8 Fair value disclosures
Fair value, as defined by the Fair Value Measurements and Disclosures Topic, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Fair Value Measurements and Disclosures Topic requires all assets and liabilities that are measured at fair value to be categorised within the fair value hierarchy. This three-level hierarchy is based on the observability of the inputs used in the fair value measurement. The levels of the fair value hierarchy are defined as follows:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the Group has the ability to access. Level 1 inputs are the most persuasive evidence of fair value and are to be used whenever possible.
Level 2 inputs are market-based inputs that are directly or indirectly observable, but not considered level 1 quoted prices. Level 2 inputs consist of (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical assets or liabilities in non-active markets (eg markets which have few transactions and where prices are not current or price quotations vary substantially); (iii) inputs other than quoted prices that are observable (eg interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates); and (iv) inputs derived from, or corroborated by, observable market data.
Level 3 inputs are unobservable inputs. These inputs reflect the Group’s own assumptions about market pricing using the best internal and external information available.
The types of instruments valued, based on unadjusted quoted market prices in active markets, include most US government and sovereign obligations, active listed equities and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy.
The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, include most government agency securities, investment-grade corporate bonds, certain mortgage- and asset-backed products, less liquid listed equities, and state, municipal and provincial obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.
Exchange-traded derivative instruments typically fall within level 1 or level 2 of the fair value hierarchy depending on whether they are considered to be actively traded or not.
Certain financial instruments are classified within level 3 of the fair value hierarchy, because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity, less liquid corporate debt securities and certain asset-backed securities. Certain over-the-counter (OTC) derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy. Pursuant to the election of the fair value option, the Group classifies certain liabilities for life and health policy benefits in level 3 of the fair value hierarchy. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.
The fair values of assets are adjusted to incorporate the counterparty risk of non-performance. Similarly, the fair values of liabilities reflect the risk of non-performance of the Group, captured by the Group’s credit spread. These valuation adjustments from assets and liabilities measured at fair value using significant unobservable inputs are recognised in net realised gains and losses. For 2015, these adjustments were not material. Whenever the underlying assets or liabilities are reported in a specific business segment, the valuation adjustment is allocated accordingly. Valuation adjustments not attributable to any business segment are reported in Group items.
In certain situations, the Group uses inputs to measure the fair value of asset or liability positions that fall into different levels of the fair value hierarchy. In these situations, the Group will determine the appropriate level based on the lowest level input that is significant to the determination of the fair value.
Valuation techniques
US government securities typically have quoted market prices in active markets and are categorised as level 1 instruments in the fair value hierarchy. Non-US government holdings are generally classified as level 2 instruments and are valued on the basis of the quotes provided by pricing services, which are subject to the Group’s pricing validation reviews and pricing vendor challenge process. Valuations provided by pricing vendors are generally based on the actual trade information as substantially all of the Group’s non-US government holdings are traded in a transparent and liquid market.
Corporate debt securities mainly include US and European investment-grade positions, which are priced on the basis of quotes provided by third-party pricing vendors and first utilise valuation inputs from actively traded securities, such as bid prices, bid spreads to Treasury securities, Treasury curves, and same or comparable issuer curves and spreads. Issuer spreads are determined from actual quotes and traded prices and incorporate considerations of credit/default, sector composition, and liquidity and call features. Where market data is not available, valuations are developed based on the modelling techniques that utilise observable inputs and option-adjusted spreads and incorporate considerations of the security’s seniority, maturity and the issuer’s corporate structure.
Values of mortgage- and asset-backed securities are obtained both from third-party pricing vendors and through quoted prices, some of which may be based on the prices of comparable securities with similar structural and collateral features. Values of certain asset-backed securities (ABS) for which there are no significant observable inputs are developed using benchmarks to similar transactions or indices. For both residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), cash flows are derived based on the transaction-specific information, which incorporates priority in the capital structure, and are generally adjusted to reflect benchmark yields, market prepayment data, collateral performance (default rates and loss severity) for specific vintage and geography, credit enhancements, and ratings. For certain RMBS and CMBS with low levels of market liquidity, judgements may be required to determine comparable securities based on the loan type and deal-specific performance. CMBS terms may also incorporate lock-out periods that restrict borrowers from prepaying the loans or provide disincentives to prepay and therefore reduce prepayment risk of these securities, compared to RMBS. The factors specifically considered in valuation of CMBS include borrower-specific statistics in a specific region, such as debt service coverage and loan-to-value ratios, as well as the type of commercial property. Mortgage- and asset-backed securities also includes debt securitised by credit card, student loan and auto loan receivables. Pricing inputs for these securities also focus on capturing, where relevant, collateral quality and performance, payment patterns, and delinquencies.
The Group uses third-party pricing vendor data to value agency securitised products, which mainly include collateralised mortgage obligations (CMO) and mortgage-backed government agency securities. The valuations generally utilise observable inputs consistent with those noted above for RMBS and CMBS.
Equity securities held by the Group for proprietary investment purposes are mainly classified in level 1. Securities classified in level 1 are traded on public stock exchanges for which quoted prices are readily available.
The category “Other invested assets” includes the Group’s private equity and hedge fund investments which are made directly or via ownership of funds. Substantially all of these investments are classified as level 3 due to the lack of observable prices and significant judgement required in valuation. Valuation of direct private equity investments requires significant management judgement due to the absence of quoted market prices and the lack of liquidity. Initial valuation is based on the acquisition cost, and is further refined based on the available market information for the public companies that are considered comparable to the Group’s holdings in the private companies being valued, and the private company-specific performance indicators; both historic and projected. Subsequent valuations also reflect business or asset appraisals, as well as market transaction data for private and public benchmark companies and the actual companies being valued, such as financing rounds and mergers and acquisitions activity. The Group’s holdings in the private equity and hedge funds are generally valued utilising net asset values (NAV), subject to adjustments, as deemed necessary, for restrictions on redemption (lock-up periods and amount limitations on redemptions).
The Group holds both exchange-traded and (OTC) interest rate, foreign exchange, credit and equity derivative contracts for hedging and trading purposes. The fair values of exchange-traded derivatives measured using observable exchange prices are classified in level 1. Long-dated contracts may require adjustments to the exchange-traded prices which would trigger reclassification to level 2 in the fair value hierarchy. OTC derivatives are generally valued by the Group based on the internal models, which are consistent with industry standards and practices, and use both observable (dealer, broker or market consensus prices, spot and forward rates, interest rate and credit curves and volatility indices) and unobservable inputs (adjustments for liquidity, inputs derived from the observable data based on the Group’s judgements and assumptions).
The Group’s OTC interest rate derivatives primarily include interest rate swaps, futures, options, caps and floors, and are valued based on the cash flow discounting models which generally utilise as inputs observable market yield curves and volatility assumptions.
The Group’s OTC foreign exchange derivatives primarily include forward, spot and option contracts and are generally valued based on the cash flow discounting models, utilising as main inputs observable foreign exchange forward curves.
The Group’s investments in equity derivatives primarily include OTC equity option contracts on single or baskets of market indices and equity options on individual or baskets of equity securities, which are valued using internally developed models (such as the Black-Scholes type option pricing model and various simulation models) calibrated with the inputs, which include underlying spot prices, dividend curves, volatility surfaces, yield curves, and correlations between underlying assets.
The Group’s OTC credit derivatives can include index and single-name credit default swaps, as well as more complex structured credit derivatives. Plain vanilla credit derivatives, such as index and single-name credit default swaps, are valued by the Group based on the models consistent with the industry valuation standards for these credit contracts, and primarily utilise observable inputs published by market data sources, such as credit spreads and recovery rates. These valuation techniques warrant classification of plain vanilla OTC derivatives as level 2 financial instruments in the fair value hierarchy.
Governance around level 3 fair valuation
The Asset Valuation Committee, endorsed by the Group Executive Committee, has a primary responsibility for governing and overseeing all of the Group’s asset and derivative valuation policies and operating parameters (including level 3 measurements). The Asset Valuation Committee delegates the responsibility for implementation and oversight of consistent application of the Groupʼs pricing and valuation policies to the Pricing and Valuation Committee.
The Pricing and Valuation Committee, which is a joint Risk Management & Finance management control committee, is responsible for the implementation and consistent application of the pricing and valuation policies. Key functions of the Pricing and Valuation Committee include: oversight over the entire valuation process, approval of internal valuation methodologies, approval of external pricing vendors, monitoring of the independent price verification (IPV) process and resolution of significant or complex valuation issues.
A formal IPV process is undertaken monthly by members of the Valuation Risk Management team within the Financial Risk Management function. The process includes monitoring and in-depth analyses of approved pricing methodologies and valuations of the Group’s financial instruments aimed at identifying and resolving pricing discrepancies.
The Risk Management function is responsible for independent validation and ongoing review of the Group’s valuation models. The Product Control group within Finance is tasked with reporting of fair values through the vendor- and model-based valuations, the results of which are also subject to the IPV process.
Assets and liabilities measured at fair value on a recurring basis
As of 31 December, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows:
| Download |
2014 |
Quoted prices in active markets for identical assets and liabilities (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Impact of netting1 |
Total |
||||
|
|||||||||
Assets |
|
|
|
|
|
||||
Fixed income securities held for proprietary investment purposes |
12 530 |
73 738 |
401 |
|
86 669 |
||||
Debt securities issued by US government and government agencies |
12 530 |
1 797 |
|
|
14 327 |
||||
US Agency securitised products |
|
3 252 |
|
|
3 252 |
||||
Debt securities issued by non-US governments and government agencies |
|
30 692 |
|
|
30 692 |
||||
Corporate debt securities |
|
31 903 |
388 |
|
32 291 |
||||
Mortgage- and asset-backed securities |
|
6 094 |
13 |
|
6 107 |
||||
Fixed income securities backing unit-linked and with-profit business |
|
3 680 |
|
|
3 680 |
||||
Equity securities held for proprietary investment purposes |
4 050 |
|
39 |
|
4 089 |
||||
Equity securities backing unit-linked and with-profit business |
20 034 |
11 |
|
|
20 045 |
||||
Short-term investments held for proprietary investment purposes |
6 407 |
7 720 |
|
|
14 127 |
||||
Short-term investments backing unit-linked and with-profit business |
|
20 |
|
|
20 |
||||
Derivative financial instruments |
40 |
3 810 |
521 |
–3 530 |
841 |
||||
Interest rate contracts |
|
2 621 |
|
|
2 621 |
||||
Foreign exchange contracts |
|
272 |
|
|
272 |
||||
Equity contracts |
40 |
892 |
396 |
|
1 328 |
||||
Credit contracts |
|
1 |
|
|
1 |
||||
Other contracts |
|
24 |
125 |
|
149 |
||||
Other invested assets |
907 |
562 |
1 812 |
|
3 281 |
||||
Funds held by ceding companies2 |
|
273 |
|
|
273 |
||||
Total assets at fair value |
43 968 |
89 814 |
2 773 |
–3 530 |
133 025 |
||||
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
||||
Derivative financial instruments |
–13 |
–3 107 |
–757 |
2 969 |
–908 |
||||
Interest rate contracts |
–5 |
–2 113 |
|
|
–2 118 |
||||
Foreign exchange contracts |
|
–407 |
|
|
–407 |
||||
Equity contracts |
–8 |
–564 |
–130 |
|
–702 |
||||
Credit contracts |
|
–1 |
–11 |
|
–12 |
||||
Other contracts |
|
–22 |
–616 |
|
–638 |
||||
Liabilities for life and health policy benefits |
|
|
–187 |
|
–187 |
||||
Accrued expenses and other liabilities |
–1 035 |
–864 |
|
|
–1 899 |
||||
Total liabilities at fair value |
–1 048 |
–3 971 |
–944 |
2 969 |
–2 994 |
||||
| Download |
2015 |
Quoted prices in active markets for identical assets and liabilities (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Impact of netting1 |
Total |
||||
|
|||||||||
Assets |
|
|
|
|
|
||||
Fixed income securities held for proprietary investment purposes |
12 900 |
69 038 |
393 |
|
82 331 |
||||
Debt securities issued by US government and government agencies |
12 900 |
1 922 |
|
|
14 822 |
||||
US Agency securitised products |
|
2 952 |
|
|
2 952 |
||||
Debt securities issued by non-US governments and government agencies |
|
27 877 |
|
|
27 877 |
||||
Corporate debt securities |
|
31 119 |
380 |
|
31 499 |
||||
Mortgage- and asset-backed securities |
|
5 168 |
13 |
|
5 181 |
||||
Fixed income securities backing unit-linked and with-profit business |
|
4 069 |
|
|
4 069 |
||||
Equity securities held for proprietary investment purposes |
4 753 |
|
34 |
|
4 787 |
||||
Equity securities backing unit-linked and with-profit business |
22 783 |
|
|
|
22 783 |
||||
Short-term investments held for proprietary investment purposes |
3 438 |
3 967 |
|
|
7 405 |
||||
Short-term investments backing unit-linked and with-profit business |
|
64 |
|
|
64 |
||||
Derivative financial instruments |
25 |
2 241 |
447 |
–1 953 |
760 |
||||
Interest rate contracts |
6 |
1 300 |
|
|
1 306 |
||||
Foreign exchange contracts |
|
318 |
|
|
318 |
||||
Equity contracts |
16 |
617 |
334 |
|
967 |
||||
Credit contracts |
|
1 |
1 |
|
2 |
||||
Other contracts |
3 |
5 |
112 |
|
120 |
||||
Other invested assets |
579 |
50 |
1 595 |
|
2 224 |
||||
Funds held by ceding companies2 |
|
245 |
|
|
245 |
||||
Total assets at fair value |
44 478 |
79 674 |
2 469 |
–1 953 |
124 668 |
||||
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
||||
Derivative financial instruments |
–24 |
–1 574 |
–581 |
1 477 |
–702 |
||||
Interest rate contracts |
–5 |
–786 |
|
|
–791 |
||||
Foreign exchange contracts |
|
–201 |
|
|
–201 |
||||
Equity contracts |
–12 |
–582 |
–38 |
|
–632 |
||||
Credit contracts |
|
|
–19 |
|
–19 |
||||
Other contracts |
–7 |
–5 |
–524 |
|
–536 |
||||
Liabilities for life and health policy benefits |
|
|
–165 |
|
–165 |
||||
Accrued expenses and other liabilities |
–812 |
–2 524 |
|
|
–3 336 |
||||
Total liabilities at fair value |
–836 |
–4 098 |
–746 |
1 477 |
–4 203 |
||||
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3)
As of 31 December, the reconciliation of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs were as follows:
| Download |
2014 |
Fixed income securities |
Equity securities |
Derivative assets |
Other invested assets |
Total assets |
Derivative liabilities |
Liabilities for life and health policy benefits |
Total liabilities |
||
|
||||||||||
Assets and liabilities |
|
|
|
|
|
|
|
|
||
Balance as of 1 January |
662 |
49 |
505 |
2 256 |
3 472 |
–993 |
–145 |
–1 138 |
||
Realised/unrealised gains/losses: |
|
|
|
|
|
|
|
|
||
Included in net income |
2 |
2 |
15 |
175 |
194 |
328 |
–39 |
289 |
||
Included in other comprehensive income |
5 |
–5 |
|
–18 |
–18 |
|
|
0 |
||
Purchases |
10 |
|
14 |
81 |
105 |
|
|
0 |
||
Issuances |
|
|
28 |
|
28 |
–126 |
|
–126 |
||
Sales |
–31 |
–4 |
–59 |
–524 |
–618 |
73 |
|
73 |
||
Settlements |
–246 |
|
–25 |
–2 |
–273 |
–39 |
|
–39 |
||
Transfers into level 31 |
|
2 |
43 |
33 |
78 |
|
|
0 |
||
Transfers out of level 31 |
|
–4 |
|
–131 |
–135 |
|
|
0 |
||
Impact of foreign exchange movements |
–1 |
–1 |
|
–58 |
–60 |
|
–3 |
–3 |
||
Closing balance as of 31 December |
401 |
39 |
521 |
1 812 |
2 773 |
–757 |
–187 |
–944 |
||
| Download |
2015 |
Fixed income securities |
Equity securities |
Derivative assets |
Other invested assets |
Total assets |
Derivative liabilities |
Liabilities for life and health policy benefits |
Total liabilities |
||
|
||||||||||
Assets and liabilities |
|
|
|
|
|
|
|
|
||
Balance as of 1 January |
401 |
39 |
521 |
1 812 |
2 773 |
–757 |
–187 |
–944 |
||
Realised/unrealised gains/losses: |
|
|
|
|
|
|
|
|
||
Included in net income |
4 |
|
–12 |
–2 |
–10 |
190 |
22 |
212 |
||
Included in other comprehensive income |
–14 |
–5 |
|
–42 |
–61 |
|
|
0 |
||
Purchases |
31 |
|
30 |
156 |
217 |
|
|
0 |
||
Issuances |
|
|
|
|
0 |
–90 |
|
–90 |
||
Sales |
–47 |
|
–21 |
–380 |
–448 |
15 |
|
15 |
||
Settlements |
–46 |
|
–79 |
|
–125 |
62 |
|
62 |
||
Transfers into level 31 |
65 |
|
8 |
70 |
143 |
–1 |
|
–1 |
||
Transfers out of level 31 |
|
|
|
|
0 |
|
|
0 |
||
Impact of foreign exchange movements |
–1 |
|
|
–19 |
–20 |
|
|
0 |
||
Closing balance as of 31 December |
393 |
34 |
447 |
1 595 |
2 469 |
–581 |
–165 |
–746 |
||
Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3)
The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) for the years ended 31 December were as follows:
| Download |
USD millions |
2014 |
2015 |
Gains/losses included in net income for the period |
483 |
202 |
Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date |
167 |
–12 |
Assets and liabilities measured at fair value on a non-recurring basis
In accordance with the provisions of FASB Codification Topic 323, Investments-Equity Method and Joint Ventures, an equity method investment with a carrying amount of USD 268 million was written down to its fair value of USD 185 million resulting in an impairment charge of USD 83 million, which was included in earnings for the period in “Net investment income – non-participating business”. This non-recurring fair value measurement was based on level 3 unobservable inputs using a discounted cash flow approach. The Group has performed an impairment analysis which suggests that, although the expected future cash flows (i.e. future dividend payments) could ultimately recover the current carrying value over approximately ten years, the recent decline in dividends as well as the forward outlook indicate that the decline in fair value is not temporary.
Quantitative information about level 3 fair value measurements
Unobservable inputs for major level 3 assets and liabilities as of 31 December were as follows:
| Download |
USD millions |
2014 |
2015 |
Valuation technique |
Unobservable input |
Range (weighted average) |
||||
|
|||||||||
Assets |
|
|
|
|
|
||||
Corporate debt securities |
388 |
380 |
|
|
|
||||
Private placement corporate debt |
317 |
241 |
Corporate Spread Matrix |
Illiquidity premium |
5 bps–186 bps (49 bps) |
||||
Private placement credit tenant leases |
71 |
51 |
Discounted Cash Flow Model |
Illiquidity premium |
75 bps–175 bps (132 bps) |
||||
Infrastructure loan |
|
86 |
Discounted Cash Flow Model |
Valuation spread |
176 bps–191 bps (180 bps) |
||||
Derivative equity contracts |
396 |
334 |
|
|
|
||||
OTC equity option referencing correlated equity indices |
396 |
334 |
Proprietary Option Model |
Correlation |
–60%–100% (20%)1 |
||||
Liabilities |
|
|
|
|
|
||||
Derivative equity contracts |
–130 |
–38 |
|
|
|
||||
OTC equity option referencing correlated equity indices |
–46 |
–38 |
Proprietary Option Model |
Correlation |
–60%–100% (20%)1 |
||||
Other derivative contracts and liabilities for life and health policy benefits |
–803 |
–689 |
|
|
|
||||
Variable annuity and fair valued GMDB contracts |
–639 |
–567 |
Discounted Cash Flow Model |
Risk margin |
4% (n.a.) |
||||
|
|
|
|
Volatility |
4%–42% |
||||
|
|
|
|
Lapse |
0.5%–33% |
||||
|
|
|
|
Mortality adjustment |
–10%–0% |
||||
|
|
|
|
Withdrawal rate |
0%–90% |
||||
Weather contracts |
–40 |
–82 |
Proprietary Option Model |
Risk Margin |
8%-11% (10%) |
||||
|
|
|
|
Correlation |
–90%–80% (21%) |
||||
|
|
|
|
Volatility (power/gas) |
28%–115% (53%) |
||||
|
|
|
|
Volatility (temperature) |
0–356 (140) HDD/CAT2 |
||||
|
|
|
|
Index value (temperature) |
6–6032 (1969) HDD/CAT2 |
||||
Sensitivity of recurring level 3 measurements to changes in unobservable inputs
The significant unobservable input used in the fair value measurement of the Group’s private placement corporate debt securities and private placement credit tenant leases is illiquidity premium. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Group’s infrastructure loan is valuation spread. A significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement.
The significant unobservable input used in the fair value measurement of the Group’s OTC equity option referencing correlated equity indices is correlation. Where the Group is long correlation risk, a significant increase (decrease) in this input in isolation would result in a significantly higher (lower) fair value measurement. Where the Group is short correlation risk, a significant increase (decrease) in this input in isolation would result in a significantly lower (higher) fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Group’s variable annuity and fair valued guaranteed minimum death benefit (GMDB) contracts are: risk margin, volatility, lapse, mortality adjustment rate and with-drawal rate. A significant increase (decrease) in isolation in each of the following inputs: risk margin, volatility and withdrawal rate would result in a significantly higher (lower) fair value of the Group’s obligation. A significant increase (decrease) in isolation in a lapse rate for in-the-money contracts would result in a significantly lower (higher) fair value of the Group’s obligation, whereas for out-of-the-money contracts, an isolated increase (decrease) in a lapse assumption would increase (decrease) fair value of the Group’s obligation. Changes in the mortality adjustment rate impact fair value of the Group’s obligation differently for living-benefit products, compared to death-benefit products. For the former, a significant increase (decrease) in the mortality adjustment rate (ie increase (decrease) in mortality, respectively) in isolation would result in a decrease (increase) in fair value of the Group’s liability. For the latter, a significant increase (decrease) in the mortality adjustment rate in isolation would result in an increase (decrease) in fair value of the Group’s liability.
The significant unobservable inputs used in the fair value measurement of the Group’s weather contracts are risk margin, correlation, volatility and index value. Where the Group has a long position, a significant increase (decrease) in the risk margin input in isolation would result in a significantly higher (lower) fair value measurement. Where the Group has a long volatility or correlation position Swiss Re a significant increase (decrease) in the correlation and volatility inputs would result in a significantly higher (lower) fair value measurement. Where the Group has a long index position, an increase (decrease) in the index value input in isolation would result in a significantly higher (lower) fair value measurement. Where the Group has a short position, a significant increase (decrease) in the risk margin input in isolation would result in a significantly lower (higher) fair value measurement. Where the Group has a short volatility or correlation position a significant increase (decrease) in the correlation and volatility inputs would result in a significantly lower (higher) fair value measurement. Where the Group has a short index position, an increase (decrease) in the index value input in isolation would result in a significantly lower (higher) fair value measurement.
Other invested assets measured at net asset value
Other invested assets measured at net asset value as of 31 December, respectively, were as follows:
| Download |
USD millions |
2014 Fair value |
2015 Fair value |
Unfunded commitments |
Redemption frequency |
Redemption notice period |
||||
|
|||||||||
Private equity funds |
710 |
686 |
150 |
non-redeemable |
n.a. |
||||
Hedge funds |
344 |
135 |
|
redeemable1 |
45‒95 days2 |
||||
Private equity direct |
109 |
121 |
|
non-redeemable |
n.a. |
||||
Real estate funds |
203 |
203 |
57 |
non-redeemable |
n.a. |
||||
Total |
1 366 |
1 145 |
207 |
|
|
||||
The hedge fund investments employ a variety of strategies, including global macro, relative value, event-driven and long/short equity across various asset classes.
The private equity direct portfolio consists of equity and equity-like investments directly in other companies. These investments have no contractual term and are generally held based on financial or strategic intent.
Private equity and real estate funds generally have limitations imposed on the amount of redemptions from the fund during the redemption period due to illiquidity of the underlying investments. Fees may apply for redemptions or transferring of interest to other parties. Distributions are expected to be received from these funds as the underlying assets are liquidated over the life of the fund, which is generally from 10 to 12 years.
The redemption frequency of hedge funds varies depending on the manager as well as the nature of the underlying product. Additionally, certain funds may impose lock-up periods and redemption gates as defined in the terms of the individual investment agreement.
Fair value option
The fair value option under the Financial Instruments Topic permits the choice to measure specified financial assets and liabilities at fair value on an instrument-by-instrument basis.
The Group elected the fair value option for positions in the following line items in the balance sheet:
Other invested assets
The Group elected the fair value option for certain investments classified as equity method investees within other invested assets in the balance sheet. The Group applied the fair value option, as the investments are managed on a fair value basis. The changes in fair value of these elected investments are recorded in earnings.
Funds held by ceding companies
For operational efficiencies, the Group elected the fair value option for funds held by the cedent under three of its reinsurance agreements. The assets are carried at fair value and changes in fair value are reported as a component of earnings.
Liabilities for life and health policy benefits
The Group elected the fair value option for existing GMDB reserves related to certain variable annuity contracts which are classified as universal life-type contracts. The Group has applied the fair value option, as the equity risk associated with those contracts is managed on a fair value basis and it is economically hedged with derivative options in the market.
Assets and liabilities measured at fair value pursuant to election of the fair value option
Pursuant to the election of the fair value option for the items described, the balances as of 31 December were as follows:
| Download |
USD millions |
2014 |
2015 |
||
|
||||
Assets |
|
|
||
Other invested assets |
9 684 |
10 367 |
||
of which at fair value pursuant to the fair value option |
444 |
449 |
||
Funds held by ceding companies |
11 222 |
9 870 |
||
of which at fair value pursuant to the fair value option1 |
273 |
245 |
||
Liabilities |
|
|
||
Liabilities for life and health policy benefits |
–33 605 |
–30 131 |
||
of which at fair value pursuant to the fair value option |
–187 |
–165 |
||
Changes in fair values for items measured at fair value pursuant to election of the fair value option
Gains/losses included in earnings for items measured at fair value pursuant to election of the fair value option including foreign exchange impact for the years ended 31 December were as follows:
| Download |
USD millions |
2014 |
2015 |
||
|
||||
Other invested assets |
50 |
–32 |
||
Funds held by ceding companies1 |
1 |
7 |
||
Liabilities for life and health policy benefits |
–41 |
21 |
||
Total |
10 |
–4 |
||
Fair value changes from other invested assets and funds held by ceding companies are reported in “Net investment income — non-participating business”. Fair value changes from the GMDB reserves are shown in “Life and health benefits”.
Assets and liabilities not measured at fair value but for which the fair value is disclosed
Assets and liabilities not measured at fair value but for which the fair value is disclosed as of 31 December, were as follows:
| Download |
2014 |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Total |
Assets |
|
|
|
Policy loans |
|
252 |
252 |
Mortgage loans |
|
1 888 |
1 888 |
Other loans |
|
1 065 |
1 065 |
Investment real estate |
|
2 482 |
2 482 |
Total assets |
0 |
5 687 |
5 687 |
|
|
|
|
Liabilities |
|
|
|
Debt |
–9 934 |
–6 291 |
–16 225 |
Total liabilities |
–9 934 |
–6 291 |
–16 225 |
| Download |
2015 |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
Total |
Assets |
|
|
|
Policy loans |
|
91 |
91 |
Mortgage loans |
|
1 946 |
1 946 |
Other loans |
|
1 086 |
1 086 |
Investment real estate |
|
3 211 |
3 211 |
Total assets |
0 |
6 334 |
6 334 |
|
|
|
|
Liabilities |
|
|
|
Debt |
–8 681 |
–5 674 |
–14 355 |
Total liabilities |
–8 681 |
–5 674 |
–14 355 |
Policy loans, other loans and certain mortgage loans are classified as level 3 measurements, as they do not have an active exit market. Some of these positions need to be assessed in conjunction with the corresponding insurance business. Considering these circumstances, the Group presents the carrying amount as an approximation for the fair value.
Investments in real estate are fair valued primarily by external appraisers based on proprietary discounted cash flow models that incorporate applicable risk premium adjustments to discount yields and projected market rental income streams based on market-specific data. These fair value measurements are classified in level 3 in the fair value hierarchy.
Debt positions, which are fair valued based on executable broker quotes or based on the discounted cash flow method using observable inputs, are classified as level 2 measurements. Fair value of the majority of the Group’s level 3 debt positions is judged to approximate carrying value due to the highly tailored nature of the obligation and short-notice termination provisions.