Swiss Reinsurance Co.
Annual Report 2017

Plain-text annual report

Swiss Reinsurance Company Consolidated Annual Report 2017 Contents Group financial statements Income statement Statement of comprehensive income Balance sheet Statement of shareholder’s equity Statement of cash flows 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 Related parties Note 14 Commitments and contingent liabilities Note 15 Variable interest entities 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 8 10 10 18 29 33 34 51 52 60 72 76 79 82 91 94 95 99 104 104 110 112 114 126 127 132 134 Financial statements Group financial statements INANCIAL STATEMENTS 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 business1 Net realised investment gains/losses – non-participating business2 Net investment result – unit-linked 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 before interest and income tax expense Interest expenses 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 of tax Net income attributable to common shareholder Note 2016 2017 4 4 3 3 7 7 7 3 3 3 11 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 30 009 27 863 662 28 525 130 2 226 981 81 50 31 993 –13 172 –9 209 –121 –6 291 –2 400 –31 193 800 –567 233 –119 114 –48 66 –67 –1 1 Total impairments for the years ended 31 December of nil in 2016 and USD 5 million in 2017, respectively, were fully recognised in earnings. 2 Total impairments for the years ended 31 December of USD 71 million in 2016 and USD 39 million in 2017, respectively, were fully recognised in earnings. The accompanying notes are an integral part of the Group financial statements. 2 Swiss Reinsurance Company Consolidated 2017 Annual Report 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/loss 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 2016 3 197 451 5 –125 –46 3 3 485 –68 –21 3 396 2017 114 –6 2 410 262 17 799 –67 –65 667 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 2017 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 1 619 1 178 –512 –215 2 070 Unrealised investment gains/losses1 2 070 1 884 –1 858 –32 2 064 Other-than- temporary impairment1 –10 5 2 –2 –5 Foreign currency translation1, 2 –5 137 –58 Adjustment from pension benefits3 –953 –113 Accumulated other comprehensive income –4 481 1 012 –67 –5 262 60 7 –999 –450 –277 –4 196 Other-than- temporary impairment1 –5 3 Foreign currency translation1, 2 –5 262 278 Adjustment from pension benefits3 –999 299 Accumulated other comprehensive income –4 196 2 464 1 –2 –3 –20 152 –4 852 28 –65 –737 –1 849 53 –3 528 1 Reclassification adjustment included in net income is presented in “Net realised investment gains/losses – non-participating business”. 2 Reclassification adjustment is limited to translation gains and losses realised upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity. 3 Reclassification adjustment included in net income is presented in “Operating expenses”. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2017 Annual Report 3 Financial statements Group financial statements INANCIAL STATEMENTS ASSETS As of 31 December USD millions Investments Fixed income securities: Available-for-sale (including 9 056 in 2016 and 11 219 in 2017 subject to securities lending and repurchase agreements) (amortised cost: 2016: 60 490; 2017: 65 694) Trading (including 1 871 in 2016 and 1 761 in 2017 subject to securities lending and repurchase agreements) Equity securities: Available-for-sale (including 19 in 2016 and 241 in 2017 subject to securities lending and repurchase agreements) (cost: 2016: 2 063; 2017: 2 993) Trading Policy loans, mortgages and other loans Investment real estate Short-term investments (including 1 798 in 2016 and 284 in 2017 subject to securities lending and repurchase agreements) Other invested assets Investments for unit-linked (including equity securities trading: 548 in 2016 and 585 in 2017) Total investments Note 7, 8, 9 2016 2017 63 250 68 682 2 695 2 538 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 3 021 3 2 396 2 017 2 674 7 800 585 89 716 3 218 630 12 749 13 245 12 617 6 380 937 3 818 187 3 660 2 961 Cash and cash equivalents (including 747 in 2016 and 262 in 2017 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 6 6 Total assets 138 611 150 118 The accompanying notes are an integral part of the Group financial statements. 4 Swiss Reinsurance Company Consolidated 2017 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 2016: 344 052 565; 2017: 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 2016 2017 5 8 10 10 51 073 17 629 5 653 8 653 2 315 1 774 452 6 631 3 697 10 315 7 805 115 997 58 221 19 361 5 764 8 487 11 429 2 592 412 4 935 2 826 7 783 8 114 129 924 1 102 750 32 8 695 –19 2 070 –5 –5 262 –999 –4 196 15 339 20 953 1 661 22 614 32 8 690 –17 2 064 –3 –4 852 –737 –3 528 12 335 18 262 1 932 20 194 138 611 150 118 Swiss Reinsurance Company Consolidated 2017 Annual Report 5 Financial statements Group financial statements INANCIAL STATEMENTS For the years ended 31 December USD millions Contingent capital instruments Balance as of 1 January Changes during the period 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 Contingent capital instrument issuance costs 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 Change in group structure1 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 Change in group structure1 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 6 Swiss Reinsurance Company Consolidated 2017 Annual Report 2016 2017 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 1 102 –352 750 32 32 8 695 8 –9 –4 8 690 –19 2 –17 2 070 –23 17 2 064 –5 2 –3 –5 262 12 398 –4 852 –999 262 –737 USD millions Retained earnings Balance as of 1 January Change in group structure1 Transactions under common control Net income after attribution of non-controlling interests Interest on contingent capital instruments, net of tax Dividends on common shares Balance as of period end Shareholder’s equity Non-controlling interests Balance as of 1 January Changes during the period Transactions with non-controlling interests Income attributable to non-controlling interests Other comprehensive income Balance as of period end Total equity 1 In January 2017, the Group sold three primary life and health insurance carriers to Swiss Re Life Capital Group. The accompanying notes are an integral part of the Group financial statements. 2016 2017 15 222 3 179 –68 –2 994 15 339 20 953 23 866 751 18 3 1 661 22 614 15 339 –45 –358 66 –67 –2 600 12 335 18 262 1 661 206 48 17 1 932 20 194 Swiss Reinsurance Company Consolidated 2017 Annual Report 7 Financial statements Group financial statements INANCIAL STATEMENTS For the years ended 31 December USD millions Cash flows from operating activities Net income/loss 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/disposals 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 for unit-linked business: Deposits Withdrawals Issuance/repayment of long-term debt Issuance/repayment of short-term debt Issuance/repayment of contingent capital instrument Purchase/sale of shares in Swiss Re Ltd. Transactions with non-controlling interests Dividends paid to parent Net cash provided/used by financing activities 8 Swiss Reinsurance Company Consolidated 2017 Annual Report 2016 2017 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 –1 48 321 –1 034 66 2 440 –309 31 607 –406 –125 1 638 38 756 4 291 –45 496 5 073 5 769 –6 077 –962 53 –2 051 67 –577 6 –97 –155 –941 –352 1 200 –2 600 –3 938 USD millions 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 Interest paid was USD 671 741 2016 and 2017, respectively. Tax paid was USD million and USD million (thereof USD million and USD 515 2016 515 –83 432 5 398 5 830 2017 –2 877 265 –2 612 5 830 3 218 49 million for letter of credit fees) for million and USD 51 507 million for 2016 and 2017, respectively. The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2017 Annual Report 9 Financial statements Group financial statements 1 Organisation and summary of significant accounting policies Nature of operations The Swiss Reinsurance Company Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company Ltd (the parent company, referred to as “SRZ”) and its subsidiaries (collectively, the “Group”). The Group is a wholesale provider of reinsurance, insurance and other insurance-based forms of risk transfer. Working through brokers and a network of offices around the globe, the Group serves a client base made up of insurance companies and public sector clients. SRZ is a wholly owned subsidiary of Swiss Re Ltd. Swiss Re Ltd is the ultimate parent company of the Swiss Re Group, which consists of four business segments: Property & Casualty Reinsurance, Life & Health Reinsurance, Corporate Solutions and 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. 10 Swiss Reinsurance Company Consolidated 2017 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 estimates. 2017, the Group had not provided any collateral on financial instruments in excess of its own market value December 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 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. 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 for which 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. The impairment loss is measured as the amount by which the asset's carrying amount exceeds its fair value and is recognised in realised investment losses. Depreciation 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 2017 Annual Report 11 Financial statements 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 contract 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 hedges 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. 12 Swiss Reinsurance Company Consolidated 2017 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 health business. The initial value is calculated as the difference between established reserves, which are set up in line with US GAAP accounting policies and assumptions of the Group, and their fair value at the acquisition date. 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. Amortisation and accrual of interest are recognised in acquisition costs. 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, which are updated quarterly. The carrying value of PVFP is reviewed periodically for indicators of impairment in value. Adjustments to PVFP reflecting impairment in value are recognised in acquisition costs 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. 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 recognises the effect of income tax positions only if sustaining those positions is more likely than not. Changes in recognition or measurement are reflected in the period in which a change in judgement occurs. Unpaid claims and claim adjustment expenses Liabilities for unpaid claims and claim adjustment expenses for property and casualty and life and health insurance and reinsurance contracts are accrued when insured events occur and are based on the estimated ultimate cost of settling the claims, Swiss Reinsurance Company Consolidated 2017 Annual Report 13 Financial statements Group financial statements 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 level premium method, based on assumptions as to investment yields, mortality, withdrawals, lapses and policyholder dividends. Assumptions are set at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. The assumptions are based on projections from past experience, making allowance for possible adverse deviation. Interest 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 as AFS 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, ie there is no mortality and morbidity risk, or the mortality and morbidity risk associated with the insurance benefit features offered in the contract is of insignificant amount or remote probability. Amounts received as payment for investment contracts are reported as policyholder account balances. Related assets are included in general account assets except for investments for unit-linked business, which are presented in a separate line item on the face of the balance sheet. Amounts assessed against policyholders for mortality, administration and surrender are shown as fee income. Amounts credited to policyholders are shown as interest credited to policyholders. Investment income and realised investment gains and losses allocable to policyholders are included in net investment income and net realised investment gains/losses except for unit-linked 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. 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. 14 Swiss Reinsurance Company Consolidated 2017 Annual Report 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 recognised 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 to 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 accompanying consolidated balance sheet. The Group provides reserves for uncollectible amounts on reinsurance balances ceded, based on management’s assessment of the collectability of the outstanding balances. Receivables Premium and claims receivables which have been invoiced are accounted for at face value. Together with assets arising from the application of the deposit method of accounting that meet the definition of financing receivables they are regularly assessed for impairment. Evidence of impairment is the age of the receivable and/or any financial difficulties of the counterparty. Allowances are set up on the net balance, meaning all balances related to the same counterparty are considered. The amount of the allowance Swiss Reinsurance Company Consolidated 2017 Annual Report 15 Financial statements Group financial statements 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 2017, the Group has a Leadership Performance Plan, restricted shares, and a Global Share Participation Plan. 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. Total compensation cost for share-based compensation plans recognised in net income was USD 19 million for the year ended 31 December 2017. 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. As of 31 December 2017, the accrual for share-based compensation plans in additional paid-in capital was USD 9 million. 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 14 March 2018. 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 Group will adopt ASU 2014-09 on 1 January 2018. statements. It is expected that the adoption will not have a material impact on the Group’s financial 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 partnerships, unincorporated joint ventures 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 measurement alternative. 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. 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 available-for-sale in combination with the entity’s other DTAs rather than separately from other DTAs. The Group will adopt ASU 2016-01 on 1 January 2018. The expected main impact from the adoption is a reclassification within shareholder’s equity from net unrealised gains, net of tax, to retained earnings of USD 0.1 billion. 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 annual and interim periods beginning after 15 December 2018. Early application of the ASU is permitted. The Group is currently assessing the impact of the new requirements. In March 2016, the FASB issued ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”, an update to topic 815, “Derivatives and Hedging”. The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under topic 815 does not require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The Group adopted ASU 2016-05 on 1 January 2017. The adoption did not have an impact on the Group’s financial statements. In March 2016, the FASB issued ASU 2016-06, “Contingent Put and Call Options in Debt Instruments”, an update to topic 815, “Derivatives and Hedging”. This ASU clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the 16 Swiss Reinsurance Company Consolidated 2017 Annual Report assessment under the amendments in this update is required to assess the embedded call or put options solely in accordance with the four-step decision sequence as defined in the implementation guidance issued by the Derivatives Implementation Group (DIG). The Group adopted ASU 2016-06 on 1 January 2017. The adoption did not have an impact on the Group’s financial statements. In March 2016, the FASB issued ASU 2016-07, “Simplifying the Transition to the Equity Method of Accounting”, an update to topic 323, “Investments – Equity Method and Joint Ventures”. The amendments in this update eliminate the requirement to retroactively adopt the equity method of accounting when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. Instead, the amendments require that the equity method investor adds the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopts the equity method of accounting as of the date the investment qualifies for equity method accounting. The Group adopted ASU January 2017. The adoption did not have an impact on the Group’s financial statements. 2016-07 on 1 In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, an update to topic 718, “Compensation – Stock Compensation”. This ASU is part of the Board’s Simplification Initiative and the areas for simplification in this update involve several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Group adopted ASU 2016-09 on 1 January 2017. The adoption did not have a material effect on the Group’s financial statements. 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. For financial instruments that are measured at amortised cost and available-for-sale debt securities, the standard requires that an entity recognises its estimate of expected credit losses as an allowance. The ASU is effective for annual and interim periods beginning after 15 December 2020. Early adoption for interim and annual periods after 2018 is permitted. The Group is currently assessing the impact of the new requirements. 15 December 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 recognise the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Group will adopt ASU 2016-16 on 1 January 2018. It is expected that the adoption will not have a material impact on the Group’s equity. In October 2016, the FASB issued ASU 2016-17, “Interests Held through Related Parties That Are under Common Control”, an update to topic 810, “Consolidation”. This ASU amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. The Group adopted ASU 2016-17 on 1 statements. January 2017. The adoption did not have an impact on the Group’s financial In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business”, an update to topic 805, “Business Combinations”. The amendments in this update clarify the definition of a business in order to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments stipulate that when substantially all of the fair value of an integrated set of assets and activities ("set") acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Group early adopted ASU 2017-01 on 1 July 2017. The adoption did not have an impact on the Group’s financial statements. In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, an update to topic 350, “Intangibles – Goodwill and Other”. This ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognised assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its regular goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognise an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognised should not exceed the total amount of goodwill allocated to that reporting unit. The new requirements are effective for goodwill impairment tests in annual and interim periods beginning after 15 December 2020. Early application of the ASU is permitted. The Group is currently assessing the impact of the new requirements. Swiss Reinsurance Company Consolidated 2017 Annual Report 17 Financial statements Notes to the Group financial statements 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 stock and mutual insurance companies as well as public sector and governmental entities. In addition to traditional reinsurance solutions, the business unit offers insurance-linked securities and other insurance-related capital market products in both Property & Casualty and Life & Health. Property & Casualty includes the business lines property, casualty (including motor) and specialty. Life & Health includes the life and health lines of business. Other Items not allocated to the business segments are included in the “Other” column which encompasses non-core activities. The “Other” column includes mainly certain costs not allocated to the Reinsurance business segments, certain Treasury activities, as well as the remaining non-core activities which have been in run-off since November 2007. As of January 2017 the Group’s primary life and health insurance business was sold to Swiss Re Life Capital Group. Comparative information has not been adjusted. 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. 18 Swiss Reinsurance Company Consolidated 2017 Annual Report This page is intentionally left blank. Swiss Reinsurance Company Consolidated 2017 Annual Report 19 Financial statements Notes to the Group financial statements a) Business segments – income statement 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 Claims and claim adjustment 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 before income tax expense 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 of tax 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 12 801 11 459 27 11 486 41 1 279 232 15 5 13 058 –10 301 –4 405 –1 204 –15 910 –8 963 –39 –1 943 –763 –11 708 2 890 –293 2 597 –479 2 118 1 2 119 –19 2 100 60.5 33.0 93.5 15.4 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 –29 –3 –32 0 –32 32 0 0 0 0 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 13.0 13.2 20 Swiss Reinsurance Company Consolidated 2017 Annual Report Business segments – income statement For the year ended 31 December 2017 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 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 Interest expenses 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 of tax 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 Reinsurance Other Consolidation Total 16 569 16 031 636 16 667 1 017 613 48 18 345 –13 172 –4 253 –1 159 –18 584 –239 –280 –519 125 –394 13 313 11 826 25 11 851 129 1 308 591 81 3 13 963 –9 211 –119 –2 064 –754 –12 148 1 815 –315 1 500 –360 1 140 –394 1 140 –19 –413 79.0 32.5 111.5 –1.3 –48 1 092 5.7 13.1 127 6 1 7 1 –50 –223 2 –263 2 –2 26 –487 –461 –724 –24 –748 116 –632 –48 –680 –680 30 009 27 863 662 28 525 130 2 226 981 81 50 31 993 –13 172 –9 209 –121 –6 291 –2 400 –31 193 800 –567 233 –119 114 –48 66 –67 –1 –49 –3 –52 0 –52 52 0 0 0 0 275.3 2.5 Swiss Reinsurance Company Consolidated 2017 Annual Report 21 Financial statements Notes to the Group financial statements Business segments – balance sheet As of 31 December 2016 USD millions Total assets 2017 USD millions Total assets Property & Casualty Reinsurance 79 263 Life & Health Reinsurance 55 957 Other Consolidation –10 638 14 029 Total 138 611 Property & Casualty Reinsurance 80 475 Life & Health Reinsurance 64 559 Other Consolidation –11 505 16 589 Total 150 118 22 Swiss Reinsurance Company Consolidated 2017 Annual Report T This page intentionally left blank Swiss Reinsurance Company Consolidated 2017 Annual Report 23 Financial statements Notes to the Group financial statements b) 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 24 Swiss Reinsurance Company Consolidated 2017 Annual Report Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2017 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 6 527 6 115 140 6 255 7 715 7 665 435 8 100 2 327 2 251 61 2 312 6 255 8 100 2 312 –5 635 –1 228 –636 –7 499 –6 041 –2 414 –356 –8 811 –1 244 –711 –1 244 –711 90.1 29.8 119.9 74.6 34.2 108.8 –1 496 –611 –167 –2 274 38 38 64.7 33.7 98.4 1 017 613 48 1 678 0 1 678 –280 1 398 16 569 16 031 636 16 667 1 017 613 48 18 345 –13 172 –4 253 –1 159 –18 584 –239 –280 –519 79.0 32.5 111.5 Swiss Reinsurance Company Consolidated 2017 Annual Report 25 Financial statements Notes to the Group financial statements c) 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 business1 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 margin2 in % Life Health Unallocated Total 9 026 7 773 5 7 778 41 912 21 15 5 8 772 –6 093 –39 –1 237 –536 –7 905 867 867 6.1 9.9 3 775 3 686 22 3 708 367 –4 215 4 071 215 –2 870 –706 –227 –3 803 268 268 5.6 6.6 0 215 –301 –86 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 1 The Group revised the methodology for allocating investment return to lines of business. Comparative information for 2016 has been adjusted accordingly. 2 Net operating margin is calculated as "Income before interest and income tax expense" divided by "Total revenues" excluding "Net investment result – unit-linked business". 26 Swiss Reinsurance Company Consolidated 2017 Annual Report Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2017 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 before income tax expense Management expense ratio in % Net operating margin1 in % Life Health Unallocated Total 9 525 8 138 79 8 217 129 1 023 57 81 3 9 510 –6 491 –119 –1 432 –533 –8 575 935 935 5.7 9.9 3 788 3 688 –54 3 634 285 –1 535 3 918 535 –2 720 –632 –221 –3 573 345 345 5.6 8.8 0 535 –315 220 13 313 11 826 25 11 851 129 1 308 591 81 3 13 963 –9 211 –119 –2 064 –754 –12 148 1 815 –315 1 500 5.7 13.1 1 Net operating margin is calculated as "Income before interest and income tax expense" divided by "Total revenues" excluding "Net investment result – unit-linked business". Swiss Reinsurance Company Consolidated 2017 Annual Report 27 Financial statements Notes to the Group financial statements d) Gross premiums earned and fee income from policyholders by geography Gross premiums earned and fee income from policyholders by region 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 Australia China Japan Germany Canada Switzerland France Spain Republic of Korea Other Total 2016 14 377 9 742 6 946 31 065 2016 11 904 3 036 1 823 2 401 1 094 1 044 1 009 940 652 461 482 6 219 31 065 2017 15 350 8 752 6 791 30 893 2017 13 001 2 684 1 980 1 910 1 161 1 082 1 030 1 013 638 509 479 5 406 30 893 Gross premiums earned and fee income from policyholders are allocated by country, based on the underlying contract. 28 Swiss Reinsurance Company Consolidated 2017 Annual Report 3 Insurance information Premiums earned and fees assessed against policyholders For the years 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 Net fee income 2017 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 Gross fee income before retrocession to external parties Retrocession to external parties Net fee income Property & Casualty Reinsurance Life & Health Reinsurance Other Total 17 474 17 474 –466 17 008 45 12 446 352 12 843 –1 357 11 486 799 172 –352 619 –120 499 0 41 41 88 88 844 30 092 0 30 936 –1 943 28 993 0 129 129 Property & Casualty Reinsurance Life & Health Reinsurance Other Total 17 197 17 197 –530 16 667 55 13 287 13 342 –1 491 11 851 130 130 –1 129 0 128 128 –121 7 96 96 –95 1 55 30 612 0 30 667 –2 142 28 525 0 226 226 –96 130 Swiss Reinsurance Company Consolidated 2017 Annual Report 29 Financial statements Notes to the Group financial statements 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 Other Total –9 242 –9 242 536 –8 706 –10 234 –275 –10 509 1 205 –9 304 –1 014 275 –739 53 –686 –20 490 0 –20 490 1 794 –18 696 –1 218 –1 218 –377 –1 595 387 –29 358 –17 341 11 29 40 51 91 –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 Other Total Gross acquisition costs with external parties Intra-group transactions (assumed and ceded) Acquisition costs before impact of retrocession to external parties Retrocession to external parties Net acquisition costs –4 530 –4 530 125 –4 405 –2 095 –58 –2 153 210 –1 943 –107 58 –49 15 –34 –6 732 0 –6 732 350 –6 382 30 Swiss Reinsurance Company Consolidated 2017 Annual Report Claims and claim adjustment expenses For the year ended 31 December 2017 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 Other Total –10 232 –9 846 –302 –10 232 468 –9 764 –9 846 1 277 –8 569 –302 302 0 –3 412 –586 61 –3 412 4 –3 408 –586 –56 –642 61 –59 2 –20 380 0 –20 380 2 047 –18 333 –3 937 0 –3 937 –111 –4 048 Claims and claim adjustment expenses; life and health benefits –13 172 –9 211 2 –22 381 Acquisition costs For the year ended 31 December 2017 USD millions Acquisition costs, thereof: Property & Casualty Reinsurance Life & Health Reinsurance Other Total Gross acquisition costs with external parties Intra-group transactions (assumed and ceded) Acquisition costs before impact of retrocession to external parties Retrocession to external parties Net acquisition costs –4 374 –2 298 –28 –4 374 121 –4 253 –2 298 234 –2 064 –28 54 26 –6 700 0 –6 700 409 –6 291 Swiss Reinsurance Company Consolidated 2017 Annual Report 31 Financial statements Notes to the Group financial statements Reinsurance assets and liabilities The reinsurance assets and liabilities as of 31 December were as follows: 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 2017 USD millions Assets Reinsurance recoverable on unpaid claims and policy benefits Deferred acquisition costs Liabilities Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Policyholder account balances Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 2 449 2 280 1 580 3 465 264 11 39 753 10 288 15 431 1 566 1 240 2 202 4 087 –210 –208 –4 4 083 5 756 51 073 17 629 5 653 Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 2 541 2 146 4 638 4 234 6 077 –11 45 276 12 129 18 230 1 574 829 1 131 4 190 –13 13 245 6 380 58 221 19 361 5 764 Reinsurance recoverable on unpaid claims and policy benefits As of 31 December 2016 and 2017, the Group had a reinsurance recoverable of USD 4 083 million and USD 13 245 million, respectively. The concentration of credit risk is regularly monitored and evaluated. The reinsurance programme with Berkshire Hathaway and subsidiaries accounted for 67% and 27% of the Group’s reinsurance recoverable as of year-end 2016 and 2017, respectively. The Group cedes certain re/insurance contracts to affiliated companies within the Swiss Re Group, but outside of the Group (please refer to Note 13). 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 2016 1 204 103 137 –35 2017 2 296 1 227 144 –31 32 Swiss Reinsurance Company Consolidated 2017 Annual Report 4 Premiums written For the years ended 31 December 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 2017 USD millions Gross premiums written, thereof: Direct Reinsurance Intra-group transactions (assumed) Gross premiums written Intra-group transactions (ceded) 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 Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 16 569 55 13 258 127 16 569 13 313 127 55 29 954 0 30 009 0 30 009 –2 146 27 863 Gross premiums written before retrocession to external parties Retrocession to external parties Net premiums written 16 569 –538 16 031 13 313 –1 487 11 826 127 –121 6 0 Swiss Reinsurance Company Consolidated 2017 Annual Report 33 Financial statements Notes to the Group financial statements 5 Unpaid claims and claim adjustment expenses A reconciliation of the opening and closing reserve balances for non-life unpaid claims and claim adjustment expenses for the years ended 31 December is presented as follows: USD millions Balance as of 1 January Reinsurance recoverable Deferred expense on retroactive reinsurance Net balance as of 1 January prior to effect of change in group structure Effect of change in group structure 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 period end Reinsurance recoverable Deferred expense on retroactive reinsurance Balance as of period end 2016 49 718 −3 202 −340 46 176 0 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 2017 51 073 −2 837 −211 48 025 −281 47 744 22 824 −813 −5 22 006 −5 971 −12 362 −18 333 2 496 51 53 964 4 017 240 58 221 34 Swiss Reinsurance Company Consolidated 2017 Annual Report Prior-year development Non-life claims development during 2017 on prior years continued to be driven by favourable experience on most lines of business. Property was mainly driven by positive claims development across the most recent accident years. Casualty includes adverse development on motor. Within specialty, the main reserve releases came from marine and engineering business lines, partially offset with adverse credit and surety experience. 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 and US life portfolios strengthened reserves following adverse trends. This was partially offset by positive experience in Continental Europe, in particular in German disability and life portfolios. 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 claims development by lines of business for the years ended 31 December is shown below: USD millions Line of business: Property Casualty Specialty Life and health Total 2016 2017 –231 –370 –362 121 –842 –588 –187 –234 196 –813 Swiss Reinsurance Company Consolidated 2017 Annual Report 35 Financial statements Notes to the Group financial statements US asbestos and environmental claims exposure The Group’s obligation for claims payments and claims settlement charges also includes obligations for long-latent injury claims arising out of policies written prior to 1986 as well as 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 2017, the business unit Reinsurance carried net reserves for US asbestos and environmental liabilities equal to USD 1 620 million. During 2017, the business unit incurred net losses of USD 42 million and paid net against these liabilities of USD 180 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. 36 Swiss Reinsurance Company Consolidated 2017 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 year. 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. For Property & Casualty Reinsurance and for Life & Health Reinsurance long-tail, the Group discloses data for ten accident years and reporting periods. 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 2017 Annual Report 37 Financial statements 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 For reinsurance business, 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 for insurance business is performed similarly, except that the Group estimates case reserves as well. 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 are 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 36). 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 on disability contracts 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. 38 Swiss Reinsurance Company Consolidated 2017 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 2017 Annual Report 39 Financial statements Notes to the Group financial statements Property & Casualty Reinsurance – Property 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 2017 Total 2008 2 715 2009 2 286 2 427 2010 2 150 2 442 2 639 2011 2 068 2 320 2 575 4 433 2012 2 065 2 276 2 446 4 497 2 772 2013 2 087 2 255 2 472 4 313 2 600 3 269 2014 2 078 2 252 2 562 4 377 2 396 3 281 2 831 2015 2 078 2 250 2 606 4 329 2 352 3 100 2 666 2 940 RSI 2016 2 076 2 252 2 720 4 325 2 322 3 012 2 483 2 870 4 055 2017 2 073 2 220 2 692 4 344 2 307 2 988 2 448 2 697 3 773 6 166 31 708 thereof IBNR 16 4 –70 122 –3 4 11 112 378 3 387 3 961 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Reporting year 2008 600 2009 1 433 583 RSI 2010 1 751 1 666 409 2011 1 877 1 996 1 576 688 2012 2 007 2 103 1 890 2 465 251 2013 2 041 2 154 2 006 3 297 1 640 562 2014 2 056 2 177 2 216 3 756 2 043 2 085 481 2015 2 062 2 187 2 375 4 056 2 167 2 613 1 770 483 All liabilities before 2008 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2016 2 063 2 198 2 526 4 164 2 211 2 815 2 168 1 717 659 2017 2 071 2 180 2 572 4 289 2 231 2 877 2 300 2 257 2 295 1 017 24 089 153 7 772 Years Property (RSI) 1 18.7% 2 47.4% 3 16.6% 4 6.2% 5 4.5% 6 2.4% 7 2.4% 8 0.8% 9 –0.4% 10 0.4% The liability for unpaid claims and claim adjustment expenses for property in Property & Casualty Reinsurance shows positive development on most recent accident years. Claims in accident year 2011 were at a high level due to several large natural catastrophes including the earthquake and tsunami in Japan, the earthquakes in Christchurch, New Zealand, and floods in Thailand. The 2017 claims incurred are higher due to natural catastrophes, mainly stemming from cyclone Debbie, hurricanes Harvey, Irma and Maria in the Americas, the two earthquakes in Mexico and the wildfires in California. Negative IBNRs can be a feature for claims arising from property exposure, due to overstated case reserves. The IBNR reserves for 2010 and 2011 are affected by allocations of IBNR for proportional treaty business in respect of several natural catastrophe events that occurred in those years. 40 Swiss Reinsurance Company Consolidated 2017 Annual Report Property & Casualty Reinsurance – Liability, proportional 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 2017 Total 2008 1 140 2009 1 164 730 2010 1 234 865 843 2011 1 306 989 991 648 2012 1 196 945 931 706 529 2013 1 094 941 910 729 612 738 2014 1 156 920 907 676 568 762 1 007 2015 1 155 932 910 635 539 769 997 1 279 RSI 2016 1 172 942 899 631 511 764 1 010 1 327 1 730 2017 1 162 936 863 608 513 768 993 1 411 1 759 1 983 10 996 thereof IBNR 55 60 105 103 98 173 386 736 1 097 1 569 4 382 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Reporting year 2008 56 2009 175 –66 RSI 2010 323 85 29 2011 490 239 161 2 2012 577 364 321 110 13 2013 696 479 413 184 119 14 2014 806 588 523 254 186 130 24 2015 925 639 618 340 246 238 162 35 2016 979 686 668 386 300 353 298 214 48 All liabilities before 2008 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2017 1 021 722 688 403 332 423 404 404 227 51 4 675 606 6 927 Years Liability, proportional (RSI) 1 2 3 4 5 6 7 8 9 10 1.6% 14.7% 14.3% 12.5% 11.1% 9.3% 5.9% 5.9% 4.2% 3.6% The increase in the incurred losses for accident years 2013 to 2017 is driven by volume increases of business being written. The increases in the incurred losses in reporting year 2017 for accident years 2015 and 2016 are driven by US business. In line with the Group‘s policy, cash flows under loss portfolio transfers are reported through claims paid. For longer-tailed 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 2017 Annual Report 41 Financial statements Notes to the Group financial statements Property & Casualty Reinsurance – Liability, non-proportional 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 2017 Total RSI 2008 697 2009 739 521 2010 685 532 536 2011 557 440 449 412 2012 512 438 412 441 337 2013 478 399 386 479 355 417 2014 446 365 364 439 315 398 442 2015 420 339 343 394 287 362 447 1 843 2016 398 325 334 361 265 306 414 1 884 597 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Reporting year 2008 –9 2009 27 –14 RSI 2010 100 12 1 2011 130 33 11 1 2012 165 56 36 10 –4 2013 192 96 53 66 11 –2 2014 234 161 88 114 35 11 –2 2015 254 184 106 140 53 37 8 0 2016 283 192 125 148 85 60 40 94 14 All liabilities before 2008 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance thereof IBNR 55 34 49 64 72 112 200 260 298 424 1 568 2017 390 323 320 347 258 276 370 1 852 560 502 5 198 2017 297 202 161 172 108 83 74 203 158 –2 1 456 5 768 9 510 Years Liability, non-proportional (RSI) 1 2 3 4 5 6 7 8 9 10 –0.7% 7.4% 10.3% 8.4% 10.1% 8.8% 7.7% 6.3% 5.3% 3.6% 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 2008 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-tailed 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. 42 Swiss Reinsurance Company Consolidated 2017 Annual Report Property & Casualty Reinsurance – Accident & Health Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year 2008 385 2009 423 352 2010 412 375 276 2011 423 352 228 231 2012 432 346 234 252 334 2013 421 342 222 247 344 352 Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total RSI Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Reporting year 2008 51 2009 160 32 RSI 2010 214 138 25 2011 254 194 85 48 2012 271 219 116 121 81 2013 281 237 131 143 184 55 All liabilities before 2008 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance thereof IBNR 88 26 28 32 34 52 77 91 149 277 854 2014 419 333 219 239 328 358 306 2014 290 250 140 154 211 143 30 2015 418 328 221 242 319 345 340 439 2015 297 256 147 163 227 184 105 63 2016 423 320 213 236 315 334 331 437 597 2016 302 261 150 167 237 208 147 140 75 2017 425 315 208 236 309 327 320 414 631 737 3 922 2017 306 266 158 177 246 221 175 193 180 96 2 018 2 896 4 800 Years Accident & Health (RSI) 1 2 3 4 5 6 7 8 9 10 14.7% 26.4% 12.7% 7.2% 4.2% 2.9% 2.4% 2.4% 1.4% 0.9% The increase in incurred losses from accident year 2015 onwards is due to an increase in the volume of workers‘ compensation written on a proportional basis. The 2008 and prior accident years include the run-off of business written by entities acquired as part of the acquisition of General Electric Insurance Solutions during 2006. This business which generally had a longer payment pattern was not renewed. Swiss Reinsurance Company Consolidated 2017 Annual Report 43 Financial statements Notes to the Group financial statements Property & Casualty Reinsurance – Motor, proportional 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 2017 Total 2008 787 2009 669 685 2010 667 679 621 2011 744 747 682 1 046 2012 776 772 723 1 041 1 565 2013 750 759 729 1 010 1 555 1 625 2014 741 755 727 966 1 537 1 598 2 088 2015 738 757 729 968 1 525 1 604 2 048 1 989 RSI 2016 738 755 729 967 1 515 1 577 2 048 1 992 2 580 2017 737 754 727 965 1 513 1 570 2 030 1 996 2 698 2 453 15 443 thereof IBNR 33 -15 -2 -21 37 19 1 60 205 1 202 1 519 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Reporting year 2008 340 2009 586 149 2010 667 405 208 2011 639 615 475 278 RSI 2012 651 650 562 702 500 2013 649 662 599 893 1 164 599 2014 670 716 681 927 1 332 1 224 773 2015 673 726 691 946 1 383 1 414 1 536 826 All liabilities before 2008 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2016 676 727 700 956 1 416 1 461 1 793 1 495 853 2017 678 731 704 964 1 437 1 492 1 872 1 748 1 889 785 12 300 321 3 464 Years Motor, proportional (RSI) 1 2 3 4 5 6 7 8 9 10 33.8% 37.9% 14.9% 2.8% 3.4% 2.1% 1.6% 0.4% 0.5% 0.3% The increase in the incurred losses from accident year 2010 onwards is driven by new business volume across all regions. Proportional motor business includes both longer-tailed liability business and shorter-tailed hull business. The increase in incurred claims and claim adjustment expenses in reporting year 2017 for accident year 2016 is due to US business. The negative IBNRs are due to overstated case reserves, mainly on the German business, and accident year 2011 includes the effects of an outwards proportional contract in inwards non-proportional business. 44 Swiss Reinsurance Company Consolidated 2017 Annual Report Property & Casualty Reinsurance – Motor, non-proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year 2008 425 2009 497 389 2010 438 405 336 2011 335 295 300 424 2012 350 297 294 465 346 2013 348 282 280 444 364 451 Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total RSI Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Reporting year 2008 16 2009 90 2 RSI 2010 129 41 6 2011 133 60 23 –11 2012 156 72 49 21 2 2013 174 86 68 58 25 7 All liabilities before 2008 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance thereof IBNR 54 71 38 96 66 79 123 170 276 388 1 361 2014 341 287 273 442 342 474 423 2014 186 100 85 82 50 88 4 2015 337 281 265 427 326 475 457 400 2015 196 111 102 106 86 154 62 –1 2016 331 278 256 420 326 457 452 423 485 2016 206 121 115 121 112 200 107 34 9 2017 329 270 252 409 309 443 451 459 605 599 4 126 2017 210 126 123 137 139 225 147 94 67 9 1 277 2 978 5 827 Years Motor, non-proportional (RSI) 1 2 3 4 5 6 7 8 9 10 1.1% 11.9% 10.5% 7.1% 6.5% 6.0% 4.2% 3.3% 2.4% 1.2% 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 an external retrocession on acquired retroactive business. The increase in claims incurred in reporting year 2017 for accident years 2015 and 2016 are due to an adverse development on the US business and to the Ogden discount changes on the UK business. These developments also affected accident year 2017. In line with the Group‘s policy, cash flows under loss portfolio transfers are reported through claims paid. For longer-tailed 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 2017 Annual Report 45 Financial statements Notes to the Group financial statements Property & Casualty Reinsurance – Specialty 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 2017 Total 2008 2 141 2009 2 136 1 586 2010 2 063 1 717 1 258 2011 2 019 1 522 1 268 1 319 2012 1 970 1 451 1 213 1 297 985 2013 1 936 1 420 1 188 1 213 1 047 1 128 2014 1 916 1 396 1 168 1 130 1 066 1 054 1 141 2015 1 925 1 381 1 136 1 178 1 048 1 012 1 135 1 265 RSI 2016 1 910 1 364 1 114 1 174 1 047 975 1 031 1 255 1 325 2017 1 899 1 337 1 115 1 189 1 033 964 1 003 1 241 1 313 1 648 12 742 thereof IBNR 14 3 21 28 36 48 91 195 457 1 063 1 956 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Reporting year 2008 259 RSI 2009 847 214 2010 1 356 676 201 2011 1 508 932 479 169 2012 1 623 1 036 675 573 131 2013 1 690 1 112 778 796 456 153 2014 1 734 1 171 857 900 697 431 182 2015 1 763 1 210 973 952 790 619 423 140 2016 1 792 1 235 995 989 848 732 610 399 148 All liabilities before 2008 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2017 1 809 1 248 1 014 1 054 891 788 710 712 491 185 8 902 678 4 518 Years Specialty (RSI) 1 14.2% 2 28.4% 3 21.1% 4 9.2% 5 5.8% 6 5.1% 7 3.2% 8 1.7% 9 1.2% 10 0.9% This category includes credit and surety business, which was adversely affected by the financial crisis in 2007–2008. The category also contains several individual large losses on marine, aviation and space lines, including the Costa Concordia event in accident year 2012. The 2017 claims are higher due to natural catastrophes mainly stemming from hurricanes Harvey, Irma and Maria in the Americas. 46 Swiss Reinsurance Company Consolidated 2017 Annual Report Cumulative number of reported thereof claims (in IBNR nominals) 14 3 139 18 4 203 20 4 599 36 6 389 8 759 44 44 11 076 58 12 386 107 14 254 9 779 202 364 4 144 907 78 728 Life & Health Reinsurance, long tail Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year 2008 98 2009 96 164 2010 95 170 203 2011 95 161 205 232 2012 98 162 200 243 288 2013 111 162 226 307 385 519 2014 114 187 226 320 388 509 508 Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total RSI Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance Reporting year 2008 5 2009 23 8 RSI USD millions Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total 2010 41 39 9 2011 53 60 43 20 2012 62 74 67 66 29 2013 70 83 87 107 93 40 2014 74 91 101 133 149 130 34 All liabilities before 2008 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2015 111 185 239 335 414 507 462 433 2015 78 98 113 155 190 198 115 38 2016 118 187 211 311 376 469 440 469 454 2016 83 106 123 177 225 262 211 113 14 2017 116 180 207 305 379 467 442 452 471 463 3 482 2017 86 113 132 194 249 306 277 201 92 13 1 663 273 2 092 Years Life & Health Reinsurance, long tail (RSI) 1 2 3 4 5 6 7 8 9 10 5.8% 16.9% 15.3% 10.8% 7.6% 6.1% 4.4% 4.1% 4.1% 2.6% 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 increases is discernible as well. Swiss Reinsurance Company Consolidated 2017 Annual Report 47 Financial statements 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. 48 Swiss Reinsurance Company Consolidated 2017 Annual Report For the year ended 31 December 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 Impact 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 recoverable 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 Impact of acquisition accounting Other short duration contract lines Unallocated reinsurance recoverable on unpaid claims Total short duration reinsurance recoverable on outstanding liabilities Exclusions: Unallocated claim adjustment expenses Long duration contracts Total other reconciling items Total unpaid claims and claim adjustment expenses 2017 7 772 6 927 9 510 4 800 3 464 5 827 4 518 2 092 44 910 –291 –511 44 108 1 832 –411 45 529 596 373 337 238 83 248 214 –118 192 411 2 574 696 9 422 10 118 58 221 Swiss Reinsurance Company Consolidated 2017 Annual Report 49 Financial statements 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 was as follows: USD millions Carrying amount of discounted claims Aggregate amount of the discount Interest accretion1 Range of interest rates 2016 1 117 –241 27 3.1% –3.6% 2017 1 262 –291 28 2.9% –3.6% 1Interest 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. 50 Swiss Reinsurance Company Consolidated 2017 Annual Report 6 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) As of 31 December, the DAC were as follows: 2016 USD millions Opening balance as of 1 January Deferred Amortisation Effect of foreign currency translation Closing balance 2017 USD millions Opening balance as of 1 January Change in group structure1 Deferred Effect of acquisitions/disposals and retrocessions Amortisation Effect of foreign currency translation and other changes Closing balance Property & Casualty Reinsurance 2 051 4 629 –4 379 –21 2 280 Property & Casualty Reinsurance 2 280 4 068 –4 255 53 2 146 Life & Health Reinsurance 3 020 893 –312 –136 3 465 Life & Health Reinsurance 3 465 1 294 –5 –508 –12 4 234 Other 13 34 –36 11 Other 11 –11 0 Total 5 084 5 556 –4 727 –157 5 756 Total 5 756 –11 5 362 –5 –4 763 41 6 380 1 In January 2017, the Group sold three primary life and health insurance carriers to the Swiss Re Life Capital Group. Retroceded DAC may arise on retrocession of reinsurance portfolios, including reinsurance undertaken as part of a securitisation. The associated potential retrocession recoveries are determined by the nature of the retrocession agreements and by the terms of the securitisation. As of 31 December, the PVFP was as follows: USD millions Opening balance as of 1 January Effect of acquisitions/disposals and retrocessions Amortisation Interest accrued on unamortised PVFP Effect of change in unrealised gains/losses Effect of foreign currency translation Closing balance Life & Health Reinsurance 1 134 –132 36 –72 966 2016 Total 1 721 0 –177 70 1 –72 1 543 Life & Health Reinsurance 966 –135 52 38 921 Other 587 –45 34 1 577 2017 Total 1 543 –562 –132 51 –1 38 937 Other 577 –562 3 –1 –1 16 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 14%, 13%, 12%, 11% and 11%. Swiss Reinsurance Company Consolidated 2017 Annual Report 51 Financial statements Notes to the Group financial statements 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 2016 1 886 70 188 184 42 69 30 21 113 452 3 055 –318 –9 2 728 2017 1 887 63 127 201 53 49 53 18 121 372 2 944 –331 –387 2 226 Dividends received from investments accounted for using the equity method were USD and 2017, respectively. 118 million and USD 119 million for 2016 Share in earnings of equity-accounted investees included an impairment of the carrying amount of an equity-accounted investee of USD 5 million for 2017. Realised gains and losses Realised gains and losses for fixed income securities, 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 on other investments Net realised/unrealised gains/losses on insurance-related activities Foreign exchange gains/losses Net realised investment gains/losses – non-participating business 2016 2017 590 –161 292 –96 –71 121 –14 32 22 877 1 592 552 –133 623 –23 –28 29 3 76 76 –194 981 Net realised/unrealised gains/losses on insurance-related activities included impairments of USD 11 million for 2017. 52 Swiss Reinsurance Company Consolidated 2017 Annual Report Investment result – unit-linked business The net investment result on unit-linked business credited to policyholders amounted to gains of USD USD million for 2016 and 2017, respectively, mainly originating from gains/losses on equity securities. 81 15 million and Impairment on fixed income securities related to credit losses Other-than-temporary impairments for debt securities are bifurcated between credit and non-credit components, with the credit component recognised through earnings and the non-credit component recognised in other comprehensive income. The credit component of other-than-temporary impairments is defined as the difference between a security’s amortised cost basis and the present value of expected cash flows. Methodologies for measuring the credit component of impairment are aligned to market observer forecasts of credit performance drivers. Management believes that these forecasts are representative of median market expectations. For securitised products, cash flow projection analysis is conducted by integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecasted economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and the present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments. A reconciliation of other-than-temporary impairments related to credit losses recognised in earnings was as follows: USD millions Balance as of 1 January Credit losses for which an other-than-temporary impairment was not previously recognised Reductions for securities sold during the period Increase of credit losses for which an other-than-temporary impairment has been recognised previously, when the Group does not intend to sell, or more likely than not will not be required to sell before recovery Impact of increase in cash flows expected to be collected Impact of foreign exchange movements Balance as of 31 December 2016 129 12 –44 7 –6 –4 94 2017 94 6 –17 4 –3 3 87 Swiss Reinsurance Company Consolidated 2017 Annual Report 53 Financial statements Notes to the Group financial statements Investments available-for-sale Amortised cost or cost, estimated fair values and other-than-temporary impairments of fixed income securities classified as available-for-sale as of 31 December were as follows: 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 2017 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 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 –5 –5 Amortised cost or cost Gross unrealised gains Gross unrealised losses Other-than-temporary impairments recognised in other comprehensive income 11 182 5 796 1 213 4 034 3 630 2 956 1 784 1 925 6 695 39 215 23 060 3 419 65 694 2 993 168 18 91 758 539 222 196 16 227 2 235 1 175 76 3 486 75 –147 –66 –5 –18 –28 –21 –10 –3 –68 –366 –112 –18 –496 –47 –2 –2 Estimated fair value 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 Estimated fair value 11 203 5 748 1 299 4 774 4 141 3 157 1 970 1 938 6 854 41 084 24 123 3 475 68 682 3 021 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. 54 Swiss Reinsurance Company Consolidated 2017 Annual Report 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 2016 2 538 45 112 2 695 60 2017 2 414 38 86 2 538 3 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 2016 and 2017, these amounted to USD million, respectively. million and USD 548 585 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 2016 and 2017, USD million, respectively, of fixed income securities million and USD available-for-sale were callable. 954 913 14 11 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 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 Amortised cost or cost 5 916 22 063 11 152 23 466 3 097 65 694 2017 Estimated fair value 5 918 22 155 11 427 26 027 3 155 68 682 Assets pledged As of 31 December 2017, investments with a carrying value of USD accordance with local requirements, and investments with a carrying value of USD pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries. 588 893 10 6 million were on deposit with regulatory agencies in million were placed on deposit or As of 31 December 2016 and 2017, securities of USD third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. Corresponding liabilities of USD obligation to return collateral that the Group has the right to sell or repledge. million, respectively, were recognised in accrued expenses and other liabilities for the million, respectively, were transferred to million and USD million and USD 989 491 767 010 13 13 1 As of 31 December 2017, a real estate portfolio with a carrying value of USD allowing the Group to withdraw funds up to CHF 500 million. 192 million serves as collateral for a credit facility, Collateral accepted which the Group has the right to sell or repledge As of 31 December 2016 and 2017, the fair value of the equity securities, government and corporate debt securities received as collateral was USD million, respectively. Of this, the amount that was sold or repledged as of 11 31 December 2016 and 2017 was USD 7 securities borrowing, reverse repurchase agreements and derivative transactions. million, respectively. The sources of the collateral are million and USD million and USD 9 255 443 453 947 3 Swiss Reinsurance Company Consolidated 2017 Annual Report 55 Financial statements Notes to the Group financial statements Offsetting of derivatives, financial assets and financial liabilities Offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows: 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 Net amount 1 060 0 0 1 060 –3 037 –169 –3 206 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 Net amount –772 8 –3 527 –26 454 –801 989 2017 USD millions Derivative financial instruments – assets Reverse repurchase agreements Securities borrowing Total Gross amounts of recognised financial assets 1 797 5 956 1 589 9 342 Collateral set-off in the balance sheet –1 176 –2 995 –524 –4 695 Net amounts of financial assets presented in the balance sheet 621 2 961 1 065 4 647 Related financial instruments not set-off in the balance sheet Net amount 603 –18 0 –2 961 0 –1 065 603 –4 044 2017 USD millions Derivative financial instruments – liabilities Repurchase agreements Securities lending Total Gross amounts of recognised financial liabilities –1 858 –2 631 –1 878 –6 367 Collateral set-off in the balance sheet 1 342 2 471 1 049 4 862 Net amounts of financial liabilities presented in the balance sheet –516 –160 –829 –1 505 Related financial instruments not set-off in the balance sheet Net amount –468 48 0 160 –64 765 –532 973 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”. 56 Swiss Reinsurance Company Consolidated 2017 Annual Report Recognised gross liability for the obligation to return collateral that the Group has the right to sell or repledge As of 31 December 2016 and 2017, the gross amounts of liabilities related to repurchase agreements and securities lending by the class of securities transferred to third parties and by the remaining maturity are shown below. The liabilities are recognised for the obligation to return collateral that the Group has the right to sell or repledge. Remaining contractual maturity of the agreements 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 Overnight and continuous Up to 30 days 30–90 days Greater than 90 days 219 219 237 13 18 268 3 023 3 023 415 415 334 334 367 258 426 367 258 426 Gross amount of recognised liabilities for repurchase agreements and securities lending Total 3 991 3 991 1 288 13 18 1 319 5 310 Remaining contractual maturity of the agreements 2017 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 Corporate debt securities Equity securities Total securities lending Overnight and continuous Up to 30 days 30–90 days Greater than 90 days 31 31 244 6 5 255 2 091 16 2 107 354 139 354 139 567 614 442 567 614 442 Gross amount of recognised liabilities for repurchase agreements and securities lending Total 2 615 16 2 631 1 867 6 5 1 878 4 509 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. Swiss Reinsurance Company Consolidated 2017 Annual Report 57 Financial statements Notes to the Group financial statements Unrealised losses on securities available-for-sale The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position as of 31 December 2016 and 2017. As of 31 December 2016 and 2017, USD securities available-for-sale relates to declines in value for less than 12 months and USD respectively, to declines in value for more than 12 months. million, respectively, of the gross unrealised loss on equity million and USD million and USD million, 44 37 37 10 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 2017 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 Total Unrealised losses Fair value 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 Less than 12 months Unrealised losses Fair value 12 months or more Unrealised losses Fair value Total Unrealised losses Fair value 7 402 3 753 259 535 1 749 685 209 1 013 2 687 18 292 5 390 1 429 25 111 114 37 4 9 27 18 8 3 52 272 83 13 368 1 368 993 39 258 262 44 7 57 319 3 347 860 394 4 601 33 29 1 9 1 3 2 0 16 94 29 7 130 8 770 4 746 298 793 2 011 729 216 1 070 3 006 21 639 6 250 1 823 29 712 147 66 5 18 28 21 10 3 68 366 112 20 498 58 Swiss Reinsurance Company Consolidated 2017 Annual Report Mortgages, loans and real estate As of 31 December, the carrying and respective fair 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 Carrying value 86 1 947 2 585 1 711 2016 Fair value 86 1 950 2 596 3 362 Carrying value 86 1 526 784 2 017 2017 Fair value 86 1 529 794 3 895 Depreciation expense related to income-producing properties was USD respectively. Accumulated depreciation on investment real estate totalled USD 31 December 2016 and 2017, respectively. 42 million and USD 49 million for 2016 and 2017, 525 million and USD 585 million as of Substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies. Swiss Reinsurance Company Consolidated 2017 Annual Report 59 Financial statements Notes to the Group financial statements 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 (eg markets which have few transactions and where prices are not current or price quotations vary substantially); (iii) inputs other than quoted prices that are observable (eg interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates); and (iv) inputs derived from, or corroborated by, observable market data. Level 3 inputs are unobservable inputs. These inputs reflect the Group’s own assumptions about market pricing using the best internal and external information available. The types of instruments valued, based on unadjusted quoted market prices in active markets, include most US government and sovereign obligations, active listed equities and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, include most government agency securities, investment-grade corporate bonds, certain mortgage- and asset-backed products, less liquid listed equities, and state, municipal and provincial obligations. Such instruments are generally classified within level 2 of the fair value hierarchy. Exchange-traded derivative instruments typically fall within level 1 or level 2 of the fair value hierarchy, depending on whether they are considered to be actively traded or not. Certain financial instruments are classified within level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity, less liquid corporate debt securities and certain asset- backed securities. Certain over-the-counter (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 2017, 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. 60 Swiss Reinsurance Company Consolidated 2017 Annual Report Valuation techniques US government securities typically have quoted market prices in active markets and are categorised as level 1 instruments in the fair value hierarchy. Non-US government holdings are generally classified as level 2 instruments and are valued on the basis of the quotes provided by pricing services, which are subject to the Group’s pricing validation reviews and pricing vendor challenge process. Valuations provided by pricing vendors are generally based on the actual trade information as substantially all of the Group’s non-US government holdings are traded in a transparent and liquid market. Corporate debt securities mainly include US and European investment-grade positions, which are priced on the basis of quotes provided by third-party pricing vendors and first utilise valuation inputs from actively traded securities, such as bid prices, bid spreads to Treasury securities, Treasury curves, and same or comparable issuer curves and spreads. Issuer spreads are determined from actual quotes and traded prices and incorporate considerations of credit/default, sector composition, and liquidity and call features. Where market data is not available, valuations are developed based on the modelling techniques that utilise observable inputs and option-adjusted spreads and incorporate considerations of the security’s seniority, maturity and the issuer’s corporate structure. Values of mortgage- and asset-backed securities are obtained both from third-party pricing vendors and through quoted prices, some of which may be based on the prices of comparable securities with similar structural and collateral features. Values of certain asset-backed securities (ABS) for which there are no significant observable inputs are developed using benchmarks to similar transactions or indices. 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. 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 the internal models, which are consistent with industry standards and practices, and use both observable (dealer, broker or market consensus prices, spot and forward rates, interest rate and credit curves and volatility indices) and unobservable inputs (adjustments for liquidity, inputs derived from the observable data based on the Group’s judgements and assumptions). Swiss Reinsurance Company Consolidated 2017 Annual Report 61 Financial statements Notes to the Group financial statements The Group’s OTC interest rate derivatives primarily include interest rate swaps, futures, options, caps and floors, and are valued based on the cash flow discounting models which generally utilise as inputs observable market yield curves and volatility assumptions. The Group’s OTC foreign exchange derivatives primarily include forward, spot and option contracts and are generally valued based on the cash flow discounting models, utilising as main inputs observable foreign exchange forward curves. The Group’s investments in equity derivatives primarily include OTC equity option contracts on single or baskets of market indices and equity options on individual or baskets of equity securities, which are valued using internally developed models (such as the Black-Scholes type option pricing model and various simulation models) calibrated with the inputs, which include underlying spot prices, dividend curves, volatility surfaces, yield curves and correlations between underlying assets. The Group’s OTC credit derivatives can include index and single-name credit default swaps, as well as more complex structured credit derivatives. Plain vanilla credit derivatives, such as index and single-name credit default swaps, are valued by the Group based on the models consistent with the industry valuation standards for these credit contracts, and primarily utilise observable inputs published by market data sources, such as credit spreads and recovery rates. These valuation techniques warrant classification of plain vanilla OTC derivatives as level 2 financial instruments in the fair value hierarchy. Governance around level 3 fair valuation The Asset Valuation Committee, endorsed by the Swiss Re Group Executive Committee, has a primary responsibility for governing and overseeing all of Group’s asset and derivative valuation policies and operating parameters (including level 3 measurements). The Asset Valuation Committee delegates the responsibility for implementation and oversight of consistent application of the Groupʼs pricing and valuation policies to the Pricing and Valuation Committee. The Pricing and Valuation Committee, which is a joint Risk Management & Finance management control committee, is responsible for the implementation and consistent application of the pricing and valuation policies. Key functions of the Pricing and Valuation Committee include: oversight over the entire valuation process, approval of internal valuation methodologies, approval of external pricing vendors, monitoring of the independent price verification (IPV) process and resolution of significant or complex valuation issues. A formal IPV process is undertaken monthly by members of the Valuation Risk Management team within a Financial Risk Management function. The process includes monitoring and in-depth analyses of approved pricing methodologies and valuations of the Group’s financial instruments aimed at identifying and resolving pricing discrepancies. The Risk Management function is responsible for independent validation and ongoing review of the Group’s valuation models. The Product Control group within Finance is tasked with reporting of fair values through the vendor- and model-based valuations, the results of which are also subject to the IPV process. 62 Swiss Reinsurance Company Consolidated 2017 Annual Report 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: 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 netting1 practical expedient Impact of 11 332 54 265 348 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 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 2017 Annual Report 63 Financial statements Notes to the Group financial statements 2017 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 Funds held under reinsurance treaties 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) Investments measured at net asset value as netting1 practical expedient Impact of 10 820 60 039 361 10 820 3 024 585 699 47 4 43 765 15 940 –20 –2 –18 –91 –939 –1 050 1 847 5 877 24 954 23 807 3 554 1 975 1 363 534 337 478 14 12 206 63 595 –1 569 –419 –436 –635 –79 –1 712 –1 785 –5 066 354 7 387 5 283 99 171 –1 176 919 –1 176 –269 1 342 –31 –238 –126 –395 1 342 607 607 Total 71 220 12 667 5 877 24 954 24 161 3 561 3 024 585 2 674 621 543 337 804 14 99 1 555 206 79 885 –516 –421 –436 –684 –79 –238 –126 –1 803 –2 724 –5 169 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. 64 Swiss Reinsurance Company Consolidated 2017 Annual Report Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December, the reconciliation of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs were as follows: 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 Derivative assets securities Other invested assets Total Derivative liabilities assets Liabilities for life and health policy benefits Accrued expenses and other liabilities Total liabilities 338 11 464 1 013 –895 1 826 –895 –497 –165 –1 474 –2 136 0 3 –5 115 –36 –55 –6 –6 348 18 –18 3 199 20 219 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 0 0 –81 20 –76 –5 0 239 238 –144 –1 236 –1 820 1 1 Impact of ASU 2015-07. Please refer to Note 1 of the 2016 Annual Report. 2 Transfers are recognised at the date of the event or change in circumstances that caused the transfer. 2017 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 Derivative assets securities Other invested assets Total Derivative liabilities assets Liabilities for life and health policy benefits Accrued expenses and other liabilities Total liabilities 348 1 459 160 968 –440 –144 –1 236 –1 820 1 –4 92 –7 –81 1 11 361 –23 32 –2 –79 –1 0 387 –22 216 19 16 –6 1 171 12 124 0 –9 –166 1 –1 12 919 –38 2 –9 1 286 –269 –1 –126 –50 0 235 0 0 –38 2 1 277 0 0 –51 –395 1 Transfers are recognised at the date of the event or change in circumstances that caused the transfer. Swiss Reinsurance Company Consolidated 2017 Annual Report 65 Financial statements Notes to the Group financial statements Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) for the years ended 31 December 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 2016 222 88 2017 213 161 66 Swiss Reinsurance Company Consolidated 2017 Annual Report 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 Infrastructure loans 2016 Fair value 2017 Fair value Valuation technique Unobservable input Range (weighted average) 341 116 354 215 Discounted Cash Flow Model Valuation spread 73 bps–232 bps (151 bps) 37 bps–246 bps (124 bps) 75 bps–175 bps (133 bps) –45%–100% (27.5%)1 –45%–100% (27.5%)1 Private placement corporate debt 177 91 Corporate Spread Matrix Credit spread Private placement credit tenant leases 48 46 Discounted Cash Flow Model Illiquidity premium Derivative equity contracts OTC equity option referencing correlated equity indices Liabilities Derivative equity contracts OTC equity option referencing correlated equity indices 341 341 283 283 Proprietary Option Model Correlation –39 –39 –31 –31 Proprietary Option Model Correlation Other derivative contracts and liabilities for life and health policy benefits –545 –364 Variable annuity and fair valued GMDB contracts –500 –325 Discounted Cash Flow Model Risk margin Volatility Lapse Mortality adjustment Withdrawal rate 4% (n.a.) 4%–42% 0.5%–33% –10%–0% 0%–90% 1 Represents average input value for the reporting period. Swiss Reinsurance Company Consolidated 2017 Annual Report 67 Financial statements Notes to the Group financial statements Sensitivity of recurring level 3 measurements to changes in unobservable inputs The significant unobservable input used in the fair value measurement of the Group’s infrastructure loans is valuation spread. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Group’s private placement corporate debt securities is credit spread. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Group’s private placement credit tenant leases is illiquidity premium. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. 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 (ie increase (decrease) in mortality, respectively) in isolation would result in a decrease (increase) in fair value of the Group’s liability. For the latter, 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. 68 Swiss Reinsurance Company Consolidated 2017 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 2016 Fair value 431 106 1 189 727 2017 Fair value 381 128 1 97 607 Unfunded commitments 82 32 114 Redemption frequency (if currently eligible) non-redeemable redeemable1 non-redeemable non-redeemable Redemption notice period n.a. 45–95 days2 n.a. n.a. 1 The redemption frequency varies by position. 2 Cash distribution can be delayed for an extended period depending on the sale of the underlyings. The hedge fund investments employ a variety of strategies, including global macro, relative value, event-driven and long/short equity across various asset classes. The private equity direct portfolio consists of equity and equity-like investments directly in other companies. These investments have no contractual term and are generally held based on financial or strategic intent. Private equity and real estate funds generally have limitations imposed on the amount of redemptions from the fund during the redemption period due to illiquidity of the underlying investments. Fees may apply for redemptions or transferring of interest to other parties. Distributions are expected to be received from these funds as the underlying assets are liquidated over the life of the fund, which is generally from 10 to 12 years. The redemption frequency of hedge funds varies depending on the manager as well as the nature of the underlying product. Additionally, certain funds may impose lock-up periods and redemption gates as defined in the terms of the individual investment agreement. Fair value option The fair value option under the Financial Instruments Topic permits the choice to measure specified financial assets and liabilities at fair value on an instrument-by-instrument basis. The Group elected the fair value option for positions in the following line items: 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. Funds held under reinsurance treaties For operational efficiencies, the Group elected the fair value option for funds held under reinsurance treaties under some of its reinsurance agreements. The liabilities are carried at fair value and changes in fair value are reported as a component of earnings. Swiss Reinsurance Company Consolidated 2017 Annual Report 69 Financial statements Notes to the Group financial statements Assets and liabilities measured at fair value pursuant to election of the fair value option Pursuant to the election of the fair value option for the items described, the balances as of 31 December 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 Funds held under reinsurance treaties of which at fair value pursuant to the fair value option 2016 2017 7 217 108 8 854 225 –17 629 –144 7 800 111 12 617 206 –19 361 –126 –11 429 –1 803 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 Funds held under reinsurance treaties Total 2016 –18 6 20 8 2017 2 19 –49 –28 Fair value changes from other invested assets, funds held by ceding companies and funds held under reinsurance treaties are reported in “Net investment income --- non-participating business”. Fair value changes from the GMDB reserves are shown in “Life and health benefits”. 70 Swiss Reinsurance Company Consolidated 2017 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: 2016 USD millions Assets Policy loans Mortgage loans Other loans Investment real estate Total assets Liabilities Debt Total liabilities 2017 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) 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 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) 86 1 529 794 3 895 6 304 0 Total 86 1 529 794 3 895 6 304 –6 149 –6 149 –6 825 –6 825 –12 974 –12 974 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 does 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 2017 Annual Report 71 Financial statements 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. 72 Swiss Reinsurance Company Consolidated 2017 Annual Report Total derivative financial instruments 100 729 2 640 –2 348 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 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 Amount offset Where a right of set-off exists Due to cash collateral Total net amount of derivative financial instruments 2017 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 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 –1 122 –458 1 060 1 122 446 –780 37 655 19 021 18 767 4 894 11 737 92 074 14 426 14 426 543 227 804 14 99 1 687 110 110 –421 –152 –684 –79 –238 –1 574 –284 –284 Notional amount assets/liabilities Fair value assets Fair value liabilities Carrying value assets/liabilities 290 –224 170 0 –283 –47 339 339 292 280 122 75 120 –65 –139 113 –174 –174 –61 105 Total derivative financial instruments 106 500 1 797 –1 858 Amount offset Where a right of set-off exists Due to cash collateral Total net amount of derivative financial instruments –801 –375 621 801 541 –516 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 2016 and 2017. Swiss Reinsurance Company Consolidated 2017 Annual Report 73 Financial statements Notes to the Group financial statements Non-hedging activities The Group primarily uses derivative financial instruments for risk management and trading strategies. Gains and losses of derivative financial instruments not designated as hedging instruments are recorded in “Net realised investment gains/losses — 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 2016 2017 –16 –121 –164 8 150 –143 56 256 –186 –21 251 356 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 2016 and 2017, the following hedging relationships were outstanding: Fair value hedges The Group enters into foreign exchange swaps to reduce the exposure to foreign exchange volatility for certain fixed income securities. These derivative instruments are designated as hedging instruments in qualifying fair value hedges. Gains and losses on derivative financial instruments designated as fair value hedging instruments are recorded in “Net realised investment gains/losses — non-participating business” in the income statement. For the years ended 31 December, the gains and losses attributable to the hedged risks were as follows: USD millions Fair value hedging relationships Foreign exchange contracts Total gains/losses recognised in income Gains/losses on derivatives 2016 Gains/losses on hedged items Gains/losses on derivatives 2017 Gains/losses on hedged items 250 250 –250 –250 –570 –570 570 570 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 2016 and 2017, the Group recorded an accumulated net unrealised foreign currency remeasurement gain of USD 1 311 million and USD 737 million, respectively, in shareholder’s equity. These offset translation gains and losses on the hedged net investment. 74 Swiss Reinsurance Company Consolidated 2017 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 2016 and 2017 was approximately USD 1 518 million and USD 996 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 and USD 66 million as of 31 December 2016 and 2017, respectively. For derivative financial instruments containing credit risk- related contingent features, the Group posted collateral of nil as of 31 December 2016 and 2017, respectively. In the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD 66 million additional collateral would have had to be posted as of 31 December 2017. The total equals the amount needed to settle the instruments immediately as of 31 December 2017. 79 million Swiss Reinsurance Company Consolidated 2017 Annual Report 75 Financial statements 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 Groupʼs 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 2018 Due in 2019 Due in 2020 Due in 2021 Due in 2022 Due after 2022 Total carrying value 2016 2 734 420 543 3 697 2 249 423 2 884 2 249 7 805 2017 2 826 2 826 2 244 390 3 110 2 370 8 114 11 502 13 270 10 940 12 974 2016 0 1 666 195 209 771 4 964 7 805 2017 0 1 699 197 213 845 5 160 8 114 76 Swiss Reinsurance Company Consolidated 2017 Annual Report Senior long-term debt Instrument Maturity 2019 Senior notes1 2022 Senior notes 2024 EMTN 2026 Senior notes1 2027 EMTN 2030 Senior notes1 2042 Senior notes Various Payment undertaking agreements Total senior long-term debt as of 31 December 2017 Total senior long-term debt as of 31 December 2016 1 Assumed in the acquisition of GE Insurance Solutions. Subordinated long-term debt Instrument Maturity 2024 Subordinated contingent write-off loan note 2042 Subordinated fixed-to-floating rate loan note 2045 Subordinated contingent write-off securities Subordinated private placement (amortising, limited recourse) Subordinated perpetual loan note Perpetual subordinated fixed-to-floating rate callable loan note 2057 Total subordinated long-term debt as of 31 December 2017 Total subordinated long-term debt as of 31 December 2016 Issued in 1999 2012 2014 1996 2015 2000 2012 various Currency USD USD CHF USD CHF USD USD USD Nominal in millions 234 250 250 397 250 193 500 338 Interest rate 6.45% 2.88% 1.00% 7.00% 0.75% 7.75% 4.25% various Book value in USD millions 245 249 255 486 257 262 490 390 2 634 2 672 Issued in 2013 2012 2013 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 778 596 197 2007 2007 GBP GBP 1 751 500 5.06% 6.30% 2019 2015 EUR 750 2.60% 2025 2 370 676 863 5 480 5 133 Swiss Reinsurance Company Consolidated 2017 Annual Report 77 Financial statements Notes to the Group financial statements Interest expense on long-term debt and contingent capital instruments Interest expense on long-term debt for the years ended 31 December was as follows: USD millions Senior financial debt Senior operational debt Subordinated financial debt Subordinated operational debt Total In addition to the above, interest expense on contingent capital instruments classified as equity was USD USD million for the years ended 31 December 2016 and 2017, respectively. 67 2016 100 10 156 122 388 2017 89 11 144 114 358 68 million and Long-term debt issued in 2017 No long-term debt was issued in the year ended 31 December 2017. Contingent capital instruments 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). The instrument may be converted, at the option of the issuer, into Swiss Re Ltd shares at any time through “at market“ conversion using the retrospective five-day volume weighted average share price with a 3% discount or within six months following a solvency event at a pre-set floor price of USD 32. The instrument is referred to in these financial statements as “contingent capital instrument”. In February 2012, SRZ issued a contingent capital instrument accounted for as equity with a face value of CHF 320 million and a fixed coupon at a rate of 7.25% per annum. This capital instrument was redeemed on 1 September 2017. 78 Swiss Reinsurance Company Consolidated 2017 Annual Report 11 Income taxes The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which it operates. The components of the income tax expense were: USD millions Current taxes Deferred taxes Income tax expense 2016 613 35 648 2017 457 –338 119 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 Non deductible expenses Change in valuation allowance Change in statutory rate Change in liability for unrecognised tax benefits including interest and penalties Other, net1 Total 1 Other, net includes tax return to tax provision adjustments from various jurisdictions. 2016 807 125 –27 –24 57 –210 46 –112 –14 648 2017 49 61 103 –48 51 –78 –81 9 53 119 For the year ended 31 December 2017, the Group reported a tax charge of USD 119 million on a pre-tax income of USD 233 million for 2017, compared to a charge of USD 648 million on a pre-tax income of USD 3 845 million for 2016. This translates into an effective tax rate in the current and prior-year reporting periods of 51.1% and 16.9%, respectively. For the year ended 31 December 2017, the tax rate was largely driven by tax on profits in higher jurisdictions and tax charges from foreign currency translation differences between statutory and US GAAP accounts, partially offset by tax benefits from US tax laws changes. For the year ended 31 December 2016, the lower tax 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. At 31 December 2017, the tax rate includes a tax benefit of USD 97 million from US tax reform impact. The impact is included within the change in statutory rate and change in valuation allowance components of the tax rate reconciliation. The benefit arises from revaluing the US deferred tax assets and liabilities to the new US statutory tax rate of 21% (from 35%). Swiss Reinsurance Company Consolidated 2017 Annual Report 79 Financial statements Notes to the Group financial statements Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows: USD millions Deferred tax assets Income accrued/deferred Technical provisions Pension provisions Benefit on loss carryforwards Currency translation adjustments Other Gross deferred tax asset Valuation allowance 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 2016 2017 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 –6 631 163 454 286 1 786 430 853 3 972 –293 –19 3 660 –73 –425 –241 –877 –1 409 –484 –152 –448 –630 –4 739 –196 –4 935 Net deferred and other non-current taxes –1 709 –1 275 As previously noted in the tax rate reconciliation, a tax benefit of USD 97 million arises from revaluing the US deferred tax assets and liabilities to the new US tax rate of 21% (from 35%). Accordingly, the revaluing reduced the US deferred tax assets by USD 1 159 million and the US deferred tax liabilities by USD 1 256 million (net USD 97 million). As of 31 December 2017, 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 2.8 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 2017, the Group had USD 8 055 million net operating tax loss carryforwards, expiring as follows: USD 17 million in 2018, USD 47 million in 2019, USD 13 million in 2020, USD 10 million in 2021, USD 7 511 million in 2022 and beyond, and USD 457 million never expire. As of 31 December 2017, the Group also had capital loss carryforwards of USD 14 million, expiring as follows: USD 4 million in 2020, USD 4 million in 2021 and USD 6 million in 2022. Net operating tax losses of USD 876 million and net capital tax losses of USD 27 million were utilised during the period ended 31 December 2017. Income taxes paid in 2016 and 2017 were USD 515 million and USD 507 million, respectively. 80 Swiss Reinsurance Company Consolidated 2017 Annual Report Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: USD millions Balance as of 1 January Change in group structure1 Additions based on tax positions related to current year Additions based on tax positions related to prior years Reduction for tax positions of current year Reductions for tax positions of prior years Statute expiration Settlements Other (including foreign currency translation) Balance as of 31 December 2016 331 36 20 –101 –44 –53 189 2017 189 –3 20 8 –1 –12 –9 –29 7 170 1 In January 2017, the Group sold three primary life and health insurance carriers to the Swiss Re Life Capital Group. As of 31 December 2016 and 2017 the amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 188 million and USD 170 million, respectively. Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such expense in 2017 was nil (USD 23 million in 2016). As of 31 December 2016 and 2017, USD 48 million and USD 45 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2017 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 2017 presented in the table above excludes accrued interest and penalties (USD 45 million). During the year, certain tax positions and audits in France and Switzerland 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 subjects to examination: Australia Brazil Canada China Denmark France Germany Hong Kong India Ireland Israel Italy Japan 2013–2017 2011–2017 2010–2017 2006–2017 2011–2017 2015–2017 2008–2017 2009–2017 2006–2017 2012–2017 2009–2017 2012–2017 2010–2017 Korea Luxembourg Malaysia Mexico Netherlands New Zealand Singapore Slovakia South Africa Spain Switzerland United Kingdom United States 2014–2017 2013–2017 2009–2017 2012–2017 2013–2017 2012–2017 2011–2017 2012–2017 2012–2017 2013–2017 2014–2017 2008, 2011–2017 2011–2017 Swiss Reinsurance Company Consolidated 2017 Annual Report 81 Financial statements 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. 82 Swiss Reinsurance Company Consolidated 2017 Annual Report The measurement date of these plans is 31 December for each year presented. 2016 USD millions Benefit obligation as of 1 January Service cost Interest cost Actuarial gains/losses Benefits paid Employee contribution Effect of settlement, curtailment and termination Effect of foreign currency translation Benefit obligation as of 31 December Fair value of plan assets as of 1 January Actual return on plan assets Company contribution Benefits paid Employee contribution Effect of settlement, curtailment and termination Effect of foreign currency translation Fair value of plan assets as of 31 December Funded status 2017 USD millions Benefit obligation as of 1 January Service cost Interest cost Amendments Actuarial gains/losses Benefits paid Employee contribution Effect of settlement, curtailment and termination Effect of foreign currency translation Benefit obligation as of 31 December Fair value of plan assets as of 1 January Actual return on plan assets Company contribution Benefits paid Employee contribution 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 Swiss plan 3 916 111 24 –55 –57 –185 26 2 166 3 948 3 532 264 95 –185 26 2 153 3 887 –61 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 Foreign plans 1 819 7 55 –2 –60 –20 125 1 924 1 771 132 59 –60 –20 130 2 012 88 –2 369 0 16 –16 0 –369 Other benefits 369 4 9 –3 42 –17 9 413 0 17 –17 0 –413 Total 5 976 125 101 272 –214 25 1 –182 6 104 5 202 316 165 –214 25 1 –192 5 303 –801 Total 6 104 122 88 –58 –17 –262 26 –18 300 6 285 5 303 396 171 –262 26 –18 283 5 899 –386 Swiss Reinsurance Company Consolidated 2017 Annual Report 83 Financial statements Notes to the Group financial statements Amounts recognised in “Other assets” and “Accrued expenses and other liabilities” in the Group’s balance sheet as of 31 December were as follows: 2016 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised 2017 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised Swiss plan –384 –384 Swiss plan –61 –61 Foreign plans 140 –3 –185 –48 Foreign plans 262 –3 –171 88 Other benefits –15 –354 –369 Other benefits –18 –395 –413 Amounts recognised in accumulated other comprehensive income, gross of tax, as of 31 December were as follows: 2016 USD millions Net gain/loss Prior service cost/credit Total 2017 USD millions Net gain/loss Prior service cost/credit Total Swiss plan 1 114 –69 1 045 Swiss plan 805 –115 690 Foreign plans 345 1 346 Other benefits –30 –58 –88 Foreign plans 271 1 272 Other benefits 13 13 Total 140 –18 –923 –801 Total 262 –21 –627 –386 Total 1 429 –126 1 303 Total 1 089 –114 975 84 Swiss Reinsurance Company Consolidated 2017 Annual Report Components of net periodic benefit cost The components of pension and post-retirement cost for the years ended 31 December were as follows: 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 an termination Net periodic benefit cost 2017 USD millions Service cost (net of participant contributions) Interest cost Expected return on assets Amortisation of: Net gain/loss Prior service cost Effect of settlement, curtailment and termination Net periodic benefit cost Swiss plan 113 31 –113 Foreign plans 7 60 –66 Other benefits 5 10 76 –9 1 99 9 10 –4 –9 2 Swiss plan 111 24 –90 Foreign plans 7 55 –59 Other benefits 4 9 77 –9 2 115 21 24 –1 –61 –49 Total 125 101 –179 81 –18 1 111 Total 122 88 –149 97 –9 –59 90 Swiss Reinsurance Company Consolidated 2017 Annual Report 85 Financial statements Notes to the Group financial statements Other changes in plan assets and benefit obligations recognised in other comprehensive income for the years ended 31 December were as follows: 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 2017 USD millions Net gain/loss Prior service cost/credit Amortisation of: Net gain/loss Prior service cost Effect of settlement, curtailment and termination Exchange rate gain/loss recognised during the year Total recognised in other comprehensive income, gross of tax Total recognised in net periodic benefit cost and other comprehensive income, gross of tax Swiss plan 56 Foreign plans 70 Other benefits 9 –76 9 –11 88 –9 –19 42 52 4 9 22 24 Swiss plan –231 –55 Foreign plans –75 Other benefits 42 –3 –77 9 –354 –239 –21 22 –74 –50 1 61 101 Total 135 –81 18 –19 53 164 Total –264 –58 –97 9 61 22 –327 52 –237 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 2018 are USD 65 million and USD 15 million, respectively. The estimated net gain/loss and prior service cost/credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2018 are nil. The Group and affiliated companies‘ accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 5 665 million and USD 5 794 million as of 31 December 2016 and 2017, respectively. Pension plans with an accumulated benefit obligation in excess of plan assets as of 31 December were as follows: USD millions Projected benefit obligation Accumulated benefit obligation Fair value of plan assets 2016 4 938 4 901 4 367 2017 5 068 5 022 4 833 86 Swiss Reinsurance Company Consolidated 2017 Annual Report 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 2016 2017 2016 2017 2016 2017 0.6% 1.8% 0.6% 1.8% 3.0% 2.9% 2.8% 2.8% 2.4% 2.1% 2.1% 2.1% 0.8% 3.3% 2.0% 0.6% 2.5% 1.8% 3.6% 3.9% 2.8% 3.0% 3.3% 2.9% 2.7% 2.4% 2.1% 2.1% 5.1% 3.8% 5.6% 3.8% 2021 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 2017: USD millions Effect on total of service and interest cost components Effect on post-retirement benefit obligation 1 percentage point increase 1 29 1 percentage point decrease 0 –25 Swiss Reinsurance Company Consolidated 2017 Annual Report 87 Financial statements Notes to the Group financial statements Plan asset allocation by asset category The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2016 and 2017 was as follows: Asset category Equity securities Debt securities Real estate Other Total Swiss plan allocation Foreign plans allocation 2016 2017 Target allocation 2016 2017 Target allocation 27% 44% 22% 7% 100% 29% 41% 23% 7% 100% 25% 47% 20% 8% 100% 19% 48% 0% 33% 100% 17% 77% 0% 6% 100% 17% 78% 1% 4% 100% Actual asset allocation is determined by a variety of current economic and market conditions and considers specific asset class risks. Equity securities include Swiss Re common stock of USD 7 million (0.1% of total plan assets) and USD 6 million (0.1% of total plan assets) as of 31 December 2016 and 2017, respectively. The Groupʼs 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 following table 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. 88 Swiss Reinsurance Company Consolidated 2017 Annual Report As of 31 December, the fair values of pension plan assets by level of input were as follows: 2016 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 2017 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 Significant Investments measured unobservable at net asset value as practical expedient inputs (Level 3) Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) 28 145 314 1 792 26 4 6 338 –6 514 3 133 –2 3 131 9 97 612 718 718 1 004 1 032 94 1 126 328 328 328 Significant Investments measured unobservable at net asset value as practical expedient inputs (Level 3) Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) 30 681 735 1 546 23 1 1 347 –38 78 3 374 3 374 10 103 692 805 805 1 141 1 171 99 1 270 450 450 450 Total 173 314 1 801 26 4 6 1 439 –6 612 842 5 211 92 5 303 Total 711 735 1 556 23 1 1 1 591 –38 692 528 5 800 99 5 899 Swiss Reinsurance Company Consolidated 2017 Annual Report 89 Financial statements Notes to the Group financial statements Assets measured at fair value using significant unobservable inputs (Level 3) For the years ended 31 December, the reconciliation of fair value of pension plan assets using significant unobservable inputs were as follows: 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 2017 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 596 Other assets 142 17 8 –9 612 –14 13 21 –53 –3 106 Real estate 612 Other assets 106 34 19 27 692 –26 19 11 3 113 Total 738 3 13 29 –53 –12 718 Total 718 8 19 30 30 805 Expected contributions and estimated future benefit payments The employer contributions expected to be made in 2018 to the defined benefit pension plans are USD 112 million and to the post-retirement benefit plan are USD 18 million. As of 31 December 2017, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: USD millions 2018 2019 2020 2021 2022 Years 2023-2027 Swiss plan 216 208 205 201 196 932 Foreign plans 86 91 94 97 99 534 Other benefits 18 19 20 20 21 110 Total 320 318 319 318 316 1 576 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 2016 and in 2017 was USD 65 million and USD 75 million, respectively. 90 Swiss Reinsurance Company Consolidated 2017 Annual Report 13 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: 2016 USD millions Revenues Gross premiums written Net premiums written Change in unearned premiums Premiums earned Net investment income – non-participating business Net realised investment gains/losses – non-participating business Other revenues Total revenues Expenses Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Operating expenses Interest expenses Total expenses 2017 USD millions Revenues Gross premiums written Net premiums written Change in unearned premiums Premiums earned Fee income from policyholders Net investment income/loss – non-participating business Net realised investment gains/losses – non-participating business Other revenues Total revenues Expenses Claims and claim adjustment expenses Life and health benefits Return credited to policyholders Acquisition costs Operating expenses Interest expenses Total expenses Corporate Solutions Life Capital Other 312 149 –35 114 9 –22 10 111 202 –20 61 243 242 242 242 4 43 10 299 –203 18 –1 21 3 –162 10 –77 1 –66 –1 400 –101 –1 501 Total 554 391 –35 356 23 –56 21 344 202 –203 18 –21 –1 318 –98 –1 420 Corporate Solutions Life Capital Other Total 283 146 –5 141 9 –2 8 156 184 –20 60 224 526 263 –67 196 –95 –479 13 22 –343 –30 322 43 2 337 6 –72 1 –65 –1 497 –145 –1 642 809 409 –72 337 –95 –464 –61 31 –252 184 –30 322 23 –1 435 –145 –1 081 Swiss Reinsurance Company Consolidated 2017 Annual Report 91 Financial statements Notes to the Group financial statements 2016 USD millions Assets 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 Liabilities 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 2017 USD millions Assets Policy loans, mortgages and other loans Other invested assets 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 Other assets Total assets Liabilities 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 Other Total 12 72 293 713 2 306 1 398 3 943 141 32 128 3 4 247 70 22 21 113 11 19 232 262 1 573 4 4 13 1 594 2 564 1 678 4 242 1 573 86 4 94 293 713 2 340 3 105 3 954 19 141 32 128 2 564 1 913 8 751 Corporate Solutions Life Capital Other Total 28 194 282 652 –1 339 1 494 3 723 124 56 95 4 4 002 66 128 1 350 9 152 2 859 4 –549 282 13 292 382 2 688 83 8 771 1 466 762 14 152 73 56 222 351 2 826 1 360 4 186 139 212 1 544 9 434 3 511 3 –549 843 15 137 4 105 2 688 207 8 827 1 561 2 826 2 126 22 340 Issued in Instrument Senior Loan 2016 Senior Loan 2017 Senior Loan 2017 Senior Loan 2017 Senior Loan 2017 2017 Senior Loan Total short-term debt as of 31 December 2017 Maturity 2018 2018 2018 2018 2018 2018 Currency USD USD USD USD GBP USD Nominal in millions 1 485 305 500 250 25 252 Interest rate 3mLIBOR+0.65% 3mLIBOR+0.65% 3mLIBOR+0.65% 3mLIBOR+0.65% 3mLIBOR+0.22% 1.495% Book value in USD millions 1 485 305 500 250 34 252 2 826 92 Swiss Reinsurance Company Consolidated 2017 Annual Report As of 31 December 2016 and 2017, the Group’s investment in mortgages and other loans included USD 292 million and USD 301 million, respectively, of loans due from employees, and USD 184 million and USD 181 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates. None of the members of BoD and the Group EC has any significant business connection with the Group or any of its Group companies. The Company has entered into subordinated funding facilities with its parent company Swiss Re Ltd under which the Company has the right, among others, to issue subordinated notes to Swiss Re Ltd at any time. For its various rights, the Company owes Swiss Re Ltd an unconditional fixed commitment fee on the total facility amount, payable in annual instalments. Annually, the Company receives a partial reimbursement of the commitment fee on the undrawn facility amount. As of 31 December 2017, the facilities were undrawn. An overview of the subordinated funding facilities is provided in the following table: Instrument Subordinated funding facility Subordinated funding facility Subordinated funding facility Lender Swiss Re Ltd Swiss Re Ltd Swiss Re Ltd Issued in 2015 2016 2016 Maturity 2030 2036 2032 Currency USD USD USD Nominal value in millions 700 400 800 Commitment fee (on total facility amount) 5.80% 6.10% 5.68% Partial reimbursement of commitment fee (on undrawn amount) 2.22% 2.13% 1.95% Swiss Reinsurance Company Consolidated 2017 Annual Report 93 Financial statements Notes to the Group financial statements 14 Commitments and contingent liabilities Leasing commitments As part of its normal business operations, the Group enters into a number of lease agreements. As of 31 December, such agreements, which are operating leases, total the following obligations for the next five years and thereafter: USD millions 2018 2019 2020 2021 2022 After 2022 Total operating lease commitments Less minimum non-cancellable sublease rentals Total net future minimum lease commitments 2017 63 62 52 29 28 171 405 6 399 Minimum rentals for all operating leases (except those with terms of one month or less that were not renewed) for the years ended 31 December 2016 and 2017 were USD million, respectively. Sublease rental income for the years ended 31 December 2016 and 2017 was nil and USD million, respectively. million and USD 36 29 2 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 ten years. The total commitments remaining uncalled as of 31 December 2017 were USD 2 114 million. In 2016, the Group entered into a real estate construction contract. Total commitments under the contract amount to USD 52 million over the next three 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 2017 Annual Report 15 Variable interest entities The Group enters into arrangements with variable interest entities (VIEs) in the normal course of business. The involvement ranges from being a passive investor to designing, structuring and managing the VIEs. The variable interests held by the Group arise 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. 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. Swiss Reinsurance Company Consolidated 2017 Annual Report 95 Financial statements Notes to the Group financial statements 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 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 and 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 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 for 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. 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. 96 Swiss Reinsurance Company Consolidated 2017 Annual Report 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 2017 that it was not previously contractually required to provide. Consolidated VIEs The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs of which the Group is the primary beneficiary as of 31 December: USD millions Fixed income securities available-for-sale Short-term investments 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 Liabilities for life and health policy benefits Unearned premiums Reinsurance balances payable Deferred and other non-current tax liabilities Accrued expenses and other liabilities Long-term debt Total liabilities 2016 3 715 128 22 33 33 9 94 8 4 042 65 25 6 213 14 2 249 2 572 2017 3 974 62 12 34 29 4 41 15 4 171 84 1 12 17 133 20 2 369 2 636 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 2017 Annual Report 97 Financial statements Notes to the Group financial statements Non-consolidated VIEs The following table shows the total assets and liabilities on 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 2016 415 466 764 1 419 163 3 227 78 78 2017 412 656 848 1 167 180 3 263 67 67 The following table shows the Group’s assets, liabilities and maximum exposure to loss related to VIEs in which the Group held a variable interest but was not the primary beneficiary as of 31 December: USD millions Insurance-linked securitisations Life and health funding vehicles Swaps in trusts Investment vehicles Investment vehicles for unit-linked business Senior commercial mortgage and infrastructure loans Total Total assets 336 2 164 1 728 163 834 3 227 2016 Maximum exposure to loss1 331 1 948 –2 1 729 834 –2 Total liabilities 1 77 78 2017 Maximum exposure to loss1 314 2 052 –2 1 772 949 –2 Total liabilities 1 66 67 Total assets 311 27 25 1 771 180 949 3 263 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 2017 Annual Report Report of the statutory auditor to the General Meeting of Swiss Reinsurance Company Ltd Zurich Report of the statutory auditor on the consolidated financial statements As statutory auditor, we have audited the accompanying consolidated financial statements of Swiss Reinsurance Company Ltd and its subsidiaries (the ‘Company’), which comprise the consolidated balance sheet as of 31 December 2017, and the related consolidated income statement, statement of comprehensive income, statement of shareholder’s equity, statement of cash flows and notes for the year ended 31 December 2017. Board of Directors’ responsibility The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control system. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of 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 2017, 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 40 to 47 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. Swiss Reinsurance Company Consolidated 2017 Annual Report 99 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 Investment valuation continues to be an area with inherent risk for certain level 2 and 3 investments that have unobservable or interpolated inputs. The risk is not the same for all investment types and is greatest for those listed below. These investments are more difficult to value because quoted prices are not always available and valuation requires unobservable or interpolated inputs and complex valuation models: Fixed income securitised products Fixed income mortgage and asset-backed securities Private placements and infrastructure loans Private equities Derivatives Insurance-related financial products How our audit addressed the key audit matter We assessed and tested the design and operating effectiveness of selected key controls around the valuation models for level 2 and 3 investments, including the Company’s independent price verification process. We also tested management’s data integrity and change management controls relating to the valuation models. In relation to the matters set out opposite, our substantive testing procedures included the following: Challenging the Company’s 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. Engaging our own valuation experts to perform independent valuations of selected investments. 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 2017. 100 Swiss Reinsurance Company Consolidated 2017 Annual Report Valuation of actuarially determined Property & Casualty (‘P&C’) loss reserves Key audit matter 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 reserves. 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 key factors and 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, loss reserves for ‘long tail’ lines of business (for example, the Liability, US Asbestos and Environmental, Motor Liability and Workers’ Compensation portfolios) 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 claim settlements are often less frequent but of higher magnitude. 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. Moreover, not all natural catastrophe events and significant man-made losses can be modelled using traditional actuarial methodologies, which increases the degree of judgement needed in establishing reserves for these events. 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 independently test management’s estimates of P&C loss reserves, and evaluate 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 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 tests to determine the impact of selected key assumptions. 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 Consolidated 2017 Annual Report 101 Valuation of actuarially determined Life & Health (‘L&H’) loss 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, methods, 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. 102 Swiss Reinsurance Company Consolidated 2017 Annual Report Completeness and valuation of uncertain tax items 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 management’s assessment whether deferred tax assets are more likely than not to be realised. In recent years there have been releases of uncertain tax positions as a result of the completion of audits by tax authorities. Changes 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 in place to determine the completeness of the uncertain tax items and management’s assessment of the items for recognition and valuation. In relation to the matters set out opposite, our substantive testing procedures included the following: Involving our own tax specialists to critically review management’s ‘more likely than not’ tax assessments to evaluate the Company’s judgements and estimates of the probabilities and the amounts. 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. Examining tax audit documentation to validate the appropriateness of releases of uncertain tax provisions. On the basis of the work performed, we consider management’s assessment relating to the valuation of the uncertain tax items to be appropriate. 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 Bret Griffin Alex Finn Audit expert Auditor in charge Zurich, 14 March 2018 Swiss Reinsurance Company Consolidated 2017 Annual Report 103 Financial statements 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 2017, the Company employed a worldwide staff at an average of 1 930 full time equivalents. Financial year 2017 The Company further aligned the legal entity structure with the management view and thus transferred risks allocated to the Life Capital Business Unit to Swiss Re Life Capital Re Ltd via novation and retrocession transactions, effective 1 January 2017. In addition, the Company was affected by several intragroup transactions in preparation of the redomiciliation of Swiss Re Asia Ltd from Switzerland to Singapore per year-end 2017. Effective 1 October 2017, the Company assumed the Canadian life and health business, which was previously novated from Swiss Re Asia Ltd to Swiss Re Life Capital Re Ltd. Furthermore, the Company entered into a new intragroup agreement with Swiss Re Asia Ltd to cover the property and casualty business originally written in the Asian branches of the Company and retroceded to Swiss Re Asia Ltd. The aforementioned intragroup transactions were all performed at Swiss statutory book value and hence did not impact the Company’s net income at inception, but significantly affected various balance sheet and income statement positions in 2017. Net income for 2017 amounted to CHF 1 209 million, benefiting from a very strong investment result of CHF 2 546 million, partly offset by several large natural catastrophe losses, namely the three hurricane events Harvey, Irma and Maria as well as the California Wildfires. These events amounted to direct incurred losses of CHF 1 597 million and additionally triggered claims of CHF 842 million from stop loss programmes with affiliated companies. These impacts were partly absorbed by a subsequent release of the equalisation provision of CHF 1 323 million. With CHF 10 821 million the total shareholder’s equity of the Company remained strong as at 31 December 2017. 104 Swiss Reinsurance Company Ltd 2017 Annual Report Reinsurance result Reinsurance result amounted to CHF 227 million in 2017, compared to CHF 1 238 million in 2016. Property and Casualty Reinsurance result decreased from CHF 1 522 million in 2016 to CHF 354 million in 2017, significantly impacted by large natural catastrophe losses and the deterioration on large casualty transactions in the US, partly absorbed by a subsequent release of the equalisation provision. Life & Health Reinsurance result experienced a loss of CHF 127 million in 2017, compared to a loss of CHF 284 million in 2016. This loss in 2017 was driven by negative impacts from Swiss Re Life & Health Australia Ltd, due to a true-up of the modified coinsurance balance as at 31 December 2016, as well as by a large transaction in Europe. Premiums earned decreased from CHF 17 580 million in 2016 to CHF 17 421 million in 2017. Property and casualty premiums earned increased from CHF 11 237 million in 2016 to CHF 11 312 million in 2017. The increase was predominately driven by the growth in the US casualty business, partly offset by a volume decrease in the agriculture business in Asia as well as negative cedent updates in Europe. Life and health premiums earned decreased from CHF 6 343 million in 2016 to CHF 6 109 million in 2017. This was stemming from the lower business volume renewed in Europe, as well as the impact of the business novated to Swiss Re Life Capital Re Ltd in 2017. Other reinsurance revenue increased from CHF 1 003 million in 2016 to CHF 1 439 million in 2017. The increase was driven by favourable fair value adjustments in the Canadian life and health business and higher interest income on cash deposit from life and health transactions in the US. Claims incurred increased from CHF 12 042 million in 2016 to CHF 13 098 million in 2017, mainly due to large natural catastrophe losses, partly absorbed by a subsequent release of the equalisation provision in 2017. The comparison of the individual claims line items was affected by large intragroup restructurings as well as new large life and health transactions, creating substantial changes year-over-year. In aggregate, these various movements fully offset each other. Property and casualty claims paid and claims adjustment expenses net increased from CHF 389 million in 2016 to CHF 3 922 million in 2017, driven by a new intragroup retrocession agreement with Swiss Re Asia Ltd as well as the growth in motor, accident and health businesses and higher loss ratio in large casualty transactions in the US. The aforementioned restructuring impacts were fully offset in change in unpaid claims net for the property and casualty business, which in consequence decreased from CHF 6 278 million in 2016 to CHF 5 393 million in 2017, despite the large natural catastrophe events mostly in property business. As a consequence of property and casualty losses in 2017, driven by the large natural catastrophe events, the equalisation provision was reduced by CHF 1 323 million. Life and health benefits net changed from a loss of CHF 3 653 million in 2016 to a gain of CHF 3 492 million in 2017, mainly due to the intragroup retrocession restructurings, primarily with Swiss Re Life Capital Re Ltd and Swiss Re Asia Ltd, as well as large transactions with external cedents. These aforementioned restructuring and large transaction impacts were fully offset in life and health claims paid and claims adjustment expenses net, which changed from a gain of CHF 241 million in 2016 to a loss of CHF 8 814 million in 2017, as well as in change in unpaid claims, which changed from a loss of CHF 1 963 million in 2016 to a gain of CHF 216 million in 2017. Acquisition costs net increased from CHF 4 150 million in 2016 to CHF 4 333 million in 2017, mainly in life and health business, driven by a profit commission adjustment in Australia and the new business in the US with exceptionally high commission ratio. Other reinsurance expenses increased from CHF 646 million in 2016 to CHF 878 million in 2017, driven by interest on cash deposits paid to Swiss Re Life Capital Re Ltd and an unfavourable day-one impact of a large transaction bound in Europe in 2017. Swiss Reinsurance Company Ltd 2017 Annual Report 105 Financial statements Swiss Reinsurance Company Ltd Investment result Investment income increased from CHF 1 779 million in 2016 to CHF 3 246 million in 2017. The increase was mainly driven by the dividend from Swiss Re Reinsurance Holding Company Ltd of CHF 974 million and the distribution of the retained income from shares in investment funds of CHF 568 million. In addition, the year under report benefitted by CHF 227 million from one-off value readjustments on fixed income securities up to amortised cost, following the new accounting policy introduced in 2017. Investment expenses decreased from CHF 695 million in 2016 to CHF 317 million in 2017, which was mainly related to higher value adjustments on fixed income securities in 2016, driven by market deteriorations. Other income and expenses The increase in other net expenses from CHF 158 million in 2016 to CHF 479 million in 2017 was mainly due to lower net realised foreign exchange gains in 2017, compared to the prior year. Extraordinary income and expenses The 2017 net income contained an extraordinary expense of CHF 226 million, which was caused by a correction of an overstatement of the 2016 income statement in the same amount. The overstatement in 2016 resulted from an incorrect recognition of foreign exchange rate adjustments on cross currency interest rate swaps through the income statement instead of adjusting only the notional of these derivative financial instruments on the balance sheet. Assets Total assets increased from CHF 101 291 million as of 31 December 2016 to CHF 113 052 million as of 31 December 2017. Total investments increased slightly from CHF 54 295 million to CHF 54 410 million in 2017, mainly driven by the increase in shares in investment funds of CHF 2 904 million, mostly in connection with proceeds reinvested from the change in the structure of reinsurance intragroup retrocession agreements with affiliated companies. This was largely offset by the decrease in short-term investments of CHF 2 484 million, mainly related to the partial funding of the dividend to the parent company and net repayments of loans CHF 659 million primarily from intragroup companies. Assets in derivative financial instruments decreased from CHF 1 108 million to CHF 822 million in 2017, mainly driven by less held hedge instruments in connection with the life and health variable annuities business due to the run-off of a closed book and the positive market performance of the underlying business. Funds held by ceding companies increased from CHF 18 840 million to CHF 20 913 million in 2017, mainly related to the property and casualty business in the US, as a result of the business volume growth, higher fund withheld percentage on intragroup treaty and large losses. In addition, life and health funds held increased, mainly due to a new intragroup transaction with Swiss Re Life Capital Re Ltd covering the Canadian in-force business. Deferred acquisition costs increased from CHF 1 595 million to CHF 2 220 million in 2017, mostly driven by a new property and casualty intragroup retrocession agreement with Swiss Re Asia Ltd. Reinsurance recoverable on technical provisions retroceded increased from CHF 8 708 million to CHF 13 380 million in 2017, mainly in life and health business, due to a new intragroup retrocession agreement with Swiss Re Life Capital Re Ltd for the Life Capital business. Premiums and other receivables from reinsurance increased from CHF 8 473 million to CHF 12 615 million in 2017, reflecting the decommissioning of the asset and liability netting process in 2017. In 2016, this process reduced the receivable and the payable balances by CHF 2 645 million, mainly related to intragroup transactions. Accrued income increased from CHF 336 million to CHF 1 258 million in 2017, mainly related to the dividend from Swiss Re Reinsurance Holding Company Ltd, to be paid by the subsidiary in 2018. 106 Swiss Reinsurance Company Ltd 2017 Annual Report Liabilities Total liabilities increased from CHF 89 089 million as of 31 December 2016 to CHF 102 231 million as of 31 December 2017. Technical provisions gross increased from CHF 64 322 million to CHF 70 798 million in 2017, mainly in property and casualty business, driven by large natural catastrophe losses, net of the equalisation provision release, as well as the business volume growth and the deterioration on motor loss ratio in the US. Further, technical provisions also increased as a result of the new intragroup retrocession agreements with affiliated companies. Liabilities in derivative financial instruments decreased from CHF 1 877 million to CHF 1 313 million in 2017, mainly driven by less held derivative financial instruments in connection with the life and health variable annuities business due to the run-off of a closed book and the positive market performance of the underlying business. Funds held under reinsurance treaties increased from CHF 3 789 million to CHF 8 050 million in 2017, mostly in life and health business, reflecting a new intragroup retrocession agreement with Swiss Re Life Capital Re Ltd covering the Life Capital business. Reinsurance balances payable increased from CHF 2 898 million to CHF 6 378 million in 2017, reflecting the decommissioning of the asset and liability netting process in 2017. In 2016, this process reduced the receivable and the payable balances by CHF 2 645 million, mainly related to intragroup transactions. Debt increased by CHF 1 424 million to CHF 5 130 million in 2017, mainly reflecting the net change of a new loan facility from Swiss Re Reinsurance Holding Company Ltd of CHF 1 876 million and an existing loan facility from Swiss Re Ltd of CHF 542 million, partly offset by the maturity of an external debt of CHF 600 million. Other liabilities decreased from CHF 6 396 million to CHF 5 572 million in 2017, mainly reflecting the reduction of intragroup payables under securities lending agreements and securities sold under agreement to repurchase, partly offset by higher intragroup current account payables. The decrease in subordinated liabilities of CHF 781 million to CHF 3 758 million in 2017 was mainly driven by the maturity of external subordinated debts. Shareholder’s equity Shareholder’s equity decreased from CHF 12 202 million as of 31 December 2016 to CHF 10 821 million as of 31 December 2017. The decrease reflected the dividend payment in cash of CHF 2 590 million partly offset by the net income for the financial year 2017 of CHF 1 209 million. Future prospects and business development Subsequent event In the context of the “Tax Cuts and Jobs Act of 2017” in the US, the Company is currently reassessing its intercompany structure with the affiliated companies Swiss Reinsurance America Corporation and Swiss Re Life & Health America Inc and their subsidiaries. It is expected that several intragroup retrocession agreements will either be recaptured, novated or not renewed in the course of 2018. While the financial impact can not be quantified at the date of approving the Company’s 2017 financial statements, it is assumed that significant impacts to the Company’s balance sheet and income statement are expected in 2018. Large transactions Following the redomiciliation of Swiss Re Asia Ltd from Switzerland to Singapore per year-end 2017, the Company is going to sell any assets and liabilities of its Singapore branch to Swiss Re Asia Ltd, effective 1 January 2018. With this sale the Company will transfer any related rights and obligations of the branch to Swiss Re Asia Ltd, including the entire reinsurance business as well as the employees, employed by the branch. Furthermore, the Company will sell its remaining Asian branches to Swiss Re Asia Ltd in the upcoming years. Swiss Reinsurance Company Ltd 2017 Annual Report 107 Financial statements Swiss Reinsurance Company Ltd Property & Casualty Reinsurance business Market environment The capital position of global reinsurers was more or less stable over the recent years. Capital growth has been managed increasingly via dividend payments and share buy-back programmes, hence returning almost all of the industry´s net income to shareholders. Nevertheless, there was still some excess capital in traditional reinsurance by mid 2017, and this has been significantly reduced by the losses from hurricanes Harvey, Irma and Maria. Strategy and priorities The three major hurricane events of 2017 led to rate hardening for both for loss-affected accounts, and to a lesser extent for loss-free accounts at the January 2018 renewals. Capital abundance in traditional reinsurance has been reduced, and alternative capacity will require additional funds from investors to operate at the same level as before the hurricane losses. In 2018, advanced markets non-life reinsurance premium growth will likely reflect a hardening of rates and slightly stronger nominal growth in the primary market. Demand should also be supported by new solvency regulations: non-life reinsurance has become more attractive for European insurers under Solvency II, since it better reflects the risk mitigating effect of reinsurance. Life & Health Reinsurance business Market environment The life reinsurance industry registered a 4% increase in premiums written in 2017. Underlying reinsurance premium growth in traditional reinsurance areas like mortality and morbidity risk has remained relatively subdued this year with an estimated growth rate of 1% in real terms in 2017. In mature markets, slight contractions in the US and UK were set off by positive developments in Canada, Japan, Australia, and Continental Europe. In the emerging markets, premiums grew by 11%, driven largely by China, with other emerging markets seeing more modest growth. Against this background, life reinsurers have sought to increase revenues through large, individual risk transfer transactions that help primary insurers stabilise income and/or bolster their balance sheets. The introduction of risk-based capital regimes has prompted much of this activity. In Europe, for example, Solvency II has underpinned interest in reinsurance to boost available capital, reduce required regulatory capital or to economise on reserves. Strategy and priorities Continued recovery in primary insurance should support growth in life reinsurance revenues, including a recovery in traditional renewable business. Premium growth will nonetheless likely remain modest, especially in the large advanced markets. In real terms, global life reinsurance premiums are forecast to increase by just over 1% in 2018. Premiums in the advanced markets are projected to decline after adjusting for inflation, driven by developments in the US where cession rates continue their long-term down trend and growth in the primary market remains weak. In Western Europe, where cession rates are usually lower, reinsurance premiums are forecast to grow by about 1%. The strongest contribution to real growth in the advanced markets will likely come from developed Asia. 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 economic outlook, the moderate global growth environment is set to continue during 2018, both in developed and emerging market economies, while inflation is forecast to modestly increase globally. From a regional perspective, growth is set to stay solid in the Eurozone and the US where it is supported by expected improvements in US corporate earnings from the recently passed tax reform legislation, while growth for China is expected to slow somewhat in 2018. For the UK, growth is expected to be more modest amid continued Brexit-related uncertainty. 108 Swiss Reinsurance Company Ltd 2017 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 for the Company and its subsidiaries. In executing this task, the 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. ̤ 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 certain legal entity CROs, including the CRO of Swiss Reinsurance Company Ltd. 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 comprises risk teams for legal entities and regions as well as central teams that provide specialised risk expertise and oversight. Legal entity risk teams of the Company and its subsidiaries are led by dedicated CROs who report directly or indirectly to their top-level CRO (Company CRO), who reports to the Group CRO, with a secondary reporting line to the Company CEO. These legal entity CROs are responsible for risk oversight in their respective legal entities, as well as for establishing the proper risk governance to ensure efficient risk identification, assessment and control. 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 dedicated 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 dedicated CROs at Group and legal entity level 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 Company and its subsidiaries, the setting of the reserves is performed by valuation actuaries within the P&C and L&H Business Management units. 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 Group Board of Directors, Executive Committees and other management bodies in identifying, mitigating and managing compliance risks. Swiss Reinsurance Company Ltd 2017 Annual Report 109 Financial statements 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 2016 2017 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 22 529 –3 822 18 707 –918 –368 –1 286 17 421 1 439 383 19 243 –10 547 –2 189 –12 736 –6 289 1 112 –5 177 –408 3 900 3 492 –14 421 1 323 –13 098 –5 421 1 088 –4 333 –707 –5 040 –878 –19 016 Reinsurance result 1 238 227 110 Swiss Reinsurance Company Ltd 2017 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 Extraordinary income and expenses Income before income tax expense Income tax expense Net income Note 2 2016 2017 1 779 –695 –297 787 1 906 –2 254 1 677 –418 247 –405 – 1 101 –226 875 3 246 –317 –383 2 546 2 300 –2 559 2 514 –408 73 –552 –226 1 401 –192 1 209 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2017 Annual Report 111 Financial statements 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 2016 2017 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 13 175 17 345 8 093 809 906 12 101 1 354 627 14 082 54 410 822 20 913 884 5 877 5 592 1 863 48 13 380 14 2 220 106 12 615 158 6 272 1 258 58 642 3 3 3 3 3 3 18 Total assets 101 291 113 052 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. 112 Swiss Reinsurance Company Ltd 2017 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 2016 2017 3 3 3 3 3 3 4 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 46 096 15 872 8 027 582 221 70 798 190 679 162 1 031 5 129 1 313 8 050 6 378 5 572 202 3 758 89 089 102 231 34 6 778 6 778 650 3 839 26 875 12 202 34 6 778 6 778 650 2 099 51 1 209 10 821 Total liabilities and shareholder’s equity 101 291 113 052 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2017 Annual Report 113 Financial statements 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 changes Swiss Re Group restructured its Canadian life and health business in 2017. This business is originally ceded from external parties to the Canada branch of the Company. Prior to the restructuring, the branch retroceded a large share of this business to Swiss Re Asia Ltd. With the restructuring, Swiss Re Asia Ltd novates this business to Swiss Re Life Capital Re Ltd, which then retrocedes the majority of this received business to the Company by applying the same terms and conditions. As such on a legal entity view, the Company discloses this business in its 2017 financial statements on a gross basis. Hence, both, the assumed external and the assumed internal business as well as the internal retroceded business are reflected on various balance sheet and income statement positions. The same gross presentation is used for a newly set up intragroup property and casualty retrocession agreement between Swiss Re Asia Ltd and the Company in connection with business originally written in the Asian branches of the Company and retroceded to Swiss Re Asia Ltd. 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 2017 financial year comprises the accounting period from 1 January 2017 to 31 December 2017. 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 Investments in subsidiaries and affiliated companies are carried at cost, less necessary and legally permissible depreciation. 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. Fixed income securities are measured at their amortised cost for the first time in 2017. Until the year-end 2016, fixed income securities were carried at cost, less necessary and legally permissible depreciation. The effect of this change as of 1 January 2017 was CHF 227 million. 114 Swiss Reinsurance Company Ltd 2017 Annual Report The following assets are carried at cost or lower market value: ̤ Equity securities ̤ Shares in investment funds ̤ Alternative investments 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 measured at their amortised cost. 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. 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. However, for back-to-back deals where the Company enters into two identical, but opposite directed derivatives, both derivatives were recorded at market value for the first time in 2017. The effect of this change amounted to CHF 264 million in 2017. 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”. Reinsurance business written by branches of the Company that is retroceded to affiliated companies, which is then retroceded back to the Company is presented on a gross basis. 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. Swiss Reinsurance Company Ltd 2017 Annual Report 115 Financial statements Swiss Reinsurance Company Ltd 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. 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. Reinsurance business written by branches of the Company that is retroceded to affiliated companies, which is then retroceded back to the Company is presented on a gross basis. 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. 116 Swiss Reinsurance Company Ltd 2017 Annual Report Debt Debt is held at redemption value. Liabilities from derivative financial instruments Liabilities from derivative financial instruments are generally maintained at the highest commitment amount as per a balance sheet date during the life of the underlying contracts. Premiums received in respect of derivative financial instruments are generally not realised until expiration or settlement of the contract and are deferred respectively. Included in this position are reinsurance contracts or features embedded in reinsurance contracts that fulfil the characteristics of derivative financial instruments. For such contracts, premiums received may be recognised as income prior to contract expiration or settlement, in cases where the recorded commitment has already reached the maximum liability amount potentially payable under the terms of the respective contracts. Decreases in the liability amounts prior to expiration or settlement are only recognised as income for contracts for which hedging instruments are in place. Funds held under reinsurance treaties Funds held under reinsurance treaties mainly contain cash deposits withheld from retrocessionaires, which are stated at redemption value. Reinsurance balances payable Reinsurance balances payable are held at redemption value. The position mainly consists of payables to insurance companies and brokers. Other liabilities Other liabilities include rights in connection with repurchase agreements and securities lending transactions, which are held at redemption value. Subordinated liabilities Subordinated liabilities are held at redemption value. Deposit arrangements Contracts which do not meet risk transfer requirements, defined as transferring a reasonable probability of a significant loss to the reinsurer, are accounted 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. Swiss Reinsurance Company Ltd 2017 Annual Report 117 Financial statements 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 978 515 216 5 20 573 18 39 630 142 2 506 Value readjustments Realised gains – 226 0 – 9 63 – 19 82 – 317 0 162 – – 173 88 0 0 88 – 423 Expenses Value adjustments Realised losses – – – – – – – – –196 –196 0 0 –7 –19 –7 – –11 –18 – –44 – –66 – –9 – –2 0 –2 – –77 2017 Total 978 903 216 5 202 724 18 58 800 142 3 246 2017 Total 0 –66 –7 –28 –7 –2 –11 –20 –196 –317 –383 2 546 118 Swiss Reinsurance Company Ltd 2017 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 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 Swiss Reinsurance Company Ltd 2017 Annual Report 119 Financial statements 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 2 334 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 4733 180 34 633 14 021 4 924 492 1 544 2 8983 Gross 2 833 11 491 231 46 096 15 872 8 027 582 221 3 768 Retro –613 1 124 –22 –5 8771 –5 5921 –1 8631 –481 – 2 610 2017 Net 2 220 12 6153 209 40 219 10 280 6 164 534 221 6 3783 1 Reported under "Reinsurance recoverable on technical provisions retroceded" on page 112. 2 Reported under "Other assets" on page 112. 3 In 2017, the netting process of assets and liabilities from reinsurance towards the same counterparty was decommissioned. This led to a gross-up of the receivables from reinsurance as well as the reinsurance balances payable. The effect of such a gross-up in 2016 was CHF 2 645 million. 4 Change in shareholder’s equity CHF millions 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 Shareholder’s equity 1.1.2017 Allocations relating to the dividend paid Dividend for the financial year 2016 Net income for the financial year Shareholder’s equity 31.12.2017 Share capital 34 Legal capital reserves 6 778 Legal profit reserves 650 Voluntary profit reserves 272 6 500 –2 933 Retained earnings brought forward 94 –68 Net income for the financial year 6 432 –6 432 34 34 6 778 650 3 839 6 778 650 3 839 850 –2 590 34 6 778 650 2 099 26 26 25 51 875 875 875 –875 1 209 1 209 Total shareholder’s equity 14 260 – –2 933 875 12 202 12 202 – –2 590 1 209 10 821 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 2017 and 2016, 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. The Company is part of the Swiss Re value added tax (VAT) group and is therefore jointly liable for existing and future VAT claims from the Swiss Federal Tax Administration. In addition, as a component of the Swiss Re Group’s financing structure, the Company has guaranteed CHF 974 million (2016: CHF 1 016 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 2017 and 2016, respectively. 120 Swiss Reinsurance Company Ltd 2017 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 2016 16 336 16 066 32 402 2017 15 439 18 657 34 096 To secure the technical provisions at the 2017 balance sheet date, securities with a book value of CHF 12 927 million (2016: CHF 14 009 million) were deposited in favour of ceding companies, of which CHF 3 513 million (2016: CHF 4 088 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 2017, total commitments remaining uncalled were CHF 1 305 million (2016: CHF 495 million). The Company has entered into subordinated funding facilities with its parent company Swiss Re Ltd under which the Company has the right, among others, to issue subordinated notes to Swiss Re Ltd at any time. For its various rights, the Company owes Swiss Re Ltd an unconditional fixed commitment fee on the total facility amount, payable in annual instalments. Annually, the Company receives a partial reimbursement of the commitment fee on the undrawn facility amount. As of 31 December 2017 and 2016, the facilities were undrawn. An overview of the subordinated funding facilities is provided in the following table: Instrument Subordinated funding facility Subordinated funding facility Subordinated funding facility Lender Swiss Re Ltd Swiss Re Ltd Swiss Re Ltd Issued in 2015 2016 2016 Maturity 2030 2036 2032 Currency USD USD USD Nominal value in millions 700 400 800 Commitment fee (on total facility amount) 5.80% 6.10% 5.68% Partial reimbursement of commitment fee (on undrawn amount) 2.22% 2.13% 1.95% Swiss Reinsurance Company Ltd 2017 Annual Report 121 Financial statements 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 2017 2018 2019 2020 2021 After 2022 Total operating leases, net 2016 11 6 4 4 4 6 35 2017 – 39 38 29 7 8 121 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 2017 and 2016, Swiss Reinsurance Company Ltd held the following direct and material indirect investments in subsidiaries and affiliated companies: Country Barbados Barbados As of 31 December 2017 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 Investments Ltd Swiss Re Life and Health Africa Limited Swiss Re Mexico Servicios, S. de R.L. de C.V. Swiss Re Private Equity Partners SGP Limited Swiss Re Reinsurance Holding Company Ltd Swiss Pillar Investments 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 Holding Pte. Ltd. Swiss Re Asia Pte. Ltd.1 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 Switzerland South Africa Mexico Cayman Islands Switzerland Switzerland United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) United States (USA) Singapore Singapore Luxembourg Luxembourg Germany United Kingdom (UK) India United Kingdom (UK) Brazil Cayman Islands Vietnam Brazil 1 Former Swiss Re Asia Ltd, Switzerland, Zurich, prior to its redomiciliation to Singapore as at 31 December 2017 122 Swiss Reinsurance Company Ltd 2017 Annual Report City Bridgetown Bridgetown Mexico City Sydney Sydney São Paulo Zurich Cape Town Mexico City George Town Zurich Zurich Wilmington New York Wilmington Wilmington Wilmington Wilmington Armonk Singapore Singapore Luxembourg Luxembourg Munich London Mumbai London São Paulo São Paulo George Town Hanoi % Equity interest 100% 100% 100% 100% 100% 99% 100% 100% 98% 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% 99% 100% 100% 98% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 94% 100% 100% 100% 20% 93% 100% 25% 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% Swiss Reinsurance Company Ltd 2017 Annual Report 123 Financial statements Swiss Reinsurance Company Ltd 12 Debt and subordinated liabilities The Company had outstanding debt and subordinated liabilities at the 2017 balance sheet date of CHF 8 888 million (2016: CHF 8 245 million). Thereof CHF 7 510 million (2016: CHF 5 978 million) were due within one to five years and CHF 1 378 million (2016: CHF 2 267 million) were due after five years. As of 31 December 2017, the following public placed debentures were outstanding: Instrument Subordinated bond Subordinated bond Subordinated bond Subordinated bond Subordinated bond Senior bond Subordinated bond Senior bond Issued in 2012 2013 2007 2013 2012 2014 2015 2015 Currency USD USD GBP CHF EUR CHF EUR CHF Nominal in millions 750 750 500 175 500 250 750 250 Interest rate 8.250% 6.375% 6.302% 7.500% 6.625% 1.000% 2.600% 0.750% Maturity/ First call in 2018 2019 2019 2020 2022 2024 2025 2027 Book value CHF millions 731 731 659 175 585 250 878 250 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 2016 96 1 0 –3 –47 110 514 923 14 Claims on and obligations towards affiliated companies CHF millions Loans 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 2016 8 743 13 533 2 7191 86 1 9412 2 6053 300 3 664 1 8611 4 9374 1 In 2017, the netting process of assets and liabilities from reinsurance towards the same counterparty was decommissioned. This led to a gross-up of the receivables from reinsurance as well as the reinsurance balances payable. The effect of such a gross-up for intercompany balances in 2016 was CHF 2 377 million. 2 Thereof at the 2017 balance sheet date CHF 2 million (2016: none) were towards the parent company Swiss Re Ltd. 3 Thereof at the 2017 balance sheet date CHF 2 720 million (2016: CHF 2 178 million) were towards the parent company Swiss Re Ltd. 4 Thereof at the 2017 balance sheet date CHF 733 million (2016: CHF 127 million) were towards the parent company Swiss Re Ltd. 2017 66 3 2 –3 –38 86 842 1 385 2017 8 025 15 051 6 7981 21 1 9082 4 6293 149 7 913 5 3351 4 6044 124 Swiss Reinsurance Company Ltd 2017 Annual Report 15 Release of undisclosed reserves In 2017, no net release of undisclosed reserves (2016: CHF 253 million). 16 Obligations towards employee pension fund As of 31 December 2017, other liabilities included CHF 1 million (2016: CHF 1 million) payable to the employee pension fund. 17 Personnel information As of 31 December 2017, the Company employed a worldwide staff at an average of 1 930 (2016: 1 846) full time equivalents. Personnel expenses for the 2017 financial year amounted to CHF 440 million (2016: CHF 440 million). 18 Accrued income from subsidiaries and affiliated companies Accrued income mainly consists of the dividend income of CHF 974 million from Swiss Re Reinsurance Holding Company Ltd in accordance with the resolution of the shareholder‘s Annual General Meeting of 12 March 2018. Based on the economic view this dividend, to be paid by the subsidiary in 2018, was already recorded in the Company‘s financial statements as of 2017. 19 Extraordinary income and expenses The 2017 net income contains extraordinary expenses of CHF 226 million, which was caused by a correction of an overstatement of the 2016 income statement in the same amount. The overstatement in 2016 resulted from an incorrect recognition of foreign exchange rate adjustments on cross currency interest rate swaps through the income statement instead of adjusting only the notional of these derivative financial instruments on the balance sheet. 20 Auditor’s fees In 2017, the Swiss Re Group incurred total auditor’s fees of CHF 30 million (2016: CHF 33 million) and additional fees of CHF 2 million (2016: CHF 4 million), of which CHF 3 million (2016: CHF 3 million) and CHF 1 million (2016: CHF 1 million), respectively, incurred for the Company. 21 Subsequent events In the context of the “Tax Cuts and Jobs Act of 2017” in the US, the Company is currently reassessing its intercompany structure with the affiliated companies Swiss Reinsurance America Corporation and Swiss Re Life & Health America Inc and their subsidiaries. It is expected that several intragroup retrocession agreements will either be recaptured, novated or not renewed in the course of 2018. While the financial impact can not be quantified at the date of approving the Company’s 2017 financial statements, it is assumed that significant impacts to the Company’s balance sheet and income statement are expected in 2018. Swiss Reinsurance Company Ltd 2017 Annual Report 125 Financial statements 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 26 March 2018, to approve the following allocation and payment of a cash dividend of USD 1 950 million, which must not exceed CHF 2 100 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 28 March 2018. 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 2 100 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 2 100 million. This threshold of CHF 2 100 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) Voluntary profit reserves after proposed cash dividend 2016 26 875 901 –850 51 2016 3 839 850 4 689 –2 5902 2 099 2017 51 1 209 1 260 –1 200 60 2017 2 099 1 200 3 299 –2 1001 1 199 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 2016 figure was recalculated based on the final cash dividend converted into CHF at spot rate on the settlement date. Zurich, 14 March 2018 126 Swiss Reinsurance Company Ltd 2017 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 110 to 125) for the year ended 31 December 2017. 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 about 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 2017 comply with Swiss law and the Company’s Articles of Association. Swiss Reinsurance Company Ltd 2017 Annual Report 127 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. Investment valuation continues to be an area with inherent risk for investments with no observable market price. 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 and valuation requires unobservable or interpolated inputs and complex valuation models: ̤ Fixed income securitised products ̤ Fixed income mortgage and asset-backed securities ̤ Public placements and infrastructure loans ̤ Private equities ̤ Derivatives ̤ 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 around the valuation models for certain investments, including the Company’s independent price verification process. We also tested management’s data integrity and change management controls relating to the valuation models. In relation to the matters set out opposite, our substantive testing procedures included the following: ̤ Challenging the Company’s 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. ̤ Engaging our own valuation experts to perform independent valuations of selected investments. 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 2017. Risk of inappropriate Swiss statutory financial reporting over investments Key audit matter Based on the derivative financial instrument error in 2016, which led to an overstatement of the income statement by CHF 226 million (as disclosed in note 19), we identified a significant risk in regards of inappropriate Swiss statutory financial reporting over investments. There is a risk of overstatement of the net income due to inappropriate treatment of investment gains based on the statutory accounting principles. How our audit addressed the key audit matter In relation to the matters set out opposite, our testing procedures included the following: ̤ Assessing and testing of the US GAAP to statutory walks. ̤ Critically reviewing the derivative portfolio as well as the gains and losses booked for US GAAP and statutory reporting. ̤ Testing application of adjusted accounting principles in regards of the back-to-back derivatives which are now valued at fair value in line with US GAAP. ̤ Assessing appropriate disclosure of error correction and change in accounting principles. ̤ Testing of the investment reconciliations. On the basis of the work performed, we note proper reporting of the investment balances as of 31 December 2017. 128 Swiss Reinsurance Company Ltd 2017 Annual Report Valuation of actuarially determined Property & Casualty (‘P&C’) loss reserves Key audit matter 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 reserves. 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 key factors and 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, loss reserves for ‘long tail’ lines of business (for example, the Liability, US Asbestos and Environmental, Motor Liability and Workers’ Compensation portfolios) 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 claim settlements are often less frequent but of higher magnitude. 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. Moreover, not all natural catastrophe events and significant man-made losses can be modelled using traditional actuarial methodologies, which increases the degree of judgement needed in establishing reserves for these events. 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 independently test management’s estimates of P&C loss reserves, and evaluate 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 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 to determine the impact of selected key assumptions. ̤ 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, methods, assumptions and underlying data used in the valuation of actuarially determined P&C loss reserves are reasonable and in line with financial reporting requirements and accepted industry practice. Swiss Reinsurance Company Ltd 2017 Annual Report 129 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, methods, 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 valuation-method inputs. The impairment assessment is considered a key audit matter due to the considerable judgement in the valuation model and inputs applied. 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. ̤ Engaging our internal valuation specialists to assist in the testing of key assumptions and inputs. 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 values for all investments in subsidiaries is recoverable. 130 Swiss Reinsurance Company Ltd 2017 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. We recommend that the financial statements submitted to you be approved. PricewaterhouseCoopers Ltd Alex Finn Audit expert Auditor in charge Bret Griffin Zurich, 14 March 2018 Swiss Reinsurance Company Ltd 2017 Annual Report 131 General information 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; 132 Swiss Reinsurance Company Consolidated 2017 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. This communication is not intended to be a recommendation to buy, sell or hold securities and does not constitute an offer for the sale of, or the solicitation of an offer to buy, securities in any jurisdiction, including the United States. Any such offer will only be made by means of a prospectus or offering memorandum, and in compliance with applicable securities laws. Swiss Reinsurance Company Consolidated 2017 Annual Report 133 General information 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. Growth forecasts among the principal global economies remain uneven and uncertain in an environment of elevated political uncertainty. The planned withdrawal of the United Kingdom from the European Union has created uncertainty not only for the United Kingdom but for the rest of the European Union, and negotiations over withdrawal will likely continue to contribute to volatility and pose significant challenges for the European Union and the United Kingdom. The long- term effects of a withdrawal of the United Kingdom from the European Union 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 in the context of a broader economic slowdown were it to occur. 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 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 (albeit hardening) 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. 134 Swiss Reinsurance Company Consolidated 2017 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”). While certain regulatory processes are designed in part to foster convergence and achieve recognition of group supervisory schemes, the Group continues to face risks of extra-territorial application of regulations, particularly as to group supervision and group solvency requirements. 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. While in recent years there has been an evolving focus on classifying certain insurance companies as systemically important, it is unclear whether and, if so, in what form reforms will be enacted. The Swiss Re Group could be designated as a global systemically important insurer (“G-SIIs”) 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. The International Association of Insurance Supervisors, an international body that represents insurance regulators and supervisors, has published and since refined the methodology for identifying G-SIIs. Were the Group to be designated as a G-SII, it could be subject to one or both of the resulting regimes, including capital standards (the basic capital requirement for G-SIIs), 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 regarding the future relationship between the United Kingdom and the European Union could also impact the legislative and/or regulatory regimes to which the Group is subject, both in the United Kingdom and in the European Union. Swiss Reinsurance Company Consolidated 2017 Annual Report 135 General information Note on risk factors 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. Recently enacted changes to the US tax regime is prompting the Group to consider modifications to its operating model for its US business. These changes, or inconsistencies between the various regimes that apply to the Group, could increase the costs of doing business (including due to increased capital requirements), reduce access to liquidity, limit the scope of current or future business or affect the competitive balance, or could make reinsurance less attractive to primary insurers. 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 reinsurance industry, 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. 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. 136 Swiss Reinsurance Company Consolidated 2017 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 reinsurance 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 businesses (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 2017 Annual Report 137 General information Note on risk factors 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 and/or the ratings of its key legal entities. 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 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 the Group’s 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. 138 Swiss Reinsurance Company Consolidated 2017 Annual Report The Group is also involved, from time to time, in investigations and regulatory proceedings, which could result in adverse judgments, settlements, fines and other outcomes. The number of these investigations and proceedings involving the financial services industry has increased in recent years, and the potential scope of these investigations and proceedings has also increased, not only in respect of matters covered by the Group’s direct regulators, but also in respect of compliance with broader business conduct rules, including those in respect of market abuse, bribery, money laundering, trade sanctions and data protection and privacy. Aggressive tax enforcement is becoming a higher priority for many tax authorities and 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 risk 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 natural disasters, such as hurricanes, windstorms, floods, earthquakes, and man-made disasters, such as acts of terrorism and other disasters such as industrial accidents, explosions, and fires, and pandemics) are inherently unpredictable in terms of both their frequency and severity and have exposed, and may expose, the Group to unexpected large losses (and related uncertainties in estimating future claims in respect of such events); changes in the insurance industry that affect ceding companies, particularly those that further increase their sensitivity to counterparty risk; competitive conditions (including as a result of consolidation and the availability of significant levels of alternative capacity); cyclicality of the industry; risks related to emerging claims and coverage issues; macro developments giving rise to emerging risks, such as climate change and technological developments (including greater exposure to cyber risks (where accumulation risk is yet to be fully understood, but also risks relating to wearable health devices and autonomous cars), which could have a range of consequences from operational disruption, to loss of proprietary or customer data, to greater regulatory burdens and potential liability); risks arising from the Group’s dependence on policies, procedures and expertise of ceding companies; risks related to investments in emerging markets; and risks related to the failure of, or attacks directed at, the Group’s operational systems and infrastructure, including its information technology networks and systems. Any of the foregoing, as well as the occurrence of future risks that the Group’s risk management procedures fail to identify or anticipate, could have a material adverse effect on the Group, and could also give rise to reputational risk. Use of models; accounting matters The Group is subject to risks relating to the preparation of estimates and assumptions that management uses, including as part of its risk models as well as those that affect the reported amounts of assets, liabilities, revenues and expenses in the Group’s financial statements, including assumed and ceded business. For example, the Group estimates premiums pending receipt of actual data from ceding companies, which actual data could deviate from the estimates. In addition, particularly with respect to large natural catastrophes, it may be difficult to estimate losses, and preliminary estimates may be subject to a high degree of uncertainty and change as new information becomes available. Deterioration in market conditions could have an adverse impact on assumptions used for financial reporting purposes, which could affect possible impairment of present value of future profits, fair value of assets and liabilities, deferred acquisition costs or goodwill. Moreover, regulators could require the use of standard models instead of permitting the use of internal Swiss Reinsurance Company Consolidated 2017 Annual Report 139 General information Note on risk factors 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 and the creation of separate business units 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’s structure provides flexibility in the way in which it finances operations and the Swiss Re Group expects that its structure will continue to evolve over time. In 2017, the Swiss Re Group entered into a transaction with MS&AD Insurance Group Holdings Inc. (“MS&AD”) pursuant to which MS&AD agreed to invest in closed books segment of the Swiss Re Group’s Life Capital business unit. While to date the Group remains wholly owned by SRL, in the future, the Swiss Re Group may partner (for purposes of acquisitions or otherwise) with other investors in, or within, one or more of its business units or sub-groups within its business units (including the Group), which, subject to applicable regulatory requirements, have the potential to alter its 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 and board composition at the relevant corporate level. The Group’s structure could also change in connection with acquisitions. 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. 140 Swiss Reinsurance Company Consolidated 2017 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 © 2018 Swiss Re. All rights reserved. 

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