7 Investments
Investment income
Net investment income by source (excluding unit-linked and with-profit business) was as follows:
Download |
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:
Download |
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:
Download |
|
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:
Download |
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:
Download |
2014 |
Amortised cost or cost |
Gross unrealised gains |
Gross unrealised losses |
Other-than-temporary impairments |
Estimated |
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 |
Download |
2015 |
Amortised cost or cost |
Gross unrealised gains |
Gross unrealised losses |
Other-than-temporary impairments |
Estimated |
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:
Download |
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:
Download |
|
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.
Download |
|
2014 |
2015 |
||
USD millions |
Amortised cost or cost |
Estimated |
Amortised cost or cost |
Estimated |
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:
Download |
2014 |
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 |
Download |
2014 |
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 |
Download |
2015 |
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 |
Download |
2015 |
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.
Download |
|
Remaining contractual maturity of the agreements |
||||
2015 |
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.
Download |
|
Less than 12 months |
|
12 months or more |
|
Total |
|||
2014 |
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 |
Download |
|
Less than 12 months |
|
12 months or more |
|
Total |
|||
2015 |
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:
Download |
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.