“The investment result remains strong despite challenging market conditions.”
Group Chief Investment Officer
Swiss Re continues to maintain a high-quality investment portfolio while delivering strong and sustainable financial results. During 2016, Swiss Re increased its overall credit allocation through the Guardian acquisition. The allocation across government bonds and cash and short-term investments remained relatively steady, while the overall allocation to equities and alternative investments has been reduced. Swiss Re maintained a strong focus on real assets with a continued increase in its infrastructure debt and real estate allocation, strengthening the quality of earnings through further diversification of our sources of investment income.
Financial markets overview
Financial markets continued to face high volatility throughout 2016, driven by monetary policy and political uncertainties. The year started in a “risk-off” mode on the back of continued oil price declines and China growth concerns, before recovering from February onwards. The improved sentiment was supported by the recovery in oil markets, improving US labour conditions, and stabilising growth in China. Having suffered persistent capital outflows since mid-2013, emerging markets started to enjoy inflows again from February onwards.
Core government bond yields fell further in the first half of the year, some into negative territory, and hit historic lows after the unexpected outcome of the vote in favour of “Brexit” in late June. Meanwhile, Donald Trump’s victory in the US presidential election in November led to a sharp repricing in financial markets, including higher bond yields due to rising inflation expectations. Meanwhile, uncertainty around trade barriers and other protectionist measures from the new US administration resulted in capital outflows from emerging markets.
Financial markets ended 2016 with more uncertainties than at the beginning of the year. Currently, hopes for fiscal stimulus in the US are positive, yet global growth remains fragile, with the recovery amongst advanced economies being uneven. Looking to 2017, investors can be expected to closely monitor the US administration’s policy pronouncements and actions, inflation developments, the European election agenda and the upcoming “Brexit” negotiations.
Net investment income
in USD billion, 2016
(2015: USD 3.4 billion)
Group return on investments
The Group’s investment portfolio, excluding unit-linked and with-profit investments, increased to USD 130.5 billion at the end of 2016, compared to USD 116.8 billion at the end of 2015. The increase was driven by the Guardian acquisition and other large transactions as well as the impact of credit spread tightening, partially offset by a negative impact from foreign exchange movements.
The return on investments for 2016 was strong at 3.4%, with approximately 80% of the result attributable to net investment income and net realised gains from equities and alternative investments. This compared to 3.5% in 2015, with the decrease reflecting slightly lower investment-related net realised gains on an increased asset base in addition to the impact of lower reinvestment yields. The Group’s non-participating net investment income increased to USD 3.7 billion in 2016 compared to USD 3.4 billion in 2015, largely driven by net asset inflows. The Group’s fixed income running yield of 2.9% was lower than the fixed income running yield of 3.0% for 2015, driven by the continued impact of lower yields for most of the year, partially offset by a positive impact from the Guardian acquisition.
The Group reported non-participating net realised investment gains of USD 1.5 billion in 2016 compared to USD 1.2 billion in 2015, reflecting a positive impact from interest rate derivatives. The total return on investments was 5.3% for 2016 compared to being flat in 2015, reflecting the impact of credit spread tightening and declining interest rates in the UK over the year.
Similar to last year, the global outlook for 2017 remains one of moderate economic growth. In particular, advanced economies are expected to grow at a subdued pace of around 2% according to the latest International Monetary Fund (IMF) forecasts. While US economic growth may pick up due to the expected fiscal stimulus, the risks for Europe are skewed to the downside. Clearly, political uncertainty will remain high and will continue to be an important driver of financial market performance. Central bank policy divergence is also set to remain a key theme, with the Fed expected to raise interest rates further, while monetary policy from the ECB, the Bank of England, and the BoJ are likely to remain extremely accommodative. Finally, growth in emerging markets is forecast to accelerate somewhat, especially with Russia and Brazil exiting recession, while the structural trend of Chinese economic growth is likely to find a more sustainable level.
Against the backdrop of muted global growth and heightened political uncertainty, we will continue to seek to maintain a well-diversified and high-quality investment portfolio.