Strategy

Swiss Re continued to move its asset allocation in 2013 within its mid-term plan, in line with an economic outlook of improving but moderate global growth. The now completed portfolio re-balancing mainly saw additions of higher quality credit exposure and, to a lesser extent, allocation to listed equities. Swiss Re also established a short duration position in anticipation of higher interest rates. The net impact was a reduction in government bonds and an increase in corporate bonds, where we are now close to the upper end of the mid-term plan’s range. The equity allocation also increased, including the contribution from Principal Investments. Principal Investments is managed in line with Swiss Re’s high growth markets strategy and the mid-term plan.

Financial markets overview for 2013

Systemic risks receded in 2013 in part due to the continued accommodative stance of central banks. The Bank of Japan introduced inflation targeting and a “US Fed-style” quantitative monetary easing. Positive steps were also taken in Europe with progress on the EU banking union front. Starting from the second quarter, policies and politics were the key market drivers, ranging from elections in Italy and Germany to the bailout of Cyprus, the debt ceiling debate, expectations of “tapering” of asset purchases in the US and reform announcements in China. Market risk appetite generally improved over 2013, as US growth continued to recover and the euro area exited recession in the third quarter. Despite the concern of a “hard landing” in mid-year, China’s growth remained stable at around 7.5% in 2013.

Equities in developed markets were the best performers in 2013, helped by a moderate growth recovery and abundant liquidity. Meanwhile, volatility in the US Treasury market picked up. Having reached a low of 1.63% in May, US 10-year Treasury yields rose to a high of 3% in September due to “tapering” expectations of asset purchases in the US. Credit spreads also widened in the second quarter before falling again to offset some of the rise in US Treasury yields.

Investment result

The size of the Group’s investment portfolio, excluding unit-linked and with-profit investments, decreased to USD 130.1 billion at the end of December 2013 compared to USD 137.4 billion at the end of December 2012. The decrease was largely due to a reduction in unrealised gains stemming from higher interest rates, the effect of which was partially offset by the impact of tighter credit spreads and rising equity values in 2013.

The return on investments for 2013 was 3.6% compared to 4.0% in 2012, with the difference mainly attributable to lower realised gains in 2013. Excluding the impact of foreign exchange movements, the return on investments was 3.6% in 2013 compared to 4.2% in 2012.

The Group’s non-participating net investment income decreased to USD 3.9 billion in 2013 compared to USD 4.5 billion in 2012, mostly driven by the impact of the sale of the Admin Re^® US business in 2012. The re-balancing of the investment portfolio across the Group helped offset the overall impact of lower reinvestment rates. On a full-year basis, the Group running yield of 3.2% was in line with 2012.

The Group reported non-participating net realised investment gains of USD 766 million in 2013, mainly as a result of gains from the sale of investments related to the re-balancing of the investment portfolio as well as from active management of the listed equity portfolio. This compares to USD 947 million in 2012, which included significantly higher realised gains in the investment portfolio offset by losses related to the sale of the Admin Re^® US business.

The total return on investments in 2013 was –0.1% as market value losses arising from higher interest rates were partially offset by credit spread tightening and a rise in equity values.

Outlook

We expect moderate growth recovery in global markets, with sustainable growth in the US set to continue. A disciplined “top-down” investment strategy continues to be warranted as the progress of economic repair is likely to be slow and accident-prone. This includes policy errors, the reform process in China and EU debt crisis as the key risk factors to monitor.