7 Investments

Investment income

Net investment income by source (excluding unit-linked and with-profit business) was as follows:

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USD millions

2017

2018

Fixed income securities

2 778

2 905

Equity securities

79

71

Policy loans, mortgages and other loans

148

213

Investment real estate

200

220

Short-term investments

65

62

Other current investments

118

128

Share in earnings of equity-accounted investees

100

166

Cash and cash equivalents

25

47

Net result from deposit-accounted contracts

127

250

Deposits with ceding companies

457

447

Gross investment income

4 097

4 509

Investment expenses

–380

–419

Interest charged for funds held

–9

–15

Net investment income – non-participating business

3 708

4 075

Dividends received from investments accounted for using the equity method were USD 170 million and USD 170 million for 2017 and 2018, respectively.

Share in earnings of equity-accounted investees included impairments of the carrying amount of equity-accounted investees of USD 46 million for 2017.

Realised gains and losses

Realised gains and losses for fixed income securities, equity securities and other investments (excluding unit-linked and with-profit business) were as follows:

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USD millions

2017

2018

1

Change due to ASU 2016-01. Please refer to Note 1 for more details.

Fixed income securities available-for-sale:

 

 

Gross realised gains

748

526

Gross realised losses

–148

–225

Equity securities available-for-sale:

 

 

Gross realised gains1

959

 

Gross realised losses1

–28

 

Other-than-temporary impairments

–46

–9

Net realised investment gains/losses on equity securities1

 

21

Change in net unrealised investment gains/losses on equity securities1

 

–483

Net realised investment gains/losses on trading securities

27

–69

Change in net unrealised investment gains/losses on trading securities

3

39

Net realised/unrealised gains/losses on other investments

–8

117

Net realised/unrealised gains/losses on insurance-related activities

99

97

Foreign exchange gains/losses

121

51

Net realised investment gains/losses – non-participating business

1 727

65

Net realised/unrealised gains/losses on insurance-related activities included impairments of USD 11 million and USD 7 million for 2017 and 2018, respectively.

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 downside 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:

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2017

 

2018

USD millions

Unit-linked

With-profit

Unit-linked

With-profit

Investment income – fixed income securities

69

120

68

120

Investment income – equity securities

705

69

715

72

Investment income – other

20

11

17

10

Total investment income – unit-linked and with-profit business

794

200

800

202

Realised gains/losses – fixed income securities

–12

12

–61

–140

Realised gains/losses – equity securities

2 094

191

–2 124

–257

Realised gains/losses – other

28

8

–14

1

Total realised gains/losses – unit-linked and with-profit business

2 110

211

–2 199

–396

Total net investment result – unit-linked and with-profit business

2 904

411

–1 399

–194

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, 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:

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USD millions

2017

2018

Balance as of 1 January

97

91

Credit losses for which an other-than-temporary impairment was not previously recognised

14

5

Reductions for securities sold during the period

–24

–12

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

4

2

Impact of increase in cash flows expected to be collected

–4

–4

Impact of foreign exchange movements

4

–2

Balance as of 31 December

91

80

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:

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2017
USD millions

Amortised cost or cost

Gross unrealised gains

Gross unrealised losses

Other-than-temporary impairments recognised in other comprehensive income

Estimated fair value

Debt securities issued by governments and government agencies:

 

 

 

 

 

US Treasury and other US government corporations and agencies

14 397

273

–152

 

14 518

US Agency securitised products

5 884

18

–66

 

5 836

States of the United States and political subdivisions of the states

1 620

108

–7

 

1 721

United Kingdom

8 699

1 378

–31

 

10 046

Germany

3 193

239

–22

 

3 410

Canada

3 969

543

–30

 

4 482

France

2 015

252

–10

 

2 257

Australia

2 065

16

–4

 

2 077

Other

7 655

318

–76

 

7 897

Total

49 497

3 145

–398

 

52 244

Corporate debt securities

39 510

3 218

–136

 

42 592

Mortgage- and asset-backed securities

4 271

162

–19

–2

4 412

Fixed income securities available-for-sale

93 278

6 525

–553

–2

99 248

Equity securities available-for-sale

3 544

365

–47

 

3 862

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2018
USD millions

Amortised cost or cost

Gross unrealised gains

Gross unrealised losses

Other-than-temporary impairments recognised in other comprehensive income

Estimated fair value

Debt securities issued by governments and government agencies:

 

 

 

 

 

US Treasury and other US government corporations and agencies

12 144

218

–156

 

12 206

US Agency securitised products

6 416

18

–130

 

6 304

States of the United States and political subdivisions of the states

1 584

55

–19

 

1 620

United Kingdom

7 837

1 085

–74

 

8 848

Germany

2 723

229

–7

 

2 945

Canada

2 721

192

–29

 

2 884

France

1 723

205

–6

 

1 922

Australia

1 658

14

–3

 

1 669

Other

9 026

273

–135

 

9 164

Total

45 832

2 289

–559

 

47 562

Corporate debt securities

39 630

1 617

–542

 

40 705

Mortgage- and asset-backed securities

4 211

117

–56

–1

4 271

Fixed income securities available-for-sale

89 673

4 023

–1 157

–1

92 538

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.

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 2017 and 2018.

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Less than 12 months

 

12 months or more

 

Total

2017
USD millions

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

9 742

113

 

1 825

39

 

11 567

152

US Agency securitised products

3 773

37

 

1 029

29

 

4 802

66

States of the United States and political subdivisions of the states

304

4

 

120

3

 

424

7

United Kingdom

1 161

18

 

301

13

 

1 462

31

Germany

722

19

 

44

3

 

766

22

Canada

1 766

29

 

276

1

 

2 042

30

France

214

8

 

7

2

 

221

10

Australia

1 118

3

 

74

1

 

1 192

4

Other

2 813

54

 

451

22

 

3 264

76

Total

21 613

285

 

4 127

113

 

25 740

398

Corporate debt securities

6 299

102

 

1 040

34

 

7 339

136

Mortgage- and asset-backed securities

1 617

14

 

421

7

 

2 038

21

Total

29 529

401

 

5 588

154

 

35 117

555

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Less than 12 months

 

12 months or more

 

Total

2018
USD millions

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

1 157

33

 

6 170

123

 

7 327

156

US Agency securitised products

1 013

11

 

3 710

119

 

4 723

130

States of the United States and political subdivisions of the states

108

2

 

518

17

 

626

19

United Kingdom

1 372

47

 

442

27

 

1 814

74

Germany

109

4

 

156

3

 

265

7

Canada

549

8

 

855

21

 

1 404

29

France

381

5

 

15

1

 

396

6

Australia

509

2

 

21

1

 

530

3

Other

2 280

68

 

1 149

67

 

3 429

135

Total

7 478

180

 

13 036

379

 

20 514

559

Corporate debt securities

12 135

275

 

6 334

267

 

18 469

542

Mortgage- and asset-backed securities

1 111

15

 

1 718

42

 

2 829

57

Total

20 724

470

 

21 088

688

 

41 812

1 158

As of 31 December 2017, USD 40 million of the gross unrealised loss on equity securities available-for-sale relates to declines in value for less than 12 months and USD 7 million to declines in value for more than 12 months.

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 2017 and 2018, USD 17 742 million and USD 18 601 million, respectively, of fixed income securities available-for-sale were callable.

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2017

 

2018

USD millions

Amortised cost or cost

Estimated fair value

Amortised cost or cost

Estimated fair value

Due in one year or less

7 399

7 410

10 449

10 379

Due after one year through five years

29 459

29 724

24 547

24 614

Due after five years through ten years

15 921

16 652

16 183

16 471

Due after ten years

36 550

41 370

34 749

37 262

Mortgage- and asset-backed securities with no fixed maturity

3 949

4 092

3 745

3 812

Total fixed income securities available-for-sale

93 278

99 248

89 673

92 538

Investments trading and at fair value through earnings

The carrying amounts of fixed income securities classified as trading and equity securities classified as trading and at fair value through earnings (excluding unit-linked and with-profit business) as of 31 December were as follows:

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USD millions

2017

2018

1

Change due to ASU 2016-01. Please refer to Note 1 for more details.

Debt securities issued by governments and government agencies

2 414

3 314

Corporate debt securities

38

37

Mortgage- and asset-backed securities

86

63

Fixed income securities trading – non-participating business

2 538

3 414

Equity securities trading – non-participating business1

3

 

Equity securities at fair value through earnings – non-participating business1

 

3 036

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:

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2017

 

2018

USD millions

Unit-linked

With-profit

Unit-linked

With-profit

1

Change due to ASU 2016-01. Please refer to Note 1 for more details.

Fixed income securities trading

2 105

3 104

2 253

2 685

Equity securities trading1

26 582

2 201

 

 

Equity securities at fair value through earnings1

 

 

21 326

1 797

Investment real estate

543

281

537

230

Other

286

64

702

16

Total investments for unit-linked and with-profit business

29 516

5 650

24 818

4 728

Mortgage, policy and other loans and investment real estate

As of 31 December, the carrying and respective fair values of investments in mortgage, policy and other loans and investment real estate (excluding unit-linked and with-profit business) were as follows:

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USD millions

Carrying value

2017
Fair value

Carrying value

2018
Fair value

Policy loans

94

94

84

84

Mortgage loans

2 665

2 674

2 890

2 882

Other loans

1 351

1 367

1 568

1 587

Investment real estate

2 220

4 099

2 411

4 307

Depreciation expense related to investment real estate was USD 49 million and USD 57 million for 2017 and 2018, respectively. Accumulated depreciation on investment real estate totalled USD 585 million and USD 609 million as of 31 December 2017 and 2018, respectively.

Substantially all mortgage, policy and other loan receivables are secured by buildings, land or the underlying policies.

Other financial assets and liabilities by measurement category

As of 31 December 2017 and 2018, “Other invested assets” and “Accrued expenses and other liabilities” by measurement category were as follows:

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2017
USD millions

Fair value

Investments measured at net asset value as practical expedient

Amortised cost or cost

Equity-accounted

Not in scope1

Total

1

Amounts do not relate to financial assets or liabilities.

Other invested assets

 

 

 

 

 

 

Derivative financial instruments

527

 

 

 

 

527

Reverse repurchase agreements

 

 

3 058

 

 

3 058

Securities lending/borrowing

776

 

1 065

 

 

1 841

Equity-accounted investments

446

 

 

2 446

 

2 892

Other

63

828

695

 

 

1 586

Other invested assets

1 812

828

4 818

2 446

0

9 904

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

 

 

 

 

 

Derivative financial instruments

582

 

 

 

 

582

Repurchase agreements

 

 

160

 

 

160

Securities lending

778

 

51

 

 

829

Securities sold short

1 947

 

 

 

 

1 947

Other

 

 

835

 

2 837

3 672

Accrued expenses and other liabilities

3 307

0

1 046

0

2 837

7 190

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2018
USD millions

Fair value

Investments measured at net asset value as practical expedient

Amortised cost or cost

Equity-accounted

Not in scope1

Total

1

Amounts do not relate to financial assets or liabilities.

Other invested assets

 

 

 

 

 

 

Derivative financial instruments

564

 

 

 

 

564

Reverse repurchase agreements

 

 

1 051

 

 

1 051

Securities lending/borrowing

302

 

11

 

 

313

Equity-accounted investments

312

 

 

2 660

 

2 972

Other

52

812

634

 

 

1 498

Other invested assets

1 230

812

1 696

2 660

0

6 398

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

 

 

 

 

 

Derivative financial instruments

582

 

 

 

 

582

Repurchase agreements

 

 

581

 

 

581

Securities lending

301

 

59

 

 

360

Securities sold short

1 538

 

 

 

 

1 538

Other

 

 

1 077

 

2 660

3 737

Accrued expenses and other liabilities

2 421

0

1 717

0

2 660

6 798

Offsetting of derivatives, financial assets and financial liabilities

Offsetting of derivatives, financial assets and financial liabilities as of 31 December was as follows:

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2017
USD millions

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

1 710

–1 176

534

 

534

Reverse repurchase agreements

6 053

–2 995

3 058

–3 058

0

Securities borrowing

1 589

–524

1 065

–1 065

0

Total

9 352

–4 695

4 657

–4 123

534

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2017
USD millions

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

–1 924

1 342

–582

49

–533

Repurchase agreements

–2 631

2 471

–160

160

0

Securities lending

–1 878

1 049

–829

765

–64

Total

–6 433

4 862

–1 571

974

–597

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2018
USD millions

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

1 620

–1 052

568

 

568

Reverse repurchase agreements

4 285

–3 234

1 051

–1 051

0

Securities borrowing

110

–99

11

–11

0

Total

6 015

–4 385

1 630

–1 062

568

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2018
USD millions

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

–1 505

923

–582

21

–561

Repurchase agreements

–3 334

2 753

–581

581

0

Securities lending

–940

580

–360

339

–21

Total

–5 779

4 256

–1 523

941

–582

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 it has been 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”, “Investments for unit-linked and with-profit business” and “Accrued expenses and other liabilities”.

Assets pledged

As of 31 December 2017 and 2018, investments with a carrying value of USD 7 384 million and USD 5 776 million, respectively, were on deposit with regulatory agencies in accordance with local requirements, of which USD 147 million and USD 277 million, respectively, were cash and cash equivalents. As of 31 December 2017 and 2018, investments with a carrying value of USD 12 209 million and USD 12 959 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries, of which USD 247 million and USD 404 million, respectively, were cash and cash equivalents. Cash and cash equivalents pledged include some instances where cash is legally restricted from usage or withdrawal.

As of 31 December 2017 and 2018, securities of USD 15 740 million and USD 15 850 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. Corresponding liabilities of USD 989 million and USD 941 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 2017 and 2018, a real estate portfolio with a carrying value of USD 192 million and USD 191 million, respectively, served as collateral for a credit facility, allowing the Group to withdraw funds up to CHF 500 million.

Collateral accepted which the Group has the right to sell or repledge

As of 31 December 2017 and 2018, the fair value of the equity securities, government and corporate debt securities received as collateral was USD 7 476 million and USD 4 239 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2017 and 2018 was USD 1 981 million and USD 1 721 million, respectively. The sources of the collateral are securities borrowing, reverse repurchase agreements and derivative transactions.

Recognised gross liability for the obligation to return collateral that the Group has the right to sell or repledge

As of 31 December 2017 and 2018, 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.

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Remaining contractual maturity of the agreements

2017
USD millions

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

31

2 091

354

139

2 615

Corporate debt securities

 

16

 

 

16

Total repurchase agreements

31

2 107

354

139

2 631

 

 

 

 

 

 

Securities lending

 

 

 

 

 

Debt securities issued by governments and government agencies

244

567

614

442

1 867

Corporate debt securities

6

 

 

 

6

Equity securities

5

 

 

 

5

Total securities lending

255

567

614

442

1 878

 

 

 

 

 

 

Gross amount of recognised liabilities for repurchase agreements and securities lending

 

 

 

 

4 509

Download

 

Remaining contractual maturity of the agreements

2018
USD millions

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

149

2 894

100

141

3 284

Corporate debt securities

9

41

 

 

50

Total repurchase agreements

158

2 935

100

141

3 334

 

 

 

 

 

 

Securities lending

 

 

 

 

 

Debt securities issued by governments and government agencies

110

146

242

431

929

Corporate debt securities

7

4

 

 

11

Equity securities

 

 

 

 

0

Total securities lending

117

150

242

431

940

 

 

 

 

 

 

Gross amount of recognised liabilities for repurchase agreements and securities lending

 

 

 

 

4 274

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.