Swiss Re Group enters into arrangements with variable interest entities (VIEs) in the normal course of business. The involvement ranges from being a passive investor to designing, structuring and managing the VIEs. The variable interests held by the Group arise as a result of the Group’s involvement in a modified coinsurance agreement, certain insurance-linked and credit-linked securitisations, swaps in trusts, debt financing and other entities which meet the definition of a VIE.

When analysing the status of an entity, the Group mainly assesses if (1) the equity is sufficient to finance the entity’s activities without additional subordinated financial support, (2) the equity holders have the right to make significant decisions affecting the entity’s operations and (3) the holders of the voting rights substantively participate in the gains and losses of the entity. When one of these criteria is not met, the entity is considered a VIE and needs to be assessed for consolidation under the VIE section of the Consolidation Topic.

The party that has a controlling financial interest is called the primary beneficiary and consolidates the VIE. An enterprise is deemed to have a controlling financial interest if it has both of the following:

• the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and
• the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

The Group assesses for all its variable interests in VIEs whether it has a controlling financial interest in these entities and, thus, is the primary beneficiary. For this, the Group identifies the activities that most significantly impact the entity’s performance and determines whether the Group has the power to direct those activities. In conducting the analysis, the Group considers the purpose, the design and the risks that the entity was designed to create and pass through to its variable interest holders. In a second step, the Group assesses if it has the obligation to absorb losses or if it has the right to receive benefits of the VIE that could potentially be significant to the entity. If both criteria are met, the Group has a controlling financial interest in the VIE and consolidates the entity.

Whenever facts and circumstances change, a review is undertaken of the impact these changes could have on the consolidation assessment previously performed. When the assessment might be impacted, a reassessment to determine the primary beneficiary is performed.

Modified coinsurance agreement

The Group assumes insurance risk via a modified coinsurance agreement from Aurora National Life Assurance Company. Until the second quarter of 2012, Aurora National Life Assurance Company was recognised as a VIE in which the Group qualified as the primary beneficiary and consolidated the entity (for further details please refer to Annual Report 2011).

In the third quarter of 2012, a put/call option to acquire the parent of Aurora National Life Assurance Company, New California Holdings, Inc., was exercised. As a result, Aurora National Life Assurance Company is wholly owned by Swiss Re and does not qualify as a VIE. The related non-controlling interests are no longer reported. Please refer to Note 6 for further information.

Insurance-linked and credit-linked securitisations

The insurance-linked and credit-linked securitisations transfer pre-existing insurance or credit risk to the capital markets through the issuance of insurance-linked or credit-linked securities. In insurance-linked securitisations, the securitisation vehicle assumes the insurance risk through insurance or derivative contracts. In credit-linked securitisations, the securitisation vehicle assumes the credit risk through credit default swaps. The securitisation vehicle generally retains the issuance proceeds as collateral. The collateral held predominantly consists of investment-grade securities.

Typically, the variable interests held by the Group arise through ownership of insurance-linked and credit-linked securities, or through protection provided under a total return swap for the principal of the collateral held by the securitisation vehicle.

Generally, the activities of a securitisation vehicle are pre-determined at formation. There are substantially no ongoing activities during the life of the VIE that could significantly impact the economic performance of the vehicle. Consequently, the main focus to identify the primary beneficiary is on the activities performed and decisions made when the VIE was designed. Typically, the Group is considered the primary beneficiary of a securitisation vehicle when the Group acts as a sponsor of risk passed to the VIE and enters at the same time into a total return swap with the VIE to protect the VIE’s assets from market risk. Under the total return swap, the Group would incur losses if some or all of the securities held as collateral in the securitisation vehicle decline in value or default. Therefore, the Group’s maximum exposure to loss equals the principal amount of the collateral protected under the total return swap.

As of 31 December 2012, the total assets of the insurance-linked and credit-linked securitisation vehicles in which the Group holds variable interests but is not the primary beneficiary were USD 2 992 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 62 million.

Swaps in trusts

The Group provides risk management services to certain asset securitisation trusts which qualify as VIEs. As the involvement of the Group is limited to interest rate and foreign exchange derivatives, Swiss Re does not have power to direct any activities of the trusts and therefore does not qualify as primary beneficiary of any of these trusts. These activities are in run-off.

Debt financing vehicles

Debt financing vehicles issue preference shares or loan notes to provide the Group with funding. The Group is partially exposed to the asset risk by holding equity rights or by protecting some of the assets held by the VIEs via guarantees or derivative contracts. The assets held by the VIEs consist of investment-grade securities, structured products, hedge fund units, derivatives and others.

The Group consolidates certain debt financing vehicles as it has power over the investment management in the vehicles, which is considered to be the activity that most significantly impacts the entities’ economic performance. In addition, the Group absorbs the variability of the investment return so that both criteria for a controlling financial interest are met.

As of 31 December 2012, the total assets of the debt financing vehicles in which the Group holds variable interests but is not the primary beneficiary were USD 2 040 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 7 195 million.

Investment vehicles

During 2012, this VIE category has been introduced to disclose the new VIEs resulting from the sale of Swiss Re Private Equity Partners AG (please see Note 6). Another private equity limited partnership, previously reported in the category “Other”, has been included in this category.

Investment vehicles are private equity limited partnerships, in which the Group is invested as part of its investment strategy. Typically, the Group’s variable interests arise through limited partner ownership interests in the vehicles. The Group does not own the general partners of the limited partnerships, and does not have any significant kick-out or participating rights. Therefore the Group lacks power over the relevant activities of the vehicles and, consequently, does not qualify as the primary beneficiary. The Group is exposed to losses when the values of the investments held by the vehicles decrease. The maximum exposure to loss equals the carrying amount of the ownership interest.

As of 31 December 2012, the total assets of investment vehicles in which the Group holds variable interests but is not the primary beneficiary were USD 2 359 million.

Other

The VIEs in this category were created for various purposes. Generally, the Group is exposed to the asset risk of the VIEs by holding an equity stake in the VIE or by guaranteeing a part or the entire asset value to third-party investors. A significant portion of the Group’s exposure is either retroceded or hedged. The assets held by the VIEs consist mainly of residential real estate and other.

As of 31 December 2012, the total assets of other VIEs in which the Group holds variable interests but is not the primary beneficiary were USD 1 663 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 747 million.

The Group did not provide financial or other support to any VIEs during 2012 that it was not previously contractually required to provide.

Consolidated VIEs

The following table shows the total assets and liabilities on the Group’s balance sheet relating to VIEs of which the Group is the primary beneficiary as of 31 December:

The above USD 11 966 million total assets as of year-end 2011 include USD 3 473 million total assets of the modified coinsurance agreement.

As of 31 December 2012, the consolidation of the VIEs resulted in non-controlling interests in the balance sheet of nil (31 December 2011: USD 414 million). The non-controlling interests in income were USD 12 million and USD 7 million net of tax for the years ended 31 December 2011 and 2012, respectively. All non-controlling interests were related to Aurora National Life Assurance Company, which has been fully owned by Swiss Re since the third quarter of 2012. Therefore, the non-controlling interests are no longer reported (see above under “Modified coinsurance agreement” and Note 6 for further information).

Non-consolidated VIEs

The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs in which the Group held a variable interest but was not the primary beneficiary as of 31 December:

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:

The assets and liabilities for the swaps in trusts represent the positive and negative fair values of the derivatives the Group has entered into with the trusts. Liabilities are recognised for certain debt financing VIEs when losses occur. To date, the respective debt financing VIEs have not incurred any losses. Liabilities of USD 544 million recognised for the “Other” category relate mainly to collateral received.