7 Investments

Investment income

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

USD millions

2018

2019

Fixed income securities

2 905

2 859

Equity securities

71

66

Policy loans, mortgages and other loans

213

162

Investment real estate

220

226

Short-term investments

62

93

Other current investments

128

127

Share in earnings of equity-accounted investees

166

387

Cash and cash equivalents

47

75

Net result from deposit-accounted contracts

250

149

Deposits with ceding companies

447

452

Gross investment income

4 509

4 596

Investment expenses

–419

–412

Interest charged for funds held

–15

–13

Net investment income – non-participating business

4 075

4 171

Dividends received from investments accounted for using the equity method were USD 170 million and USD 104 million for 2018 and 2019, respectively.

Share in earnings of equity-accounted investees included impairments of the carrying amount of equity-accounted investees of USD 80 million for 2019.

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:

USD millions

2018

2019

1

For more details on the transaction, please refer to Note 11 “Assets held for sale”.

Fixed income securities available-for-sale:

 

 

Gross realised gains

526

1 590

Gross realised losses

–225

–143

Other-than-temporary impairments

–9

–5

Net realised investment gains/losses on equity securities

21

200

Change in net unrealised investment gains/losses on equity securities

–483

478

Net realised investment gains/losses on trading securities

–69

153

Change in net unrealised investment gains/losses on trading securities

39

–26

Net realised/unrealised gains/losses on other investments

117

–197

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

97

108

Foreign exchange gains/losses

51

–348

Loss related to agreed sale of ReAssure1

 

–230

Net realised investment gains/losses – non-participating business

65

1 580

Net realised/unrealised gains/losses on insurance-related activities included impairments of USD 7 million and USD 5 million for 2018 and 2019, 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:

 

 

2018

 

2019

USD millions

Unit-linked

with-profit

Unit-linked

with-profit

Investment income – fixed income securities

68

120

58

101

Investment income – equity securities

715

72

733

76

Investment income – other

17

10

25

11

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

800

202

816

188

Realised gains/losses – fixed income securities

–61

–140

89

135

Realised gains/losses – equity securities

–2 124

–257

3 333

279

Realised gains/losses – other

–14

1

90

9

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

–2 199

–396

3 512

423

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

–1 399

–194

4 328

611

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:

USD millions

2018

2019

Balance as of 1 January

91

80

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

5

5

Reductions for securities sold during the period

–12

–24

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

2

2

Impact of increase in cash flows expected to be collected

–4

–3

Impact of foreign exchange movements

–2

1

Balance as of 31 December

80

61

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:

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

Japan

872

74

–8

 

938

Other

9 812

213

–130

 

9 895

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

2019
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

14 192

377

–31

 

14 538

US Agency securitised products

7 034

104

–14

 

7 124

States of the United States and political subdivisions of the states

1 783

168

–3

 

1 948

United Kingdom

7 936

1 309

–26

 

9 219

Germany

2 870

298

–35

 

3 133

Canada

2 256

139

–4

 

2 391

France

2 095

343

–13

 

2 425

Japan

2 028

98

–2

 

2 124

Other

10 589

583

–33

 

11 139

Total

50 783

3 419

–161

 

54 041

Corporate debt securities

37 293

3 749

–46

 

40 996

Mortgage- and asset-backed securities

4 397

195

–14

–2

4 576

Reclassified to assets held for sale

–17 693

–2 785

28

 

–20 450

Fixed income securities available-for-sale

74 780

4 578

–193

–2

79 163

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 2018 and 2019.

 

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

Japan

160

0

 

73

8

 

233

8

Other

2 629

70

 

1 097

60

 

3 726

130

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

 

Less than 12 months

 

12 months or more

 

Total

2019
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

2 357

31

 

97

0

 

2 454

31

US Agency securitised products

1 842

7

 

654

7

 

2 496

14

States of the United States and political subdivisions of the states

39

1

 

30

2

 

69

3

United Kingdom

1 297

22

 

83

4

 

1 380

26

Germany

669

34

 

17

1

 

686

35

Canada

863

3

 

62

1

 

925

4

France

340

12

 

16

1

 

356

13

Japan

443

1

 

2

1

 

445

2

Other

1 492

17

 

315

16

 

1 807

33

Total

9 342

128

 

1 276

33

 

10 618

161

Corporate debt securities

2 562

18

 

531

28

 

3 093

46

Mortgage- and asset-backed securities

730

5

 

404

11

 

1 134

16

Reclassified to assets held for sale

–1 071

–8

 

–301

–20

 

–1 372

–28

Total

11 563

143

 

1 910

52

 

13 473

195

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 2018 and 2019, USD 18 601 million and USD 20 188 million, respectively, of fixed income securities available-for-sale were callable.

 

 

2018

 

2019

USD millions

Amortised cost or cost

Estimated fair value

Amortised cost or cost

Estimated fair value

Due in one year or less

10 449

10 379

7 294

7 324

Due after one year through five years

24 547

24 614

27 559

28 083

Due after five years through ten years

16 183

16 471

15 994

17 115

Due after ten years

34 749

37 262

37 865

43 144

Mortgage- and asset-backed securities with no fixed maturity

3 745

3 812

3 761

3 947

Reclassified to assets held for sale

 

 

–17 693

–20 450

Total fixed income securities available-for-sale

89 673

92 538

74 780

79 163

Investments trading and at fair value through earnings

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

USD millions

2018

2019

Debt securities issued by governments and government agencies

3 314

2 358

Corporate debt securities

37

 

Mortgage- and asset-backed securities

63

52

Fixed income securities trading – non-participating business

3 414

2 410

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

3 036

2 993

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:

USD millions

Unit-linked

2018
With-profit

Unit-linked

2019
With-profit

Fixed income securities trading

2 253

2 685

1 963

2 717

Equity securities at fair value through earnings

21 326

1 797

35 528

2 078

Investment real estate

537

230

512

200

Other

702

16

692

3

Reclassified to assets held for sale

 

 

–38 175

–4 998

Total investments for unit-linked and with-profit business

24 818

4 728

520

0

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:

USD millions

Carrying value

2018
fair value

Carrying value1

2019
fair value

1

Policy loans, mortgages and other loans include a total of USD 1 447 million which were reclassified to assets held for sale. Investment real estate of USD 146 million was reclassified to assets held for sale.

Policy loans

84

84

50

50

Mortgage loans

2 890

2 882

2 104

2 144

Other loans

1 568

1 587

2 314

2 376

Investment real estate

2 411

4 307

2 674

4 706

Depreciation expense related to investment real estate was USD 57 million and USD 61 million for 2018 and 2019, respectively. Accumulated depreciation on investment real estate totalled USD 609 million and USD 660 million as of 31 December 2018 and 2019, respectively. Investment real estate held by the Group includes residential and commercial investment real estate.

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

Maturity of lessor cash flows

As of 31 December 2019, the total undiscounted cash flows to be received from operating leases of investment real estate for the next five years and thereafter were as follows:

USD millions

Operating leases

2020

191

2021

174

2022

157

2023

136

2024

107

After 2024

420

Total cash flows

1 185

The Group manages risk associated with the residual value of its leased properties through careful property selection as well as diversification by geographical region and property type. Lease contracts for residential real estate in Switzerland and Germany are usually open-ended. Cash flows for such contracts have been projected taking into consideration the average turnover rate in the region. Lease contracts for residential real estate in the US with a lease term of one year or less have been excluded from the projected cash flows in the table above. Rental income for those leases for the year ended 31 December 2019 was USD 28 million.

Other financial assets and liabilities by measurement category

As of 31 December 2018 and 2019, “Other invested assets” and “Accrued expenses and other liabilities” by measurement category were as follows:

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

2019
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

472

 

 

 

 

472

Reverse repurchase agreements

 

 

2 089

 

 

2 089

Securities lending/borrowing

457

 

21

 

 

478

Equity-accounted investments

335

 

 

2 580

 

2 915

Other

76

913

905

 

 

1 894

Reclassified to assets held for sale

–60

 

–445

 

 

–505

Other invested assets

1 280

913

2 570

2 580

0

7 343

 

 

 

 

 

 

 

Accrued expenses and other liabilities

 

 

 

 

 

 

Derivative financial instruments

692

 

 

 

 

692

Repurchase agreements

 

 

678

 

 

678

Securities lending

458

 

115

 

 

573

Securities sold short

1 764

 

 

 

 

1 764

Other

 

 

1 653

 

2 512

4 165

Reclassified to liabilities held for sale

–161

 

–329

 

–191

–681

Accrued expenses and other liabilities

2 753

0

2 117

0

2 321

7 191

Offsetting of derivatives, financial assets and financial liabilities

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

2018
USD millions

Gross amounts of recognised financial assets

Amounts 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

2018
USD millions

Gross amounts of recognised financial liabilities

Amounts 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

2019
USD millions

Gross amounts of recognised financial assets

Amounts 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

1 662

–1 184

478

–2

476

Reverse repurchase agreements

5 185

–3 096

2 089

–2 061

28

Securities borrowing

171

–150

21

–20

1

Total

7 018

–4 430

2 588

–2 083

505

2019
USD millions

Gross amounts of recognised financial liabilities

Amounts 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

–1 750

1 058

–692

75

–617

Repurchase agreements

–3 352

2 674

–678

653

–25

Securities lending

–1 145

572

–573

524

–49

Total

–6 247

4 304

–1 943

1 252

–691

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 2018 and 2019, investments with a carrying value of USD 5 776 million and USD 5 239 million, respectively, were on deposit with regulatory agencies in accordance with local requirements, of which USD 277 million and USD 223 million, respectively, were cash and cash equivalents. As of 31 December 2018 and 2019, investments with a carrying value of USD 12 959 million and USD 14 659 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities, including pledged investments in subsidiaries, of which USD 404 million and USD 485 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 2018 and 2019, securities of USD 15 850 million and USD 18 686 million, respectively, were transferred to third parties under securities lending transactions and repurchase agreements on a fully collateralised basis. Corresponding liabilities of USD 941 million and USD 1 251 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 reuse.

As of 31 December 2018 and 2019, a real estate portfolio with a carrying value of USD 191 million and USD 188 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 2018 and 2019, the fair value of the equity securities, government and corporate debt securities received as collateral was USD 4 239 million and USD 5 477 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2018 and 2019 was USD 1 721 million and USD 2 025 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 (from repurchase agreements and securities lending)

As of 31 December 2018 and 2019, 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.

 

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

Total securities lending

117

150

242

431

940

 

 

 

 

 

 

Gross amount of recognised liabilities for repurchase agreements and securities lending

 

 

 

 

4 274

 

Remaining contractual maturity of the agreements

2019
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

30

3 312

 

 

3 342

Corporate debt securities

3

7

 

 

10

Total repurchase agreements

33

3 319

0

0

3 352

 

 

 

 

 

 

Securities lending

 

 

 

 

 

Debt securities issued by governments and government agencies

295

 

493

299

1 087

Corporate debt securities

58

 

 

 

58

Total securities lending

353

0

493

299

1 145

 

 

 

 

 

 

Gross amount of recognised liabilities for repurchase agreements and securities lending

 

 

 

 

4 497

The programme is structured in a conservative manner with a clearly defined risk framework. Yield enhancement is conducted on a non-cash basis, thereby taking no re-investment risk.