2 Investments

Investment income

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

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USD millions

2012

2013

Fixed income securities

3 063

2 626

Equity securities

91

143

Policy loans, mortgages and other loans

313

119

Investment real estate

134

139

Short-term investments

102

109

Other current investments

78

93

Share in earnings of equity-accounted investees

508

350

Cash and cash equivalents

79

48

Net result from deposit-accounted contracts

166

154

Deposits with ceding companies

430

595

Gross investment income

4 964

4 376

Investment expenses

–464

–406

Interest charged for funds held

–27

–23

Net investment income – non-participating

4 473

3 947

Dividends received from investments accounted for using the equity method were USD 128 million and USD 198 million for 2012 and 2013, respectively.

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

2012

2013

Fixed income securities available-for-sale:

 

 

Gross realised gains

2 336

1 215

Gross realised losses

–383

–689

Equity securities available-for-sale:

 

 

Gross realised gains

181

349

Gross realised losses

–77

–46

Other-than-temporary impairments

–162

–41

Net realised investment gains/losses on trading securities

58

–4

Change in net unrealised investment gains/losses on trading securities

67

–38

Other investments:

 

 

Net realised/unrealised gains/losses

–230

301

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

–189

–306

Gain/loss related to sale of Admin Re® US operations

–399

 

Foreign exchange gains/losses

–255

25

Net realised investment gains/losses – non-participating

947

766

Proceeds from sales of fixed income securities available-for-sale amounted to USD 101 046 million and USD 79 815 million for 2012 and 2013, respectively. Sales of equity securities available-for-sale were USD 1 494 million and USD 2 604 million for 2012 and 2013, respectively.

Investment result – unit-linked and with-profit business

Unit-linked and with-profit business are presented together as they are similar in nature. 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 Swiss Re (typically 10%).

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

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2012

 

2013

USD millions

Unit-linked

With-profit

Unit-linked

With-profit

Investment income – fixed income securities

128

97

117

97

Investment income – equity securities

531

32

511

26

Investment income – other

18

24

25

13

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

677

153

653

136

Realised gains/losses – fixed income securities

65

88

–133

–105

Realised gains/losses – equity securities

1 679

89

2 711

136

Realised gains/losses – other

–149

–32

1

–52

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

1 595

145

2 579

–21

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

2 272

298

3 232

115

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 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 forecast 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 net 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 impairment related to credit losses recognised in earnings was as follows:

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USD millions

2012

2013

1

During 2013 the Group revised the other-than-temporary impairment on fixed income securities related to credit losses. The revision had no impact on net income and shareholders’ equity of the Group.

Balance as of 1 January1

515

310

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

14

1

Reductions for securities sold during the period

–237

–57

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

54

11

Impact of increase in cash flows expected to be collected

–61

–37

Impact of foreign exchange movements

6

 

Balance as of 31 December

291

228

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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2012
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

13 375

746

–26

 

14 095

US Agency securitised products

4 063

114

–7

 

4 170

States of the United States and political subdivisions of the states

85

19

 

 

104

United Kingdom

14 820

1 268

–48

 

16 040

Canada

3 556

760

–2

 

4 314

Germany

5 963

273

–7

 

6 229

France

3 201

255

–6

 

3 450

Other

7 627

514

–37

 

8 104

Total

52 690

3 949

–133

 

56 506

Corporate debt securities

21 347

2 369

–46

–18

23 652

Residential mortgage-backed securities

911

46

–23

–14

920

Commercial mortgage-backed securities

2 894

245

–33

–2

3 104

Other asset-backed securities

2 752

56

–9

–7

2 792

Fixed income securities available-for-sale

80 594

6 665

–244

–41

86 974

Equity securities available-for-sale

2 789

373

–60

 

3 102

 

 

 

 

 

 

 

 

 

 

 

 

2013
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

6 027

143

–113

 

6 057

US Agency securitised products

3 970

36

–75

 

3 931

States of the United States and political subdivisions of the states

953

10

–48

 

915

United Kingdom

11 255

344

–351

 

11 248

Canada

3 063

315

–67

 

3 311

Germany

4 386

96

–37

 

4 445

France

2 727

113

–12

 

2 828

Other

7 185

181

–274

 

7 092

Total

39 566

1 238

–977

 

39 827

Corporate debt securities

30 464

1 477

–528

–4

31 409

Residential mortgage-backed securities

796

54

–12

–3

835

Commercial mortgage-backed securities

2 712

182

–40

 

2 854

Other asset-backed securities

2 811

48

–22

–1

2 836

Fixed income securities available-for-sale

76 349

2 999

–1 579

–8

77 761

Equity securities available-for-sale

6 110

1 047

–81

 

7 076

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 presented in the “Other-than-temporary impairments recognised in other comprehensive income” column.

Investments trading

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

2012

2013

Debt securities issued by governments and government agencies

1 506

1 202

Corporate debt securities

182

145

Mortgage- and asset-backed securities

186

188

Fixed income securities trading – non-participating

1 874

1 535

Equity securities trading – non-participating

672

615

Investments held for unit-linked and with-profit business

Investments held for unit-linked and with-profit business as of 31 December were as follows:

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2012

2013

USD millions

Unit-linked

With-profit

Unit-linked

With-profit

Fixed income securities trading

2 559

2 071

2 541

2 044

Equity securities trading

17 686

931

20 252

928

Investment real estate

636

489

517

386

Short-term investments

1 129

 

547

 

Total investments for unit-linked and with-profit business

22 010

3 491

23 857

3 358

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 2012 and 2013, USD 9 958 million and USD 11 476 million, respectively, of fixed income securities available-for-sale were callable.

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2012

 

2013

USD millions

Amortised cost or cost

Estimated fair value

Amortised cost or cost

Estimated fair value

Due in one year or less

2 746

2 768

3 308

3 305

Due after one year through five years

20 799

21 452

19 308

19 697

Due after five years through ten years

14 928

16 183

14 243

14 522

Due after ten years

35 855

40 048

33 370

33 911

Mortgage- and asset-backed securities with no fixed maturity

6 266

6 523

6 120

6 326

Total fixed income securities available-for-sale

80 594

86 974

76 349

77 761

Assets pledged

As of 31 December 2013, investments with a carrying value of USD 8 445 million were on deposit with regulatory agencies in accordance with local requirements, and investments with a carrying value of USD 11 849 million were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries.

As of 31 December 2012 and 2013, securities of USD 12 994 million and USD 16 215 million, respectively, were pledged as collateral in securities lending transactions and repurchase agreements. The associated liabilities of USD 2 612 million and USD 1 991 million, respectively, were recognised in accrued expenses and other liabilities.

A real estate portfolio with a carrying value of USD 261 million serves as collateral for short-term senior operational debt of USD 731 million.

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

As of 31 December 2012 and 2013, the fair value of the government and corporate bond securities received as collateral was USD 4 329 million and USD 4 367 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2012 and 2013 was USD 1 195 million and USD 1 472 million, respectively. The sources of the collateral are 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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2012
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

7 929

–5 645

2 284

–411

1 873

Reverse repurchase agreements

5 900

–3 437

2 463

–2 462

1

Securities borrowing

 

 

0

 

0

Total

13 829

–9 082

4 747

–2 873

1 874

 

 

 

 

 

 

 

 

 

 

 

 

2012
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

–8 713

4 990

–3 723

93

–3 630

Repurchase agreements

–3 899

3 437

–462

462

0

Securities lending

–2 135

 

–2 135

2 062

–73

Total

–14 747

8 427

–6 320

2 617

–3 703

 

 

 

 

 

 

 

 

 

 

 

 

2013
USD millions

Gross amounts of recognised financial assets

Collateral set off in the balance sheets

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

4 099

–2 877

1 222

–380

842

Reverse repurchase agreements

4 064

–1 811

2 253

–2 253

0

Securities borrowing

 

 

0

 

0

Total

8 163

–4 688

3 475

–2 633

842

 

 

 

 

 

 

 

 

 

 

 

 

2013
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

–4 104

2 656

–1 448

157

–1 291

Repurchase agreements

–2 009

1 811

–198

198

0

Securities lending

–1 792

 

–1 792

1 655

–137

Total

–7 905

4 467

–3 438

2 010

–1 428

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 setoff 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 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.

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 2012 and 2013. As of 31 December 2012 and 2013, USD 32 million and USD 77 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 28 million and USD 4 million, respectively, to declines in value for more than 12 months.

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Less than 12 months

12 months or more

Total

2012
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

2 766

26

 

 

2 766

26

US Agency securitised products

734

7

 

 

734

7

States of the United States and political subdivisions of the states

4

 

 

 

4

0

United Kingdom

3 316

48

 

 

3 316

48

Canada

291

2

2

 

293

2

Germany

524

6

32

1

556

7

France

147

6

5

 

152

6

Other

1 846

33

37

4

1 883

37

Total

9 628

128

76

5

9 704

133

Corporate debt securities

1 845

32

318

32

2 163

64

Residential mortgage-backed securities

56

2

424

35

480

37

Commercial mortgage-backed securities

190

14

347

21

537

35

Other asset-backed securities

547

9

98

7

645

16

Total

12 266

185

1 263

100

13 529

285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

12 months or more

Total

2013
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

2 874

113

 

 

2 874

113

US Agency securitised products

2 248

71

41

4

2 289

75

States of the United States and political subdivisions of the states

703

48

 

 

703

48

United Kingdom

6 973

351

 

 

6 973

351

Canada

938

65

11

2

949

67

Germany

1 697

33

199

4

1 896

37

France

506

10

47

2

553

12

Other

3 392

198

646

76

4 038

274

Total

19 331

889

944

88

20 275

977

Corporate debt securities

12 189

494

319

38

12 508

532

Residential mortgage-backed securities

50

1

252

14

302

15

Commercial mortgage-backed securities

601

31

174

9

775

40

Other asset-backed securities

1 183

15

139

8

1 322

23

Total

33 354

1 430

1 828

157

35 182

1 587

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

2012

2013

Policy loans

284

270

Mortgage loans

1 362

1 801

Other loans

653

824

Investment real estate

777

825

The fair value of the real estate as of 31 December 2012 and 2013 was USD 2 536 million and USD 2 551 million, respectively. The carrying value of policy loans, mortgages and other loans approximates fair value.

As of 31 December 2012 and 2013, investments in real estate included USD 5 million and USD 5 million, respectively, of real estate held for sale.

Depreciation expense related to income-producing properties was USD 24 million and USD 25 million for 2012 and 2013, respectively. Accumulated depreciation on investment real estate totalled USD 549 million and USD 577 million as of 31 December 2012 and 2013, respectively.

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