Liquidity management

We actively manage liquidity risks to ensure that we can satisfy the financial obligations of the Group

To manage these risks, we have a range of liquidity policies and measures in place. In particular, we aim to ensure that:

• sufficient liquidity is held to meet funding requirements under current conditions as well as adverse circumstances;
• funding is charged and credited at an appropriate market rate through our internal transfer pricing;
• diversified sources are used to meet our residual funding needs; and
• long-term liquidity needs are taken into account, both in our planning process and in our management of financial market risk.

Composition of spot liquidity in the Swiss Reinsurance Company Ltd liquidity pool as of 31 December 2013

(Total USD 12.7 billion)

Liquidity risk management

Our core liquidity policy is to retain sufficient liquidity in the form of unencumbered liquid assets and cash to meet potential funding requirements arising from a range of possible stress events. To allow for regulatory restrictions on intra-group funding, liquidity is managed within groups of entities known as liquidity pools. Swiss Re is served by four main liquidity pools representing the parent companies of the Group and the three Business Units: the Swiss Re Ltd liquidity pool, the Swiss Reinsurance Company Ltd (SRZ) liquidity pool, the Swiss Re Corporate Solutions Ltd liquidity pool, and the Swiss Re Life Capital liquidity pool. Each liquidity pool comprises the parent company and its unregulated subsidiaries whose funds are freely transferable to the parent company. The amount of liquidity held is largely determined by internal liquidity stress tests, which estimate the potential funding requirements stemming from extreme loss events. The funding requirements under stress include:

• cash and collateral outflows, as well as potential capital and funding support required by subsidiaries as a result of loss events;
• repayment or loss of all maturing unsecured debt and credit facilities;
• additional collateral requirements associated with a potential ratings downgrade;
• further contingent funding requirements related to asset downgrades; and
• other large committed payments, such as expenses, commissions and tax.

The stress tests also assume that funding from assets is subject to conservative haircuts, that intra-group funding is not available if it is subject to regulatory approval, that no new unsecured funding is available, and that funding from new reinsurance business is reduced.

The primary liquidity stress test is based on a one-year time horizon, a loss event corresponding to 99% Tail VaR (see Risk assessment), and a three-notch ratings downgrade.

Swiss Re’s liquidity stress tests are reviewed regularly and their main assumptions are approved by the Group Risk and Capital Committee. Swiss Re provides FINMA with a yearly report on its liquidity position, in accordance with FINMA’s circular 13/5,“Liquidity – Insurers.”

Liquidity position of the SRZ liquidity pool

The SRZ pool is the primary liquidity pool of the Group. The estimated total liquidity sources in the SRZ liquidity pool available within one year, after haircuts and net of short-term loans from Swiss Re Ltd, amounted to USD 18.3 billion as of 31 December 2013, compared with USD 22.5 billion on 31 December 2012. This total includes USD 12.7 billion of liquid assets and cash, referred to as “spot liquidity”, compared with USD 18.3 billion in 2012. Based on the internal liquidity stress tests described above, we estimate that the SRZ liquidity pool holds surplus liquidity.

In 2013, the surplus liquidity of the SRZ liquidity pool after dividends to Swiss Re Ltd was deployed mainly to reduce leverage and to facilitate an increase in investment risk.