110 Swiss Re 2011 Financial Report

Transcription

1 110 Swiss Re 2011 Financial Report

2 Financial statements / Introduction Financial statements 113 Group financial statements 113 Income statement 114 Balance sheet 116 Statement of shareholders equity 117 Statement of comprehensive income 118 Statement of cash flow 120 Notes to the Group financial statements 120 Note 1 Organisation and summary of significant accounting policies 128 Note 2 Investments 135 Note 3 Fair value disclosures 146 Note 4 Derivative financial instruments 152 Note 5 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) 153 Note 6 Debt 156 Note 7 Unpaid claims and claim adjustment expenses 158 Note 8 Reinsurance information 160 Note 9 Earnings per share 161 Note 10 Income taxes 164 Note 11 Benefit plans 172 Note 12 Share-based payments 175 Note 13 Compensation, participations and loans of members of governing bodies 176 Note 14 Commitments and contingent liabilities 177 Note 15 Information on business segments 184 Note 16 Subsidiaries, equity investees and variable interest entities 193 Note 17 Restructuring provision 194 Note 18 Risk assessment 196 Report of the statutory auditor 198 Group financial years Swiss Re Ltd 200 Annual Report 201 Income statement 202 Balance sheet 204 Notes 217 Proposal for allocation of disposable profit 218 Report of the statutory auditor Swiss Re 2011 Financial Report 111

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4 Financial statements Group financial statements Income statement For the years ended 31 December USD millions Note Revenues Premiums earned 8, Fee income from policyholders 8, Net investment income 2, Net realised investment gains (total impairments for the years ended 31 December were 683 in 2010 and 439 in 2011, of which 423 and 258, respectively, were recognised in earnings) 2, Other revenues Total revenues Expenses Claims and claim adjustment expenses 8, Life and health benefits 8, Return credited to policyholders Acquisition costs 8, Other expenses Interest expenses Total expenses Income before income tax expense Income tax expense Net income before attribution of non-controlling interests Income attributable to non-controlling interests Net income after attribution of non-controlling interests Convertible perpetual capital instrument Net income attributable to common shareholders Earnings per share in USD Basic Diluted Earnings per share in CHF1 Basic Diluted The translation from USD to CHF is shown for informational purposes only and has been calculated at the Group s average exchange rates for the years ended 31 December 2010 and 2011, respectively. The accompanying notes are an integral part of the Group financial statements. Swiss Re 2011 Financial Report 113

5 Financial statements Group financial statements Balance sheet As of 31 December Assets USD millions Note Investments 2, 3, 4 Fixed income securities: Available-for-sale, at fair value (including in 2010 and in 2011 subject to securities lending and repurchase agreements) (amortised cost: 2010: ; 2011: ) Trading (including in 2010 and 620 in 2011 subject to securities lending and repurchase agreements) Equity securities: Available-for-sale, at fair value (including 0 in 2010 and 45 in 2011 subject to securities lending and repurchase agreements) (cost: 2010: 1 241; 2011: 1 907) Trading Policy loans, mortgages and other loans Investment real estate Short-term investments, at amortised cost which approximates fair value (including in 2010 and 87 in 2011 subject to securities lending and repurchase agreements) Other invested assets Total investments Cash and cash equivalents (including in 2010 and 36 in 2011 subject to securities lending) Accrued investment income Premiums and other receivables Reinsurance recoverable on unpaid claims and policy benefits Funds held by ceding companies Deferred acquisition costs 5, Acquired present value of future profits Goodwill Income taxes recoverable Other assets Total assets The accompanying notes are an integral part of the Group financial statements. 114 Swiss Re 2011 Financial Report

6 Financial statements Group financial statements Liabilities and equity USD millions Note Liabilities Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits 3, Policyholder account balances Unearned premiums Funds held under reinsurance treaties Reinsurance balances payable Income taxes payable Deferred and other non-current taxes Short-term debt Accrued expenses and other liabilities Long-term debt Total liabilities Equity Common stock, CHF 0.10 par value 2010: ; 2011: shares authorised and issued Additional paid-in capital Treasury shares, net of tax Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax Other-than-temporary impairment, net of tax Cumulative translation adjustments, net of tax Accumulated adjustment for pension and post-retirement benefits, net of tax Total accumulated other comprehensive income Retained earnings Shareholders equity Non-controlling interests Total equity Total liabilities and equity Please refer to Note 1 Organisation and summary of significant accounting policies and Note 9 Earnings per share for details on the number of shares authorised and issued. The accompanying notes are an integral part of the Group financial statements. Swiss Re 2011 Financial Report 115

7 Financial statements Group financial statements Statement of shareholders equity For the years ended 31 December USD millions Convertible perpetual capital instrument (CPCI) Balance as of 1 January Reclassification of convertible perpetual capital instrument Balance as of period end 0 0 Common shares Balance as of 1 January Issue of common shares Balance as of period end Additional paid-in capital Balance as of 1 January Share-based compensation Realised gains/losses on treasury shares Dividends on common shares Balance as of period end Treasury shares, net of tax Balance as of 1 January Purchase of treasury shares Issuance of treasury shares, including share-based compensation to employees Balance as of period end Net unrealised gains/losses, net of tax Balance as of 1 January Other changes during the period Cumulative effect of adoption of ASU No Balance as of period end Other-than-temporary impairment, net of tax Balance as of 1 January Other changes during the period Balance as of period end Foreign currency translation, net of tax Balance as of 1 January Other changes during the period Balance as of period end Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January Change during the period Balance as of period end Retained earnings Balance as of 1 January Net income after non-controlling interests Convertible perpetual capital instrument (net income) Dividends on common shares2 319 Cumulative effect of adoption of ASU No Balance as of period end Shareholders equity Non-controlling interests Balance as of 1 January Change during the period Income attributable to non-controlling interests Balance as of period end Total equity The CPCI was reclassified from equity to short-term debt upon termination on 4 November The final cash settlement was made in January In 2011 dividends to shareholders were paid in the form of a withholding tax exempt repayment of legal reserves from capital contributions. 3 The Group adopted a new accounting pronouncement, ASU No (FAS167), an update to Topic 810 Consolidation, as of 1 January 2010, which resulted in the full consolidation of certain VIEs. This resulted in a transition impact to retained earnings of USD 60 million and to net unrealised gains/losses of USD 35 million. The accompanying notes are an integral part of the Group financial statements. 116 Swiss Re 2011 Financial Report

8 Financial statements Group financial statements Statement of comprehensive income For the years ended 31 December USD millions Net income before attribution of non-controlling interests Other comprehensive income, net of tax: Change in unrealised gains/losses Change in other-than-temporary impairment Change in foreign currency translation Change in adjustment for pension benefits Total comprehensive income before attribution of non-controlling interests Comprehensive income attributable to non-controlling interests Total comprehensive income attributable to common shareholders After interest on convertible perpetual capital instrument. The accompanying notes are an integral part of the Group financial statements. Swiss Re 2011 Financial Report 117

9 Financial statements Group financial statements Statement of cash flow For the years ended 31 December USD millions Cash flows from operating activities Net income attributable to common shareholders Add net income attributable to non-controlling interests Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items Net realised investment gains/losses Convertible perpetual capital instrument Change in: Technical provisions, net Funds held by ceding companies and other reinsurance balances Reinsurance recoverable on unpaid claims and policy benefits Other assets and liabilities, net Income taxes payable/recoverable Income from equity-accounted investees, net of dividends received Trading positions, net Securities purchased/sold under agreement to resell/repurchase, net Net cash provided/used by operating activities Cash flows from investing activities Fixed income securities: Sales and maturities Purchases Net purchase/sale/maturities of short-term investments Equity securities: Sales Purchases Cash paid/received for acquisitions/disposals of reinsurance transactions, net 80 Net purchases/sales/maturities of other investments Net cash provided/used by investing activities Cash flows from financing activities Issuance/repayment of long-term debt Issuance/repayment of short-term debt Issuance Repayment Purchase/sale of treasury shares Interest on convertible perpetual capital instrument 323 Dividends paid to shareholders Net cash provided/used by financing activities Total net cash provided/used Effect of foreign currency translation Change in cash and cash equivalents Cash and cash equivalents as of 1 January Impact of adoption of ASU No Cash and cash equivalents as of 31 December From 1 January 2011, the Group presents the amortisation of deferred acquisition cost in Depreciation, amortisation and other non-cash items. Comparatives for 2010 are presented accordingly. 2 As of 1 January 2010, the Group adopted ASU No (FAS167), an update to Topic 810 Consolidation, which resulted in the full consolidation of certain VIEs. Interest paid was USD million and USD million for the twelve months ended 31 December 2010 and 2011, respectively. Tax paid was USD 476 million and USD 748 million for the twelve months ended 31 December 2010 and 2011, respectively. The accompanying notes are an integral part of the Group financial statements. 118 Swiss Re 2011 Financial Report

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11 Financial statements Not es t o t he Group financial st at ement s 1 Organisat ion and summary of significant account ing policies Nature of operations The Swiss Re Group, which is headquart ered in Zurich, Swit zerland, comprises Swiss Re Lt d (t he parent company) and it s subsidiaries (collect ively, t he Swiss Re Group or t he Group ). The Swiss Re Group is a wholesale provider of reinsurance, insurance and ot her insurance-based forms of risk t ransfer. Working t hrough brokers and a net work of more t han 60 offices around t he globe, it s client base consist s of insurance companies, mid-t o-large-sized corporat ions and public sect or client s. Basis of presentation The accompanying consolidat ed financial st at ement s of t he Swiss Re Group have been prepared in accordance wit h account ing principles generally accept ed in t he Unit ed St at es of America (US GAAP) and comply wit h Swiss law. All significant int er-company t ransact ions and balances have been eliminat ed on consolidat ion. On 17 February 2011, t he Swiss Re Group announced t he implement at ion of a new organisat ional st ruct ure. As a first st ep t o creat e t hat new st ruct ure, t he Swiss Re Group est ablished a new holding company (Swiss Re Lt d) t hrough an exchange offer. Swiss Reinsurance Company Lt d ( Swiss Reinsurance Company ) shareholders were offered t he opport unit y t o exchange t heir shares in Swiss Reinsurance Company for new shares in t he holding company on a one-for-one basis. Effect ive 20 May 2011, Swiss Re Lt d became t he holding company of t he Swiss Re Group, and effect ive 13 December 2011, Swiss Reinsurance Company became a wholly owned subsidiary of Swiss Re Lt d. Because holders of Swiss Re Lt d shares had t he same beneficial ownership int erest s before and aft er t he exchange offer, t he exchange offer has been account ed for in a manner similar t o a t ransact ion bet ween ent it ies under common cont rol (and not as a purchase event ). The exchange offer did not have an impact on t he consolidat ed financial st at ement s of t he Swiss Re Group for t he periods present ed because t he financial st at ement s are present ed as if Swiss Re Lt d had been t he parent company for such periods. St art ing wit h t he second quart er of 2011, t he scope of t he Swiss Re Group consolidat ed financial st at ement s and t he Swiss Reinsurance Company consolidat ed financial st at ement s differs due t o t he inclusion of t he ult imat e holding company, Swiss Re Lt d, and a subsidiary, Swiss Re Specialised Invest ment s Holdings (UK) Lt d ( SRSIH ), which is held direct ly by Swiss Re Lt d, in t he Swiss Re Group financial st at ement s. Neit her Swiss Re Lt d nor SRSIH is included in t he Swiss Reinsurance Company consolidat ed financial st at ement s. The new corporat e st ruct ure will be reflect ed in t he Group financial st at ement s beginning wit h t he first quart er of As a result, t he segment al disclosures will change t o reflect t he way t he Group manages it s business act ivit ies. The new Group report ing st ruct ure will consist of t he Reinsurance segment, wit h separat e disclosure of t he Propert y & Casualt y and Life & Healt h unit s, t he Corporat e Solut ions segment and t he Admin Re segment. The Group it ems segment will include t he Group s holding company (Swiss Re Lt d), and cert ain Treasury act ivit ies, as well as t he remaining non-core act ivit ies t hat have been in run-off since November Furt her changes in t he course of 2012 t o t he legal ent it y st ruct ure of t he Swiss Re Group, t o t he ext ent operat ions wit hin t he Swiss Reinsurance Company consolidat ed group are t ransferred t o Swiss Re Lt d, will lead t o addit ional differences bet ween t he Swiss Re Group consolidat ed financial st at ement s and Swiss Reinsurance Company consolidat ed financial st at ement s. Principles of consolidation The Group s financial st at ement s include t he consolidat ed financial st at ement s of Swiss Re Lt d and it s subsidiaries. Vot ing ent it ies which Swiss Re Lt d direct ly or indirect ly cont rols t hrough holding a majorit y of t he vot ing right s are consolidat ed in t he Group s account s. Variable int erest ent it ies (VIEs) are consolidat ed when t he Swiss Re Group is t he primary beneficiary. The Group is t he primary beneficiary when it has power over t he act ivit ies t hat impact t he VIE s economic performance and at t he same t ime has t he obligat ion t o absorb losses or t he right t o receive benefit s t hat could pot ent ially be significant t o t he VIE. Companies which t he Group does not cont rol, but over which it direct ly or indirect ly exercises significant influence, are account ed for using t he equit y met hod and are included in ot her invest ed asset s. The Swiss Re Group s share of net profit or loss in invest ment s account ed for under t he equit y met hod is included in net invest ment income. Equit y and net income of t hese companies are adjust ed as necessary t o be in line wit h t he Group s account ing policies. The result s of consolidat ed subsidiaries and invest ment s account ed for using t he equit y met hod are included in t he financial st at ement s for t he period commencing from t he dat e of acquisit ion. Use of estimates in the preparation of financial statements The preparat ion of financial st at ement s requires management t o make significant est imat es and assumpt ions t hat affect t he report ed amount s of asset s, liabilit ies, revenues and expenses as well as t he relat ed disclosure including cont ingent asset s and liabilit ies. The Swiss Re Group s liabilit ies for unpaid claims and claim adjust ment expenses and policy benefit s for life and healt h include est imat es for premium, claim and benefit dat a not received from ceding companies at t he dat e of t he financial st at ement s. In addit ion, t he Group uses cert ain financial inst rument s and invest s in securit ies of cert ain ent it ies for which exchange t rading does not exist. The Group det ermines t hese est imat es based on hist orical informat ion, act uarial analyses, financial modelling, and ot her analyt ical t echniques. Act ual result s could differ significant ly from t he est imat es described above. 120 Swiss Re 2011 Financial Report

12 Foreign currency remeasurements and translation Transact ions denominat ed in foreign currencies are remeasured t o t he respect ive subsidiary s funct ional currency at average quart erly exchange rat es. Monet ary asset s and liabilit ies are remeasured t o t he funct ional currency at closing exchange rat es, whereas non-monet ary asset s and liabilit ies are remeasured t o t he funct ional currency at hist orical rat es. Remeasurement gains and losses on monet ary asset s and liabilit ies and t rading securit ies are report ed in earnings. Remeasurement gains and losses on available-for-sale securit ies, invest ment s in consolidat ed subsidiaries and invest ment s account ed for using t he equit y met hod are report ed in shareholders equit y. For consolidat ion purposes, asset s and liabilit ies of subsidiaries wit h funct ional currencies ot her t han US dollars are t ranslat ed from t he funct ional currency t o US dollars at closing rat es. Revenues and expenses are t ranslat ed at average exchange rat es. Translat ion adjust ment s are report ed in shareholders equit y. Valuation of financial assets The fair value of t he majorit y of t he Group s financial inst rument s is based on quot ed prices in act ive market s or observable input s. These inst rument s include government and agency securit ies, commercial paper, most invest ment -grade corporat e debt, most high-yield debt securit ies, exchange-t raded derivat ive inst rument s, most mort gage-backed and asset -backed securit ies and list ed equit y securit ies. In market s wit h reduced or no liquidit y, spreads bet ween bid and offer prices are normally wider compared t o spreads in highly liquid market s. Such market condit ions affect t he valuat ion of cert ain asset classes of t he Group, such as some asset -backed securit ies as well as cert ain derivat ive st ruct ures referencing such asset classes. The Group considers bot h t he credit risk of it s count erpart ies, and own risk of non-performance in t he valuat ion of derivat ive inst rument s and ot her over-t he-count er financial asset s. In det ermining t he fair value of t hese financial inst rument s, t he assessment of t he Group s exposure t o t he credit risk of it s count erpart ies incorporat es considerat ion of exist ing collat eral and net t ing arrangement s ent ered int o wit h each count erpart y. The measure of t he count erpart y credit risk is est imat ed wit h incorporat ion of t he observable credit spreads, where available, or credit spread est imat es derived based on t he benchmarking t echniques where market dat a is not available. The impact of t he Group s own risk of non-performance is analysed in t he manner consist ent wit h t he aforement ioned approach, wit h considerat ion of t he Group s observable credit spreads. The value represent ing such risk is incorporat ed int o t he fair value of t he financial inst rument s (primarily derivat ives), in a liabilit y posit ion as of t he measurement dat e. The change in t his adjust ment from period t o period is reflect ed in realised gains and losses in t he income st at ement. For asset s or derivat ive st ruct ures at fair value, t he Group uses market prices or input s derived from market prices. A separat e int ernal price verificat ion process, independent of t he t rading funct ion, provides an addit ional cont rol over t he market prices or market input used t o det ermine t he fair values of such asset s. Whilst management considers t hat appropriat e values have been ascribed t o such asset s, t here is always a level of uncert aint y and judgment over t hese valuat ions. Subsequent valuat ions could differ significant ly from t he result s of t he process described above. The Group may become aware of count erpart y valuat ions, eit her direct ly t hrough t he exchange of informat ion or indirect ly, for example, t hrough collat eral demands. Any implied differences are considered in t he independent price verificat ion process and may result in adjust ment s t o init ially indicat ed valuat ions. As of 31 December 2011, t he Group had not provided any collat eral on financial inst rument s in excess of it s own market value est imat es. Investments The Group s invest ment s in fixed income and equit y securit ies are classified as available-for-sale (AFS) or t rading. Fixed income securit ies AFS and equit y securit ies AFS are carried at fair value, based on quot ed market prices, wit h t he difference bet ween original cost and fair value being recognised in shareholders equit y. Trading fixed income and equit y securit ies are carried at fair value wit h unrealised gains and losses being recognised in earnings. The cost of equit y securit ies AFS is reduced t o fair value, wit h a corresponding charge t o realised invest ment losses if t he decline in value, expressed in funct ional currency t erms, is ot her t han t emporary. Subsequent recoveries of previously recognised impairment s are not recognised. Swiss Re 2011 Financial Report 121

13 For debt securit ies AFS which are ot her-t han-t emporary impaired and for which t here is not an int ent ion t o sell, t he impairment is separat ed int o (i) t he est imat ed amount relat ing t o credit loss, and (ii) t he amount relat ing t o all ot her fact ors. The est imat ed credit loss amount is recognised in earnings, wit h t he remainder of t he loss amount recognised in ot her comprehensive income. In cases where t here is an int ent ion or requirement t o sell, t he account ing of t he ot her-t han-t emporary impairment is t he same as for equit y securit ies AFS described above. Int erest on fixed income securit ies is recorded in net invest ment income when earned and is adjust ed for t he amort isat ion of any purchase premium or discount. Dividends on equit y securit ies are recorded on t he basis of t he ex-dividend dat e. Realised gains and losses on sales are included in earnings and are calculat ed using t he specific ident ificat ion met hod. Policy loans, mort gages and ot her loans are carried at amort ised cost. Int erest income is recognised in accordance wit h t he effect ive yield met hod. Invest ment in real est at e t hat t he Group int ends t o hold for t he product ion of income is carried at depreciat ed cost, net of any writ e-downs for impairment in value. Impairment in value is recognised if t he sum of t he est imat ed fut ure undiscount ed cash flows from t he use of t he real est at e is lower t han it s carrying value. Impairment in value, depreciat ion and ot her relat ed charges or credit s are included in net invest ment income. Invest ment in real est at e held for sale is carried at t he lower of cost or fair value, less est imat ed selling cost s, and is not depreciat ed. Reduct ions in t he carrying value of real est at e held for sale are included in realised invest ment losses. Short -t erm invest ment s are carried at amort ised cost, which approximat es fair value. The Group considers highly liquid invest ment s wit h a remaining mat urit y at t he dat e of acquisit ion of one year or less, but great er t han t hree mont hs, t o be short -t erm invest ment s. Ot her invest ed asset s include affiliat ed companies, equit y account ed companies, derivat ive financial inst rument s, collat eral receivables, securit ies purchased under agreement t o resell, and invest ment s wit hout readily det erminable fair value (including limit ed part nership invest ment s). Invest ment s in limit ed part nerships where t he Group s int erest equals or exceeds 3% are account ed for using t he equit y met hod. Invest ment s in limit ed part nerships where t he Group s int erest is below 3% and equit y invest ment s in corporat e ent it ies which are not publicly t raded are account ed for at est imat ed fair value wit h changes in fair value recognised as unrealised gains/losses in shareholders equit y. The Group ent ers int o securit y lending arrangement s under which it loans cert ain securit ies in exchange for collat eral and receives securit ies lending fees. The Group s policy is t o require collat eral, consist ing of cash or securit ies, equal t o at least 102% of t he carrying value of t he securit ies loaned. In cert ain arrangement s, t he Group may accept collat eral of less t han 102% if t he st ruct ure of t he overall t ransact ion offers an equivalent level of securit y. Cash received as collat eral is recognised along wit h an obligat ion t o ret urn t he cash. Securit ies received as collat eral t hat can be sold or repledged are also recognised along wit h an obligat ion t o ret urn t hose securit ies. Securit y lending fees are recognised over t he t erm of t he relat ed loans. Derivative financial instruments and hedge accounting The Group uses a variet y of derivat ive financial inst rument s including swaps, opt ions, forwards and exchange-t raded financial fut ures for t he Group s t rading and hedging st rat egy in line wit h t he overall risk management st rat egy. Derivat ive financial inst rument s are primarily used as a means of managing exposure t o price, foreign currency and/or int erest rat e risk on planned or ant icipat ed invest ment purchases, exist ing asset s or liabilit ies and also t o lock in at t ract ive invest ment condit ions for funds which become available in t he fut ure. The Group recognises all of it s derivat ive inst rument s on t he balance sheet at fair value. Derivat ives t hat are not designat ed as hedging inst rument s are adjust ed t o fair value t hrough earnings. If t he derivat ive is designat ed as a hedge of t he fair value of asset s or liabilit ies, changes in t he fair value of t he derivat ive are recognised in earnings, t oget her wit h changes in t he fair value of t he relat ed hedged it em. If t he derivat ive is designat ed as a hedge of t he variabilit y in expect ed fut ure cash flows relat ed t o a part icular risk, changes in t he fair value of t he derivat ive are report ed in ot her comprehensive income unt il t he hedged it em is recognised in earnings. The ineffect ive port ion of t he hedge is recognised in earnings. When hedge account ing is 122 Swiss Re 2011 Financial Report

14 discont inued on a cash flow hedge, t he net gain or loss remains in accumulat ed ot her comprehensive income and is reclassified t o earnings in t he period in which t he formerly hedged t ransact ion is report ed in earnings. When t he Group discont inues hedge account ing because it is no longer probable t hat a forecast ed t ransact ion will occur wit hin t he required t ime period, t he derivat ive cont inues t o be carried on t he balance sheet at fair value, and gains and losses t hat were previously recorded in accumulat ed ot her comprehensive income are recognised in earnings. The Group recognises separat ely derivat ives t hat are embedded wit hin ot her host inst rument s if t he economic charact erist ics and risks are not clearly and closely relat ed t o t he economic charact erist ics and risks of t he host cont ract and if it meet s t he definit ion of a derivat ive if it were st and-alone. Derivat ive financial inst rument asset s are generally included in ot her invest ed asset s and derivat ive financial inst rument liabilit ies are generally included in accrued expenses and ot her liabilit ies. The Group also designat es non-derivat ive monet ary financial inst rument s as a hedge of t he foreign currency exposure of it s net invest ment in cert ain foreign operat ions. From t he incept ion of t he hedging relat ionship, remeasurement gains and losses on t he designat ed nonderivat ive monet ary financial inst rument s and t ranslat ion gains and losses on t he hedged net invest ment are report ed as t ranslat ion gains and losses in shareholders equit y. Cash and cash equivalents Cash and cash equivalent s include cash on hand, short -t erm deposit s, cert ain short -t erm invest ment s in money market funds, and highly liquid debt inst rument s wit h a remaining mat urit y at t he dat e of acquisit ion of t hree mont hs or less. Deferred acquisition costs Acquisit ion cost s, which vary wit h, and are primarily relat ed t o, t he product ion of new insurance and reinsurance business, are deferred t o t he ext ent t hey are deemed recoverable from fut ure gross profit s. Deferred acquisit ion cost s consist principally of commissions. Deferred acquisit ion cost s for short -durat ion cont ract s are amort ised in proport ion t o premiums earned. Fut ure invest ment income is considered in det ermining t he recoverabilit y of deferred acquisit ion cost s for short -durat ion cont ract s. Deferred acquisit ion cost s for long-durat ion cont ract s are amort ised over t he life of underlying cont ract s. Deferred acquisit ion cost s for universal-life and similar product s are amort ised based on t he present value of est imat ed gross profit s. Est imat ed gross profit s are updat ed quart erly. Business combinations The Group applies t he purchase met hod of account ing for business combinat ions. This met hod allocat es t he cost of t he acquired ent it y t o t he asset s and liabilit ies assumed based on t heir est imat ed fair values at t he dat e of acquisit ion. Admin Re blocks of business can be acquired in different legal forms, eit her t hrough an acquisit ion of an ent it y s share capit al or t hrough a reinsurance t ransact ion. The Group s policy is t o t reat t hese t ransact ions consist ent ly regardless of t he form of acquisit ion. Accordingly, t he Group records t he acquired asset s and liabilit ies direct ly t o t he balance sheet. Premiums, life and healt h benefit s and ot her income st at ement it ems are not recorded in t he income st at ement on t he dat e of t he acquisit ion. The underlying liabilit ies and asset s acquired are subsequent ly account ed for according t o t he relevant GAAP guidance, including specific guidance applicable t o subsequent account ing for asset s and liabilit ies recognised as part of t he purchase met hod of account ing, including present value of fut ure profit, goodwill and ot her int angible asset s. Swiss Re 2011 Financial Report 123

15 Acquired present value of future profits The acquired present value of fut ure profit s (PVFP) of business in force is recorded in connect ion wit h t he acquisit ion of life and/or healt h business. The init ial value is det ermined act uarially by discount ing est imat ed fut ure gross profit s as a measure of t he value of business acquired. The result ing asset is amort ised on a const ant yield basis over t he expect ed revenue recognit ion period of t he business acquired, generally over periods ranging up t o 30 years, wit h t he accrual of int erest added t o t he unamort ised balance at t he earned rat e. For universal-life and similar product s, PVFP is amort ised in line wit h est imat ed gross profit s, and est imat ed gross profit s are updat ed quart erly. The carrying value of PVFP is reviewed periodically for indicat ors of impairment in value. Adjust ment s t o reflect impairment in value are recognised in earnings during t he period in which t he det erminat ion of impairment is made. Goodwill The excess of t he purchase price of acquired businesses over t he est imat ed fair value of net asset s acquired is recorded as goodwill, which is reviewed periodically for indicat ors of impairment in value. Adjust ment s t o reflect impairment in value are recognised in earnings in t he period in which t he det erminat ion of impairment is made. Other assets Ot her asset s include deferred expenses on ret roact ive reinsurance, separat e account asset s, prepaid reinsurance premiums, receivables relat ed t o invest ing act ivit ies, real est at e for own use, propert y, plant and equipment, accrued income, cert ain int angible asset s and prepaid asset s. The excess of est imat ed liabilit ies for claims and claim adjust ment expenses payable over considerat ion received in respect of ret roact ive propert y and casualt y reinsurance cont ract s is recorded as a deferred expense. The deferred expense on ret roact ive reinsurance cont ract s is amort ised t hrough earnings over t he expect ed claims-paying period. Separat e account asset s are carried at fair value. The invest ment performance (including int erest, dividends, realised gains and losses and changes in unrealised gains and losses) of separat e account asset s and t he corresponding amount s credit ed t o t he cont ract holder are offset t o zero in t he same line it em in earnings. Real est at e for own use, propert y, plant and equipment are carried at depreciat ed cost. Capitalised software costs Ext ernal direct cost s of mat erials and services incurred t o develop or obt ain soft ware for int ernal use, payroll and payroll-relat ed cost s for employees direct ly associat ed wit h soft ware development and int erest cost incurred while developing soft ware for int ernal use are capit alised and amort ised on a st raight -line basis t hrough earnings over t he est imat ed useful life. Deferred income taxes Deferred income t ax asset s and liabilit ies are recognised based on t he difference bet ween financial st at ement carrying amount s and t he corresponding income t ax bases of asset s and liabilit ies using enact ed income t ax rat es and laws. A valuat ion allowance is recorded against deferred t ax asset s when it is deemed more likely t han not t hat some or all of t he deferred t ax asset may not be realised. Unpaid claims and claim adjustment expenses Liabilit ies for unpaid claims and claim adjust ment expenses for propert y and casualt y reinsurance cont ract s are accrued when insured event s occur and are based on t he est imat ed ult imat e cost of set t ling t he claims, using report s and individual case est imat es received from ceding companies. A provision is also included for claims incurred but not report ed, which is developed on t he basis of past experience adjust ed for current t rends and ot her fact ors t hat modify past experience. The est ablishment of t he appropriat e level of reserves is an inherent ly uncert ain process involving est imat es and judgment s made by management, and t herefore t here can be no assurance t hat ult imat e claims and claim adjust ment expenses will not exceed t he loss reserves current ly est ablished. These est imat es are regularly reviewed, and adjust ment s for differences bet ween est imat es and act ual payment s for claims and for changes in est imat es are reflect ed in income in t he period in which t he est imat es are changed or payment s are made. 124 Swiss Re 2011 Financial Report

16 The Group does not discount liabilit ies arising from prospect ive propert y and casualt y insurance and reinsurance cont ract s, including liabilit ies which are discount ed for US st at ut ory report ing purposes. Liabilit ies arising from propert y and casualt y insurance and reinsurance cont ract s acquired in a business combinat ion are init ially recognised at fair value in accordance wit h t he purchase met hod of account ing. Experience feat ures which are direct ly linked t o a reinsurance asset or liabilit y are classified in a manner t hat is consist ent wit h t he present at ion of t hat asset or liabilit y. Liabilities for life and health policy benefits Liabilit ies for life and healt h policy benefit s from reinsurance business are generally calculat ed using t he net level premium met hod, based on assumpt ions as t o invest ment yields, mort alit y, wit hdrawals, lapses and policyholder dividends. Assumpt ions are set at t he t ime t he cont ract is issued or, in t he case of cont ract s acquired by purchase, at t he purchase dat e. The assumpt ions are based on project ions from past experience, making allowance for possible adverse deviat ion. Int erest assumpt ions for life and healt h reinsurance benefit s liabilit ies range from 1% t o 11%. Assumed mort alit y rat es generally rest upon experience mult iples applied t o t he act uarial select and ult imat e t ables based on indust ry experience. Liabilit ies for policy benefit s are increased if it is det ermined t hat fut ure cash flows, including invest ment income, are insufficient t o cover fut ure benefit s and expenses. The liabilit y for accident and healt h policy benefit s consist s of act ive life reserves and t he est imat ed present value of t he remaining ult imat e net cost s of incurred claims. The act ive life reserves include unearned premiums and addit ional reserves. The addit ional reserves are comput ed on t he net level premium met hod using assumpt ions for fut ure invest ment yield, mort alit y and morbidit y experience. The assumpt ions are based on project ions of past experience and include provisions for possible adverse deviat ion. Policyholder account balances Policyholder account balances relat e t o universal life-t ype cont ract s and invest ment cont ract s. Int erest credit ing rat es for policyholder account balances range from 2% t o 9%. Universal life-t ype cont ract s are long-durat ion insurance cont ract s, providing eit her deat h or annuit y benefit s, wit h t erms t hat are not fixed and guarant eed. Invest ment cont ract s are long-durat ion cont ract s t hat do not incorporat e significant insurance risk, ie t here is no mort alit y and morbidit y risk, or t he mort alit y and morbidit y risk associat ed wit h t he insurance benefit feat ures offered in t he cont ract is of insignificant amount or remot e probabilit y. Amount s received as payment for invest ment cont ract s are report ed as policyholder account balances. Relat ed asset s are included in general account asset s. Amount s assessed against policyholders for mort alit y, administ rat ion and surrender are shown as fee income. Amount s credit ed t o policyholders are shown as int erest credit ed t o policyholders. Invest ment income and realised invest ment gains and losses allocable t o policyholders are included in net invest ment income and net realised invest ment gains/losses. Funds held assets and liabilities Funds held asset s and liabilit ies include amount s ret ained by t he ceding company or t he Group for business writ t en on a funds-wit hheld basis, and amount s arising from t he applicat ion of t he deposit met hod of account ing t o insurance and reinsurance cont ract s t hat do not indemnify t he ceding company or t he Group against loss or liabilit y relat ing t o insurance risk. Under t he deposit met hod of account ing, t he deposit asset or liabilit y is init ially measured based on t he considerat ion paid or received. For cont ract s t hat t ransfer neit her significant t iming nor underwrit ing risk, and cont ract s t hat t ransfer only significant t iming risk, changes in est imat es of t he t iming or amount s of cash flows are account ed for by recalculat ing t he effect ive yield. The deposit is t hen adjust ed t o t he amount t hat would have exist ed had t he new effect ive yield been applied since t he incept ion of t he cont ract. The revenue and expense recorded for such cont ract s is included in net invest ment income. For cont ract s t hat t ransfer only significant underwrit ing risk, once a loss is incurred, t he deposit is adjust ed by t he present value of t he incurred loss. At each subsequent balance sheet dat e, t he port ion of t he deposit at t ribut able t o t he incurred loss is recalculat ed by discount ing t he est imat ed fut ure cash flows. The result ing changes in t he carrying amount of t he deposit are recognised in claims and claim adjust ment expenses. Swiss Re 2011 Financial Report 125

17 Premiums Propert y and casualt y reinsurance premiums are recorded when writ t en and include an est imat e for writ t en premiums receivable at period end. Premiums earned are generally recognised in income over t he cont ract period in proport ion t o t he amount of reinsurance provided. Unearned premiums consist of t he unexpired port ion of reinsurance provided. Life reinsurance premiums are earned when due. Relat ed policy benefit s are recorded in relat ion t o t he associat ed premium or gross profit s so t hat profit s are recognised over t he expect ed lives of t he cont ract s. Life and healt h reinsurance premiums for group coverages are generally earned over t he t erm of t he coverage. For group cont ract s t hat allow experience adjust ment s t o premiums, such premiums are recognised as t he relat ed experience emerges. Reinsurance ceded The Group uses ret rocession arrangement s t o increase it s aggregat e underwrit ing capacit y, t o diversify it s risk and t o reduce t he risk of cat ast rophic loss on reinsurance assumed. The ceding of risks t o ret rocessionaires does not relieve t he Group of it s obligat ions t o it s ceding companies. The Group regularly evaluat es t he financial condit ion of it s ret rocessionaires and monit ors t he concent rat ion of credit risk t o minimise it s exposure t o financial loss from ret rocessionaires insolvency. Premiums and losses ceded under ret rocession cont ract s are report ed as reduct ions of premiums earned and claims and claim adjust ment expenses. Amount s recoverable for ceded short - and longdurat ion cont ract s, including universal life-t ype and invest ment cont ract s, are report ed as asset s in t he accompanying consolidat ed balance sheet. The Group provides reserves for uncollect ible amount s on reinsurance balances ceded, based on management s assessment of t he collect ibilit y of t he out st anding balances. Receivables Premium and claims receivables which have been invoiced are account ed for at face value. Toget her wit h asset s arising from t he applicat ion of t he deposit met hod of account ing t hat meet t he definit ion of financing receivables t hey are regularly assessed for impairment. Evidence of impairment is ageing and financial difficult ies of t he count erpart y. Allowances are set up on t he net balance, meaning all balances relat ed t o t he same count erpart y are considered. The amount of t he allowance is set up in relat ion t o t he t ime a receivable has been due and financial difficult ies of t he debt or, and can be as high as t he out st anding net balance. Pensions and other post-retirement benefits The Group account s for it s pension and ot her post -ret irement benefit cost s using t he accrual met hod of account ing. Amount s charged t o expense are based on periodic act uarial det erminat ions. Share-based payment transactions The Group has a long-t erm incent ive plan, a fixed opt ion plan, a rest rict ed share plan, and an employee part icipat ion plan. These plans are described in more det ail in Not e 12. The Group account s for share-based payment t ransact ions wit h employees using t he fair value met hod. Under t he fair value met hod, t he fair value of t he awards is recognised in earnings over t he vest ing period. For share-based compensat ion plans which are set t led in cash, compensat ion cost s are recognised as liabilit ies, whereas for equit y-set t led plans, compensat ion cost s are recognised as an accrual t o addit ional paid-in capit al wit hin shareholders equit y. Treasury shares Treasury shares are report ed at cost in shareholders equit y. Treasury shares also include st and-alone derivat ive inst rument s indexed t o t he Group s shares t hat meet t he requirement s for classificat ion in shareholders equit y. Earnings per common share Basic earnings per common share are det ermined by dividing net income available t o shareholders by t he weight ed average number of common shares ent it led t o dividends during t he year. Dilut ed earnings per common share reflect t he effect on earnings and average common shares out st anding associat ed wit h dilut ive securit ies. Subsequent events Subsequent event s for t he current report ing period have been evaluat ed up t o 15 March This is t he dat e on which t he financial st at ement s are available t o be issued. 126 Swiss Re 2011 Financial Report

18 Recent accounting guidance In January 2010, t he FASB issued Improving Disclosures about Fair Value Measurement s (ASU No ), an updat e t o Topic 820 Fair Value Measurement s and Disclosures. This new st andard implement s addit ional disclosure requirement s for t he t hree fair value levels. As required by t he updat e, t he Group adopt ed some of t he requirement s as of 1 January The remaining requirement s were adopt ed as of 1 January 2011 and can be found in Not e 3. In December 2010, t he FASB issued When t o Perform St ep 2 of t he Goodwill Impairment Test for Report ing Unit s wit h Zero or Negat ive Carrying Amount s (ASU No ), an updat e t o Topic 350 Int angibles Goodwill and Ot her. This updat e provides guidance under what circumst ances a company is required t o perform st ep 2 of t he goodwill impairment t est for report ing unit s wit h zero or negat ive carrying amount s. The Group adopt ed t his guidance as of 1 January The adopt ion did not have an impact on t he Group s financial st at ement s. Also in December 2010, t he FASB issued Disclosure of Supplement ary Pro Forma Informat ion for Business Combinat ions (ASU No ), an updat e t o Topic 805 Business Combinat ions. This updat e specifies t hat an ent it y should disclose revenue and earnings of t he combined ent it y as t hough t he business combinat ions t hat occurred during t he current year had occurred as of t he beginning of t he comparable prior annual report ing period only. The Group adopt ed t his updat e as of 1 January The adopt ion did not have an impact on t he Group s financial st at ement s. In April 2011, t he FASB issued A Credit or s Det erminat ion of Whet her a Rest ruct uring Is a Troubled Debt Rest ruct uring (ASU No ), an updat e t o Topic 310 Receivables. This updat e provides clarificat ions on t he det erminat ion whet her a rest ruct uring of debt const it ut es a t roubled debt rest ruct uring. The Group adopt ed t his guidance as of 1 July The adopt ion did not have an impact on t he Group s financial st at ement s. In Oct ober 2010, t he FASB issued Account ing for Cost s Associat ed wit h Acquiring or Renewing Insurance Cont ract s (ASU No ), an updat e t o Topic 944 Financial Services Insurance. This new guidance limit s t he definit ion of deferrable acquisit ion cost s t o cost s direct ly relat ed t o t he successful acquisit ion or renewal of insurance cont ract s. The Group will adopt ASU No in t he first quart er of Swiss Re does not expect t hat t he adopt ion will have a mat erial impact on t he Group s financial st at ement s. Swiss Re 2011 Financial Report 127