in traditional life reinsurance, consisting of mortality and morbidity, are estimated to have grown by 1.5% in real terms in 2016. In advanced markets, a 0.5% increase was driven by positive developments in Canada, the UK, Japan and Australia, while premiums in the US contracted as a result of lower cession rates and weakness in protection sales. In the emerging markets, premiums are estimated to have grown by 9%, driven largely by China. World premiums in traditional life reinsurance are expected to increase only marginally over the next two years, driven by the emerging markets, especially China. Premiums in the advanced markets will be roughly flat. Large transactions and longevity risk transfer will remain a growth area for life reinsurers. Strategy and priorities The Company expects life and health reinsurance business to be relatively flat in mature markets and to increase in high growth markets. In mature markets the prolonged low interest rate environment continues to have an unfavourable impact on primary sales. Cession rates in the US have decreased and have now generally flattened as primary insurers retain more risk. However, the Company sees a strong focus on capital, risk and balance sheet optimisation in mature markets, leading to positive opportunities for large transactions. Recent political instability has given rise to uncertainty for growth in many regions of the world that could last two years or more. Market volatility is increasing in the short-term, with uncertain impact on Swiss Re’s new business overall. The Company believes high growth markets will continue to see strong increases in primary life and, in particular, health volumes, while cession rates are expected to be stable. The Company will continue to pursue growth opportunities in high growth markets and in large transactions, including longevity deals. The Company is responding to the expanding need for health protection driven by ageing societies and the Company will apply its experience to help reduce the protection gap in all regions. Swiss Reinsurance Company Ltd 2016 Annual Report 111 Financial Statements I Swiss Reinsurance Company Ltd 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 the investment outlook for 2017, government bond yields are expected to rise from current levels, in particular in the US with smaller rises in the UK and Germany. The outlook is neutral for corporate bonds, with modest spread widening expected in the US while Eurozone corporate bonds remain tight, supported by the European Central Bank asset purchase program. The outlook is similarly neutral for equities with a preference for the US given better near-term earnings outlook. 112 Swiss Reinsurance Company Ltd 2016 Annual Report Risk assessment The Company’s Board of Directors has issued a mandate to establish a Risk Management function to provide independent risk taking oversight within the Business Unit Reinsurance. In executing this task, Reinsurance’s Risk Management function is supported by the Swiss Re Group Risk Management organisation. Significant parts of risk exposure identification, assessment, control and reporting for Swiss Reinsurance Company Ltd on a stand-alone basis are integrated in Group Risk Management processes. The Board of Directors of Swiss Reinsurance Company Ltd sets the Company’s risk tolerance. In this role, it is advised by the Board of Directors of the Swiss Re Group, which defines the Group’s basic risk management principles and risk appetite framework including the Group risk tolerance. The Board of Directors of the Swiss Re Group mainly performs risk oversight and governance through three committees: ̤ The Finance and Risk Committee defines the Group Risk Policy, reviews risk capacity limits, monitors adherence to risk tolerance, and reviews top risk issues and exposures of the Company’s assets and liabilities. ̤ 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 (Group CRO) as well as to the Business Units. The Group CRO is appointed as the principal independent risk controller of Swiss Re. The Group CRO is a member of the Group EC and reports directly to the Group CEO as well as to the Board’s Finance and Risk Committee. The Group CRO also advises the Group EC, the Chairman or the respective Group Board Committees, in particular the Finance and Risk Committee, on significant matters arising in his area of responsibility. The Group CRO leads the independent Risk Management function, which is responsible for risk oversight and control across Swiss Re. It thus forms an integral part of Swiss Re’s business model and risk management framework. The Risk Management function is comprised of central teams providing specialised risk expertise and oversight, as well as dedicated risk teams for the Reinsurance, Corporate Solutions, and Life Capital (formerly Admin Re®) Business Units. The Business Unit Reinsurance Risk Management teams are led by a dedicated Chief Risk Officer who reports directly to the Group CRO, with a secondary reporting line to the CEO Reinsurance. The Business Unit Reinsurance CRO is responsible for risk oversight within the Business Unit Reinsurance, as well as for establishing the proper risk governance to ensure efficient risk identification, assessment and control. The CRO Reinsurance is supported by functional, regional and legal entity CROs who are responsible for overseeing risk management issues that arise at regional or legal entity level. While the risk management organisation is closely aligned to Swiss Re’s business structure, in order to ensure effective risk oversight, all embedded teams and functional CROs remain part of the central Group Risk Management function under the Group CRO, thus ensuring their independence as well as a consistent Group-wide approach to overseeing and controlling risks. The central teams 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 departments also oversee Group liquidity and capital adequacy and maintain the Group frameworks for controlling these risks throughout Swiss Re. For the Business Unit Reinsurance and its subsidiaries, the setting of the reserves is performed by valuation actuaries within the P&C and L&H Business Management units. Business Unit Reinsurance and Group Risk Management activities are complemented by Swiss Re’s Group Internal Audit and Compliance units: ̤ Group Internal Audit performs independent assessments of adequacy and effectiveness of internal control systems. It evaluates the execution of processes within Swiss Re, including those within Risk Management. ̤ The Compliance function oversees Swiss Re’s compliance with applicable laws, regulations, rules, and the Group Code of Conduct. It also assists the Business Unit and the Group Board of Directors, Executive Committees and other management bodies in identifying, mitigating and managing compliance risks. Swiss Reinsurance Company Ltd 2016 Annual Report 113 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 2015 2016 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 22 976 –4 207 18 769 –1 112 –77 –1 189 17 580 1 003 297 18 880 –2 523 2 375 –148 –8 545 304 –8 241 –4 101 448 –3 653 –12 042 – –12 042 –5 373 1 223 –4 150 –804 –4 954 –646 –17 642 Reinsurance result 1 634 1 238 114 Swiss Reinsurance Company Ltd 2016 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 2015 2016 8 575 –2 418 –324 5 833 456 –749 7 174 –404 93 –348 6 515 –83 6 432 1 779 –695 –297 787 1 906 –2 254 1 677 –418 247 –405 1 101 –226 875 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2016 Annual Report 115 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 2015 2016 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 13 094 17 382 8 752 808 611 9 197 3 838 613 13 648 54 295 1 108 18 840 2 226 4 732 1 707 2 223 46 8 708 15 1 595 100 8 473 183 5 412 336 46 996 3 3 3 3 3 3 Total assets 90 263 101 291 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. 116 Swiss Reinsurance Company Ltd 2016 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 2015 2016 3 3 3 3 3 3 4 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 39 365 15 728 7 147 538 1 544 64 322 209 938 215 1 362 3 706 1 877 3 789 2 898 6 396 200 4 539 76 003 89 089 34 6 778 6 778 650 272 94 6 432 14 260 34 6 778 6 778 650 3 839 26 875 12 202 Total liabilities and shareholder’s equity 90 263 101 291 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2016 Annual Report 117 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. Structural change The new group wide service company Swiss Re Management Ltd, as a wholly-owned subsidiary of Swiss Re Ltd, started its operating activities as a provider for Swiss Re’s Group Functions as of 1 January 2016. At that date, together with related assets and liabilities, employees which were formerly employed by the Company and provided services in the Swiss Re’s Group Functions, were transferred to the newly established service company. This transfer led to a significant decrease of both, the number of employees and personnel expenses in the Company, and in return to higher service expenses of the Company for services provided newly by Swiss Re Management Ltd. As a result of the transfer, various line items of the Financial Statements as well as disclosure notes, such as outstanding leasing commitments, management fee contribution and auditor’s fees, were impacted in 2016. 1 Significant accounting principles Basis of presentation In general, the financial statements are prepared in accordance with Swiss Company Law. As a reinsurance company and based on Art. 111b of the Ordinance on the supervision of private insurance companies (ISO), the Company is also required to follow the Insurance Supervisory Ordinance-FINMA (ISO-FINMA). The ISO-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 Swiss Code of Obligations (SCO). Time period The 2016 financial year comprises the accounting period from 1 January 2016 to 31 December 2016. 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. 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. 118 Swiss Reinsurance Company Ltd 2016 Annual Report 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 cedent 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 2016 Annual Report 119 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. Generally 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 drawn from experience studies. Cash flows include primarily premiums, claims, commissions, profit commissions and expenses, with provisions for adverse deviations added for prudence to reflect the uncertainties of the underlying best estimates. The gross premium valuation approach may 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. A loss ratio approach can be taken, mainly for Group business, and for individual risk premium lump sum business, where either information is limited or a gross premium valuation is not possible due to practical constraints. 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. Debt Debt is held at redemption value. 120 Swiss Reinsurance Company Ltd 2016 Annual Report 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. Income statement classification Interest expenses on debt were reclassified from other financial expenses to interest expenses on debt and subordinated liabilities. Therefore, the previously reported 2015 figures of other financial expenses and interest expenses on debt and subordinated liabilities with a respective amount of CHF 316 million have been changed accordingly. Swiss Reinsurance Company Ltd 2016 Annual Report 121 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 290 648 218 6 22 11 11 30 52 118 1 354 Value readjustments Realised gains – 115 – – 10  –  – 7 7 – 132 2 193 – – 61 20 1 16 37 – 293 Expenses Value adjustments Realised losses – – – –  –  –  – – –179 –179 –181 –215 – –20 –28  – –21 –49 – –465 – –44 – –6  – –1 0 –1 – –51 2016 Total 292 956 218 6 93 31 12 53 96 118 1 779 2016 Total –181 –259 – –26 –28 –1 –21 –50 –179 –695 –297 787 122 Swiss Reinsurance Company Ltd 2016 Annual Report 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 Swiss Reinsurance Company Ltd 2016 Annual Report 123 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 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 Gross 2 334 8 414 209 39 365 15 728 7 147 538 1 544 1 278 Retro –739 59 –29 –4 7321 –1 7071 –2 2231 –461 – 1 620 2016 Net 1 595 8 473 180 34 633 14 021 4 924 492 1 544 2 898 1 Reported under "Reinsurance recoverable on technical provisions retroceded" on page 116. 2 Reported under "Other assets" on page 116. 4 Change in shareholder’s equity CHF millions 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 Shareholder’s equity 1.1.2016 Allocations relating to the dividend paid Dividend for the financial year 2015 Net income for the financial year Shareholder’s equity 31.12.2016 Share capital 34 Legal capital reserves 8 057 –1 279 Legal profit reserves 650 Voluntary profit reserves 272 2 879 –2 879 Retained earnings brought forward 28 66 Net income for the financial year 1 666 –1 666 34 34 6 778 650 272 6 778 650 272 6 500 –2 933 94 94 –68 34 6 778 650 3 839 26 6 432 6 432 6 432 –6 432 875 875 Total shareholder’s equity 10 707 – –2 879 6 432 14 260 14 260 – –2 933 875 12 202 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 2016 and 2015, 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 1 016 million (2015: CHF 1 000 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 2016 and 2015, respectively. 124 Swiss Reinsurance Company Ltd 2016 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 2015 15 887 18 155 34 042 2016 16 336 16 066 32 402 To secure the technical provisions at the 2016 balance sheet date, securities with a book value of CHF 14 009 million (2015: CHF 13 017 million) were deposited in favour of ceding companies, of which CHF 4 088 million (2015: CHF 4 584 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 2016, total commitments remaining uncalled were CHF 495 million (2015: CHF 885 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 2016 and 2015, the facility was undrawn. In April 2016, 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 400 million at any time before February 2036. For its various rights, the Company owes Swiss Re Ltd an unconditional fixed commitment fee, payable in annual instalments calculated as 6.10% on the total facility amount. Annually, the Company receives a partial reimbursement of the commitment fee equal to 2.13% per annum on the undrawn facility amount. As of 31 December 2016, the facility was undrawn. In June 2016, 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 800 million at any time before August 2032. For its various rights, the Company owes Swiss Re Ltd an unconditional fixed commitment fee, payable in annual instalments calculated as 5.68% on the total facility amount. Annually, the Company receives a partial reimbursement of the commitment fee equal to 1.95% per annum on the undrawn facility amount. As of 31 December 2016, the facility was undrawn. Swiss Reinsurance Company Ltd 2016 Annual Report 125 Financial Statements I Swiss Reinsurance Company Ltd 10 Leasing contracts Total off-balance-sheet commitments from operating leases for the next five years and there after are as follows: CHF millions 2016 2017 2018 2019 2020 After 2021 Total operating leases, net 2015 24 20 16 9 9 8 86 2016 – 11 6 4 4 10 35 These operating lease commitments pertain to the non-cancellable contract periods and refer primarily to office and apartment space rented by the Company. 11 Investments in subsidiaries and affiliated companies As of 31 December 2016 and 2015, Swiss Reinsurance Company Ltd held the following direct and material indirect investments in subsidiaries and affiliated companies: Country Liechtenstein Barbados Barbados As of 31 December 2016 Elips Life AG European Finance Reinsurance Company Ltd Gasper Funding Corporation Swiss Brokers México, Intermediario de Reaseguro, S.A. de C.V. Mexico Swiss Re Australia Ltd Swiss Re Life & Health Australia Limited Swiss Re Brasil Resseguros S.A. Swiss Re GB Limited Swiss Re Investments Ltd Swiss Re Life and Health Africa Limited Swiss Re Private Equity Partners SGP Limited Swiss Re Reinsurance Holding Company Ltd Swiss Re America Holding Corporation Swiss Re Capital Markets Corporation Swiss Re Financial 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 Asia Ltd Swiss Re Europe Holdings S.A. Swiss Re Europe S.A. Swiss Re Germany GmbH Swiss Re Services Limited Swiss Re 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 Australia Australia Brazil 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) United States (USA) Switzerland Luxembourg Luxembourg Germany United Kingdom (UK) India United Kingdom (UK) Brazil Cayman Islands Vietnam Brazil City Triesen Bridgetown Bridgetown Mexico City Sydney Sydney São Paulo London Zurich Cape Town George Town Zurich Wilmington New York Wilmington Wilmington Wilmington Wilmington Armonk Zurich Luxembourg Luxembourg Munich London Mumbai London São Paulo São Paulo George Town Hanoi % Equity interest 100% 100% 100% 100% 100% 100% 99% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 94% 100% 100% 100% 20% 93% 65% 25% % Voting interest 100% 100% 100% 100% 100% 100% 99% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 94% 100% 100% 100% 20% 93% 100% 25% 126 Swiss Reinsurance Company Ltd 2016 Annual Report Country Liechtenstein Barbados Barbados Luxembourg 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. Mexico 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 Swiss Re America Holding Corporation Swiss Re Capital Markets Corporation Swiss Re Financial 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 Asia Ltd Swiss Re Europe Holdings S.A. Swiss Re Europe S.A. Swiss Re Germany GmbH 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 Australia Australia Brazil United Kingdom (UK) United Kingdom (UK) Switzerland South Africa Switzerland Cayman Islands Switzerland United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) Switzerland Luxembourg Luxembourg Germany Belgium India India United Kingdom (UK) Brazil Cayman Islands Vietnam Brazil City Triesen Bridgetown Bridgetown Luxembourg Mexico City Sydney Sydney São Paulo London London Zurich Cape Town Adliswil George Town Zurich Wilmington New York Wilmington Wilmington Wilmington Wilmington Armonk Zurich Luxembourg Luxembourg Munich Brussels Mumbai Bangalore London São Paulo São Paulo George Town Hanoi % 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% 100% 94% 100% 100% 100% 100% 20% 93% 65% 25% % 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% 100% 94% 100% 100% 100% 100% 20% 93% 100% 25% Swiss Reinsurance Company Ltd 2016 Annual Report 127 Financial Statements I Swiss Reinsurance Company Ltd 12 Debt and subordinated liabilities The Company had outstanding debt and subordinated liabilities at the 2016 balance sheet date of CHF 8 245 million (2015: CHF 9 597 million). Thereof CHF 5 978 million (2015: CHF 7 236 million) were due within one to five years and CHF 2 267 million (2015: CHF 2 361 million) were due after five years. As of 31 December 2016, the following public placed debentures were outstanding: Instrument Subordinated bond Senior bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Senior bond Subordinated bond Senior bond Issued in 2012 2011 2007 2007 2012 2013 2007 2013 2012 2014 2015 2015 Currency CHF CHF AUD AUD USD USD GBP CHF EUR CHF EUR CHF Nominal in millions 320 600 300 450 750 750 500 175 500 250 750 250 Interest rate 7.250% 2.125% 7.635% 2.015% 8.250% 6.375% 6.302% 7.500% 6.625% 1.000% 2.600% 0.750% Maturity/ First call in 2017 2017 2017 2017 2018 2019 2019 2020 2022 2024 2025 2027 Book value CHF millions 320 600 221 331 762 762 628 175 536 250 804 250 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 1 Thereof at the 2016 balance sheet date CHF 2 178 million (2015: CHF 2 287 million) were towards the parent company Swiss Re Ltd. 2 Thereof at the 2016 balance sheet date CHF 127 million (2015: CHF 8 million) were towards the parent company Swiss Re Ltd. 2015 109 2 2 –3 –99 58 1 735 2 000 2015 11 751 – 8 946 2 145 32 1 827 2 7881 347 4 507 1 988 4 2292 752 2016 96 1 0 –3 –47 110 514 923 2016 8 743 – 13 533 2 719 86 1 941 2 6051 300 3 664 1 861 4 9372 – 128 Swiss Reinsurance Company Ltd 2016 Annual Report 15 Release of undisclosed reserves In 2016, net undisclosed reserves were released by an amount of CHF 253 million (2015: CHF 949 million). 16 Obligations towards employee pension fund As of 31 December 2016, other liabilities included CHF 1 million (2015: CHF 4 million) payable to the employee pension fund. 17 Personnel information As of 31 December 2016, the Company employed a worldwide staff at an average of 1 846 (2015: 4 018) full time equivalents. Personnel expenses for the 2016 financial year amounted to CHF 440 million (2015: CHF 1 079 million). 18 Management fee contribution In 2016, management expenses of CHF 152 million (2015: CHF 710 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 2016, the Swiss Re Group incurred total auditor’s fees of CHF 33 million (2015: CHF 35 million) and additional fees of CHF 4 million (2015: CHF 5 million), of which CHF 3 million (2015: CHF 17 million) and CHF 1 million (2015: CHF 3 million), respectively, incurred for the Company. Swiss Reinsurance Company Ltd 2016 Annual Report 129 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 24 March 2017, to approve the following allocation and payment of a cash dividend of USD 2 600 million, which must not exceed CHF 2 900 million, translated into CHF at spot rate on the settlement date. The cash dividend is paid to its sole shareholder, Swiss Re Ltd, out of voluntary profit reserves on 30 March 2017. 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 2 900 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 2 900 million. This threshold of CHF 2 900 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 Voluntary profit reserves CHF millions Voluntary profit reserves brought forward Allocation from retained earnings Voluntary profit reserves before proposed cash dividend 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 proposed cash dividend 2015 94 6 432 6 526 –6 500 26 2015 272 6 500 6 772 –2 8332 –100 3 839 2016 26 875 901 –850 51 2016 3 839 850 4 689 –2 9001 – 1 789 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 2015 figure was recalculated based on the final cash dividend converted into CHF at spot rate on the settlement date. The Board of Directors further proposes to the Annual General Meeting to approve the intragroup retrocession (IGR) novation and the new retrocession pursuant to the novation and retrocession agreements, effective as of 1 January 2017, between, among others, the Company and Swiss Re Life Capital Reinsurance Ltd (being an indirect subsidiary of the Company’s sole shareholder, Swiss Re Ltd), such transactions being conducted based on Swiss statutory book values of the transferring assets and liabilities, which implies that the difference between the Swiss statutory book value and the higher fair market value (where applicable) of the transferring assets, as well as expectations of future profits associated with the novation and retrocession agreements, are transferred by the Company to Swiss Re Life Capital Reinsurance Ltd without compensation. Zurich, 15 March 2017 130 Swiss Reinsurance Company Ltd 2016 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 114 to 129) for the year ended 31 December 2016. 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 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 2016 comply with Swiss law and the Company’s Articles of Association. Swiss Reinsurance Company Ltd 2016 Annual Report 131 Report on a key audit matter based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Unobservable or interpolated inputs used for the valuation of certain investments Key audit matter Investments are generally valued at lower of cost or market value (prudence principle). In addition to the lower of cost or market value, amortised cost must also be considered for fixed income securities, which is in accordance with the Insurance Supervision Ordinance. Accordingly market values have to be observed to assess the appropriate application of the prudence principle. Given the ongoing market volatility and macroeconomic uncertainty, determination of market values, where no observable market price exist, investment valuation continues to be an area of inherent risk. The risk is not the same for all investment types and is greatest for those listed below, where the investments are more difficult to value because quoted prices are not always available: ̤ Fixed income securitised products ̤ Fixed income mortgage and asset-backed securities ̤ Public placements ̤ Private equity ̤ Derivatives — equity contracts ̤ Derivatives — credit contracts ̤ Derivatives — rates ̤ Other derivatives and insurance-related financial products How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls of the valuation models for certain investments, including the Company’s independent price verification process. In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Evaluating the methodology and assumptions, in particular, the yield curves, discounted cash flows, perpetual growth rates and liquidity premiums used in the valuation models. ̤ Comparing the assumptions used against appropriate benchmarks and investigating significant differences. ̤ Testing the operation of data integrity and change management controls relating to the models. ̤ Engaging our own valuation experts to perform independent valuations, where applicable. On the basis of the work performed, we consider the assumptions used by management to be appropriate and that investments are properly valued as of 31 December 2016. 132 Swiss Reinsurance Company Ltd 2016 Annual Report Valuation of actuarially determined Property & Casualty (‘P&C’) loss reserves Key audit matter The valuation of actuarially determined P&C loss reserves involves a high degree of subjectivity and complexity. Reserves for losses and loss adjustment expenses represent estimates of future payments of reported and unreported claims for losses and related expenses at a given date. The Company uses a range of actuarial methodologies and methods to estimate these provisions. Actuarially determined P&C loss reserves require significant judgement relating to certain factors and assumptions. Among the most significant reserving assumptions are the A-priori loss ratios, which typically drive the estimates of P&C loss reserves for the most recent contract years. Other assumptions include, but are not limited to, interest rates, inflation trends, claims trends, regulatory decisions, historical claims information and the growth of exposure. In particular, ‘long tail’ lines of business (for example, Liability, US Asbestos and Environmental, Motor Liability and Workers’ Compensation) are generally more difficult to project. This is due to the protracted period over which claims can be reported as well as the fact that claims settlements are often less frequent but of higher impact. They are also subject to greater uncertainties than claims relating to ‘short-tail’ business. Long-tailed lines of business generally rely on many assumptions based on experts’ judgement. How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls relating to the application of the actuarial methodology, data collection and analysis, as well as the processes for determining the assumptions used by management in the valuation of actuarially determined P&C loss reserves. In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Testing the completeness and accuracy of underlying data utilised by the Company’s actuaries in estimating P&C loss reserves. ̤ Applying IT audit techniques to analyse claims through the recalculation of claims triangles. ̤ Involving PwC’s internal actuarial specialists to test independently management’s estimates of P&C loss reserves, and evaluating the reasonableness of the methodology and assumptions used by comparing them with recognised actuarial practices and by applying our industry knowledge and experience. ̤ Performing independent projections of selected product lines. For these product lines, we compared our calculations of projected reserves with those of the Company taking into account the available corroborating and contrary evidence and challenging management’s assumptions as appropriate. ̤ Assessing the process and related judgements of Moreover, not all natural catastrophe events and/or significant man-made losses can be modelled using traditional actuarial methodologies, which increases the degree of judgement needed in establishing reserves for these events. management in relation to natural catastrophes and other large losses, including using our industry knowledge to assess the reasonableness of market loss estimates and other significant assumptions. ̤ Performing sensitivity testing and evaluating the appropriateness of any significant adjustments made by management to P&C loss reserve estimates. On the basis of the work performed, we consider that the methodology, assumptions and underlying data used in the valuation of actuarially determined P&C loss reserves to be reasonable and in line with financial reporting requirements and accepted industry practice. Swiss Reinsurance Company Ltd 2016 Annual Report 133 Valuation of actuarially determined Life & Health (L&H) reserves Key audit matter The Company’s valuation of liabilities for L&H policy benefits and policyholder account balances involves complex judgements about future events affecting the business. Actuarial assumptions selected by the Company with respect to interest rates, investment returns, mortality, morbidity, lapse in coverage, longevity, persistency, expenses, stock market volatility and future policyholder behaviour may result in material impacts on the valuation of L&H reserves. The methodology and methods used can also have a material impact on the valuation of actuarially determined L&H reserves. The valuation of actuarially determined L&H reserves depends on the use of complex models. The Company continues to migrate actuarial data and models from legacy systems and/or spreadsheets to new actuarial modelling systems. At the same time, management is validating models to ensure that new models are fit for use. Moving from one modelling platform to another is a complex and time-consuming process, frequently taking several years. Any resulting adjustments to reserves need to be assessed in terms of appropriateness and classified as changes in estimates or as an out-of-period adjustment. How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls relating to the application of actuarial methodology, data collection and analysis, as well as the processes for determining the assumptions used by management in the valuation of actuarially determined L&H reserves. In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Testing the completeness and accuracy of the underlying data by vouching against the source documentation. ̤ Testing the migration of actuarial data from legacy systems and/or spreadsheets to the new actuarial systems for completeness and accuracy. ̤ Performing independent model validation procedures, including detailed testing of models, independent recalculations and back testing. ̤ Involving our own life insurance actuarial specialists to test the methodology and assumptions used by management, with particular consideration of industry studies, the Company’s experience and management’s liability adequacy test procedures. ̤ Challenging the Company’s methodology and methods, focusing on changes to L&H actuarial methodology and methods during the year, by applying our industry knowledge and experience to check whether the methodology and methods are consistent with recognised actuarial practices and reporting requirements. On the basis of the work performed, we consider that the methodology, assumptions and underlying data used in the valuation of actuarially determined L&H reserves to be reasonable and in line with financial reporting requirements and accepted industry practice. Impairment assessment of investments in subsidiaries and affiliated companies Key audit matter The Company applies group valuation method when a close business link exists and a similarity in nature is given in accordance with Swiss Accounting Law. How our audit addressed the key audit matter In relation to the matter set out opposite, our substantive testing procedures included the following: ̤ Assessing whether the group valuation method is still In performing impairment assessments of investments in subsidiaries and affiliated companies, management uses considerable judgement in determining different valuation- method inputs. The impairment assessment is considered a key audit matter due to the considerable judgement in performing the impairment assessment. appropriate. ̤ Assessing whether the method applied for each subsidiary is reasonable. ̤ Understanding changes in the approach and discussing these with management to ensure they are in accordance with our own expectation based on our knowledge of the business and industry. On the basis of the work performed, we consider the methods and assumption used by management to be reasonable. We agree with their conclusion that the book value for all investments in subsidiaries are recoverable. 134 Swiss Reinsurance Company Ltd 2016 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 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 and the additional proposal of the Board of Directors to approve the Novation and Retrocession Transaction (as described in the proposal for allocation of disposable profit) does not contradict with the Swiss law or the Company’s Articles of Association related to capital protection. We recommend that the financial statements submitted to you be approved. PricewaterhouseCoopers Ltd Alex Finn Audit expert Auditor in charge Bret Griffin Zurich, 15 March 2017 Swiss Reinsurance Company Ltd 2016 Annual Report 135 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: ̤ further instability affecting the global financial system and developments related thereto; ̤ further deterioration in global economic conditions; ̤ the Group’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debt-like arrangements and collateral calls due to actual or perceived deterioration of the Group’s financial strength or otherwise; ̤ the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on the Group’s investment assets; ̤ changes in the Group’s investment result as a result of changes in its investment policy or the changed composition of its investment assets, and the impact of the timing of any such changes relative to changes in market conditions; ̤ uncertainties in valuing credit default swaps and other credit-related instruments; ̤ possible inability to realise amounts on sales of securities on the Group’s balance sheet equivalent to their mark-to-market values recorded for accounting purposes; ̤ the outcome of tax audits, the ability to realise tax loss carryforwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings; ̤ the possibility that the Group’s hedging arrangements may not be effective; ̤ the lowering or loss of financial strength or other ratings of one or more Group companies, and developments adversely affecting the Group’s ability to achieve improved ratings; ̤ the cyclicality of the reinsurance industry; ̤ uncertainties in estimating reserves; 136 Swiss Reinsurance Company Ltd 2016 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 2016 Annual Report 137 Financial Statements I Notes to the 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 (collectively, 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. Market sentiment is dominated in large part by concerns over the trends exemplified by the outcome of the US presidential election and the UK referendum on European Union (EU) membership. Growth forecasts among the principal global economies remain uneven and uncertain in an environment of elevated political uncertainty. Stable, but uneven growth, in the Eurozone could suffer as a result of the potential impact of populism and anti-globalisation sentiments on upcoming elections in the Netherlands, France and Germany, and potentially Italy, during 2017. The planned withdrawal of the United Kingdom from the EU has created uncertainty not only for the United Kingdom but for the rest of the EU, and negotiations over withdrawal will likely continue to contribute to volatility and pose significant challenges for the EU, while also calling into question the ability of the EU to address significant ongoing structural challenges. The long-term effects of a withdrawal of the United Kingdom from the EU will depend in part on any agreements the United Kingdom makes to retain access to the single market within the European Economic Area (EEA) following such withdrawal, the scope and nature of which currently remain highly uncertain. As China’s economy undergoes structural changes, recent near-term growth stabilisation may be reversed. Growth in China remains heavily dependent on government stimulus and credit expansion; it continues to face significant capital outflows, reflecting concerns over foreign currency, and its banking sector could be adversely impacted by rising interest rates. The foregoing may be exacerbated by geopolitical tensions, fears over security and migration, and uncertainty created generally by the policy pronouncements that have been, and may in the coming months be, announced by the new US administration on a range of trade, security, foreign policy, environmental protection and other issues having global implications, as well as by the consequences of the implementation of such policy pronouncements. 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 the Group’s ability to access the capital markets and bank funding markets, could adversely affect the ability of counterparties to meet their obligations to the Group and could adversely affect the confidence of the ultimate buyers of reinsurance. Any of the foregoing factors, developments and trends could 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, make it more difficult to acquire suitable investments to meet its risk and return criteria and otherwise have a material adverse effect on its business and operations. 138 Swiss Reinsurance Company Consolidated 2016 Annual Report Regulatory changes Swiss Re and its subsidiaries operate in a highly regulated environment. The regulatory regimes to which members of the Group are subject have changed significantly in recent years and are expected to continue to evolve. During this period, there has been a noticeable trend to extend the scope of reforms and oversight, which initially targeted banks, beyond such institutions to cover reinsurance operations. While some regulation is national in scope, the global nature of the Group’s business means that its operations are subject in effect to a patchwork of global, national and regional standards. Swiss Re and its subsidiaries 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. In addition, the Group could be affected by regulatory changes or developments affecting the overall Swiss Re group, comprising Swiss Re Ltd (“SRL”) and its consolidated subsidiaries, of which the Group is a part (the “Swiss Re Group”). In addition, regulators in jurisdictions beyond those where the Group has core operations increasingly are playing a far greater oversight role, requiring more localised resources and, despite a predominantly local focus, also raise issues of a cross-border nature. Furthermore, evolving regulatory schemes and requirements may be inconsistent or may conflict with each other, thereby subjecting the Group, particularly in light of the increasing focus on legal entities in isolation, to higher compliance and legal costs, as well as the possibility of higher operational, capital and liquidity costs. The effect of these trends could be exacerbated to the extent that the current political environment results in a return to more bilateral, and less harmonised, cross-border regulatory efforts. There is an evolving 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 SIFIs developed by the Financial Stability Board, or as a systemically important non-bank financial company by the Financial Stability Oversight Council (“FSOC”) in the United States. Separately, the International Association of Insurance Supervisors, an international body that represents insurance regulators and supervisors, has published and since refined its methodology for identifying global systemically important insurers (“G-SIIs”) and also published a framework for supervision of internationally active insurance groups. 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), which would have various implications for the Group, including additional compliance costs and reporting obligations as well as heightened regulatory scrutiny in various jurisdictions. In addition, the Group ultimately will be subject to oversight of its Swiss regulator in respect of recovery and resolution planning. The Group cannot predict which legislative and/or regulatory initiatives 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. The Group may be subject to changes in views of its regulators in respect of the models that the Group uses for capital and solvency purposes, and could be adversely affected if for example it is required to use standard models rather than internal models. Generally, legal and regulatory changes could have a material impact on the Group’s business. Uncertainty triggered by the outcome of the UK referendum on EU membership could also impact the legislative and/or regulatory regimes to which the Group or the broader Swiss Re Group is subject, both in the United Kingdom and in the European Union. Swiss Reinsurance Company Consolidated 2016 Annual Report 139 Financial Statements I Notes to the Group financial statements 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 current or future business or affect the competitive balance, or could make reinsurance less attractive to primary insurers. Market risk Volatility and disruption in the global financial markets could 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 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. 140 Swiss Reinsurance Company Consolidated 2016 Annual Report Credit risk If the credit markets were again to deteriorate and further asset classes were to be impacted, the Group could experience 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 write-downs in other areas of its portfolio, including other structured instruments, and the Group and its counterparties could face difficulties in valuing credit-related instruments. Differences in opinion with respect to valuations of credit-related instruments could result in legal disputes among the Group and its counterparties as to their respective obligations, the outcomes of which are difficult to predict and could be material. Liquidity risks The Group’s business requires, and its clients expect, that it has sufficient capital and sufficient liquidity to meet its 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. Unexpected liquidity needs (including to meet collateral calls) could require the Group to incur indebtedness or liquidate investments or other assets. 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. Swiss Reinsurance Company Consolidated 2016 Annual Report 141 Financial Statements I Notes to the Group financial statements 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. Risks relating to credit rating downgrades Ratings are an important factor in establishing the competitive position of reinsurance companies. 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. Ratings may be revised downward or revoked at the sole discretion of 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, and market conditions could increase the risk of downgrade. 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 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. 142 Swiss Reinsurance Company Consolidated 2016 Annual Report The Group is also involved, from time to time, in investigations and regulatory proceedings, 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. Tax authorities may also actively pursue additional taxes based on retroactive changes to tax laws. 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. 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); macro developments giving rise to emerging risks, such as climate change and technological developments (including greater exposure to cyber risks, which could have a range of consequences from operational disruption, to loss of proprietary or customer data, to greater regulatory burdens and potential liability); risks arising from the Group’s dependence on policies, procedures and expertise of ceding companies; risks related to investments in emerging markets; and risks related to the failure of, or attacks directed at, the Group’s operational systems and infrastructure. Any of the foregoing, as well as the occurrence of future risks that the Group’s risk management procedures fail to identify or anticipate, could have a material adverse effect on the Group, and could also give rise to reputational risk. 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. Swiss Reinsurance Company Consolidated 2016 Annual Report 143 Financial Statements I Notes to the Group financial statements 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. Moreover, regulators could require the use of standard models instead of permitting the use of internal models. 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. Changes in accounting standards could impact future reported results or require restatement of past reported results. 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. The Group uses non-GAAP financial measures in its external reporting. 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 substitutes for measures prepared in accordance with US GAAP. Moreover, these may be different from, or otherwise inconsistent with, non-GAAP financial measures used by other companies. These measures have inherent limitations, are not required to be uniformly applied and are not audited. Risks related to the Swiss Re corporate structure Following the realignment of the corporate structure of 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 Swiss Re Group. Capital, funding, reserve and cost allocations are made at the Swiss Re Group level across the four operating segments based principally on business plans as measured against US GAAP and economic value management metrics. Decisions at the Swiss Re Group level in respect of the broader Swiss Re 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 the Swiss Re Group’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 Swiss Re Group level based on legal entity, regulatory, capital and liquidity considerations. The Swiss Re Group expects that, over time, its structure will continue to evolve, and while to date all of the Swiss Re Group’s principal operations, including the Group, remain wholly owned, in the future the Swiss Re Group may elect to partner with minority investors in or within one or more of the Swiss Re Group’s business units or sub-groups within its business units, which could alter historical approaches taken in respect of capital, liquidity, funding and/or dividends, as well as other governance matters, including strategy for such business unit or sub-group. While further changes to the overall Swiss Re Group structure may not have a financial statement impact on a Swiss Re Group 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 (from the perspective of the Swiss Re Group) to the extent the Group is a counterparty to any such transactions. 144 Swiss Reinsurance Company Consolidated 2016 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 © 2017 Swiss Re. All rights reserved. 

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