Net investment income
in USD billions, 2012
Swiss Re maintained a balanced investment management approach throughout the year, taking into account each Business Unit’s risk appetite and strategy. At the same time, the key longer-term risk factors were monitored such as the eurozone debt crisis, growth sustainability in the US as well as China “hard landing” concerns, while the Group’s and Business Units’ investments have been steered within the Group’s asset-liability management (ALM) framework.
Financial markets overview for 2012
Concerns over the global economic outlook and the eurozone debt crisis dominated financial markets. In the first quarter, sentiment was positive as a result of additional liquidity provided by the ECB in the form of three-year long-term refinancing operations (LTROs). Greece also completed its private sector debt restructuring and secured a second bailout programme. Later in the year, political and banking sector risks in Europe as well as a continued weak global economic growth environment were the key market drivers. Market risk appetite improved substantially as global central banks took an even more accommodative stance, as with the ECB’s conditional bond-buying plan. Following US President Obama’s re-election in November, attention shifted to the uncertainty around the looming US “fiscal cliff”.
The environment in 2012 was supportive for core sovereign bond markets: US Treasury and “core” European government bond yields declined further with US 10-year Treasury yields reaching a new all-time low of 1.39% in July 2012. Equities had a good start into the year: the S&P 500 was up 12% in the first quarter, followed by a market correction in the spring. After a renewed “risk-on” period, volatility increased again somewhat in the fourth quarter. Once more, credit risk proved to deliver very strong total returns thanks to both tightening spreads and falling government bond yields.
Group return on investments
The Group’s investment portfolio decreased to USD 137.4 billion at the end of December 2012, excluding unit-linked and with-profit businesses, compared to USD 150.6 billion at the end of December 2011. This was primarily due to the reduction in investments from the sale of the Admin Re® US business, being partially offset by mark-to-market and foreign exchange gains. The Group engaged in moderate re-risking during the year, increasing its exposure to spread-related products by approximately USD 5.0 billion and to equity products by USD 0.8 billion.
Operating income for investments, including the impact of foreign exchange, decreased to USD 5.2 billion in 2012 from USD 5.7 billion in 2011. This was driven by realised gains, reduced hedging costs and lower impairments during the year, which more than offset the lower net investment income from decreasing yields and a lower asset base from the sale of Admin Re® US completed in the third quarter of 2012. The return on investments declined 0.4 percentage points in 2012 to 4.0% from 4.4% in 2011. Excluding the impact of foreign exchange, return on investments was 4.2% in 2012, compared to 3.7% in 2011.
Net investment income from investments was USD 3.6 billion for 2012, compared to USD 4.0 billion for 2011. This was mainly due to lower yields and the impact of a lower asset base from the sale of Admin Re® US business. On a full year basis, the Group running yield declined to 3.2%, compared to 3.6% during 2011.
Net realised gains from investments, including the impact of foreign exchange, were USD 1.5 billion for 2012, compared to USD 1.7 billion for 2011. For 2012, net realised gains on sales of USD 2.1 billion were partially offset by losses on hedges of USD 0.3 billion and impairments of USD 0.2 billion.
Including mark-to-market gains, which increased shareholders’ equity by USD 1.7 billion, primarily from the impact of lower interest rates on government bonds and credit spread tightening, the total return on investments reached 5.4% in 2012.
Looking ahead, credit risk is expected to remain attractive in risk-adjusted terms within the current global low growth and low interest rate environment. The fiscal and debt outlook in advanced economies continues to be challenging, with the political economy dimension likely to remain a key driver for financial markets in 2013, warranting a continued disciplined “top-down” investment strategy.