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Annual Report 2015

7 Investments

Investment income

Net investment income by source (excluding unit-linked and with-profit business) was as follows:

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USD millions

2014

2015

Fixed income securities

2 798

2 553

Equity securities

100

105

Policy loans, mortgages and other loans

133

128

Investment real estate

144

158

Short-term investments

111

77

Other current investments

127

155

Share in earnings of equity-accounted investees

321

52

Cash and cash equivalents

42

35

Net result from deposit-accounted contracts

149

95

Deposits with ceding companies

571

462

Gross investment income

4 496

3 820

Investment expenses

–358

–362

Interest charged for funds held

–35

–22

Net investment income – non-participating business

4 103

3 436

Dividends received from investments accounted for using the equity method were USD 277 million and USD 254 million for 2014 and 2015, respectively.

Share in earnings of equity-accounted investees includes an impairment of the carrying amount of an equity-accounted investee of USD 83 million for 2015.

Realised gains and losses

Realised gains and losses for fixed income, equity securities and other investments (excluding unit-linked and with-profit business) were as follows:

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USD millions

2014

2015

Fixed income securities available-for-sale:

 

 

Gross realised gains

814

889

Gross realised losses

–231

–283

Equity securities available-for-sale:

 

 

Gross realised gains

686

372

Gross realised losses

–84

–69

Other-than-temporary impairments

–40

–57

Net realised investment gains/losses on trading securities

46

64

Change in net unrealised investment gains/losses on trading securities

120

–30

Net realised/unrealised gains/losses on other investments

–340

85

Net realised/unrealised gains/losses on insurance-related activities

–331

143

Gain/Loss related to sale of Aurora National Life Assurance Company

–247

9

Foreign exchange gains/losses

174

83

Net realised investment gains/losses – non-participating business

567

1 206

Investment result – unit-linked and with-profit business

For unit-linked contracts, the investment risk is borne by the policyholder. For with-profit contracts, the majority of the investment risk is also borne by the policyholder, although there are certain guarantees that limit the down-side risk for the policyholder, and a certain proportion of the returns may be retained by the Group (typically 10%).

Net investment result on unit-linked and with-profit business credited to policyholders was as follows:

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2014

2015

USD millions

Unit-linked

With-profit

Unit-linked

With-profit

Investment income – fixed income securities

109

92

90

77

Investment income – equity securities

621

32

556

28

Investment income – other

22

13

32

16

Total investment income – unit-linked and with-profit business

752

137

678

121

Realised gains/losses – fixed income securities

132

168

–75

–58

Realised gains/losses – equity securities

206

–1

124

–19

Realised gains/losses – other

5

–18

28

15

Total realised gains/losses – unit-linked and with-profit business

343

149

77

–62

Total net investment result – unit-linked and with-profit business

1 095

286

755

59

Impairment on fixed income securities related to credit losses

Other-than-temporary impairments for debt securities are bifurcated between credit and non-credit components, with the credit component recognised through earnings and the non-credit component recognised in other comprehensive income. The credit component of other-than-temporary impairments is defined as the difference between a security’s amortised cost basis and the present value of expected cash flows. Methodologies for measuring the credit component of impairment are aligned to market observer forecasts of credit performance drivers. Management believes that these forecasts are representative of median market expectations.

For securitised products, a cash flow projection analysis is conducted by integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities, and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecasted economic environment is used for securities identified as credit-impaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and the present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.

A reconciliation of other-than-temporary impairments related to credit losses recognised in earnings was as follows:

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USD millions

2014

2015

Balance as of 1 January

228

137

Credit losses for which an other-than-temporary impairment was not previously recognised

9

30

Reductions for securities sold during the period

–78

–23

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

 

7

Impact of increase in cash flows expected to be collected

–23

–10

Impact of foreign exchange movements

1

–5

Balance as of 31 December

137

136

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:

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2014
USD millions

Amortised cost or cost

Gross unrealised gains

Gross unrealised losses

Other-than-temporary impairments
recognised in other comprehensive income

Estimated
fair value

Debt securities issued by governments and government agencies:

 

 

 

 

 

US Treasury and other US government corporations and agencies

11 639

960

–9

 

12 590

US Agency securitised products

3 212

47

–23

 

3 236

States of the United States and political subdivisions of the states

1 047

80

–2

 

1 125

United Kingdom

8 224

1 259

–2

 

9 481

Canada

2 944

626

–17

 

3 553

Germany

4 521

369

–30

 

4 860

France

2 889

355

–19

 

3 225

Other

7 902

405

–103

 

8 204

Total

42 378

4 101

–205

 

46 274

Corporate debt securities

29 750

2 622

–139

–2

32 231

Mortgage- and asset-backed securities

5 739

231

–23

–2

5 945

Fixed income securities available-for-sale

77 867

6 954

–367

–4

84 450

Equity securities available-for-sale

3 133

959

–68

 

4 024

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2015
USD millions

Amortised cost or cost

Gross unrealised gains

Gross unrealised losses

Other-than-temporary impairments
recognised in other comprehensive income

Estimated
fair value

Debt securities issued by governments and government agencies:

 

 

 

 

 

US Treasury and other US government corporations and agencies

12 212

612

–92

 

12 732

US Agency securitised products

2 937

29

–28

 

2 938

States of the United States and political subdivisions of the states

1 236

55

–10

 

1 281

United Kingdom

7 514

773

–54

 

8 233

Canada

3 943

520

–38

 

4 425

Germany

2 920

239

–31

 

3 128

France

2 065

223

–18

 

2 270

Other

7 818

262

–146

 

7 934

Total

40 645

2 713

–417

 

42 941

Corporate debt securities

30 540

1 448

–530

–11

31 447

Mortgage- and asset-backed securities

4 970

118

–38

–3

5 047

Fixed income securities available-for-sale

76 155

4 279

–985

–14

79 435

Equity securities available-for-sale

4 294

632

–207

 

4 719

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.

Investments trading

The carrying amounts of fixed income securities and equity securities classified as trading (excluding unit-linked and with-profit business) as of 31 December were as follows:

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USD millions

2014

2015

Debt securities issued by governments and government agencies

1 997

2 710

Corporate debt securities

60

52

Mortgage- and asset-backed securities

162

134

Fixed income securities trading – non-participating

2 219

2 896

Equity securities trading – non-participating

65

68

Investments held for unit-linked and with-profit business

The carrying amounts of investments held for unit-linked and with-profit business as of 31 December were as follows:

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2014

2015

USD millions

Unit-linked

With-profit

Unit-linked

With-profit

Fixed income securities trading

1 870

1 810

2 410

1 659

Equity securities trading

19 054

991

21 894

889

Investment real estate

736

429

691

366

Other invested assets

435

 

332

 

Total investments for unit-linked and with-profit business

22 095

3 230

25 327

2 914

Maturity of fixed income securities available-for-sale

The amortised cost or cost and estimated fair values of investments in fixed income securities available-for-sale by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2014 and 2015, USD 11 579 million and USD 12 725 million, respectively, of fixed income securities available-for-sale were callable.

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2014

2015

USD millions

Amortised cost or cost

Estimated
fair value

Amortised cost or cost

Estimated
fair value

Due in one year or less

4 749

4 757

4 874

4 911

Due after one year through five years

17 920

18 459

19 370

19 671

Due after five years through ten years

17 300

18 329

16 577

17 101

Due after ten years

32 334

37 137

30 611

32 952

Mortgage- and asset-backed securities with no fixed maturity

5 564

5 768

4 723

4 800

Total fixed income securities available-for-sale

77 867

84 450

76 155

79 435

Assets pledged

As of 31 December 2015, investments with a carrying value of USD 6 914 million were on deposit with regulatory agencies in accordance with local requirements, and investments with a carrying value of USD 9 601 million were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries.

As of 31 December 2014 and 2015, securities of USD 16 915 million and USD 15 828 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. Corresponding liabilities of USD 1 951 million and USD 995 million, respectively, were recognised in accrued expenses and other liabilities for the obligation to return collateral that the Group has the right to sell or repledge.

As of 31 December 2015, a real estate portfolio with a carrying value of USD 224 million serves as collateral for short-term senior operational debt of USD 250 million.

Collateral accepted which the Group has the right to sell or repledge

As of 31 December 2014 and 2015, the fair value of the equity securities, government and corporate debt securities received as collateral was USD 3 907 million and USD 7 030 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2014 and 2015 was USD 494 million and USD 2 429 million, respectively. The sources of the collateral are securities borrowing, reverse repurchase agreements and derivative transactions.

Offsetting of derivatives, financial assets and financial liabilities

Offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows:

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2014
USD millions

Gross amounts of recognised financial assets

Collateral set off in the balance sheet

Net amounts of financial assets presented in the balance sheet

Related financial instruments not set off in the balance sheet

Net amount

Derivative financial instruments - assets

4 371

–3 530

841

–188

653

Reverse repurchase agreements

3 254

–1 303

1 951

–1 951

0

Securities borrowing

87

 

87

–87

0

Total

7 712

–4 833

2 879

–2 226

653

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2014
USD millions

Gross amounts of recognised financial liabilities

Collateral set off in the balance sheet

Net amounts of financial liabilities presented in the balance sheet

Related financial instruments not set off in the balance sheet

Net amount

Derivative financial instruments - liabilities

–3 877

2 969

–908

149

–759

Repurchase agreements

–1 353

1 003

–350

350

0

Securities lending

–1 901

300

–1 601

1 475

–126

Total

–7 131

4 272

–2 859

1 974

–885

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2015
USD millions

Gross amounts of recognised financial assets

Collateral set off in the balance sheet

Net amounts of financial assets presented in the balance sheet

Related financial instruments not set off in the balance sheet

Net amount

Derivative financial instruments - assets

2 713

–1 953

760

–13

747

Reverse repurchase agreements

6 401

–3 000

3 401

–3 394

7

Securities borrowing

452

 

452

–452

0

Total

9 566

–4 953

4 613

–3 859

754

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2015
USD millions

Gross amounts of recognised financial liabilities

Collateral set off in the balance sheet

Net amounts of financial liabilities presented in the balance sheet

Related financial instruments not set off in the balance sheet

Net amount

Derivative financial instruments - liabilities

–2 179

1 477

–702

81

–621

Repurchase agreements

–2 844

2 475

–369

369

0

Securities lending

–1 151

525

–626

582

–44

Total

–6 174

4 477

–1 697

1 032

–665

Collateral pledged or received between two counterparties with a master netting arrangement in place, but not subject to balance sheet netting is disclosed at fair value. The fair values represent the gross carrying value amounts at the reporting date for each financial instrument received or pledged by the Group. Management believes that master netting agreements provide for legally enforceable set-off in the event of default, which substantially reduces credit exposure. Upon occurrence of an event of default the non-defaulting party may set off the obligation against collateral received regardless if offset on 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”, and “Accrued expenses and other liabilities”, respectively.

Recognised gross liability for the obligation to return collateral that the Group has the right to sell or repledge

As of 31 December 2015, the gross amounts of liabilities related to repurchase agreements and securities lending by the class of securities transferred to third parties and by the remaining maturity are shown below. The liabilities are recognised for the obligation to return collateral that the Group has the right to sell or repledge.

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.

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Remaining contractual maturity of the agreements

2015
USD millions

Overnight and continuous

Up to 30 days

30–90 days

Greater than 90 days

Total

Repurchase agreements

 

 

 

 

 

Debt securities issued by governments and government agencies

370

2 136

176

135

2 817

Corporate debt securities

3

24

 

 

27

Total repurchase agreements

373

2 160

176

135

2 844

 

 

 

 

 

 

Securities lending

 

 

 

 

 

Debt securities issued by governments and government agencies

217

 

501

433

1 151

Total securities lending

217

0

501

433

1 151

 

 

 

 

 

 

Gross amount of recognised liabilities for repurchase agreements and securities lending

 

 

 

 

3 995

Unrealised losses on securities available-for-sale

The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position as of 31 December 2014 and 2015. As of 31 December 2014 and 2015, USD 52 million and USD 161 million, respectively, of the gross unrealised loss on equity securities available-for-sale relates to declines in value for less than 12 months and USD 16 million and USD 46 million, respectively, to declines in value for more than 12 months.

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Less than 12 months

 

12 months or more

 

Total

2014
USD millions

Fair value

Unrealised losses

 

Fair value

Unrealised losses

 

Fair value

Unrealised losses

Debt securities issued by governments and government agencies:

 

 

 

 

 

 

 

 

US Treasury and other US government corporations and agencies

1 637

5

 

265

4

 

1 902

9

US Agency securitised products

1 069

12

 

483

11

 

1 552

23

States of the United States and political subdivisions of the states

117

1

 

32

1

 

149

2

United Kingdom

129

2

 

33

 

 

162

2

Canada

358

6

 

88

11

 

446

17

Germany

836

27

 

67

3

 

903

30

France

317

18

 

15

1

 

332

19

Other

1 360

75

 

802

28

 

2 162

103

Total

5 823

146

 

1 785

59

 

7 608

205

Corporate debt securities

3 884

95

 

917

46

 

4 801

141

Mortgage- and asset-backed securities

1 506

12

 

329

13

 

1 835

25

Total

11 213

253

 

3 031

118

 

14 244

371

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Less than 12 months

 

12 months or more

 

Total

2015
USD millions

Fair value

Unrealised losses

 

Fair value

Unrealised losses

 

Fair value

Unrealised losses

Debt securities issued by governments and government agencies:

 

 

 

 

 

 

 

 

US Treasury and other US government corporations and agencies

5 993

91

 

11

1

 

6 004

92

US Agency securitised products

1 503

23

 

223

5

 

1 726

28

States of the United States and political subdivisions of the states

325

9

 

6

1

 

331

10

United Kingdom

1 551

52

 

56

2

 

1 607

54

Canada

976

14

 

96

24

 

1 072

38

Germany

860

25

 

131

6

 

991

31

France

502

13

 

23

5

 

525

18

Other

3 113

111

 

202

35

 

3 315

146

Total

14 823

338

 

748

79

 

15 571

417

Corporate debt securities

11 246

481

 

365

60

 

11 611

541

Mortgage- and asset-backed securities

2 419

32

 

225

9

 

2 644

41

Total

28 488

851

 

1 338

148

 

29 826

999

Mortgages, loans and real estate

As of 31 December, the carrying values of investments in mortgages, policy and other loans, and real estate (excluding unit-linked and with-profit business) were as follows:

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USD millions

2014

2015

Policy loans

252

91

Mortgage loans

1 888

1 946

Other loans

1 065

1 086

Investment real estate

888

1 556

The fair value of the real estate as of 31 December 2014 and 2015 was USD 2 482 million and USD 3 211 million, respectively. The carrying value of policy loans, mortgages and other loans approximates fair value.

Depreciation expense related to income-producing properties was USD 26 million and USD 36 million for 2014 and 2015, respectively. Accumulated depreciation on investment real estate totalled USD 539 million and USD 504 million as of 31 December 2014 and 2015, respectively.


Substantially all mortgages, policy loans and other loan receivables are secured by buildings, land or the underlying policies.