Swiss Reinsurance Co.
Annual Report 2018

Plain-text annual report

Swiss Reinsurance Company Consolidated Annual Report 2018 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 6 8 10 12 12 21 31 35 36 52 53 61 71 75 78 81 88 91 92 96 102 102 108 110 112 124 125 130 132 Financial statements Group financial 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 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 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/loss attributable to common shareholder Note 2017 2018 4 4 3 3 7 7 7 3 3 3 11 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 31 182 28 746 32 28 778 154 2 601 367 –33 75 31 942 –11 614 –10 287 –7 –6 029 –2 180 –30 117 1 825 –601 1 224 –176 1 048 –37 1 011 –41 970 1 Total impairments for the years ended 31 December of USD 5 million in 2017 and nil in 2018, respectively, were fully recognised in earnings. 2 Total impairments for the years ended 31 December of USD 39 million in 2017 and USD 11 million in 2018, respectively, were fully recognised in earnings. The accompanying notes are an integral part of the Group financial statements. 2 Swiss Reinsurance Company Consolidated 2018 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 net 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, net of tax Comprehensive income attributable to non-controlling interests Total comprehensive income attributable to common shareholder The accompanying notes are an integral part of the Group financial statements. 2017 114 –6 2 410 262 17 799 –67 –65 667 2018 1 048 –1 483 –267 –14 –20 –736 –41 –17 –794 Swiss Reinsurance Company Consolidated 2018 Annual Report 3 Financial statements Group financial statements RECLASSIFICATION OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME For the years ended 31 December 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 2018 USD millions Balance as of 1 January Impact of Accounting Standards Updates4 Change during the period Amounts reclassified out of accumulated other comprehensive income Tax Balance as of period end Net unrealised investment gains/losses1 2 070 1 884 Other-than- temporary impairment1 –5 3 Foreign currency translation1, 2 –5 262 278 Adjustment for pension benefits3 –999 299 Credit risk of financial liabilities at fair value option 0 Accumulated other comprehensive income –4 196 2 464 –1 858 –32 2 064 Net unrealised investment gains/losses1 2 064 111 –2 083 1 –2 –3 –20 152 –4 852 28 –65 –737 –1 849 53 –3 528 0 Other-than- temporary impairment1 –3 Foreign currency translation1, 2 –4 852 –3 –172 Adjustment for pension benefits3 –737 –17 –78 Credit risk of financial liabilities at fair value option 0 5 Accumulated other comprehensive income –3 528 96 –2 333 182 418 692 15 –110 –5 122 61 3 –768 –3 258 311 –5 196 5 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’’. 4 Impact of ASU 2018-02, ASU 2016-16 and ASU 2016-01. Please refer to Note 1 for more details. The accompanying notes are an integral part of the Group financial statements. 4 Swiss Reinsurance Company Consolidated 2018 Annual Report This page is intentionally left blank. Swiss Reinsurance Company Consolidated 2018 Annual Report 5 Financial statements Group financial statements ASSETS As of 31 December USD millions Investments Fixed income securities: Available-for-sale (including 11 219 in 2017 and 10 245 in 2018 subject to securities lending and repurchase agreements) (amortised cost: 2017: 65 694; 2018: 64 850) Trading (including 1 761 in 2017 and 2 599 in 2018 subject to securities lending and repurchase agreements) Equity securities: Available-for-sale (including 241 in 2017 subject to securities lending and repurchase agreements) (cost: 2017: 2 993)1 Trading1 At fair value through earnings (including 407 in 2018 subject to securities lending and repurchase agreements)1 Policy loans, mortgages and other loans Investment real estate Short-term investments (including 284 in 2017 and 456 in 2018 subject to securities lending and repurchase agreements) Other invested assets Investments for unit-linked business (including equity securities trading: 585 in 2017, equity securities at fair value through earnings: 424 in 2018) Total investments Note 7, 8, 9 2017 2018 68 682 65 881 2 538 3 414 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 2 450 2 883 2 240 3 815 4 550 424 85 657 3 695 632 11 983 12 740 10 894 6 940 842 3 731 363 4 152 2 460 Cash and cash equivalents (including 262 in 2017 and 466 in 2018 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 11 Total assets 150 118 144 089 1Change due to ASU 2016-01. Please refer to Note 1 for more details. The accompanying notes are an integral part of the Group financial statements. 6 Swiss Reinsurance Company Consolidated 2018 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 2017: 344 052 565; 2018: 344 052 565 shares authorised and issued Additional paid-in capital Treasury shares, 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 Credit risk of financial liabilities at fair value option, 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 2017 2018 5 8 11 10 7 10 58 221 19 361 5 764 8 487 11 429 2 592 412 4 935 2 826 7 783 8 114 129 924 750 32 8 690 –17 2 064 –3 –4 852 –737 –3 528 12 335 18 262 1 932 20 194 58 652 18 969 5 574 8 248 10 262 1 879 453 4 952 4 955 6 941 6 491 127 376 32 8 701 –19 692 –3 –5 122 –768 5 –5 196 11 246 14 764 1 949 16 713 150 118 144 089 Swiss Reinsurance Company Consolidated 2018 Annual Report 7 Financial statements Group financial 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 in 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 Impact of ASU 2018-022 Impact of ASU 2016-162 Impact of ASU 2016-012 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 Impact of ASU 2018-022 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 Impact of ASU 2018-022 Changes during the period Balance as of period end The accompanying notes are an integral part of the Group financial statements. 8 Swiss Reinsurance Company Consolidated 2018 Annual Report 2017 2018 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 –737 750 –750 0 32 32 8 690 11 –3 3 8 701 –17 –2 –19 2 064 175 4 –68 –1 483 692 –3 –3 –4 852 –3 –267 –5 122 –737 –17 –14 –768 USD millions Credit risk of financial liabilities at fair value option, net of tax 2017 2018 Balance as of 1 January Impact of ASU 2016-012 Balance as of period end 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 Impact of ASU 2018-022 Impact of ASU 2016-162 Impact of ASU 2016-012 Balance as of period end Shareholder’s equity Non-controlling interests Balance as of 1 January Transactions with non-controlling interests Income attributable to non-controlling interests Other comprehensive income attributable to non-controlling interests Balance as of period end Total equity 1 In 2017, the Group sold three primary life and health insurance carriers to Swiss Re Life Capital Group. 2 Impact of Accounting Standards Update. Please refer to Note 1 for more details. The accompanying notes are an integral part of the Group financial statements. 0 0 15 339 –45 –358 66 –67 –2 600 12 335 18 262 1 661 206 48 17 1 932 20 194 0 5 5 12 335 –7 1 011 –41 –1 950 –155 –10 63 11 246 14 764 1 932 37 –20 1 949 16 713 Swiss Reinsurance Company Consolidated 2018 Annual Report 9 Financial statements Group financial statements For the years ended 31 December USD millions Cash flows from operating activities Net income/loss attributable to common shareholder Add net income/loss 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. Dividends paid to parent Transactions with non-controlling interests Net cash provided/used by financing activities The accompanying notes are an integral part of the Group financial statements. 10 Swiss Reinsurance Company Consolidated 2018 Annual Report 2017 2018 –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 –2 600 200 –3 938 970 37 140 –309 44 1 487 489 186 –493 –274 107 2 384 39 402 4 214 –45 053 –1 176 1 676 –1 348 3 386 –910 75 266 –111 293 496 –750 –4 –1 950 –2 026 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 653 671 2017 and 2018, respectively. Tax paid was USD million and USD million (thereof USD million and USD 507 2017 –2 877 265 –2 612 5 830 3 218 2018 624 –147 477 3 218 3 695 43 million for letter of credit fees) for million and USD 49 439 million for 2017 and 2018, respectively. Cash and cash equivalents include restricted cash and restricted cash equivalents, for instance pledged cash and cash equivalents (please refer to Note 7, “Investments“). The accompanying notes are an integral part of the Group financial statements. Swiss Reinsurance Company Consolidated 2018 Annual Report 11 Financial statements Notes to the Group financial statements 1 Organisation and summary of significant accounting policies Nature of operations The Swiss Reinsurance Company Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company Ltd (the parent company, referred to as “SRZ”) and its subsidiaries (collectively, the “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. In the half-year 2018 report, the impact of the Accounting Standard Updates (ASUs) 2016-01, 2016-16 and 2018-02 was reflected in the Group’s statement of comprehensive income. In the year-end 2018 report, the Group revised the presentation and presented the statement of comprehensive income without the impact of these ASUs totalling USD 96 million. The revision had no impact on the Group’s financial position, net income and cash flows. Please refer to the subsection ”Adoption of new accounting standards” for more details about the ASUs. 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 12 Swiss Reinsurance Company Consolidated 2018 Annual Report monetary assets and liabilities and trading securities are reported in earnings. Remeasurement gains and losses on available-for- sale securities, investments in consolidated subsidiaries and investments accounted for using the equity method are reported in shareholder’s equity. For consolidation purposes, assets and liabilities of subsidiaries with functional currencies other than US dollars are translated from the functional currency to US dollars at closing rates. Revenues and expenses are translated at average exchange rates. Translation adjustments are reported in shareholder’s equity. Valuation of financial assets The fair value of the majority of the Group’s financial instruments is based on quoted prices in active markets or observable inputs. These instruments include government and agency securities, commercial paper, most investment-grade corporate debt, most high-yield debt securities, exchange-traded derivative instruments, most mortgage- and asset-backed securities and listed equity securities. In markets with reduced or no liquidity, spreads between bid and offer prices are normally wider compared to spreads in highly liquid markets. Such market conditions affect the valuation of certain asset classes of the Group, such as some asset-backed securities as well as certain derivative structures referencing such asset classes. The Group considers both the credit risk of its counterparties and own risk of non-performance in the valuation of derivative instruments and other over-the-counter financial assets. In determining the fair value of these financial instruments, the assessment of the Group’s exposure to the credit risk of its counterparties incorporates consideration of existing collateral and netting arrangements entered into with each counterparty. The measure of the counterparty credit risk is estimated with incorporation of the observable credit spreads, where available, or credit spread estimates derived based on the benchmarking techniques where market data is not available. The impact of the Group’s own risk of non-performance is analysed in the manner consistent with the aforementioned approach, with consideration of the Group’s observable credit spreads. The value representing such risk is incorporated into the fair value of the financial instruments (primarily derivatives), in a liability position as of the measurement date. The change in this adjustment from period to period is reflected in realised gains and losses in the income statement. For assets or derivative structures at fair value, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Although management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and 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. 2018, 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 securities are classified as available-for-sale (AFS) or trading. Fixed income 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 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. 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 and the fair value is lower than cost expressed in functional currency terms, the cost of fixed income securities AFS is reduced to fair value, with a corresponding charge to realised investment losses. Subsequent recoveries are not recognised in earnings. Equity investments are carried at fair value with unrealised gains and losses recognised in earnings, with the exception of equity method investments and investments that result in consolidation. Interest on fixed income securities is recorded in net investment income when earned and is adjusted for the amortisation of any purchase premium or discount. Dividends on equity securities are recognised as investment income on the ex-dividend date. Realised gains and losses on sales are included in earnings and are calculated using the specific identification method. Policy loans, mortgages and other loans are carried at amortised cost. Interest income is recognised in accordance with the effective yield method. Swiss Reinsurance Company Consolidated 2018 Annual Report 13 Financial statements Notes to the Group financial statements Investment in real estate that the Group intends to hold for the production of income is carried at depreciated cost, net of any write- downs for impairment in value. Depreciation on buildings is recognised on a straight-line basis over the estimated useful life of the asset. Land is recognised at cost and not depreciated. Impairment in value is recognised if the sum of the estimated future undiscounted cash flows from the use of the real estate is lower than its carrying value. 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. 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 in earnings. 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. 14 Swiss Reinsurance Company Consolidated 2018 Annual Report Deferred acquisition costs The Group incurs costs in connection with acquiring new and renewal reinsurance and insurance business. Some of these costs, which consist primarily of commissions, are deferred as they are directly related to the successful acquisition of such business. Deferred acquisition costs for short-duration contracts are amortised in proportion to premiums earned. Future investment income is considered in determining the recoverability of deferred acquisition costs for short-duration contracts. Deferred acquisition costs for long-duration contracts are amortised over the life of underlying contracts. Deferred acquisition costs for universal-life and similar products are amortised based on the present value of estimated gross profits. Estimated gross profits are updated quarterly. Modifications of insurance and reinsurance contracts The Group accounts for modifications of insurance and reinsurance contracts that result in a substantially unchanged contract as a continuation of the replaced contract. The associated deferred acquisition costs and present value of future profits (PVFP) will continue to be amortised. The Group accounts for modifications of insurance and reinsurance contracts that result in a substantially changed contract as an extinguishment of the replaced contract. The associated deferred acquisition costs or PVFP are written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. Business combinations The Group applies the acquisition method of accounting for business combinations. This method allocates the cost of the acquired entity to the assets and liabilities assumed based on their estimated fair values at the date of acquisition. The underlying assets and liabilities acquired are subsequently accounted for according to the relevant US 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 Swiss Reinsurance Company Consolidated 2018 Annual Report 15 Financial statements Notes to the Group financial statements recorded against deferred tax assets when it is deemed more likely than not that some or all of the deferred tax assets 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. The Group releases stranded tax effects for unrealised gains/losses on AFS securities to earnings on a straight-line basis over the average duration of the relevant AFS portfolio as an approximation of when the individual securities within the portfolio are sold or mature. For adjustment for pension and other post-retirement benefits, stranded tax effects are released to earnings when the relevant pension plan is terminated. For foreign currency translation, stranded tax effects are released to earnings in line with the recycling of the underlying foreign currency translation amounts. Unpaid claims and claim adjustment expenses Liabilities for unpaid claims and claim adjustment expenses for property and casualty and life and health insurance and reinsurance contracts are accrued when insured events occur and are based on the estimated ultimate cost of settling the claims, using reports and individual case estimates received from ceding companies. A provision is also included for claims incurred but not reported, which is developed on the basis of past experience adjusted for current trends and other factors that modify past experience. The establishment of the appropriate level of reserves is an inherently uncertain process involving estimates and judgements made by management, and therefore there can be no assurance that ultimate claims and claim adjustment expenses will not exceed the loss reserves currently established. These estimates are regularly reviewed, and adjustments for differences between estimates and actual payments for claims and for changes in estimates are reflected in income in the period in which the estimates are changed or payments are made. The Group does not discount liabilities arising from prospective property and casualty insurance and reinsurance contracts, including liabilities which are discounted for US statutory reporting purposes. Liabilities arising from property and casualty insurance and reinsurance contracts acquired in a business combination are initially recognised at fair value in accordance with the acquisition method of accounting. The Group does not discount life and health claim reserves except for disability income claims in payment and mortality claims paid out in the form of an annuity. These claims 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. 16 Swiss Reinsurance Company Consolidated 2018 Annual Report Funds held assets and liabilities On the asset side, funds held by ceding companies consist mainly of amounts retained by the ceding company for business written on a funds withheld basis. In addition, the account also includes amounts arising from the application of the deposit method of accounting to ceded retrocession or reinsurance contracts. On the liability side, funds held under reinsurance treaties consist mainly of amounts arising from the application of the deposit method of accounting to inward insurance and reinsurance contracts. In addition, the account also includes amounts retained from ceded business written on a funds withheld basis. Funds withheld assets are assets that would normally be paid to the Group but are withheld by the cedent to reduce a potential credit risk or to retain control over investments. In case of funds withheld liabilities, it is the Group that withholds assets related to ceded business in order to reduce its credit risk or retain control over the investments. The deposit method of accounting is applied to insurance and reinsurance contracts that do not indemnify the ceding company or the Group against loss or liability relating to insurance risk. Under the deposit method of accounting, the deposit asset or liability is initially measured based on the consideration paid or received. For contracts that transfer neither significant timing nor underwriting risk, and contracts that transfer only significant timing risk, changes in estimates of the timing or amounts of cash flows are accounted for by recalculating the effective yield. The deposit is then adjusted to the amount that would have existed had the new effective yield been applied since the inception of the contract. The revenue and expense recorded for such contracts is included in net investment income. For contracts that transfer only significant underwriting risk, once a loss is incurred, the deposit is adjusted by the present value of the incurred loss. At each subsequent balance sheet date, the portion of the deposit attributable to the incurred loss is recalculated by discounting the estimated future cash flows. The resulting changes in the carrying amount of the deposit are recognised in claims and claim adjustment expenses. Funds withheld balances are presented together with assets and liabilities arising from the application of the deposit method because of their common deposit-type character. Shadow adjustments Shadow adjustments are 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 US GAAP reserves rather than using locked-in or current book yields. If the unlocked best estimate US 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 Swiss Reinsurance Company Consolidated 2018 Annual Report 17 Financial statements Notes to the Group financial statements 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 is set up in relation to the time a receivable has been due and any 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 2018, 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 15 million for the year ended 31 December 2018. 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 2018, the accrual for share-based compensation plans in additional paid-in capital was USD 6 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 13 March 2019. This is the date on which the financial statements are available to be issued. Adoption of new accounting standards 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 adopted ASU 2014-09 on 1 January 2018 together with the following ASUs related to topic 606: ASU 2016-08 ‘‘Principal versus Agent Considerations (Reporting Revenue Gross versus Net)’’, ASU 2016-10 ‘‘Identifying Performance Obligations and Licensing’’, ASU 2016-12 ‘‘Narrow-Scope Improvements and Practical Expedients’’ and ASU 2016-20 ‘‘Technical Corrections and Improvements to Topic 606’’. The retrospective adoption of ASU 2014-09 and related ASUs did not have a material impact on the Group’s financial statements. In January 2016, the FASB issued ASU 2016-01, ‘‘Recognition and Measurement of Financial Assets and Financial Liabilities’’, an update to subtopic 825-10, ‘‘Financial Instruments --- Overall’’. The ASU requires the Group to carry investments in equity securities, including partnerships, unincorporated joint ventures and limited liability companies at fair value through earnings, with the exception of equity method investments, investments that result in consolidation or investments for which the measurement alternative has been elected. The Group did not elect the measurement alternative for any of its investments. For financial liabilities to which the fair value option has been applied, the ASU requires an entity to separately present the change in fair value attributable to instrument-specific credit risk in other comprehensive income (OCI) 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 adopted ASU 2016-01 on 1 January 2018 together with ASU 2018-03, ‘‘Technical Corrections and Improvements to Financial Instruments --- Overall (Subtopic 825-10)’’. The opening balance sheet impact from the adoption is a reclassification within shareholder’s equity from net unrealised investment gains, net of tax, to retained earnings of USD 68 million. In addition, USD 5 million were reclassified from retained earnings to credit risk of financial liabilities at fair value option, net of tax. These 18 Swiss Reinsurance Company Consolidated 2018 Annual Report reclassifications can be found in the statement of shareholder’s equity. The impact on pre-tax earnings in 2018 due to the adoption of ASU 2016-01 was an estimated net realised investment loss of USD 326 million. In August 2016, the FASB issued ASU 2016-15, ‘‘Classification of Certain Cash Receipts and Cash Payments’’, a consensus of the FASB Emerging Issues Task Force (EITF) to topic 230, ‘‘Statement of Cash Flows’’. ASU 2016-15 provides guidance on eight issues related to the presentation and classification of cash receipts and cash payments in the statement of cash flows with the objective of reducing existing diversity in practice. The Group adopted ASU 2016-15 retrospectively on 1 January 2018. The adoption did not have a material impact on the Group’s statement of cash flows. 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 former guidance which prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. This new standard requires that an entity recognises the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Group adopted ASU 2016-16 on 1 January 2018 on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the adoption date. The adoption resulted in an increase of net unrealised investment gains/losses, net of tax, of USD 4 million, an increase of deferred tax of USD 6 million, and a reduction of retained earnings of USD 10 million. The movements in equity related to the adoption of ASU 2016-16 can be found in the statement of shareholder’s equity. The impact on earnings in 2018 due to the adoption of ASU 2016-16 was a tax benefit of USD 67 million. In November 2016, the FASB issued ASU 2016-18, ‘‘Restricted Cash’’, a consensus of the FASB EITF to topic 230, ‘‘Statement of Cash Flows’’. The update requires that the statement of cash flows explains the change during the period in the total of cash, cash equivalents and restricted cash included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Group adopted ASU 2016-18 retrospectively on 1 January 2018. The adoption did not have a material impact on the Group’s financial statements. and restricted cash equivalents. Restricted cash and restricted cash equivalents should be In February 2017, the FASB issued ASU 2017-05, ‘‘Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets’’, an update to subtopic 610-20, ‘‘Other Income --- Gains and Losses from the Derecognition of Nonfinancial Assets’’. This update clarifies and provides guidance on the scope of subtopic 610-20 including financial assets meeting the definition of an in-substance non-financial asset. The Group adopted ASU 2017-05 retrospectively on 1 January 2018. The adoption did not have an impact on the Group’s financial statements. In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost’’, an update to topic 715, “Compensation – Retirement Benefits”. The amendments in this update require that an employer separates other components of net benefit cost from the service cost component and presents these components outside a subtotal of income from operations, if one is presented. Further, the ASU only allows the service cost component of net benefit cost to be capitalised. The Group adopted ASU 2017-07 retrospectively on 1 January 2018. The adoption did not have a material impact on the Group’s financial statements. In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting’’, an update to topic 718, “Compensation – Stock Compensation”. The amendments in this update provide guidance about which changes to the terms or conditions of a share- based payment award require to apply modification accounting under topic 718. The Group adopted ASU 2017-09 on 1 January 2018. The adoption did not have an impact on the Group’s financial statements. In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, an update to topic 220, “Income Statement – Reporting Comprehensive Income”. The ASU allows a reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the Tax Cuts and Jobs Act. The Group early adopted ASU 2018-02 on 1 January 2018. The adoption resulted in a reclassification within shareholder’s equity of USD 155 million of stranded tax charges from accumulated other comprehensive income to retained earnings. The reclassification can be found in the statement of shareholder’s equity. Future adoption of new accounting standards 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 Group will adopt this ASU on 1 Further, deferred gains carried on the balance sheet and amortised over time under the existing sale-leaseback guidance (estimated to be approximately USD 97 million as of 1 January 2019) will be released as a cumulative-effect adjustment to opening retained earnings as of 1 January 2019. 2019. The expected impact from the adoption is a net balance sheet gross-up of approximately USD 0.25 billion. January Swiss Reinsurance Company Consolidated 2018 Annual Report 19 Financial statements Notes to the Group 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 is permitted. The Group is currently assessing the impact of the new requirements. 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 adoption of the ASU is permitted. The Group is currently assessing the impact of the new requirements. In August 2018, the FASB issued ASU 2018-12, “Targeted Improvements to the Accounting for Long-Duration Contracts“, an update to topic 944, “Financial Services—Insurance“. This ASU requires that the cash flows and net premium ratio will be updated for changes in insurance assumptions (eg mortality, morbidity, terminations) when measuring the liability for future policy benefits for non-participating traditional and limited-payment insurance and reinsurance contracts. The effect of updating cash flow assumptions will be measured on a retrospective catch-up basis and presented separately from the ongoing policyholder benefit expense in the statement of operations in the period the update is made. There will no longer be a provision for adverse deviation. In addition, the discount rate used to reflect the time value of money in the calculation of the liability for future policy benefits will be standardised. An upper-medium-grade fixed-income instrument yield will be required, which differs from the current requirement to use a discount rate reflecting expected investment yields. Further, a locked-in rate will be used in the periodic calculation of the net premium ratio and accretion of interest on the liability for income statement purposes. For balance sheet remeasurement purposes, the discount rate will be updated at each reporting date, with the effect of discount rate changes on the liability recorded immediately in OCI. The ASU requires deferred acquisition costs (DAC) relating to most long-duration contracts to be amortised on a constant basis over the expected term of the contract, and the resulting amortisation amount should not be a function of revenue or profit. The new standard also introduces a new category called market risk benefits, which are features that protect the contract holder from capital market risk and expose the insurer to that risk. These features have to be measured at fair value, with changes in own credit risk recognised in OCI, and presented separately in the primary financial statements. The ASU also requires significant additional disclosures, including disaggregated roll forwards of the liability for future policy benefits, policyholder account balances, market risk benefits and DAC. The ASU is effective for annual and interim periods beginning after 15 December 2020. Early adoption of the amendments is permitted. The new guidance relating to measurement of the traditional and limited-payment contract liabilities and DAC amortisation has to be adopted under a modified retrospective transition approach, with an option to elect a full retrospective transition if certain criteria are met. Under the modified retrospective approach, for contracts in force at the transition date, an entity would continue to use the existing locked-in investment yield interest rate assumptions to calculate the net premium ratio. However, for balance sheet measurement purposes, policyholder liabilities are discounted at the upper-medium-grade fixed-income instrument yield at the transition date, with the impact of the change recognised against accumulated OCI. The Group is currently assessing the impact of the new requirements. 20 Swiss Reinsurance Company Consolidated 2018 Annual Report 2 Information on business segments The Group provides reinsurance and insurance throughout the world through its business segments. The business segments are determined by the organisational structure and by the way in which management reviews the operating performance of the Group. The Group presents four core operating business segments: Property & Casualty Reinsurance, Life & Health Reinsurance, Corporate Solutions and Life Capital. 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 Unit 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, Reinsurance 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. Group items 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. Consolidation Segment information is presented net of external and internal retrocession and other intra-group arrangements. The Group total is obtained after elimination of intra-group transactions in the “Consolidation” column. This includes significant intra-group reinsurance arrangements, recharge of trademark licence fees and intersegmental funding. Swiss Reinsurance Company Consolidated 2018 Annual Report 21 Financial statements Notes to the Group financial statements a) 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/benefit 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 127 6 1 7 1 –50 –223 2 –263 2 –2 26 –487 –461 –724 –24 –748 116 –632 –48 –680 –680 16 569 16 031 636 16 667 1 017 613 48 18 345 13 313 11 826 25 11 851 129 1 308 591 81 3 13 963 –13 172 –9 211 –119 –2 064 –754 –18 584 –12 148 –4 253 –1 159 –239 –280 –519 125 –394 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 30 009 27 863 662 28 525 130 2 226 981 81 50 31 993 –49 –3 –52 –13 172 –9 209 –121 –6 291 –2 400 0 –31 193 –52 52 0 0 0 0 800 –567 233 –119 114 –48 66 –67 –1 2.5 22 Swiss Reinsurance Company Consolidated 2018 Annual Report Business segments – income statement For the year ended 31 December 2018 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/benefit 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 110 1 –1 2 48 36 42 128 –7 –2 28 –312 –293 –165 –10 –175 51 –124 –37 –161 –161 16 545 16 098 –3 16 095 1 380 –16 36 17 495 14 527 12 647 36 12 683 152 1 305 347 –33 1 14 455 –11 614 –10 280 –5 –2 045 –758 –16 740 –13 088 –4 012 –1 114 755 –313 442 –72 370 1 367 –410 957 –155 802 370 802 370 72.2 31.8 104.0 4.3 –41 761 5.4 9.4 31 182 28 746 32 28 778 154 2 601 367 –33 75 31 942 –132 –4 –136 –11 614 –10 287 –7 –6 029 4 –2 180 4 –30 117 –132 132 0 0 0 0 1 825 –601 1 224 –176 1 048 –37 1 011 –41 970 5.7 Swiss Reinsurance Company Consolidated 2018 Annual Report 23 Financial statements Notes to the Group financial statements Business segments – balance sheet As of 31 December 2017 USD millions Total assets 2018 USD millions Total assets Property & Casualty Reinsurance 80 475 Life & Health Reinsurance 64 559 Other Consolidation –11 505 16 589 Total 150 118 Property & Casualty Reinsurance 80 162 Life & Health Reinsurance 61 574 Other Consolidation –13 497 15 850 Total 144 089 24 Swiss Reinsurance Company Consolidated 2018 Annual Report This page is intentionally left blank. Swiss Reinsurance Company Consolidated 2018 Annual Report 25 Financial statements Notes to the Group financial statements b) 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 26 Swiss Reinsurance Company Consolidated 2018 Annual Report Property & Casualty Reinsurance business segment – by line of business For the year ended 31 December 2018 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 6 403 6 047 –18 6 029 7 595 7 548 116 7 664 2 547 2 503 –101 2 402 6 029 7 664 2 402 –4 284 –1 189 –547 –6 020 9 9 71.1 28.8 99.9 –5 860 –2 228 –388 –8 476 –812 –812 76.5 34.1 110.6 –1 470 –595 –179 –2 244 158 158 61.2 32.2 93.4 1 380 –16 36 1 400 0 1 400 –313 1 087 16 545 16 098 –3 16 095 1 380 –16 36 17 495 –11 614 –4 012 –1 114 –16 740 755 –313 442 72.2 31.8 104.0 Swiss Reinsurance Company Consolidated 2018 Annual Report 27 Financial statements Notes to the Group financial statements c) 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”. 28 Swiss Reinsurance Company Consolidated 2018 Annual Report Life & Health Reinsurance business segment – by line of business For the year ended 31 December 2018 USD millions Revenues Gross premiums written Net premiums written Change in unearned premiums Premiums earned Fee income from policyholders Net investment income – non-participating business Net realised investment gains/losses – non-participating business Net investment result – unit-linked business Other revenues Total revenues Expenses Life and health benefits Return credited to policyholders Acquisition costs Operating expenses Total expenses before interest expenses Income before interest and income tax expense Interest expenses Income/loss before income tax expense Management expense ratio in % Net operating margin1 in % Life Health Unallocated Total 10 356 8 606 29 8 635 152 1 001 59 –33 1 9 815 –7 128 –5 –1 449 –513 –9 095 720 720 5.2 7.3 4 171 4 041 7 4 048 304 –4 292 4 348 292 –3 152 –596 –245 –3 993 355 355 5.6 8.2 0 292 –410 –118 14 527 12 647 36 12 683 152 1 305 347 –33 1 14 455 –10 280 –5 –2 045 –758 –13 088 1 367 –410 957 5.4 9.4 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 2018 Annual Report 29 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 Switzerland China Japan Canada Germany France Republic of Korea India Other Total 2017 15 350 8 752 6 791 30 893 2017 13 001 2 684 1 980 1 013 1 910 1 161 1 030 1 082 638 479 326 5 589 30 893 2018 15 033 9 472 7 031 31 536 2018 12 698 2 804 1 920 1 753 1 611 1 423 1 091 1 053 690 537 434 5 522 31 536 Gross premiums earned and fee income from policyholders are allocated by country, based on the underlying contract. 30 Swiss Reinsurance Company Consolidated 2018 Annual Report 3 Insurance information Premiums earned and fees assessed against policyholders For the years ended 31 December 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 2018 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 17 197 17 197 –530 16 667 0 55 13 287 13 342 –1 491 11 851 130 130 –1 129 128 128 –121 7 96 96 –95 1 55 30 612 0 30 667 –2 142 28 525 0 226 226 –96 130 Property & Casualty Reinsurance Life & Health Reinsurance Other Total 16 601 16 601 –506 16 095 0 67 14 509 14 576 –1 893 12 683 153 153 –1 152 108 108 –108 0 98 98 –96 2 67 31 218 0 31 285 –2 507 28 778 0 251 251 –97 154 Swiss Reinsurance Company Consolidated 2018 Annual Report 31 Financial statements Notes to the Group financial statements 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 –4 374 121 –4 253 –2 298 234 –2 064 –28 –28 54 26 –6 700 0 –6 700 409 –6 291 32 Swiss Reinsurance Company Consolidated 2018 Annual Report Claims and claim adjustment expenses For the year ended 31 December 2018 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 –11 122 –11 198 –302 –11 122 859 –10 263 –11 198 1 658 –9 540 –302 298 –4 –1 202 –758 70 –1 202 –149 –1 351 –758 18 –740 70 –73 –3 –22 622 0 –22 622 2 815 –19 807 –1 890 0 –1 890 –204 –2 094 Claims and claim adjustment expenses; life and health benefits –11 614 –10 280 –7 –21 901 Acquisition costs For the year ended 31 December 2018 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 –4 127 –2 332 –34 –4 127 115 –4 012 –2 332 287 –2 045 –34 62 28 –6 493 0 –6 493 464 –6 029 Swiss Reinsurance Company Consolidated 2018 Annual Report 33 Financial statements Notes to the Group financial statements Reinsurance assets and liabilities The reinsurance assets and liabilities as of 31 December were as follows: 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 2018 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 2 541 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 Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 2 345 2 156 4 359 4 784 6 046 –10 45 659 12 192 17 888 1 356 811 1 081 4 218 –10 12 740 6 940 58 652 18 969 5 574 Reinsurance recoverable on unpaid claims and policy benefits As of 31 December 2017 and 2018, the Group had a reinsurance recoverable of USD million, respectively. The concentration of credit risk is regularly monitored and evaluated. The reinsurance programme with Berkshire Hathaway and subsidiaries accounted for 27% and 23% of the Group’s reinsurance recoverable as of year-end 2017 and 2018, respectively. million and USD 245 740 13 12 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 2017 2 296 1 227 144 –31 2018 2 275 466 120 –23 34 Swiss Reinsurance Company Consolidated 2018 Annual Report 4 Premiums written For the years ended 31 December 2017 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 2018 USD millions Gross premiums written, thereof: Direct Reinsurance Intra-group transactions (assumed) Gross premiums written Intra-group transactions (ceded) Gross premiums written before retrocession to external parties Retrocession to external parties Net premiums written Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 16 569 55 13 258 16 569 13 313 16 569 –538 16 031 13 313 –1 487 11 826 127 127 127 –121 6 55 29 954 0 30 009 0 30 009 –2 146 27 863 0 Property & Casualty Reinsurance Life & Health Reinsurance Other Consolidation Total 16 545 67 14 460 16 545 14 527 16 545 –447 16 098 14 527 –1 880 12 647 110 110 110 –109 1 67 31 115 0 31 182 0 31 182 –2 436 28 746 0 Swiss Reinsurance Company Consolidated 2018 Annual Report 35 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 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 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 2017 51 073 −2 837 −211 −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 2018 58 221 –4 017 –240 53 964 21 809 –341 –41 21 427 –6 421 –13 386 –19 807 –1 598 724 54 710 3 773 169 58 652 36 Swiss Reinsurance Company Consolidated 2018 Annual Report Prior-year development Non-life claims development during 2018 on prior years includes favourable development on property and specialty, partially offset by adverse development on casualty. The favourable development on property and specialty is mainly related to the natural catastrophe events in North America and wildfires in California that occurred in 2017. Casualty includes adverse development for motor and liability lines of business. For the life and health business, the adverse claims development on prior-year business was across a number of lines of business, in particular the individual life and disability portfolios in the US and the group disability portfolio in Australia. This was partially offset by positive experience in other regions, including Continental Europe and Asia. Claims development related to prior years also includes an element of interest accretion for unpaid claims reported at the estimated present value. A summary of prior-year net claims and claim adjustment expenses development by lines of business for the years ended 31 December is shown below: USD millions Line of business: Property Casualty Specialty Life and health Total 2017 2018 –588 –187 –234 196 –813 –437 241 –288 143 –341 Swiss Reinsurance Company Consolidated 2018 Annual Report 37 Financial statements Notes to the Group financial statements US asbestos and environmental claims exposure The Groupʼs 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 2018 the Group carried net reserves for US asbestos and environmental liabilities equal to USD 1 634 million. During 2018, the Group incurred net losses of USD 114 million and paid net against these liabilities of USD 100 million. Incurred claims include a settlement with one cedent on reported asbestos and environmental claims. 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. 38 Swiss Reinsurance Company Consolidated 2018 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 2018 Annual Report 39 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. For reinsurance business, case reserves and estimated IBNR reported by cedents to the Group have been accounted for as case reserves in previous years. For the year-end 2018, IBNR reported by cedents are presented together with the Group's own estimate of IBNR as IBNR in the claims development tables. 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 38). 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. 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. 40 Swiss Reinsurance Company Consolidated 2018 Annual Report Property & Casualty Reinsurance – Property Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 2 341 2010 2 356 2 521 2011 2 237 2 469 4 303 2012 2 194 2 338 4 354 2 696 2013 2 172 2 357 4 168 2 524 3 130 2014 2 170 2 441 4 222 2 324 3 146 2 732 2015 2 168 2 483 4 174 2 281 2 972 2 572 2 830 2016 2 170 2 590 4 169 2 252 2 887 2 393 2 764 3 902 RSI 2017 2 141 2 563 4 187 2 236 2 865 2 361 2 594 3 627 6 032 2018 2 148 2 523 4 224 2 237 2 849 2 358 2 562 3 333 5 937 4 656 32 827 thereof IBNR 12 29 13 8 1 4 67 40 598 2 604 3 376 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Reporting year 2009 559 2010 1 608 389 RSI 2011 1 924 1 511 671 2012 2 026 1 805 2 394 239 2013 2 076 1 914 3 197 1 591 541 2014 2 097 2 110 3 635 1 981 1 999 464 2015 2 107 2 263 3 917 2 101 2 504 1 708 467 2016 2 118 2 405 4 018 2 144 2 698 2 089 1 654 636 All liabilities before 2009 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2017 2 103 2 448 4 138 2 164 2 758 2 218 2 172 2 210 980 2018 2 110 2 461 4 159 2 175 2 780 2 262 2 338 2 842 3 672 634 25 433 139 7 533 Years Property (RSI) 1 17.4% 2 48.6% 3 17.0% 4 6.2% 5 3.8% 6 2.2% 7 2.4% 8 0.9% 9 -0.1% 10 0.3% 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 accident year 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. The 2018 accident year claims incurred are lower than 2017 but include a higher level of natural catastrophes than 2012 to 2016. Swiss Reinsurance Company Consolidated 2018 Annual Report 41 Financial statements Notes to the Group financial statements Property & Casualty Reinsurance – Liability, proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year 2009 726 2010 861 835 2011 980 982 639 2012 937 921 696 519 2013 932 901 720 603 727 Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total RSI 2014 910 897 668 559 750 994 2015 921 901 625 530 757 984 1 264 2016 930 889 621 503 752 996 1 312 1 709 2017 926 854 598 505 757 980 1 397 1 737 1 964 2018 880 829 584 487 747 969 1 467 1 759 2 072 1 898 11 692 thereof IBNR 38 82 77 71 135 277 606 899 1 483 1 714 5 382 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Reporting year 2009 -60 2010 88 28 RSI 2011 241 159 2 2012 365 317 107 13 2013 478 408 180 115 14 2014 586 516 249 182 126 23 2015 635 612 335 240 232 157 34 2016 682 661 381 294 347 291 209 46 2017 717 681 399 328 418 400 400 223 50 All liabilities before 2009 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2018 720 707 428 364 493 546 627 497 252 52 4 686 908 7 914 Years Liability, proportional (RSI) 1 2 3 4 5 6 7 8 9 10 1.4% 14.7% 14.9% 13.0% 12.7% 9.8% 5.5% 4.2% 3.6% 0.3% The increase in the incurred losses for accident years 2013 to 2018 is driven by volume increases of business being written. The increases in the incurred losses in reporting year 2018 for accident years 2015 to 2017 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. 42 Swiss Reinsurance Company Consolidated 2018 Annual Report Property & Casualty Reinsurance – Liability, non-proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total RSI 2009 509 2010 520 521 2011 426 436 401 2012 425 400 430 329 2013 385 375 467 347 406 2014 351 354 426 308 388 432 2015 327 333 382 280 353 437 1 754 2016 313 324 349 259 298 405 1 793 585 2017 311 311 336 251 270 362 1 762 540 494 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Reporting year 2009 –14 2010 12 1 RSI 2011 32 11 1 2012 55 35 9 –4 2013 93 52 65 11 –2 2014 155 87 111 35 11 –2 2015 178 104 138 53 36 8 0 2016 186 123 145 84 59 40 89 13 2017 195 158 168 106 82 73 193 145 –2 All liabilities before 2009 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance thereof IBNR 27 39 56 59 89 146 199 250 326 428 1 619 2018 304 315 332 241 252 342 1 787 524 508 450 5 055 2018 202 160 181 136 118 118 345 106 18 –1 1 383 5 179 8 851 Years Liability, non- proportional (RSI) 1 2 3 4 5 6 7 8 9 10 -0.5% 7.0% 7.3% 8.8% 11.1% 10.3% 8.2% 5.9% 1.8% 2.3% 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 2009 include reserves for historic US Asbestos and Environmental losses. In line with the Group´s policy, cash flows under loss portfolio transfers are reported through claims paid. For longer tail lines and depending on the business volume written, timing of cash flows can lead to net inward payments across the whole portfolio in the first development year of the contract for some accident years. Swiss Reinsurance Company Consolidated 2018 Annual Report 43 Financial statements Notes to the Group financial statements Property & Casualty Reinsurance – Accident & Health Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year 2009 347 2010 370 274 2011 347 226 228 2012 342 231 248 324 2013 338 220 245 334 344 2014 329 217 236 319 351 302 Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total RSI Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Reporting year 2009 31 2010 136 25 RSI 2011 192 84 48 2012 216 115 120 77 2013 234 130 142 177 54 2014 247 138 152 203 139 30 All liabilities before 2009 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance thereof IBNR 24 24 28 33 48 61 75 202 354 376 1 225 2015 324 219 239 310 338 335 434 2015 253 145 161 219 180 103 62 2016 317 211 234 306 328 327 432 592 2016 258 149 165 229 203 145 138 74 2017 311 206 234 300 321 316 410 626 733 2017 262 156 175 238 216 173 190 178 96 2018 310 202 230 298 318 305 400 621 767 723 4 174 2018 265 158 177 242 224 190 223 271 232 98 2 080 2 865 4 959 Years Accident & Health (RSI) 1 2 3 4 5 6 7 8 9 10 14.9% 25.8% 13.3% 7.1% 4.4% 3.0% 2.4% 2.0% 1.1% 1.0% 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 2009 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. 44 Swiss Reinsurance Company Consolidated 2018 Annual Report Property & Casualty Reinsurance – Motor, proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 650 2010 646 591 2011 711 652 998 2012 736 691 994 1 487 2013 723 697 965 1 477 1 554 2014 719 695 922 1 461 1 528 1 996 2015 721 697 925 1 449 1 535 1 959 1 916 2016 719 697 924 1 440 1 509 1 958 1 916 2 478 RSI 2017 718 695 922 1 438 1 502 1 941 1 920 2 594 2 373 2018 716 695 914 1 435 1 497 1 931 1 924 2 644 2 391 2 032 16 179 thereof IBNR –5 –1 –23 28 14 –2 25 147 476 1 149 1 808 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Reporting year 2009 141 2010 385 198 RSI 2011 585 453 266 2012 619 537 670 474 2013 631 573 852 1 104 573 2014 682 651 885 1 265 1 170 738 2015 691 660 904 1 314 1 352 1 468 795 2016 693 669 913 1 345 1 397 1 714 1 440 821 All liabilities before 2009 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2017 696 673 921 1 366 1 428 1 790 1 682 1 816 759 2018 699 676 924 1 378 1 444 1 826 1 783 2 163 1 526 624 13 043 322 3 458 Years Motor, proportional (RSI) 1 2 3 4 5 6 7 8 9 10 32.2% 37.8% 15.2% 4.2% 3.5% 2.4% 1.1% 0.4% 0.4% 0.4% 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 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. Swiss Reinsurance Company Consolidated 2018 Annual Report 45 Financial statements Notes to the Group financial statements Property & Casualty Reinsurance – Motor, non-proportional Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year 2009 375 2010 390 325 2011 283 288 407 2012 284 283 445 332 2013 270 269 424 349 432 2014 275 262 422 329 454 408 Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total RSI Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Reporting year 2009 1 2010 39 5 RSI 2011 58 22 -10 2012 70 48 20 2 2013 83 67 56 25 7 2014 96 83 79 50 85 4 All liabilities before 2009 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance thereof IBNR 66 33 107 65 70 88 118 199 276 392 1 414 2015 269 255 407 313 457 441 388 2015 107 100 103 85 149 60 –1 2016 267 246 401 315 440 436 409 470 2016 117 113 117 111 194 104 34 8 2017 259 243 390 298 427 435 445 585 579 2017 121 120 133 136 220 144 92 65 9 2018 261 245 416 307 432 428 441 549 611 489 4 179 2018 125 130 144 157 248 187 157 127 59 4 1 338 2 877 5 718 Years Motor, non-proportional (RSI) 1 2 3 4 5 6 7 8 9 10 0.7% 10.4% 10.5% 9.1% 7.0% 6.0% 5.1% 3.1% 2.8% 1.5% 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. 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. 46 Swiss Reinsurance Company Consolidated 2018 Annual Report Property & Casualty Reinsurance – Specialty Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 1 542 2010 1 673 1 229 2011 1 485 1 241 1 292 2012 1 416 1 186 1 270 959 2013 1 384 1 160 1 185 1 019 1 095 2014 1 361 1 141 1 102 1 040 1 021 1 108 2015 1 346 1 110 1 148 1 021 981 1 100 1 237 2016 1 330 1 088 1 144 1 021 945 999 1 219 1 286 RSI 2017 1 303 1 090 1 159 1 008 935 972 1 205 1 274 1 613 2018 1 293 1 081 1 152 994 912 956 1 196 1 228 1 535 1 646 11 993 thereof IBNR 2 21 8 15 34 60 116 221 501 1 194 2 172 Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Reporting year 2009 209 2010 659 197 RSI 2011 910 467 165 2012 1 011 659 561 127 2013 1 085 759 778 444 148 2014 1 143 837 881 679 417 173 2015 1 181 952 931 770 600 409 135 2016 1 205 973 967 827 710 590 387 143 2017 1 218 992 1 031 869 765 688 692 477 181 All liabilities before 2009 Liabilities for claims and claim adjustment expenses, net of reinsurance Average annual percentage payout of incurred claims by age, net of reinsurance 2018 1 230 1 004 1 054 903 801 744 853 722 580 185 8 076 658 4 575 Years Specialty (RSI) 1 14.2% 2 28.3% 3 20.5% 4 10.1% 5 5.8% 6 5.3% 7 3.5% 8 1.9% 9 1.1% 10 0.9% This category contains several individual large losses on engineering, marine, aviation and space lines, including the Costa Concordia event in accident year 2012. The 2017 accident year claims incurred is higher due to natural catastrophes mainly stemming from hurricanes Harvey, Irma and Maria in the Americas which have reduced in reporting year 2018. The 2018 accident year claims incurred include natural catastrophes and man-made losses. Swiss Reinsurance Company Consolidated 2018 Annual Report 47 Financial statements Notes to the Group financial statements Life & Health Reinsurance, long tail Incurred claims and allocated claim adjustment expenses, net of reinsurance USD millions Reporting year Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total 2009 148 2010 154 184 2011 146 185 210 2012 147 181 219 260 2013 147 204 277 347 468 2014 169 204 289 350 460 458 2015 168 216 302 374 458 418 391 2016 169 191 281 339 423 398 424 411 RSI Cumulative claims paid and allocated claim adjustment expenses, net of reinsurance USD millions Accident year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total Reporting year 2009 7 2010 36 8 RSI 2011 54 39 18 2012 67 61 59 26 2013 75 78 96 84 36 2014 83 91 120 134 117 31 2015 88 102 140 171 178 104 34 2016 96 111 160 203 237 190 102 13 All liabilities before 2009 Liabilities for claims and claim adjustment expenses, net of reinsurance 2017 163 187 275 341 422 399 409 426 419 2018 164 190 276 338 424 422 410 413 424 389 3 450 thereof IBNR 16 20 29 29 33 51 64 126 208 297 873 Cumulative number of reported claims (in nominals) 4 305 4 722 6 621 9 069 11 528 13 134 15 528 12 106 11 126 3 677 91 816 2017 102 119 175 225 276 250 181 83 11 2018 108 125 188 243 302 285 229 152 72 11 1 715 230 1 965 Average annual percentage payout of incurred claims by age, net of reinsurance Years Life & Health Reinsurance, long tail (RSI) 1 2 3 4 5 6 7 8 9 10 5.5% 16.7% 15.2% 10.9% 7.7% 6.1% 4.6% 4.6% 3.4% 3.7% In the reporting year 2013, the Group significantly strengthened IBNR claims liabilities in Australia for some lines of business. In addition, for 2013 and 2014 the effect of business volume increases is discernible as well. In 2018 the first year incurred claims are below 2017 due to lower volume in Australia. 48 Swiss Reinsurance Company Consolidated 2018 Annual Report 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. For details on consolidation please refer to Note 2. Swiss Reinsurance Company Consolidated 2018 Annual Report 49 Financial statements Notes to the Group financial statements 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 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 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 2018 7 533 7 914 8 851 4 959 3 458 5 718 4 575 1 965 44 973 –291 –450 44 232 1 819 46 051 571 324 266 215 76 237 594 –98 181 2 366 681 9 554 10 235 58 652 50 Swiss Reinsurance Company Consolidated 2018 Annual Report 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 2017 1 262 –291 28 2.9% –3.6% 2018 1 223 –291 35 3.0% –3.6% 1 Interest accretion is shown as part of “Life and health benefits” in the income statement. Please refer to Note 1 for more details about the Group‘s discounting approach for unpaid claims and claim adjustment expenses. Swiss Reinsurance Company Consolidated 2018 Annual Report 51 Financial statements Notes to the Group financial statements 6 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) As of 31 December, the DAC were as follows: 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 2018 USD millions Opening balance as of 1 January Deferred Amortisation Effect of foreign currency translation and other changes Closing balance Property & Casualty Reinsurance 2 280 Life & Health Reinsurance 3 465 4 068 –4 255 53 2 146 Property & Casualty Reinsurance 2 146 4 048 –4 012 –26 2 156 1 294 –5 –508 –12 4 234 Life & Health Reinsurance 4 234 1 235 –496 –189 4 784 Other 11 –11 0 Other 0 0 Total 5 756 –11 5 362 –5 –4 763 41 6 380 Total 6 380 5 283 –4 508 –215 6 940 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 966 –135 52 38 921 Other 577 –562 3 –1 –1 16 2017 Total 1 543 –562 –132 51 –1 38 937 Life & Health Reinsurance 921 –140 45 –22 804 2018 Total 937 0 –135 44 18 –22 842 Other 16 5 –1 18 38 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 15%, 14%, 13%, 12% and 10%. 52 Swiss Reinsurance Company Consolidated 2018 Annual Report 7 Investments Investment income Net investment income by source (excluding unit-linked business) was as follows: USD millions Fixed income securities Equity securities Policy loans, mortgages and other loans Investment real estate Short-term investments Other current investments Share in earnings of equity-accounted investees Cash and cash equivalents Net result from deposit-accounted contracts Deposits with ceding companies Gross investment income Investment expenses Interest charged for funds held Net investment income – non-participating business 2017 1 887 63 127 201 53 49 53 18 121 372 2 944 –331 –387 2 226 2018 2 017 61 144 220 47 104 89 35 111 542 3 370 –357 –412 2 601 Dividends received from investments accounted for using the equity method were USD and 2018, respectively. 119 million and USD 133 million for 2017 Share in earnings of equity-accounted investees included impairments of the carrying amount of equity-accounted investees 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 gains1 Gross realised losses1 Other-than-temporary impairments Net realised investment gains/losses on equity securities1 Change in net unrealised investment gains/losses on equity securities1 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 1 Change due to ASU 2016-01. Please refer to Note 1 for more details. 2017 2018 552 –133 623 –23 –28 29 3 76 76 –194 981 445 –194 –4 15 –228 –68 39 113 64 185 367 Net realised/unrealised gains/losses on insurance-related activities included impairments of USD 11 million and USD 7 million for 2017 and 2018, respectively. Swiss Reinsurance Company Consolidated 2018 Annual Report 53 Financial statements Notes to the Group financial statements Investment result – unit-linked business The net investment result on unit-linked business credited to policyholders amounted to gains of USD USD million for 2017 and 2018, respectively, mainly originating from gains/losses on equity securities. 33 81million and to losses of 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 2017 94 6 –17 4 –3 3 87 2018 87 5 –12 2 –3 –2 77 54 Swiss Reinsurance Company Consolidated 2018 Annual Report Investments available-for-sale Amortised cost or cost, estimated fair values and other-than-temporary impairments of fixed income securities classified as available-for-sale as of 31 December were as follows: 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 Germany Canada France Australia Other Total Corporate debt securities Mortgage- and asset-backed securities Fixed income securities available-for-sale Equity securities available-for-sale 2018 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 Germany Canada France Australia Other Total Corporate debt securities Mortgage- and asset-backed securities Fixed income securities available-for-sale Amortised cost or cost Gross unrealised gains Gross unrealised Other-than-temporary impairments recognised in other losses comprehensive income 11 182 5 796 1 213 4 034 2 956 3 630 1 784 1 925 6 695 39 215 23 060 3 419 65 694 2 993 168 18 91 758 222 539 196 16 227 2 235 1 175 76 3 486 75 –147 –66 –5 –18 –21 –28 –10 –3 –68 –366 –112 –18 –496 –47 –2 –2 Amortised cost or cost Gross unrealised gains Gross unrealised Other-than-temporary impairments recognised in other losses comprehensive income 9 416 6 192 1 186 3 795 2 523 2 294 1 495 1 514 8 255 36 670 24 751 3 429 64 850 131 17 45 575 211 191 159 14 202 1 545 445 52 2 042 –148 –130 –16 –57 –6 –24 –6 –2 –133 –522 –434 –54 –1 010 –1 –1 Estimated fair value 11 203 5 748 1 299 4 774 3 157 4 141 1 970 1 938 6 854 41 084 24 123 3 475 68 682 3 021 Estimated fair value 9 399 6 079 1 215 4 313 2 728 2 461 1 648 1 526 8 324 37 693 24 762 3 426 65 881 The “Other-than-temporary impairments recognised in other comprehensive income” column includes only securities with a credit-related loss recognised in earnings. Subsequent recovery in fair value of securities previously impaired in other comprehensive income is also presented in the “Other-than-temporary impairments recognised in other comprehensive income” column. Swiss Reinsurance Company Consolidated 2018 Annual Report 55 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 2017 and 2018. 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 Germany Canada France Australia Other Total Corporate debt securities Mortgage- and asset-backed securities Total 2018 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 Germany Canada 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 7 402 3 753 259 535 685 1 749 209 1 013 2 687 18 292 5 390 1 429 25 111 114 37 4 9 18 27 8 3 52 272 83 13 368 1 368 993 39 258 44 262 7 57 319 3 347 860 394 4 601 33 29 1 9 3 1 2 0 16 94 29 7 130 8 770 4 746 298 793 729 2 011 216 1 070 3 006 21 639 6 250 1 823 29 712 147 66 5 18 21 28 10 3 68 366 112 20 498 Less than 12 months Unrealised losses Fair value 12 months or more Unrealised losses Fair value Total Unrealised losses Fair value 913 993 111 991 104 278 381 489 2 273 6 533 10 008 1 104 17 645 42 11 2 42 3 3 5 2 68 178 227 15 420 4 367 3 689 392 247 137 855 15 13 1 142 10 857 5 231 1 566 17 654 106 119 14 15 3 21 1 0 65 344 207 40 591 5 280 4 682 503 1 238 241 1 133 396 502 3 415 17 390 15 239 2 670 35 299 148 130 16 57 6 24 6 2 133 522 434 55 1 011 As of 31 December 2017, USD value for less than 12 months and USD 37 million of the gross unrealised loss on equity securities available-for-sale relates to declines in 10 million to declines in value for more than 12 months. 56 Swiss Reinsurance Company Consolidated 2018 Annual Report 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 2017 and 2018, USD million, respectively, of fixed income securities million and USD available-for-sale were callable. 888 954 15 14 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 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 Amortised cost or cost 7 753 19 119 11 646 23 368 2 964 64 850 2018 Estimated fair value 7 691 19 098 11 644 24 480 2 968 65 881 Investments trading and at fair value through earnings The carrying amounts of fixed income securities classified as trading and equity securities classified as trading and at fair value through earnings (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 business1 Equity securities at fair value through earnings – non-participating business1 1 Change due to ASU 2016-01. Please refer to Note 1 for more details. 2017 2 414 38 86 2 538 3 2018 3 314 37 63 3 414 2 450 Investments held for unit-linked business As of 31 December 2017, the carrying amounts of investments held for unit-linked business consist of equity securities trading of USD securities at fair value through earnings of USD million. As of 31 December 2018, the carrying amounts of investments held for unit-linked business consist of equity million. Please refer to Note 1 for details on changes related to ASU 2016-01. 585 424 Mortgage, policy and other loans and investment real estate As of 31 December, the carrying and respective fair values of investments in mortgage, policy and other loans and investment real estate (excluding unit-linked) were as follows: USD millions Policy loans Mortgage loans Other loans Investment real estate Carrying value 86 1 526 784 2 017 2017 Fair value 86 1 529 794 3 895 Carrying value 78 1 817 988 2 240 2018 Fair value 78 1 806 998 4 136 Depreciation expense related to investment real estate was USD Accumulated depreciation on investment real estate totalled USD 2018, respectively. 49 585 million and USD 57 million and USD million for 2017 and 2018, respectively. million as of 31 December 2017 and 609 Substantially all mortgage, policy and other loan receivables are secured by buildings, land or the underlying policies. Swiss Reinsurance Company Consolidated 2018 Annual Report 57 Financial statements Notes to the Group financial statements Other financial assets and liabilities by measurement category As of 31 December 2017 and 2018, ‘‘Other invested assets’’ and ‘‘Accrued expenses and other liabilities’’ by measurement category were as follows: 2017 USD millions Other invested assets Derivative financial instruments Reverse repurchase agreements Securities lending/borrowing Equity-accounted investments Other Other invested assets Accrued expenses and other liabilities Derivative financial instruments Repurchase agreements Securities lending Securities sold short Other Accrued expenses and other liabilities 2018 USD millions Other invested assets Derivative financial instruments Reverse repurchase agreements Securities lending/borrowing Equity-accounted investments Other Other invested assets Accrued expenses and other liabilities Derivative financial instruments Repurchase agreements Securities lending Securities sold short Other Accrued expenses and other liabilities 1 Amounts do not relate to financial assets or liabilities. Investments measured at net asset value as Fair value practical expedient Amortised cost or cost Equity-accounted Not in scope1 Total 607 607 621 776 111 60 1 568 516 778 1 947 3 241 0 2 961 1 065 369 4 395 160 51 627 838 1 230 1 230 621 2 961 1 841 1 341 1 036 7 800 516 160 829 1 947 4 331 0 3 704 0 3 704 7 783 Investments measured at net asset value as Fair value practical expedient Amortised cost or cost Equity-accounted Not in scope1 Total 656 302 18 47 1 023 569 302 1 538 631 631 1 031 11 410 1 452 581 58 798 1 444 1 444 0 3 095 656 1 031 313 1 462 1 088 4 550 569 581 360 1 538 3 893 2 409 0 1 437 0 3 095 6 941 58 Swiss Reinsurance Company Consolidated 2018 Annual Report Offsetting of derivatives, financial assets and financial liabilities Offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows: 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 Related financial assets presented instruments not set-off in the balance sheet –18 –2 961 –1 065 –4 044 in the balance sheet 621 2 961 1 065 4 647 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 Related financial liabilities presented instruments not set-off in the balance sheet in the balance sheet 48 –516 160 –160 765 –829 973 –1 505 2018 USD millions Derivative financial instruments – assets Reverse repurchase agreements Securities borrowing Total Gross amounts of recognised financial assets 1 708 4 265 110 6 083 Collateral set-off in the balance sheet –1 052 –3 234 –99 –4 385 Net amounts of financial Related financial assets presented instruments not set-off in the balance sheet –23 –1 031 –11 –1 065 in the balance sheet 656 1 031 11 1 698 2018 USD millions Derivative financial instruments – liabilities Repurchase agreements Securities lending Total Gross amounts of recognised financial liabilities –1 492 –3 334 –940 –5 766 Collateral set-off in the balance sheet 923 2 753 580 4 256 Net amounts of financial Related financial liabilities presented instruments not set-off in the balance sheet in the balance sheet 21 –569 581 –581 339 –360 941 –1 510 Net amount 603 0 0 603 Net amount –468 0 –64 –532 Net amount 633 0 0 633 Net amount –548 0 –21 –569 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 the 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”, “Investments for unit-linked business” and “Accrued expenses and other liabilities”. Assets pledged As of 31 December 2017 and 2018, investments with a carrying value of USD were on deposit with regulatory agencies in accordance with local requirements, of which USD respectively, were cash and cash equivalents. As of 31 December 2017 and 2018, investments with a carrying value of 748 USD liabilities, including pledged investments in subsidiaries, of which USD million, respectively, were cash and cash equivalents. Cash and cash equivalents pledged include some instances where cash is legally restricted from usage or withdrawal. million, respectively, were placed on deposit or pledged to secure certain reinsurance million, respectively, million, 216 million and USD million and USD million and USD million and USD 840 588 382 893 247 126 10 11 6 4 As of 31 December 2017 and 2018, 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 989 767 941 173 13 14 As of 31 December 2017 and 2018, a real estate portfolio with a carrying value of USD 191 respectively, served as collateral for a credit facility, allowing the Group to withdraw funds up to CHF 500 million. million and USD 192 million, Swiss Reinsurance Company Consolidated 2018 Annual Report 59 Financial statements Notes to the Group financial statements Collateral accepted which the Group has the right to sell or repledge As of 31 December 2017 and 2018, the fair value of the equity securities, government and corporate debt securities received as million and USD 9 collateral was USD 31 December 2017 and 2018 was USD 3 securities borrowing, reverse repurchase agreements and derivative transactions. million, respectively. Of this, the amount that was sold or repledged as of million, respectively. The sources of the collateral are million and USD 5 947 443 396 914 3 Recognised gross liability for the obligation to return collateral that the Group has the right to sell or repledge As of 31 December 2017 and 2018, 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 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 2 107 354 354 139 139 567 614 442 567 614 442 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 Remaining contractual maturity of the agreements 2018 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 Total securities lending Overnight and continuous Up to 30 days 30–90 days Greater than 90 days 149 9 158 110 7 117 2 894 41 2 935 146 4 150 100 100 141 141 242 431 242 431 Gross amount of recognised liabilities for repurchase agreements and securities lending Total 3 284 50 3 334 929 11 940 4 274 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. 60 Swiss Reinsurance Company Consolidated 2018 Annual Report 8 Fair value disclosures Fair value, as defined by the Fair Value Measurements and Disclosures Topic, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements and Disclosures Topic requires all assets and liabilities that are measured at fair value to be categorised within the fair value hierarchy. This three-level hierarchy is based on the observability of the inputs used in the fair value measurement. The levels of the fair value hierarchy are defined as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the Group has the ability to access. Level 1 inputs are the most persuasive evidence of fair value and are to be used whenever possible. Level 2 inputs are market-based inputs that are directly or indirectly observable, but not considered level 1 quoted prices. Level 2 inputs consist of (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical assets or liabilities in non-active markets (eg markets which have few transactions and where prices are not current or price quotations vary sub- stantially); (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 (ABS). 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 2018, these adjustments were not material. Whenever the underlying assets or liabilities are reported in a specific business segment, the valuation adjustment is allocated accordingly. Valuation adjustments not attributable to any business segment are reported in Other. In certain situations, the Group uses inputs to measure the fair value of asset or liability positions that fall into different levels of the fair value hierarchy. In these situations, the Group will determine the appropriate level based on the lowest level input that is significant to the determination of the fair value. Swiss Reinsurance Company Consolidated 2018 Annual Report 61 Financial statements Notes to the Group financial statements Valuation techniques US government securities typically have quoted market prices in active markets and are categorised as level 1 instruments in the fair value hierarchy. Non-US government holdings are generally classified as level 2 instruments and are valued on the basis of the quotes provided by pricing services, which are subject to the Group’s pricing validation reviews and pricing vendor challenge process. Valuations provided by pricing vendors are generally based on the actual trade information as substantially all of the Group’s non-US government holdings are traded in a transparent and liquid market. Corporate debt securities mainly include US and European investment-grade positions, which are priced on the basis of quotes provided by third-party pricing vendors and first utilise valuation inputs from actively traded securities, such as bid prices, bid spreads to Treasury securities, Treasury curves and same or comparable issuer curves and spreads. Issuer spreads are determined from actual quotes and traded prices and incorporate considerations of credit/default, sector composition, and liquidity and call features. Where market data is not available, valuations are developed based on the modelling techniques that utilise observable inputs and option-adjusted spreads and incorporate considerations of the security’s seniority and 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 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. Sub- sequent 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, credit and equity derivative contracts for hedging and trading purposes. The fair values of exchange-traded derivatives measured using observable exchange prices are classified in level 1. Long-dated contracts may require adjustments to the exchange-traded prices which would trigger reclassification to level 2 in the fair value hierarchy. OTC derivatives are generally valued by the Group based on the internal models, which are consistent with industry standards and practices, and use both observable (dealer, broker or market consensus prices, spot and forward rates, interest rate and credit curves and volatility indices) and unobservable inputs (adjustments for liquidity, inputs derived from the observable data based on the Group’s judgements and assumptions). 62 Swiss Reinsurance Company Consolidated 2018 Annual Report 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. 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. Swiss Reinsurance Company Consolidated 2018 Annual Report 63 Financial statements Notes to the Group financial statements Assets and liabilities measured at fair value on a recurring basis As of 31 December, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: 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 practical expedient Impact of netting1 10 820 60 039 361 10 820 3 024 585 699 47 4 43 765 15 940 –20 –2 –18 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 –79 354 7 387 5 283 99 171 –1 176 919 –1 176 –269 1 342 –31 –238 –126 607 607 –91 –939 –1 050 –1 712 –1 785 –5 066 –395 1 342 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 2018 Annual Report 2018 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 practical expedient Impact of netting1 8 974 59 858 463 8 974 2 450 424 951 7 6 1 286 13 092 –11 –3 –8 1 668 6 327 24 038 24 342 3 483 2 864 1 276 440 410 425 1 16 206 64 220 –1 184 –325 –325 –533 –1 457 6 425 6 338 81 65 –1 052 953 –1 052 923 –297 –3 –43 –251 –120 631 631 –102 –302 –415 –1 377 –1 538 –4 099 –417 923 Total 69 295 10 642 6 327 24 038 24 799 3 489 2 450 424 3 815 656 452 410 764 1 81 998 206 77 844 –569 –331 –325 –584 –1 –251 –120 –1 479 –1 840 –4 008 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 2018 Annual Report 65 Financial statements Notes to the Group financial statements Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December, the reconciliations of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs were as follows: 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. 2018 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 361 0 387 171 919 –269 –126 0 –395 47 –18 29 45 6 –11 165 –6 –35 –11 463 38 –6 –41 0 425 –11 203 0 –93 –76 0 –3 –15 953 –49 –1 –19 –3 –1 –297 –81 –3 –4 65 –120 0 51 0 0 –49 –1 –19 –3 0 –1 –417 1 Transfers are recognised at the date of the event or change in circumstances that caused the transfer. 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 2017 213 161 2018 80 37 66 Swiss Reinsurance Company Consolidated 2018 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 Private placement corporate debt Private placement credit tenant leases Derivative equity contracts OTC equity option referencing correlated equity indices Liabilities Derivative equity contracts OTC equity option referencing correlated equity indices Other derivative contracts and liabilities for life and health policy benefits Variable annuity and fair valued GMDB contracts 2017 2018 Fair value Fair value Valuation technique Unobservable input Range (weighted average) 354 215 91 46 283 283 457 359 Discounted cash flow model 56 Corporate spread matrix 42 Discounted cash flow model Valuation spread Credit spread Illiquidity premium 118–250 bps (187 bps) 131–254bps (181 bps) 125–150 bps (146 bps) 338 338 Proprietary option model Correlation –35–40% (2.5%)1 –31 –31 –43 –43 –364 –371 Proprietary option model Correlation –20–40% (10%)1 –325 –329 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. 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. Swiss Reinsurance Company Consolidated 2018 Annual Report 67 Financial statements Notes to the Group financial statements 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 2017 Fair value 381 128 1 97 607 2018 Fair value 391 196 1 43 631 Unfunded commitments 341 30 371 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 relative value and event-driven 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. The liability is carried at fair value and changes in fair value attributable to instrument-specific credit risk are reported on other comprehensive income and all other changes in fair value are reported as a component of earnings. 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. 68 Swiss Reinsurance Company Consolidated 2018 Annual Report Assets and liabilities measured at fair value pursuant to election of the fair value option Pursuant to the election of the fair value option for the items described, the balances as of 31 December were as follows: USD millions Assets Other invested assets of which at fair value pursuant to the fair value option Funds held by ceding companies of which at fair value pursuant to the fair value 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 2017 2018 7 800 111 12 617 206 –19 361 –126 –11 429 –1 803 4 550 18 10 894 206 –18 969 –120 –10 262 –1 479 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 Liabilities for life and health policy benefits Funds held under reinsurance treaties Total 2017 2 19 –49 –28 2018 –9 6 67 64 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”. Swiss Reinsurance Company Consolidated 2018 Annual Report 69 Financial statements Notes to the Group financial statements Assets and liabilities not measured at fair value but for which the fair value is disclosed Assets and liabilities not measured at fair value but for which the fair value is disclosed as of 31 December were as follows: 2017 USD millions Assets Policy loans Mortgage loans Other loans Investment real estate Total assets Liabilities Debt Total liabilities 2018 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 1 529 794 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 Significant other observable inputs (level 2) Significant unobservable inputs (level 3) 78 1 806 998 4 136 7 018 0 Total 78 1 806 998 4 136 7 018 –5 750 –5 750 –7 264 –7 264 –13 014 –13 014 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 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. 70 Swiss Reinsurance Company Consolidated 2018 Annual Report 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. Swiss Reinsurance Company Consolidated 2018 Annual Report 71 Total derivative financial instruments 119 010 1 797 –1 858 Financial statements Notes to the Group financial statements 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 2017 USD millions Derivatives not designated as hedging instruments Interest rate contracts1 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 2018 USD millions Derivatives not designated as hedging instruments Interest rate contracts1 Foreign exchange contracts Equity contracts Credit contracts Other contracts Total Derivatives designated as hedging instruments Foreign exchange contracts Total 50 165 19 021 18 767 4 894 11 737 104 584 14 426 14 426 543 227 804 14 99 1 687 110 110 –421 –152 –684 –79 –238 –1 574 –284 –284 –801 –375 621 801 541 –516 52 540 23 213 13 451 584 10 220 100 008 15 503 15 503 452 195 764 1 81 1 493 215 215 –331 –176 –584 –1 –251 –1 343 –149 –149 Notional amount assets/liabilities Fair value assets Fair value liabilities Carrying value assets/liabilities 122 75 120 –65 –139 113 –174 –174 –61 105 121 19 180 0 –170 150 66 66 216 87 Total derivative financial instruments 115 511 1 708 –1 492 Amount offset Where a right of set-off exists Due to cash collateral Total net amount of derivative financial instruments –623 –429 656 623 300 –569 1 During 2018, the Group revised its methodology on the calculation of notional amounts for interest rate derivatives. The revision has no impact on the income statement or balance sheet of the Group. Comparative information for 2017 has been adjusted accordingly. 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 2017 and 2018. 72 Swiss Reinsurance Company Consolidated 2018 Annual Report 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 2017 2018 56 256 –186 –21 251 356 –167 –5 20 –7 54 –105 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 2017 and 2018, 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 –570 –570 2017 Gains/losses on hedged items Gains/losses on derivatives 2018 Gains/losses on hedged items 570 570 412 412 –412 –412 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 2017 and 2018, the Group recorded an accumulated net unrealised foreign currency remeasurement gain of USD and losses on the hedged net investment. million, respectively, in shareholder’s equity. These offset translation gains million and USD 166 737 1 Swiss Reinsurance Company Consolidated 2018 Annual Report 73 Financial statements Notes to the Group financial statements 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 2017 and 2018 was approximately USD maximum potential loss is based on the positive market replacement cost assuming non-performance of all counterparties, excluding cash collateral. million, respectively. The million and USD 085 996 1 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. 60 The total fair value of derivative financial instruments containing credit risk-related contingent features amounted to USD million as of 31 December 2017 and 2018, respectively. For derivative financial instruments containing credit risk- and USD related contingent features, the Group posted collateral of nil as of 31 December 2017 and 2018, respectively. In the event of a reduction of the Group’s credit rating to below investment grade, a fair value of USD million additional collateral would have had to be posted as of 31 December 2018. The total equals the amount needed to settle the instruments immediately as of 31 December 2018. 60 66 million 74 Swiss Reinsurance Company Consolidated 2018 Annual Report 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 Subordinated financial debt1 Contingent capital instruments classified as financial debt1 Short-term debt Senior financial debt Senior operational debt Subordinated financial debt1 Subordinated operational debt Contingent capital instruments classified as financial debt1 Long-term debt Total carrying value Total fair value 2017 2 826 2 826 2 244 390 2 135 2 370 975 8 114 2018 3 557 637 761 4 955 1 979 388 1 824 2 112 188 6 491 10 940 12 974 11 446 13 014 1 Certain items previously described within the disclosure table as subordinated financial debt are now included as contingent capital instruments classified as financial debt. Comparative information for 2017 has been amended accordingly. Maturity of long-term debt As of 31 December, long-term debt as reported above had the following maturities: USD millions Due in 2019 Due in 2020 Due in 2021 Due in 2022 Due in 2023 Due after 2023 Total carrying value 2017 1 699 197 213 845 2 5 158 8 114 2018 0 188 219 817 432 4 835 6 491 Swiss Reinsurance Company Consolidated 2018 Annual Report 75 Financial statements Notes to the Group financial statements Senior long-term debt Instrument Maturity 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 2018 Total senior long-term debt as of 31 December 2017 1 Assumed in the acquisition of GE Insurance Solutions. Subordinated long-term debt Issued in 2012 2014 1996 2015 2000 2012 various Currency USD CHF USD CHF USD USD USD Nominal in millions 250 250 397 250 193 500 344 Interest rate 2.88% 1.00% 7.00% 0.75% 7.75% 4.25% various Instrument Maturity 2042 Subordinated fixed-to-floating rate loan note 2043 Subordinated fixed-to-floating rate loan 2057 Subordinated private placement (amortising, limited recourse) Perpetual subordinated fixed-to-floating rate callable loan note Issued in 2012 2018 2007 2015 Currency EUR USD GBP EUR Nominal in millions 500 430 1 658 750 Interest rate 6.63% 5.75% 5.28% 2.60% First call in 2022 2023 2025 Total subordinated long-term debt as of 31 December 2018 Total subordinated long-term debt as of 31 December 20171 Book value in USD millions 249 253 476 254 257 490 388 2 367 2 634 Book value in USD millions 568 430 2 112 826 3 936 4 505 1 Certain items previously described within the disclosure table as subordinated long-term debt are now included as contingent capital instruments classified as long-term debt. Comparative information for 2017 has been amended accordingly. Contingent capital instruments classified as long-term debt Instrument Maturity 2045 Subordinated contingent write-off securities Total contingent capital instruments classified as long-term debt as of 31 December 2018 Total contingent capital instruments classified as long-term debt as of 31 December 20171 Currency CHF Issued in 2013 Nominal in millions 175 Interest rate 7.50% First call in 2020 Book value in USD millions 188 188 975 1 Certain items previously described within the disclosure table as subordinated long-term debt are now included as contingent capital instruments classified as long-term debt. Comparative information for 2017 has been amended accordingly. 76 Swiss Reinsurance Company Consolidated 2018 Annual Report Interest expense on long-term debt and contingent capital instruments classified as equity 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 debt1 Subordinated operational debt Contingent capital instruments classified as financial debt1 Total 2017 89 11 106 114 38 358 2018 77 11 99 118 28 333 1 Certain items previously described within the disclosure table as subordinated financial debt are now included as contingent capital instruments classified as financial debt. Comparative information for 2017 has been amended accordingly. In addition to the above, interest expense on contingent capital instruments classified as equity was USD USD million for the years ended 31 December 2017 and 2018, respectively. 41 67 million and Long-term debt issued in 2018 In June 2018, Swiss Re Ltd granted a USD 430 million subordinated fixed-to-floating rate callable loan to Swiss Reinsurance Company Ltd due in 2043 with a first optional redemption date on 13 June 2023. The loan bears interest through the first optional redemption date at 5.75% per annum. Contingent capital instruments classified as equity In March 2012, Swiss Reinsurance Company Ltd issued a perpetual subordinated capital instrument with issuer stock settlement, a face value of USD 750 million and a fixed coupon of 8.25% per annum. This capital instrument was redeemed on 1 September 2018. Swiss Reinsurance Company Consolidated 2018 Annual Report 77 Financial statements Notes to the Group financial statements 11 Income taxes The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which it operates. The components of the income tax expense were: USD millions Current taxes Deferred taxes Income tax expense 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 Intra-entity transfers 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. 2017 49 61 103 –48 51 –78 –81 24 9 29 119 2018 361 –185 176 2018 257 141 –79 –56 56 –128 –67 64 –12 176 For the year ended 31 December 2018, the Group reported a tax charge of USD 176 million on a pre-tax income of USD 1 224 million, compared to a charge of USD 119 million on a pre-tax income of USD 233 million for 2017. This translates into an effective tax rate in the current and prior-year reporting periods of 14.4% and 51.1%, respectively. For the year ended 31 December 2018, the tax rate was largely driven by tax benefits from foreign currency translation differences between statutory and US GAAP accounts, the releases of valuation allowances on net operating losses and tax benefits from intra-entity transfers, partially offset by the impact of different rates in various jurisdictions and tax charges from unrecognised tax benefits. The higher rate in the year ended 31 December 2017 was largely driven by tax charges from currency translation differences between statutory and US GAAP accounts, impacts from unrecognised tax benefits and recognition of deferred tax charges from intra-entity transfers, partially offset by tax benefits from US tax law changes. 78 Swiss Reinsurance Company Consolidated 2018 Annual Report Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows: USD millions Deferred tax assets Income accrued/deferred Technical provisions Pension provisions Benefit on loss carryforwards Currency translation adjustments Other Gross deferred tax asset Valuation allowance Unrecognised tax benefits offsetting benefits on loss carryforwards Total deferred tax assets Deferred tax liabilities Present value of future profits Income accrued/deferred Investment valuation in income Deferred acquisition costs Technical provisions Unrealised gains on investments 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 2017 2018 163 454 286 1 786 430 853 3 972 –293 –19 3 660 –73 –425 –393 –877 –1 409 –484 –448 –630 –4 739 –196 –4 935 105 474 274 2 025 350 1 101 4 329 –156 –21 4 152 –61 –171 –317 –990 –1 805 –269 –517 –577 –4 707 –245 –4 952 As of 31 December 2018, 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 2018, the Group had USD 9 393 million net operating tax loss carryforwards, expiring as follows: USD 13 million in 2020, USD 4 million in 2021, USD 2 million in 2022, USD 5 606 million in 2023 and beyond, and USD million never expire. 768 3 As of 31 December 2018, the Group had capital loss carryforwards of USD 30 million, expiring as follows: USD 3 million in 2020, USD 4 million in 2021 and USD 23 million in 2023. For the year ended 31 December 2018, net operating tax losses of USD 422 million and net capital tax losses of nil were utilised. Income taxes paid in 2017 and 2018 were USD 507 million and USD 439 million, respectively. Swiss Reinsurance Company Consolidated 2018 Annual Report 79 Financial statements Notes to the Group financial statements Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: USD millions Balance as of 1 January Change in group structure1 Additions based on tax positions related to current year Additions based on tax positions related to prior years Reductions 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 2017 189 -3 20 8 –1 –12 –9 –29 7 170 2018 170 36 56 –5 –13 –17 –6 –6 215 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 2017 and 2018, the amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 170 million and USD 215 million, respectively. Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. For the years ended 31 December 2017 and 2018, such expenses were nil and USD 7 million, respectively. For the years ended 31 December 2017 and 2018, USD 45 million and USD 51 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2018 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 2018 presented in the table above excludes accrued interest and penalties (USD 51 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 subject to examination: Australia Brazil Canada China Colombia Denmark France Germany Hong Kong India Ireland Israel Italy Japan 2013–2018 2013–2018 2011–2018 2009–2018 2012–2016 2013–2018 2017–2018 2014–2018 2013–2018 2006–2018 2014–2018 2014–2018 2013–2018 2013–2018 Korea Luxembourg Malaysia Mexico Netherlands New Zealand Singapore Slovakia South Africa Spain Switzerland United Kingdom United States 2013–2018 2014–2018 2009–2018 2013–2018 2014–2018 2013–2018 2013–2018 2014–2018 2014–2018 2014–2018 2015–2018 2011–2018 2011–2018 80 Swiss Reinsurance Company Consolidated 2018 Annual Report 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. The measurement date of these plans is 31 December for each year presented. 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 2018 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 3 916 111 24 –55 –57 –185 26 2 166 3 948 3 532 264 95 –185 26 2 153 3 887 –61 Swiss plan 3 948 120 23 –43 –202 25 4 –43 3 832 3 887 –73 162 –202 25 4 –43 3 760 –72 Foreign plans 1 819 7 55 0 –2 –60 Other benefits 369 4 9 –3 42 –17 –20 125 1 924 1 771 132 59 –60 –20 130 2 012 88 9 413 0 17 –17 0 –413 Foreign plans 1 924 7 53 1 –45 –72 Other benefits 413 5 9 –61 –25 –18 –71 1 797 2 012 –29 14 –72 –79 1 846 49 –4 319 0 18 –18 0 –319 Total 6 104 122 88 –58 –17 –262 26 –18 300 6 285 5 303 396 171 –262 26 –18 283 5 899 –386 Total 6 285 132 85 –60 –113 –292 25 4 –118 5 948 5 899 –102 194 –292 25 4 –122 5 606 –342 Swiss Reinsurance Company Consolidated 2018 Annual Report 81 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: 2017 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised 2018 USD millions Non-current assets Current liabilities Non-current liabilities Net amount recognised Swiss plan –61 –61 Swiss plan –72 –72 Foreign plans 262 –3 –171 88 Foreign plans 218 –2 –167 49 Other benefits –18 –395 –413 Other benefits –17 –302 –319 Amounts recognised in accumulated other comprehensive income, gross of tax, as of 31 December were as follows: 2017 USD millions Net gain/loss Prior service cost/credit Total 2018 USD millions Net gain/loss Prior service cost/credit Total Swiss plan 805 –115 690 Swiss plan 864 –100 764 Foreign plans 271 1 272 Other benefits 13 13 Foreign plans 299 2 301 Other benefits –12 –61 –73 Components of net periodic benefit cost The components of pension and post-retirement cost for the years ended 31 December were as follows: 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 2018 USD millions Service cost (net of participant contributions) Interest cost Expected return on assets Amortisation of: Net gain/loss Prior service cost Effect of settlement, curtailment and termination Net periodic benefit cost Swiss plan 111 24 –90 Foreign plans 7 55 –59 Other benefits 4 9 77 –9 2 115 21 24 –1 –61 –49 Swiss plan 120 23 –93 Foreign plans 7 53 –65 Other benefits 5 9 64 –15 4 103 12 7 14 Total 262 –21 –627 –386 Total 218 –19 –541 –342 Total 1 089 –114 975 Total 1 151 –159 992 Total 122 88 –149 97 –9 –59 90 Total 132 85 –158 76 –15 4 124 82 Swiss Reinsurance Company Consolidated 2018 Annual Report Other changes in plan assets and benefit obligations recognised in other comprehensive income for the years ended 31 December were as follows: 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 2018 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 –231 –55 Foreign plans –75 Other benefits 42 –3 –77 9 –354 –239 –21 22 –74 –50 1 61 101 Total –264 –58 –97 9 61 22 –327 52 –237 Swiss plan 123 Foreign plans 49 1 Other benefits –25 –61 –64 15 74 177 –12 –9 29 36 –86 –72 Total 147 –60 –76 15 0 –9 17 141 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 2019 are USD 53 million and USD 15 million, respectively. The estimated net gain and prior service credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2019 are USD 2 million and USD 15 million, respectively. The Group and affiliated companies‘ accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 5 794 million and USD 5 570 million as of 31 December 2017 and 2018, 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 2017 5 068 5 022 4 833 2018 4 895 4 854 4 654 Swiss Reinsurance Company Consolidated 2018 Annual Report 83 Financial statements Notes to the Group financial statements Principal actuarial assumptions Assumptions used to determine obligations at the end of the year Discount rate Rate of compensation increase Assumptions used to determine net periodic pension costs for the year ended Discount rate Expected long-term return on plan assets Rate of compensation increase Assumed medical trend rates at year end Medical trend – initial rate Medical trend – ultimate rate Year that the rate reaches the ultimate trend rate Swiss plan Foreign plans weighted average Other benefits weighted average 2017 2018 2017 2018 2017 2018 0.6% 1.8% 0.8% 1.8% 2.8% 2.8% 3.0% 2.8% 2.1% 2.1% 2.2% 2.1% 0.6% 2.5% 1.8% 0.6% 2.5% 1.8% 3.0% 3.3% 2.9% 2.8% 3.5% 2.8% 2.4% 2.1% 2.1% 2.1% 5.6% 3.8% 4.7% 3.6% 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 2018: USD millions Effect on total of service and interest cost components Effect on post-retirement benefit obligation 1 percentage point increase 0 18 1 percentage point decrease 0 –15 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 2017 and 2018 was as follows: Asset category Equity securities Debt securities Real estate Other Total Swiss plan allocation Foreign plans allocation 2017 2018 Target allocation 2017 2018 Target allocation 29% 41% 23% 7% 100% 23% 46% 24% 7% 100% 23% 45% 24% 8% 100% 17% 77% 0% 6% 100% 14% 80% 0% 6% 100% 16% 79% 0% 5% 100% Actual asset allocation is determined by a variety of current economic and market conditions and considers specific asset class risks. Equity securities include Swiss Re common stock of USD 6 million (0.1% of total plan assets) and USD 4 million (0.1% of total plan assets) as of 31 December 2017 and 2018, 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. 84 Swiss Reinsurance Company Consolidated 2018 Annual Report 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. Swiss Reinsurance Company Consolidated 2018 Annual Report 85 Financial statements Notes to the Group financial statements As of 31 December, the fair values of pension plan assets by level of input were as follows: 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) 30 181 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) 32 201 1 112 1 669 23 1 1 347 –38 78 3 374 3 374 10 103 692 805 805 450 450 450 1 147 1 625 16 1 7 3 257 5 –13 78 3 327 3 327 10 721 731 731 545 545 545 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 Agency securitised products Other asset-backed securities Equity securities: Equity securities held for proprietary investment purposes 1 141 Short-term investments Derivative financial instruments Real estate Other assets Total assets at fair value Cash Total plan assets 1 171 99 1 270 2018 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 Agency securitised products Other asset-backed securities Equity securities: Equity securities held for proprietary investment purposes 901 Short-term investments Derivative financial instruments Real estate Other assets Total assets at fair value Cash Total plan assets 933 70 1 003 86 Swiss Reinsurance Company Consolidated 2018 Annual Report Total 211 1 112 1 679 23 1 0 1 1 591 0 –38 692 528 5 800 99 5 899 Total 233 1 147 1 635 16 1 7 3 1 158 5 –13 721 623 5 536 70 5 606 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: 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 2018 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 612 Other assets 106 34 19 27 692 –26 19 11 3 113 Real estate 692 Other assets 113 27 10 –8 721 –14 27 –11 –103 –2 10 Total 718 8 19 30 0 30 805 Total 805 13 27 –1 –103 –10 731 Expected contributions and estimated future benefit payments The employer contributions expected to be made in 2019 to the defined benefit pension plans are USD 119 million and to the post-retirement benefit plan are USD 17 million. As of 31 December 2018, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: USD millions 2019 2020 2021 2022 2023 Years 2024–2028 Swiss plan 214 210 204 200 194 934 Foreign plans 71 75 78 80 82 433 Other benefits 17 17 17 17 18 89 Total 302 302 299 297 294 1 456 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 2017 and 2018 was USD 75 million and USD 63 million, respectively. Swiss Reinsurance Company Consolidated 2018 Annual Report 87 Financial statements Notes to the Group financial statements 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: 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 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 2018 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 88 Swiss Reinsurance Company Consolidated 2018 Annual Report 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 2 337 809 409 –72 337 –95 –464 –61 31 –252 184 –30 322 23 –1 435 –145 –1 081 6 –72 1 –65 –1 497 –145 –1 642 Corporate Solutions Life Capital Other Total 276 177 –17 160 10 –37 11 144 86 –4 77 –1 158 1 151 469 469 –96 –313 –26 33 67 –270 310 4 9 53 1 427 646 –17 629 –96 –311 –25 44 241 86 –270 310 0 –1 282 –198 –1 354 –8 38 30 –1 368 –197 –1 565 2017 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 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 2018 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 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 Long-term debt Accrued expenses and other liabilities Total liabilities 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 0 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 Corporate Solutions Life Capital Other Total 30 96 527 298 9 336 1 296 3 674 106 83 92 66 143 860 8 917 1 643 24 –528 30 11 155 422 2 530 78 7 424 855 328 4 283 483 11 792 60 84 1 126 271 3 322 430 895 4 647 126 257 1 956 9 444 1 941 33 –528 492 12 722 4 096 2 530 184 7 507 947 3 322 430 1 706 20 722 Swiss Reinsurance Company Consolidated 2018 Annual Report 89 Financial statements Notes to the Group financial statements Share in earnings and dividends received from equity-accounted investees for the years ended 31 December, were as follows: USD millions Share in earnings of equity-accounted investees Dividends received from equity-accounted investees 2017 53 119 2018 89 133 An overview of the financing activities between the Group and affiliated companies is shown below: Maturity 2019 2019 2020 2043 Total debt as of 31 December 2018 Instrument Senior Loan Senior Loan Senior Loan Subordinated Loan Issued in 2018 2018 2018 2018 Currency USD USD USD USD Nominal in millions 222 2 600 500 430 Interest rate 2.47% 3mLIBOR+0.35% 3mLIBOR+0.53% 5.75% Book value in USD millions 222 2 600 500 430 3 752 As of 31 December 2017 and 2018, the Group’s investment in mortgages and other loans included USD 301 million and USD 373 million, respectively, of loans due from employees, and USD 181 million and USD 212 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates. 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 2018, 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% None of the members of BoD and the Group EC has any significant business connection with the Group or any of its Group companies. 90 Swiss Reinsurance Company Consolidated 2018 Annual Report 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 2018, such agreements, which are operating leases, total the following obligations for the next five years and thereafter: USD millions 2019 2020 2021 2022 2023 After 2023 Total operating lease commitments Less minimum non-cancellable sublease rentals Total net future minimum lease commitments 2018 34 31 27 26 23 135 276 4 272 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 2017 and 2018 were USD million, respectively. Sublease rental income for the years ended 31 December 2017 and 2018 was 2 million and USD million, respectively. million and USD 36 35 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 2018 were USD 1 862 million. The Group enters into a number of contracts in the ordinary course of reinsurance and financial services business which, if the Group’s credit rating and/or defined statutory measures decline to certain levels, would require the Group to post collateral or obtain guarantees. The contracts typically provide alternatives for recapture of the associated business. Legal proceedings In the normal course of business operations, the Group is involved in various claims, lawsuits and regulatory matters. In the opinion of management, the disposition of these matters is not expected to have a material adverse effect on the Group’s business, consolidated financial position, results of operations or cash flows. Swiss Reinsurance Company Consolidated 2018 Annual Report 91 Financial statements Notes to the Group financial statements 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: 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 regularly reassesses 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. 92 Swiss Reinsurance Company Consolidated 2018 Annual Report 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. Swiss Reinsurance Company Consolidated 2018 Annual Report 93 Financial statements Notes to the Group financial statements 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 2018 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 2017 3 974 62 12 34 29 4 41 15 4 171 84 1 12 17 133 20 2 369 2 636 2018 3 444 79 18 30 26 3 206 16 3 822 66 8 15 174 15 2 112 2 390 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. 94 Swiss Reinsurance Company Consolidated 2018 Annual Report 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 Equity securities at fair value through earnings Policy loans, mortgages and other loans Other invested assets Investments for unit-linked business Total assets Accrued expenses and other liabilities Total liabilities 2017 412 656 848 1 167 180 3 263 67 67 2018 749 205 1 056 1 413 141 3 564 58 58 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 311 27 25 1 771 180 949 3 263 2017 Maximum exposure to loss1 314 2 052 –2 1 772 949 –2 Total liabilities 1 66 67 2018 Maximum exposure to loss1 462 2 174 –2 1 517 1 358 –2 Total liabilities 58 58 Total assets 447 25 76 1 517 141 1 358 3 564 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. Swiss Reinsurance Company Consolidated 2018 Annual Report 95 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 2018, 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 2018. 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 2018, the results of operations and the 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 41 to 48 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. 96 Swiss Reinsurance Company Consolidated 2018 Annual Report Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Unobservable or interpolated inputs used for the valuation of certain level 2 and 3 investments Key audit matter 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 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 level 2 and 3 investments. Based on the work performed, we consider the methodology and assumptions used by management in determining the valuation to be appropriate. Swiss Reinsurance Company Consolidated 2018 Annual Report 97 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. Furthermore, on a regular basis, the Company enters into large and/or structured transactions which often have material or complex financial reporting and reserving consequences. The reserving for such transactions is subject to increased risk of error due to the non-routine nature of transactions and the judgemental nature of reserving. 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 may be reported as well as the fact that claim settlements are often less frequent but of higher magnitude. 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, which are applicable for both the standard reserving and large and/or structured transactions: 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. Evaluating the appropriateness of the recognition, accounting, and disclosures for large and/or structured transactions. Based on the work performed, we consider the methodologies and assumptions used by management in the valuation of actuarially determined P&C loss reserves to be appropriate. 98 Swiss Reinsurance Company Consolidated 2018 Annual Report Valuation of actuarially determined Life & Health (‘L&H’) reserves Key audit matter The Company’s valuation of liabilities for L&H policy benefits and policyholder account balances involves complex judgements about future events affecting the business. Actuarial assumptions selected by the Company with respect to interest rates, inflation trends, 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. Furthermore, on a regular basis, the Company enters into large and/or structured transactions which often have material or complex financial reporting and reserving consequences. The reserving for such transactions is subject to increased risk of error due to the non-routine nature of transactions and the judgemental nature of reserving. 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, which are applicable for both the standard reserving and large and/or structured transactions: 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. Involving our own life insurance actuarial specialists to perform independent model validation procedures, including detailed testing of models, independent recalculations and back testing. 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. Evaluating the appropriateness of the recognition, accounting, and disclosures for large and/or structured transactions. Based on the work performed, we consider the methodologies and assumptions used by management in the valuation of actuarially determined L&H reserves to be appropriate. Swiss Reinsurance Company Consolidated 2018 Annual Report 99 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. 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 and 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. Evaluating the appropriateness of management's assessment of completeness of uncertain tax provisions. Examining material movements within the uncertain tax positions in each jurisdiction. Based on the work performed, we determined management’s assessment of 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 Roy Clark Audit expert Auditor in charge Zurich, 13 March 2019 Frank Trauschke 100 Swiss Reinsurance Company Consolidated 2018 Annual Report This page is intentionally left blank. Swiss Reinsurance Company Ltd 2018 Annual Report 101 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 2018, the Company employed a worldwide staff at an average of 1 842 full time equivalents. Financial year 2018 The financial year 2018 was characterised by large intercompany transactions impacting both the Company’s income statement and balance sheet. To further align the legal entity structure with the management view, the Company sold the assets and liabilities of its Singapore branch to Swiss Re Asia Pte. Ltd. With this sale the Company transferred related rights and obligations of the branch, including the entire reinsurance business as well as the employees, employed by the branch. Following the sale, a new retrocession agreement for the life and health business transferred was setup from Swiss Re Asia Pte. Ltd. with a negative day-one impact on the Company’s Life & Health Reinsurance result of CHF 297 million. Further, the Company sold its fully owned direct subsidiary Swiss Re Australia Ltd to Swiss Re Asia Holding Pte. Ltd. domiciled in Singapore generating a one-off realised gain of CHF 545 million. In order to finance the sale, the Company provided a capital contribution to Swiss Re Asia Holding Pte. Ltd. of CHF 1 236 million. This contribution increased the book value of the Company’s direct subsidiary Swiss Re Reinsurance Holding Company Ltd in the same amount. As a consequence of the new tax regime in the US, effective as of 31 December 2017, the Company restructured its assumed intragroup retrocession agreements with the affiliated companies Swiss Reinsurance America Corporation and Swiss Re Life & Health America Inc. In 2018, these restructurings led to a one-off net gain of CHF 643 million in the Life & Health Reinsurance result. In the last quarter of 2018, the Company restructured its intragroup retrocession agreement with Swiss Re Life Capital Reinsurance Ltd for the Canadian life and health business, moving from a full funds withheld structure to a partial funds withheld and new securities lending agreements structure. Net income for 2018 amounted to CHF 1 231 million driven by a strong investment result of CHF 1 914 million and a moderate Property & Casualty Reinsurance result, impacted by several large natural catastrophe and man-made losses. Life & Health Reinsurance result closed negatively, due to assumptions updates and day-one impacts from large transactions, more than offsetting the one-off gain from the restructuring of the intragroup retrocession agreements with Swiss Re Life & Health America Inc. With CHF 10 192 million the total shareholder’s equity of the Company remained strong as at 31 December 2018. 102 Swiss Reinsurance Company Ltd 2018 Annual Report Reinsurance result Reinsurance result amounted to CHF 411 million in 2018, compared to CHF 227 million in 2017. Property & Casualty Reinsurance result increased from CHF 354 million in 2017 to CHF 642 million in 2018. The current year experienced a modest Property & Casualty Reinsurance result impacted by several new large natural catastrophe losses in Asia and Americas and by man-made losses compared to an exceptionally large loss burden in 2017. Life & Health Reinsurance result deteriorated from a loss of CHF 127 million in 2017, to a loss of CHF 231 million in 2018, mainly due to day-one impacts originating from several new large transactions as well as unfavourable reserves development, predominantly in Israel. In addition, Life & Health Reinsurance result was affected by restructurings of intragroup retrocession agreements with Swiss Re Life & Health America Inc. leading to a net gain of CHF 643 million and with Swiss Re Asia Pte. Ltd. generating a loss of CHF 297 million. Premiums earned decreased from CHF 17 421 million in 2017 to CHF 15 798 million in 2018. The decrease was primarily driven by the restructuring of several intragroup retrocession agreements with US affiliated companies. The decrease was additionaly driven by the non-renewal of a large quota share treaty with an external US client in property and casualty, partly offset by higher assumed life and health Canadian business, new Life Capital business as well as continued growth in Asia. Other reinsurance revenues increased from CHF 1 439 million in 2017 to CHF 1 933 million in 2018, mainly driven by the gain from the recapture of the Swiss Re Life & Health America Inc intragroup retrocession agreements. Claims incurred decreased from CHF 13 098 million in 2017 to CHF 11 789 million in 2018, mostly reflecting the large natural catastrophes in 2017. The comparison of the individual claims line items is 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 3 922 million in 2017 to CHF 7 317 million in 2018, reflecting the new intragroup retrocession agreement with Swiss Re Asia Pte. Ltd. established in 2017, fully offset in change in unpaid claims. Property and casualty change in unpaid claims net decreased from an expense of CHF 5 393 million in 2017 to an income of CHF 793 million in 2018 due to the quota share reduction of the intragroup retrocession agreement with Swiss Re America Corporation and the settlement of outstanding claims to Swiss Re Asia Pte. Ltd. related to 2017 intragroup retrocession agreements as well as settlement of large losses reported in 2017. Life and health claims paid and claims adjustment expenses net and change in unpaid claims net decreased from CHF 8 598 million in 2017 to CHF 6 818 million in 2018, driven by several intragroup retrocession agreements restructurings, in 2018 the recapture from Swiss Re Life & Health America Inc and in 2017 the new agreement with Swiss Re Life Capital Reinsurance Ltd, as well as by large transactions in both years. These aforementioned restructurings and large transactions impacts were fully offset in life and health benefits net. Furthermore, claims paid and claims adjustment expenses net and change in unpaid claims net movements were mainly driven by Swiss Re Life Capital Reinsurance Ltd intragroup retrocession agreements for the Canadian business, as well as for the new Life Capital business. Life and health benefits net decreased from a gain of CHF 3 492 million in 2017 to a gain of CHF 1 554 million in 2018, mainly driven by several intragroup retrocession restructurings, in 2018 the recapture with Swiss Re Life & Health America Inc and in 2017 the new agreement with Swiss Re Life Capital Reinsurance Ltd, as well as large transactions in both years. These aforementioned restructurings and large transactions impacts were fully offset in life and health claims paid and claims adjustment expenses net and change in unpaid claims net. In addition, 2018 was negatively impacted in line with the volume update and new business in Asia, mainly in Japan as well as reserves strengthening in Israel. Acquisition costs net decreased from CHF 4 333 million in 2017 to CHF 3 664 million in 2018, mainly in property and casualty, in line with the premium development. This was driven by the quota share reduction of the intragroup retrocession agreement from Swiss Reinsurance America Corporation and the non-renewal of a large quota share treaty with an external US client, partly offset by the new volume from the intragroup retrocession agreement with Swiss Re Asia Pte. Ltd. Other reinsurance expenses increased from CHF 878 million in 2017 to CHF 1 545 million in 2018, reflecting the day-one losses from the new life and health intragroup retrocession from Swiss Re Asia Pte. Ltd. and from large transactions retroceded from Swiss Re Life & Health Australia Limited. Swiss Reinsurance Company Ltd 2018 Annual Report 103 Financial statements Swiss Reinsurance Company Ltd Investment result Investment income decreased from CHF 3 246 million in 2017 to CHF 2 777 million in 2018. The decrease was driven by lower distributions from investment funds of CHF 153 million and lower realised gains on equity securities of CHF 120 million compared to prior year. Furthermore, the introduction of the new accounting policy to account fixed income securities at amortised cost resulted in a one-off value readjustment in 2017 of CHF 227 million. In 2018, the Company received less income from subsidiaries and affiliated companies by CHF 536 million. This decrease was offset by a one-off realised gain on investments in subsidiaries and affiliated companies of CHF 563 million, mostly related to the sale of Swiss Re Australia Ltd. Investment expenses increased from CHF 317 million in 2017 to CHF 466 million in 2018. The increase was mainly related to higher value adjustments on equity securities and shares in investment funds, driven by market deteriorations in 2018. Other income and expenses The decrease in other net expenses from CHF 479 million in 2017 to CHF 334 million in 2018 was mainly related to a change in allocation of management expenses and to the loss from the sale of assets and liabilities of the Company’s Singapore branch which was recognised in 2017. Assets Total assets decreased from CHF 113 052 million as of 31 December 2017 to CHF 106 285 million as of 31 December 2018. Total investments increased from CHF 54 410 million to CHF 57 431 million in 2018. This was mainly due to the increase in investments in subsidiaries and affiliated companies by CHF 2 146 million, mostly related to the capital contributions to subsidiaries of Swiss Re Reinsurance Holding Company Ltd of CHF 2 895 million to fund their capital needs, primarily from the legal entity restructuring in Asia and the restructuring of several intragroup retrocession agreements with US affiliated companies. The increase was partly offset by the sale of Swiss Re Australia Ltd. The increase in short-term investments of CHF 1 746 million was mainly related to reinvestments of fixed income securities proceeds in connection with the restructuring of the Company’s life and health Canadian business, which led mostly to the decrease in fixed income securities of CHF 958 million. Further, short-term investments increased following the strategic asset allocation. Funds held by ceding companies decreased from CHF 20 913 million to CHF 15 684 million in 2018. Property and casualty funds held by ceding companies decreased mainly driven by the quota share reduction of the intragroup retrocession agreement from Swiss Reinsurance America Corporation and by the partial return of funds related to the restructure of the intragroup retrocession agreement with Westport Insurance Corporation. Life and health funds held by ceding companies decreased due to the recapture of intragroup retrocession agreements with Swiss Re Life & Health America Inc and the restructure of the intragroup retrocession agreement with Swiss Re Swiss Re Life Capital Reinsurance Ltd for the Canadian business. Deferred acquisition costs decreased from CHF 2 220 million to CHF 2 055 million in 2018, mostly driven by property and casualty business related to the reduction of the intragroup quota share retrocession agreement from Swiss Reinsurance America Corporation, partly offset by new transactions retroceded from Swiss Re Life & Health Australia Limited. Reinsurance recoverable on technical provisions retroceded increased from CHF 13 380 million to CHF 13 860 million in 2018, mainly in property and casualty business, due to large recoveries from Swiss Re Asia Pte. Ltd. reflecting large losses in Japan, partly offset by the commutation of a large adverse development cover. Premiums and other receivables from reinsurance decreased from CHF 12 615 million to CHF 10 785 million in 2018. The decrease was primarily driven by the restructure of several intragroup retrocession agreements with US affiliated companies. In addition, the decrease in property and casualty was driven by the transfer of the Company’s Singapore branch to Swiss Re Asia Pte. Ltd., partly offset by growth in life and health business in Asia and business from Swiss Re Life Capital Reinsurance Ltd. Accrued income decreased from CHF 1 258 million to CHF 225 million in 2018, mainly related to the settlement of the dividend from Swiss Re Reinsurance Holding Company Ltd in 2018. 104 Swiss Reinsurance Company Ltd 2018 Annual Report Liabilities Total liabilities decreased from CHF 102 231 million as of 31 December 2017 to CHF 96 093 million as of 31 December 2018. Technical provisions gross decreased from CHF 70 798 million to CHF 65 826 million in 2018. The decrease was primarily driven by the restructuring of several intragroup retrocession agreements with US affiliated companies. In addition, the decrease related to the settlement of outstanding claims from Swiss Re Asia Pte. Ltd. mainly for a new 2017 intragroup treaty and the transfer of the Company’s Singapore branch to Swiss Re Asia Pte. Ltd., partly offset by reserves strengthening in Israel. Funds held under reinsurance treaties decreased from CHF 8 050 million to CHF 6 866 million in 2018, mostly in life and health business, reflecting the restructure of the intragroup retrocession agreement with Swiss Re Swiss Re Life Capital Reinsurance Ltd for the Canadian business. Debt decreased by CHF 312 million to CHF 4 817 million in 2018, mainly reflecting the partial repayment of a loan to Swiss Re Reinsurance Holding Company Ltd of CHF 831 million, partly offset by the net increase of an existing loan facility from Swiss Re Ltd of CHF 552 million. Other liabilities increased from CHF 5 572 million to CHF 6 394 million in 2018, mainly reflecting higher intragroup current account payables. The decrease in subordinated liabilities of CHF 384 million to CHF 3 374 million in 2018 was mainly driven by the maturity of an external subordinated debt, partly offset by the issurance of an intragroup subordinated debt with Swiss Re Ltd of CHF 424 million. Shareholder’s equity Shareholder’s equity decreased from CHF 10 821 million as of 31 December 2017 to CHF 10 192 million as of 31 December 2018. The decrease reflected the dividend payment in cash of CHF 1 860 million, partly offset by the net income for the financial year 2018 of CHF 1 231 million. Future prospects and business development Large transactions In order to further align the legal entity structure with the management view, the Company is going to sell the assets and liabilities of its Korea branch to Swiss Re Asia Pte. Ltd., Korea branch, effective 1 January 2019. With this sale the Company will transfer related rights and obligations of the branch to Swiss Re Asia Pte. Ltd., Korea branch, including the entire reinsurance business as well as the employees, employed by the branch of the Company. Furthermore, the Company plans to sell its remaining Asian branches to Swiss Re Asia Pte. Ltd. in the upcoming years. Following the new tax regime in the US, effective as of 31 December 2017, the Company will further restructure its intragroup retrocession agreements with the affiliated companies through a taxable presence in the US. Swiss Reinsurance Company Ltd 2018 Annual Report 105 Financial statements Swiss Reinsurance Company Ltd Property & Casualty Reinsurance business Market environment Global non-life reinsurance industry has experienced slight growth in 2018, driven by the emerging markets. Growth in advanced markets is attributable to strong economic momentum, especially in North America, and more favourable general market conditions, especially in Nat Cat and casualty lines. Non-life premium development will be stable across the global, advanced and emerging markets over the next two years. With the stabilization of rates in 2019, underwriting result for the global non-life sector is expected to remain slightly positive. Overall profitability of the global property/casualty insurance remains at moderate levels, also driven by continuing low investment returns. Strategy and priorities The Company has benefitted from an improved non-life reinsurance market environment, with price increases and increasing interest rates impacting positively our long tail lines of business. In the context of these favourable market conditions, the Company is applying its selective growth strategy, specifically focused on portfolios with long-term profitability. Additionally, a differentiation approach is continuously applied and clients’ needs are addressed through the development of innovative, structured transactions. Further, the Company is diversifying its access to various risk pools through the contribution of its three main pillars (core, transactions and solutions). Life & Health Reinsurance business Market environment The life reinsurance industry registered a 2% increase in 2018. Underlying reinsurance premium growth in traditional reinsurance areas such as mortality and morbidity risk has again remained relatively subdued, but also other kinds of reinsurance transactions were sluggish this year. In mature markets, slow increases in the US were contrasted by healthy growth in Europe and Asia. 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. Another area of growth for reinsurers has been longevity risk transfer. 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 around 2% in 2019 and 2020. Premiums in the advanced markets are projected to expand by below 1% annually, 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 markets in Asia. Strategy and priorities The Company has experienced material growth of its life reinsurance portfolio, mostly reflecting the increasing diversification of its sources of earnings, through a larger mix of products lines and markets. The Company is diversifying its access to various risk pools through the contribution of its three main pillars (core, transactions and solutions). With this differentiation strategy, the Company is aiming to deliver sustainable profitability. Investments Strategy and priorities Financial investments are managed in accordance with Swiss Re‘s Targeted Standard on Asset Management 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 Global economic growth has peaked and is expected to slow in 2019, particularly in advanced markets. In the US and Euro area, tighter financial conditions, the waning US fiscal stimulus and lingering political concerns are likely to weigh on growth. Economic growth in emerging Asia will slow moderately, but remains the strongest region globally, while Latin America will see a modest growth recovery, albeit from a low base. In contrast to last year’s outlook, the balance of risks is seen as skewed to the down side, amid increasing protectionism (e.g. US-China trade conflict), ongoing monetary policy tightening, late cycle concerns (especially in the US) and uncertain (geo)politics (such as Brexit, European Parliament election, or elections in India, South Africa and Argentina). 106 Swiss Reinsurance Company Ltd 2018 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 2018 Annual Report 107 Financial statements Swiss Reinsurance Company Ltd Income statement Swiss Reinsurance Company Ltd For the years ended 31 December Income statement CHF millions Reinsurance Premiums written gross Premiums written retroceded Premiums written net Change in unearned premiums gross Change in unearned premiums retroceded Change in unearned premiums net Premiums earned Other reinsurance revenues Allocated investment return Total revenues from reinsurance business Claims paid and claim adjustment expenses gross Claims paid and claim adjustment expenses retroceded Claims paid and claim adjustment expenses net Change in unpaid claims gross Change in unpaid claims retroceded Change in unpaid claims net Life and health benefits gross Life and health benefits retroceded Life and health benefits net Claims and claim adjustment expenses and life and health benefits Change in equalisation provision Claims incurred Acquisition costs gross Acquisition costs retroceded Acquisition costs net Operating costs Acquisition and operating costs Other reinsurance expenses Total expenses from reinsurance business Note 2017 2018 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 18 277 –4 041 14 236 1 602 –40 1 562 15 798 1 933 397 18 128 –18 010 3 350 –14 660 631 686 1 317 1 562 –8 1 554 –11 789 - –11 789 –4 659 995 –3 664 –719 –4 383 –1 545 –17 717 Reinsurance result 227 411 108 Swiss Reinsurance Company Ltd 2018 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 2017 2018 3 246 –317 –383 2 546 2 300 –2 559 2 514 –408 73 –552 –226 1 401 –192 1 209 2 777 –466 –397 1 914 1 356 –1 539 2 142 –421 82 –416 - 1 387 –156 1 231 19 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2018 Annual Report 109 Financial statements Swiss Reinsurance Company Ltd Balance sheet Swiss Reinsurance Company Ltd As of 31 December Assets CHF millions Investments Investments in subsidiaries and affiliated companies Fixed income securities Loans Mortgages Equity securities Shares in investment funds Short-term investments Alternative investments Other investments Total investments Financial and reinsurance assets Assets in derivative financial instruments Funds held by ceding companies Cash and cash equivalents Reinsurance recoverable from unpaid claims Reinsurance recoverable from liabilities for life and health policy benefits Reinsurance recoverable from unearned premiums Reinsurance recoverable from provisions for profit commissions Reinsurance recoverable on technical provisions retroceded Tangible assets Deferred acquisition costs Intangible assets Premiums and other receivables from reinsurance Other receivables Other assets Accrued income Total financial and reinsurance assets Note 2017 2018 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 15 321 16 387 8 631 813 927 11 569 3 100 683 15 352 57 431 896 15 684 866 6 450 5 554 1 813 43 13 860 10 2 055 110 10 785 277 4 086 225 48 854 3 3 3 3 3 3 18 Total assets 113 052 106 285 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. 110 Swiss Reinsurance Company Ltd 2018 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 2017 2018 3 3 3 3 3 3 4 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 44 569 14 131 6 366 539 221 65 826 292 870 153 1 315 4 817 1 080 6 866 6 278 6 394 143 3 374 102 231 96 093 34 6 778 6 778 650 2 099 51 1 209 10 821 34 6 778 6 778 650 1 439 60 1 231 10 192 Total liabilities and shareholder’s equity 113 052 106 285 The accompanying notes are an integral part of Swiss Reinsurance Company Ltd’s financial statements. Swiss Reinsurance Company Ltd 2018 Annual Report 111 Financial statements Swiss Reinsurance Company Ltd Notes Swiss Reinsurance Company Ltd Reinsurance and sub-holding company Swiss Reinsurance Company Ltd (the Company), domiciled in Zurich, Switzerland, performs a dual role within the Swiss Re Group as both a reinsurance company and a sub-holding company for the Reinsurance Business Unit. The Company is a wholly-owned subsidiary of Swiss Re Ltd, the ultimate parent company domiciled in Zurich, Switzerland. 1 Significant accounting principles Basis of presentation 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 2018 financial year comprises the accounting period from 1 January 2018 to 31 December 2018. 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 carried at their amortised cost, less necessary depreciation to address other than temporary market value decreases. 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. Infrastructure loans are carried at their amortised cost, less necessary depreciation to address other than temporary market value decreases. 112 Swiss Reinsurance Company Ltd 2018 Annual Report 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 are recorded at market value. 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 2018 Annual Report 113 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. 114 Swiss Reinsurance Company Ltd 2018 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 2018 Annual Report 115 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 441 521 278 5 28 420 20 51 491 131 1 895 Value readjustments Realised gains – – – – 4 – – 10 10 – 14 563 208 0 – 53 42 0 2 44 – 868 Expenses Value adjustments Realised losses – – – – – – – – –174 –174 –41 –6 0 –110 –36 – –22 –58 – –215 0 –50 – –12 –14 –1 0 –15 – –77 2018 Total 1 004 729 278 5 85 462 20 63 545 131 2 777 2018 Total –41 –56 0 –122 –50 –1 –22 –73 –174 –466 –397 1 914 116 Swiss Reinsurance Company Ltd 2018 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 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 Swiss Reinsurance Company Ltd 2018 Annual Report 117 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 2 833 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 12 615 209 40 219 10 280 6 164 534 221 6 378 Gross 2 673 9 412 165 44 569 14 131 6 366 539 221 3 472 Retro –618 1 373 –19 –6 4501 –5 5541 –1 8131 –431 – 2 806 2018 Net 2 055 10 785 146 38 119 8 5773 4 553 496 221 6 278 1 Reported under "Reinsurance recoverable on technical provisions retroceded" on page 110. 2 Reported under "Other assets" on page 110. 3 Changes mainly in modelling and assumptions resulting in a reserve increase of CHF 196 million impacted business from all years. Thereof CHF 144 million related to modelling changes for the Israel Medex business. 4 Change in shareholder’s equity CHF millions 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 Shareholder’s equity 1.1.2018 Allocations relating to the dividend paid Dividend for the financial year 2017 Net income for the financial year Shareholder’s equity 31.12.2018 Share capital 34 Legal capital reserves 6 778 Legal profit reserves 650 Voluntary profit reserves 3 839 850 –2 590 Retained earnings brought forward 26 25 Net income for the financial year 875 –875 34 34 6 778 650 2 099 6 778 650 2 099 1 200 –1 860 34 6 778 650 1 439 51 51 9 60 1 209 1 209 1 209 –1 209 1 231 1 231 Total shareholder’s equity 12 202 – –2 590 1 209 10 821 10 821 – –1 860 1 231 10 192 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 2018 and 2017, 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 1 921 million (2017: CHF 974 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 2018 and 2017, respectively. 118 Swiss Reinsurance Company Ltd 2018 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 2017 15 439 18 657 34 096 2018 16 066 16 960 33 026 To secure the technical provisions at the 2018 balance sheet date, securities with a book value of CHF 12 863 million (2017: CHF 12 927 million) were deposited in favour of ceding companies, of which CHF 3 726 million (2017: CHF 3 513 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 2018, total commitments remaining uncalled were CHF 987 million (2017: CHF 1 305 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 2018 and 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 Ltd 2018 Annual Report 119 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 2018 2019 2020 2021 2022 After 2023 Total operating leases, net 2017 1 12 12 10 7 6 2 49 2018 – 10 7 4 3 2 26 1 Operating leasing for a branch was overstated in 2017 by CHF 72 million. Therefore, the previously reported 2017 figures have been changed accordingly. 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 2018 and 2017, Swiss Reinsurance Company Ltd held the following direct and material indirect investments in subsidiaries and affiliated companies: Country Barbados Barbados As of 31 December 2018 European Finance Reinsurance Company Ltd Gasper Funding Corporation Swiss Brokers México, Intermediario de Reaseguro, S.A. de C.V. Mexico Swiss Re Brasil Resseguros S.A. Swiss Re Investments Ltd Swiss Re Africa Limited 1 Swiss Re Mexico Servicios, S. de R.L. de C.V. 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. Swiss Re Australia Ltd Swiss Re Life & Health Australia Limited Swiss Re Capital Markets Corporation 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 Brazil Switzerland South Africa Mexico 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 Australia Australia United States (USA) Luxembourg Luxembourg Germany United Kingdom (UK) India United Kingdom (UK) Brazil Cayman Islands Vietnam Brazil City Bridgetown Bridgetown Mexico City São Paulo Zurich Cape Town Mexico City Zurich Zurich Wilmington New York Wilmington Wilmington Wilmington Wilmington Armonk Singapore Singapore Sydney Sydney New York Luxembourg Luxembourg Munich London Mumbai London % Equity interest 100% 100% 100% 99% 100% 100% 98% 100% 100% 100% 77% 100% 100% 100% 100% 100% 100% 100% 100% 100% 23% 100% 100% 6% 100% 100% 100% % Voting interest 100% 100% 100% 99% 100% 100% 98% 100% 100% 100% 77% 100% 100% 100% 100% 100% 100% 100% 100% 100% 23% 100% 100% 6% 100% 100% 100% São Paulo 20% 20% São Paulo George Town Hanoi 93% 100% 25% 93% 100% 25% 1 Swiss Re Life and Health Africa Limited, prior to its renaming in 2018 120 Swiss Reinsurance Company Ltd 2018 Annual Report 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. 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 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% Swiss Reinsurance Company Ltd 2018 Annual Report 121 Financial statements Swiss Reinsurance Company Ltd 12 Debt and subordinated liabilities The Company had outstanding debt and subordinated liabilities at the 2018 balance sheet date of CHF 8 191 million (2017: CHF 8 888 million). Thereof CHF 6 846 million (2017: CHF 7 510 million) were due within one to five years and CHF 1 345 million (2017: CHF 1 378 million) were due after five years. As of 31 December 2018, the following public placed debentures were outstanding: Instrument Subordinated bond Subordinated bond Subordinated bond Subordinated bond Senior bond Subordinated bond Senior bond Issued in 2013 2007 2013 2012 2014 2015 2015 Currency USD GBP CHF EUR CHF EUR CHF Nominal in millions 750 500 175 500 250 750 250 Interest rate 6.375% 6.302% 7.500% 6.625% 1.000% 2.600% 0.750% Maturity/ First call in 2019 2019 2020 2022 2024 2025 2027 Book value CHF millions 739 628 175 563 250 845 250 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 2017 66 3 2 –3 –38 86 842 1 385 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 Subordinated liabilities 2017 8 025 15 051 6 798 21 1 9081 4 6292 149 7 913 5 335 4 6043 –4 1 Thereof at the 2018 balance sheet date CHF 75 million (2017: CHF 2 million) were towards the parent company Swiss Re Ltd. 2 Thereof at the 2018 balance sheet date CHF 3 273 million (2017: CHF 2 720 million) were towards the parent company Swiss Re Ltd. 3 Thereof at the 2018 balance sheet date CHF 323 million (2017: CHF 733 million) were towards the parent company Swiss Re Ltd. 4 Thereof at the 2018 balance sheet date CHF 424 million (2017: none) were towards the parent company Swiss Re Ltd. 2018 87 12 –1 –2 –60 26 634 1 556 2018 8 321 8 126 5 606 36 2 8071 4 3172 109 6 757 5 578 4 9113 4244 122 Swiss Reinsurance Company Ltd 2018 Annual Report 15 Release of undisclosed reserves In 2018, no net release of undisclosed reserves (2017: no net release). 16 Obligations towards employee pension fund As of 31 December 2018, other liabilities included CHF 1 million (2017: CHF 1 million) payable to the employee pension fund. 17 Personnel information As of 31 December 2018, the Company employed a worldwide staff at an average of 1 842 (2017: 1 930) full time equivalents. Personnel expenses for the 2018 financial year amounted to CHF 447 million (2017: CHF 440 million). 18 Accrued income from subsidiaries and affiliated companies The 2017 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, paid by the subsidiary in 2018, was already recorded in the 2017 Company‘s financial statements. 19 Extraordinary income and expenses The 2017 net income contained 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 2018, the Swiss Re Group incurred total auditor’s fees of CHF 31 million (2017: CHF 30 million) and additional fees of CHF 7 million (2017: CHF 2 million), of which CHF 2 million (2017: CHF 3 million) and CHF 0 million (2017: CHF 1 million), respectively, incurred for the Company. Swiss Reinsurance Company Ltd 2018 Annual Report 123 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 27 March 2019, to approve the following allocation and payment of a cash dividend of USD 1 670 million, which must not exceed CHF 1 800 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 2019. 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 1 800 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 1 800 million. This threshold of CHF 1 800 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 2017 51 1 209 1 260 –1 200 60 2017 2 099 1 200 3 299 –1 8602 1 439 2018 60 1 231 1 291 –1 250 41 2018 1 439 1 250 2 689 –1 8001 889 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 2017 figure was recalculated based on the final cash dividend converted into CHF at spot rate on the settlement date. Zurich, 13 March 2019 124 Swiss Reinsurance Company Ltd 2018 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 108 to 123) for the year ended 31 December 2018. 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 2018 comply with Swiss law and the Company’s Articles of Association. Swiss Reinsurance Company Ltd 2018 Annual Report 125 Financial statements Swiss Reinsurance Company Ltd 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 certain 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 complex valuation models: ̤ Fixed income securitised products ̤ Fixed income mortgage and asset-backed securities ̤ Private placements ̤ 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. Based on the work performed, we consider the methodologies and assumptions used by management in the determination of the valuation to be appropriate. 126 Swiss Reinsurance Company Ltd 2018 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. Furthermore, on a regular basis, the Company enters into large and/or structured transactions which often have material or complex financial reporting and reserving consequences. The reserving for such transactions are subject to increased risk of error due to the non-routine nature of transactions and the judgemental nature of reserving. 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, which are applicable for both the standard reserving and large and/or structured transactions: ̤ 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 protfolios. For these portfolios, 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 estimate. ̤ Evaluating the appropriateness of the recognition, accounting, and disclosures for large and/or structured transactions Based of the work performed, we consider that the methodologies and assumptions used by management in the valuation of actuarially determined P&C loss reserves to be appropriates. Swiss Reinsurance Company Ltd 2018 Annual Report 127 Financial statements Swiss Reinsurance Company Ltd 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, inflation trends, 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. Furthermore, on a regular basis, the Company enters into large and/or structured transactions which often have material or complex financial reporting and reserving consequences. The reserving for such transactions are subject to increased risk of error due to the non-routine nature of transactions and the judgemental nature of reserving. 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, which are applicable for both the standard reserving and large and/or structured transactions: ̤ 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. ̤ Involving our life insurance actuarial specialists to perform independent model validation procedures, including detailed testing of models, independent recalculations and back testing. ̤ 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 ̤ Evaluating the appropriateness of the recognition, accounting, and disclosures for large and/or structured transactions. Based on the work performed, we consider that the methodologies and assumptions used by management in the valuation of actuarially determined L&H reserves to be appropriate. 128 Swiss Reinsurance Company Ltd 2018 Annual Report 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. Based on the work performed, we consider the methods and assumptions used by management 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 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 Roy Clark Audit expert Auditor in charge Frank Trauschke Zurich, 13 March 2019 Swiss Reinsurance Company Ltd 2018 Annual Report 129 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; 130 Swiss Reinsurance Company Consolidated 2018 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 2018 Annual Report 131 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. Financial, credit and foreign exchange markets are experiencing continued periods of volatility reflecting a range of political, economic and other uncertainties, some of the more significant of which are inter-related. These include the planned withdrawal of the United Kingdom from the European Union and significant uncertainty regarding the basis of that withdrawal and the future relationship between the United Kingdom and the European Union; the possible emergence of trade barriers and other protection policies across a range of economies, including a sustained trade war between the United States and China; geopolitical tensions more broadly; a prolonged slowdown in one or more of the principal global economies, particularly in China, and possible recession; continued challenges faced by the Eurozone; the tightening of monetary policy; sustained challenges to multilateral institutions and frameworks; the domestic political situation in the United States, various member states of the European Union and potentially other countries; and heightened scrutiny of technology companies. Further adverse developments or the continuation of adverse trends that, in turn, have a negative impact on financial markets and economic conditions could limit the Group’s ability to access the capital markets and bank funding markets, could adversely affect the ability of counterparties to meet their obligations to the Group and could adversely affect the confidence of the ultimate buyers of reinsurance. Any of the foregoing factors, developments and trends could have an adverse effect on the Group’s investment results, which in the current low interest rate environment and soft insurance cycle could have a material adverse effect on the Group’s overall results, make it difficult to determine the value of certain assets in the Group’s portfolio, make it more difficult to acquire suitable investments to meet its risk and return criteria and otherwise have a material adverse effect on its business and operations. 132 Swiss Reinsurance Company Consolidated 2018 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. The Group is subject to the Swiss Solvency Test and, through its legal entities organised in the EEA, Solvency II. 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 Group could be designated as a global systemically important financial institution (“SIFI”) under the framework for SIFIs developed by the Financial Stability Board, or as a systemically important insurer 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 its methodology for identifying global systemically important insurers (“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, reporting obligations, capital costs (in the form of capital charges or high loss absorption capacity) 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 UK and the EU 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 2018 Annual Report 133 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. Changes to the US tax regime enacted in early 2018 prompted us to modify our operating model for our 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 insurance and reinsurance industries, with earnings capacity under stress unless lower investment returns from fixed income assets can be offset by lower combined ratios or higher returns from other asset classes. 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, basis and correlation risks. 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. 134 Swiss Reinsurance Company Consolidated 2018 Annual Report Credit risk If the credit markets were again to deteriorate and further asset classes were to be impacted, the Group could experience losses. Changes in the market value of the underlying securities and other factors impacting their price could give rise to market value losses. If the credit markets were to deteriorate again, the Group could also face write-downs in other areas of its portfolio, including other structured instruments, and the Group and its counterparties could face difficulties in valuing credit-related instruments. Differences in opinion with respect to valuations of credit-related instruments could result in legal disputes among the Group and its counterparties as to their respective obligations, the outcomes of which are difficult to predict and could be material. Liquidity risks The Group’s business requires, and its clients expect, that it has sufficient capital and sufficient liquidity to meet its re/insurance obligations, and that this would continue to be the case following the occurrence of any foreseeable event or series of events, including extreme catastrophes, that would trigger insurance or reinsurance coverage obligations. The Group’s uses of funds include obligations arising in its reinsurance business (including claims and other payments as well as insurance provision repayments due to portfolio transfers, securitisations and commutations), which may include large and unpredictable claims (including catastrophe claims), funding of capital requirements and operating costs, payment of principal and interest on outstanding indebtedness and funding of acquisitions. The Group also has unfunded capital commitments in its private equity and hedge fund investments, which could result in funding obligations at a time when it is subject to liquidity constraints. In addition, the Group has potential collateral requirements in connection with a number of reinsurance arrangements, the amounts of which may be material and the meeting of which could require the Group to liquidate cash equivalents or other securities. The Group manages liquidity and funding risks by focusing on the liquidity stress that is likely to result from extreme capital markets scenarios or from extreme loss events or combinations of the two. Generally, the ability to meet liquidity needs could be adversely impacted by factors that the Group cannot control, such as market dislocations or interruptions, adverse economic conditions, severe disruption in the financial and worldwide credit markets and the related increased constraints on the availability of credit; changes in interest rates, foreign exchange rates and credit spreads; or by perceptions among market participants of the extent of the Group’s liquidity needs. Unexpected liquidity needs (including to meet collateral calls) could require the Group to incur indebtedness or liquidate investments or other assets. The Group may not be able to secure new sources of liquidity or funding, should projected or actual liquidity fall below levels it requires. The ability to meet liquidity needs through asset sales may be constrained by market conditions and the related stress on valuations, and through third-party funding may be limited by constraints on the general availability of credit and willingness of lenders to lend. In addition, the Group’s ability to meet liquidity needs may also be constrained by regulatory requirements that require regulated entities to maintain or increase regulatory capital, or that restrict intra-group transactions, the timing of dividend payments from subsidiaries or the fact that certain assets may be encumbered or otherwise non-tradable. Failure to meet covenants in lending arrangements could give rise to collateral-posting or defaults, and further constrain access to liquidity. Finally, any adverse ratings action could trigger a need for further liquidity (for example, by triggering termination provisions or collateral delivery requirements in contracts to which the Group is a party) at a time when the Group’s ability to obtain liquidity from external sources is limited by such ratings action. Swiss Reinsurance Company Consolidated 2018 Annual Report 135 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. 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 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. 136 Swiss Reinsurance Company Consolidated 2018 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. The Group also is subject to audits and challenges from time to time by tax authorities, which could result in increases in tax costs, changes to internal structures and interest and penalties. Tax authorities may also actively pursue additional taxes based on retroactive changes to tax laws. The Group could be subject to risks arising from alleged, or actual, violations of any of the foregoing, and could also be subject to risks arising from potential employee misconduct, including non-compliance with internal policies and procedures and malfeasance, such as undertaking or facilitating cyber attacks on internal systems. Substantial legal liability could materially adversely affect the Group’s business, financial condition or results of operations or could cause significant reputational harm, which could seriously affect its business. Insurance, operational and other risks As part of the Group’s ordinary course operations, the Group is subject to a variety of risks, including risks that reserves may not adequately cover future claims and benefits; risks that catastrophic events (including hurricanes, windstorms, floods, earthquakes, acts of terrorism, man-made disasters such as industrial accidents, explosions, and fires, and pandemics) may expose the Group to unexpected large losses (and related uncertainties in estimating future claims in respect of such events); changes in the insurance industry that affect ceding companies, particularly those that further increase their sensitivity to counterparty risk; competitive conditions (including as a result of consolidation and the availability of significant levels of alternative capacity); cyclicality of the industry; risks related to emerging claims and coverage issues; macro developments giving rise to emerging risks, such as climate change and technological developments (including greater exposure to cyber risks, which could have a range of consequences from operational disruption, to loss of proprietary or customer data, to greater regulatory burdens and potential liability); risks arising from the Group’s dependence on policies, procedures and expertise of ceding companies; risks related to investments in emerging markets; and risks related to the failure of, or attacks directed at, the Group’s operational systems and infrastructure, 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 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. Swiss Reinsurance Company Consolidated 2018 Annual Report 137 General information Note on risk factors 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 financial reporting, including in this report. These measures are not prepared in accordance with US GAAP or any other comprehensive set of accounting rules or principles, and should not be viewed as 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 Swiss Re is a wholly owned subsidiary of SRL, and the Group represents 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. 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 or dispositions. To the extent it undertakes acquisitions, it is subject to the risks inherent in acquiring and integrating new operations. 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. 138 Swiss Reinsurance Company Consolidated 2018 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 © 2019 Swiss Re. All rights reserved. 

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