Swiss Re Group Third Quarter 2013 Report
Key information Financial highlights (unaudited) For the three months ended 30 September, unless otherwise stated 2012 2013 Change in % Group Net income attributable to common shareholders 2 182 1 072 51 Premiums earned and fee income 6 580 7 475 14 Earnings per share in CHF 5.96 2.93 51 Shareholders equity (31.12.2012/30.09.2013) 34 002 31 920 6 Return on equity1 in % (annualised) 28.0 14.3 49 Return on investments in % (annualised) 4.5 3.5 22 Number of employees2 (31.12.2012/30.09.2013) 11 193 11 533 3 Property & Casualty Reinsurance Net income attributable to common shareholders 1 030 807 22 Premiums earned 3 296 3 951 20 Combined ratio in % 69.3 80.9 17 Return on equity1 in % 36.6 29.4 20 Life & Health Reinsurance Net income attributable to common shareholders 187 12 94 Premiums earned and fee income 2 265 2 452 8 Benefit ratio in % 79.0 84.8 7 Return on equity1 in % 9.9 0.9 91 Corporate Solutions Net income attributable to common shareholders 110 71 35 Premiums earned 588 791 35 Combined ratio in % 87.4 95.8 10 Return on equity1 in % 16.6 10.8 35 Admin Re Net income attributable to common shareholders 823 151 82 Premiums earned and fee income 427 281 34 Return on equity1 in % 48.9 10.3 79 1 Return on equity is calculated by dividing annualised net income attributable to common shareholders by average common shareholders equity. 2 Regular staff Share price (CHF) 100 80 60 40 20 0 2008 Swiss Re 2009 Swiss Market Index 2010 2011 STOXX Europe 600 Insurance Index 2012 2013 Financial strength ratings As of 31 October 2013 S&P Moody s A.M. Best Rating AA A1 A+ Outlook stable positive stable Share information As of 31 October 2013 Share price in CHF 79.70 Market capitalisation in CHF millions 27 281 Share performance in % 1 January 2008 31 October 2013 (p.a.) Year to 31 October 2013 Swiss Re 0.2 20.9 Swiss Market Index 0.5 20.7 STOXX Europe 600 Insurance Index 2.5 23.2
Content 02 Letter to shareholders 04 Key events 06 Group results 08 Reinsurance 08 Property & Casualty Reinsurance 09 Life & Health Reinsurance 10 Corporate Solutions 11 Admin Re 12 Outlook 88 General information 88 Note on risk factors 94 Cautionary note on forwardlooking statements 14 Financial statements 14 Income statement 15 Statement of comprehensive income 16 Balance sheet 18 Statement of equity 20 Statement of cash flow 23 Notes to the Group financial statements 23 Note 1 Organisation and summary of significant accounting policies 25 Note 2 Investments 32 Note 3 Fair value disclosures 50 Note 4 Derivative financial instruments 56 Note 5 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP) 57 Note 6 Debt and contingent capital instruments 58 Note 7 Insurance information 67 Note 8 Premiums written 68 Note 9 Earnings per share 69 Note 10 Benefit plans 71 Note 11 Information on business segments 84 Note 12 Variable interest entities Swiss Re Ltd Swiss Re Ltd is the holding company of the Swiss Re Group. Its shares are listed on the SIX Swiss Exchange and trade under the symbol SREN. Swiss Re Third Quarter 2013 Report 1
Letter to shareholders A strong quarter for Swiss Re 1.1 Group net income USD billions Dear shareholders We are pleased to report a strong net income of USD 1.1 billion for the third quarter of 2013. Property & Casualty Reinsurance led the way with USD 807 million. Corporate Solutions added another USD 71 million to that amount, executing on its ambitious growth plans. Life & Health Reinsurance delivered USD 12 million. Finally, Admin Re contributed USD 151 million in net income and generated USD 85 million in cash for the Group. The Group s premiums earned and fee income totalled USD 7.5 billion, or 14% more than in the same period in 2012. In addition, the Group delivered a strong combined ratio of 83.4%. While this ratio was helped by a generally benign natural catastrophe experience, it also underlines the strength of our underwriting in the face of significant hailstorms in Germany, flooding in Canada, hurricanes in Mexico and a number of large man-made losses. Celebrating 150 years of achievement In the third quarter we commenced the activities to commemorate our 150th anniversary. They began with Swiss Re Regional Days in Zurich and in London. Both events were highly successful, and they were complemented by Swiss Re Family Days, when employees celebrated in the same venue with their families. That so many of them participated enthusiastically in these activities provides the best evidence of the close bond between Swiss Re and those who work for the company every day with such commitment and dedication. More Regional and National Days and local events are planned for the coming months around the globe. As part of the anniversary we commissioned a Risk Perception Survey that asked more than 22 000 people around the world to share their thoughts on the risks of longevity, climate change, food security, sustainable energy and natural catastrophes. The results have provoked constructive dialogue among specialists and nonspecialists about a range of risks and how people in different countries and of different generations can tackle them. You can see the results and join the discussion at openminds.swissre.com. 2 Swiss Re Third Quarter 2013 Report
Letter to shareholders Walter B. Kielholz Chairman of the Board of Directors Michel M. Liès Group CEO A resilient business model In an economic environment still marked by low interest rates, there has been an influx of so-called alternative capital into the reinsurance sector. This alternative capital increases competition and capacity, thus far concentrating on peak risks in the US natural catastrophe business. However, it has yet to be tested in the case of rising interest rates or large catastrophe losses. We firmly believe that alternative capital will not fundamentally challenge Swiss Re s business model. We are a knowledge company with a deep understanding of our clients needs, and we offer a true partnership by providing solutions that our clients need and want, and thus generate additional profitable business. This is also what has made us successful for the last 150 years and what prepares us for the challenges ahead. We are ever mindful that none of this would be possible without the support of our shareholders. We appreciate your trust and are continuing to do all we can to earn it. Zurich, 7 November 2013 Walter B. Kielholz Chairman of the Board of Directors Michel M. Liès Group CEO Swiss Re Third Quarter 2013 Report 3
Key events 8 August 2013 Swiss Re reports second-quarter Group net income of USD 786 million, 10.0% annualised return on equity and earnings per share of USD 2.28 The Swiss Re Group reports net income of USD 786 million for the second quarter of 2013, a period that saw high levels of natural catastrophes, especially flooding. Premium growth in the property and casualty businesses continued with a good renewal season in July. All business segments contributed positively to the robust results and profitable growth. 21 August 2013 sigma publishes preliminary estimates for the first half of 2013; catastrophes cost global insurance industry more than USD 20 billion According to preliminary sigma estimates, total economic losses from natural catastrophes and man-made disasters were USD 56 billion in the first half of 2013. The global insurance industry covered USD 20 billion of the total losses, of which USD 17 billion were caused by natural catastrophes, in large part due to widespread flood events. In the first half of 2013, disasters claimed around 7 000 lives. 27 August 2013 Swiss Re survey finds that people of all generations brace themselves for a riskier world and want their governments to do more People around the world say they are acutely aware of the risks they may face in the future, and are ready to shoulder the financial burden personally. This is a key result from a landmark risk perception survey commissioned by Swiss Re on the occasion of its 150th anniversary and conducted by Gallup, the consulting, polling and research organisation. Respondents of the survey also want their political leaders to do more to tackle a riskier world ahead. 9 September 2013 Les Rendez-vous de Monte Carlo Swiss Re expects demand for natural catastrophe cover to double in high-growth markets and to rise by around 50% in mature markets by 2020. The Group estimates that prices for nat cat covers will stabilise in 2014 after a decline this year. Alternative capital is focusing on peak exposures in the US nat cat markets where entry barriers are low and margins high. With clients looking for more than just capacity, Swiss Re is well positioned to take advantage of its full service business model. 23 September 2013 Swiss Re estimates losses from recent hail storms in Germany at approximately USD 240 million Unusually strong hail storms throughout Germany in July 2013 caused significant hail losses in the country. A first hail storm affected the areas around Hannover and Wolfsburg on 27 July 2013. One day later another hail storm hit southern Germany, causing major damage around the cities of Rottenburg, Tuebingen and Reutlingen. It is expected that these hail storms will generate approximately USD 240 million in claims for Swiss Re, net of retrocession and before tax. The total losses for the insurance industry are estimated between USD 2.0 billion and USD 2.7 billion. 2 October 2013 Swiss Re Corporate Solutions Singapore branch receives a licence to offer commercial insurance in Singapore and Asia Swiss Re International SE, Swiss Re Corporate Solutions wholly-owned Luxembourg subsidiary, has set up a branch in Singapore and received an insurance licence from the Monetary Authority of Singapore. The newly licensed entity, Swiss Re International SE Singapore Branch, will begin operations immediately. 15 October 2013 Swiss Re Capital Markets structures and places EUR 350 million catastrophe bond for AXA Global P&C Swiss Re Capital Markets has successfully arranged the issuance of EUR 350 million of insurance-linked securities by Calypso Capital II Limited ( Calypso II ) on behalf of AXA Global P&C ( AXA ), a wholly-owned subsidiary of AXA S.A. Swiss Re Capital Markets underwrote the transaction, which covers Europe windstorm losses via two classes of Principal At-Risk Variable Rate Notes issued by Calypso Capital II Limited. Calypso Capital II Limited is an Irish private company incorporated with limited liability. The EUR 185 million Class A notes have a three-year risk period and the EUR 165 million Class B notes have a four-year risk period. 16 October 2013 Swiss Re to invest up to USD 425 million in FWD Group Swiss Re announces that it has entered into an agreement with Pacific Century Group to invest up to USD 425 million in FWD Group (FWD), confirming Swiss Re s commitment to the high growth markets. Swiss Re s investment in FWD consists of an initial investment for a 12.3% stake in FWD and a commitment for additional investments to fund FWD s planned expansion across Asia.Swiss Re s ultimate ownership stake in FWD will be determined based on the amount of committed capital eventually deployed. 4 Swiss Re Third Quarter 2013 Report
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Group results Swiss Re reported net income of USD 1 072 million for the third quarter of 2013 compared to net income of USD 2 182 million in the prior-year period. Earnings per share were CHF 2.93 or USD 3.12 compared to CHF 5.96 (USD 6.33) in the third quarter of 2012. The Group results in the third quarter of 2013 reflected a strong underwriting result along with favourable prior-year development and one-time tax benefits. Reinsurance reported net income of USD 819 million compared to USD 1 217 million in the prior-year period mainly due to lower realised gains on investments. Net income in Property & Casualty was USD 807 million compared to USD 1 030 million in the third quarter of 2012, and USD 12 million in Life & Health compared to USD 187 million in the prior-year period. Corporate Solutions delivered net income of USD 71 million compared to USD 110 million in the prior-year period. Higher natural catastrophe experience in the third quarter of 2013 was offset by continued strong earned premium growth and positive reserve development. Admin Re reported net income of USD 151 million compared to USD 823 million in the prior-year period. The 2012 result included USD 626 million from the sale of Admin Re US. The third quarter of 2013 benefited from tax rate changes in the UK. The Group combined ratio was 83.4% in the third quarter of 2013 compared to an exceptional combined ratio of 72.0% in the same period of the prior year. This quarter saw a higher occurrence of natural catastrophe losses than in the third quarter of 2012, as well as several large man-made losses, partially offset by positive development on prior-year reserves. Return on investments was 3.5% compared to 4.5% for the same period in 2012, mainly driven by lower gains from the sale of investments and unfavourable movements in foreign exchange rates. Shareholders equity increased to USD 31.9 billion from USD 30.1 billion as of 30 June 2013 reflecting the net income for the quarter. For the third quarter of 2013, annualised return on equity was 14.3% compared to 13.4% for the full year 2012, and 28.0% (annualised) for the third quarter of 2012. Book value per common share increased to USD 90.06 or CHF 81.43 at the end of September 2013, compared to USD 84.03 or CHF 79.50 at the end of June 2013. Book value per common share is based on common shareholders equity and excludes non-controlling interests and the impact of contingent capital instruments. For information on segment shareholders equity, please see pages 76 to 77. Third quarter 2013 operating performance Premiums earned for Property & Casualty Reinsurance were USD 4.0 billion or 20% higher compared to the same period last year, mainly driven by the expiry of a major quota share retrocession agreement at the end of 2012. Life & Health Reinsurance premiums and fees increased by 8%, primarily driven by the business recaptured in the first quarter of 2013, rate increases in the yearly-renewable term business and higher health premiums in Europe and Asia-Pacific. Corporate Solutions premiums earned increased 35% to USD 791 million, reflecting organic growth across most lines of business and the expiry of the same quota share retrocession agreement mentioned above for Property & Casualty Reinsurance. The Group s non-participating net investment income remained constant at USD 1.0 billion compared to USD 1.0 billion in the same period of the prior year. The impact of the sale of the Admin Re US business in 2012 was offset by the re-balancing of the investment portfolio and the higher yield environment. The Group running yield was 3.3% in the reporting period, compared to 3.1% in the same period of the prior year. The Group reported non-participating net realised investment gains of USD 4 million in the third quarter of 2013, which was the result of gains from the sale of real estate and active management of the listed equity portfolio, offset by the write-down of own used property and unfavourable movements in foreign exchange rates. This compares to gains of USD 1.2 billion in the same period of the prior year, which included gains of USD 626 million related to the sale of the Admin Re US business. The Property & Casualty Reinsurance combined ratio was 80.9% compared to an exceptional 69.3% in the prior-year period. The increase was mainly due to less favourable natural catastrophe experience and a higher burden from large man-made losses, as well as by less net reserve releases from prior years. The Corporate Solutions combined ratio was 95.8% compared to 87.4% in the same period of the prior year. The result for the current period reflects higher natural catastrophe experience than the same period of 2012. In addition, both periods benefited from favourable prior-year development; however, development in the third quarter of 2013 was lower than in the same period of the prior year. Life & Health Reinsurance benefits increased 15% to USD 2.0 billion over the prior-year period mainly due to reserve strengthening for Australian group disability business and the adverse performance of 6 Swiss Re Third Quarter 2013 Report
Group results business recaptured in the first quarter of 2013. The benefit ratio was 84.8% in the third quarter of 2013, up from 79.0% in the same period of 2012, with the increase driven by the performance of the abovementioned business. Return credited to policyholders reflected the investment performance on the underlying assets, mainly backing unitlinked and with-profit policies, which are passed through to policyholders. In the third quarter of 2013, an investment gain of USD 755 million was passed through to policyholders compared to a gain of USD 983 million in the prior-year period. Acquisition costs for the Group increased by 9% to USD 1.3 billion, reflecting higher business volumes. Administrative expenses were USD 739 million, 10% lower than in the prior-year period mainly due to lower variable compensation expenses. Other expenses were USD 109 million for the third quarter of 2013. Interest expenses were USD 198 million, 10% higher when compared to the third quarter of 2012. The Group reported a tax expense of USD 93 million on a pre-tax income of USD 1 182 million in the third quarter of 2013 compared to an expense of USD 412 million on a pre-tax income of USD 2 632 million for the same period in 2012. This translates into an effective tax rate in the current and prior-year reporting periods of 7.9% and 15.7%, respectively. The lower tax rate in the current period mainly reflects the enactment of reduced UK tax rates, the transition to a new tax regime in the UK and other one-time tax benefits. Income statement, for the three months ended 30 September 2012 2013 Change in % Revenues Premiums earned 6 388 7 349 15 Fee income from policyholders 192 126 34 Net investment income non-participating 1 019 995 2 Net realised investment gains/losses non-participating 1 163 4 100 Net investment result unit-linked and with-profit 969 701 28 Other revenues 84 2 98 Total revenues 9 815 9 177 7 Expenses Claims and claim adjustment expenses 1 660 2 588 56 Life and health benefits 2 280 2 351 3 Return credited to policyholders 983 755 23 Acquisition costs 1 152 1 255 9 Administrative expenses 820 739 10 Other expenses 108 109 1 Interest expenses 180 198 10 Total expenses 7 183 7 995 11 Income before income tax expense 2 632 1 182 55 Income tax expense 412 93 77 Net income before attribution of non-controlling interests 2 220 1 089 51 Income attributable to non-controlling interests 20 0 Net income after attribution of non-controlling interests 2 200 1 089 51 Interest on contingent capital instruments 18 17 6 Net income attributable to common shareholders 2 182 1 072 51 Swiss Re Third Quarter 2013 Report 7
Reinsurance The Reinsurance Business Unit, which comprises the segments Property & Casualty Reinsurance and Life & Health Reinsurance, reported a net income of USD 819 million in the third quarter of 2013. Summaries of each segmentʼs performance are below. Property & Casualty Reinsurance Net income for the third quarter of 2013 decreased 21.7% to USD 807 million compared to USD 1.0 billion in the third quarter of 2012. The decrease was largely driven by a higher burden from large manmade and natural catastrophe losses in the reporting period, as well as by lower net reserve releases in prior years. Net premiums earned Net premiums earned increased 19.9% to USD 4.0 billion in the third quarter of 2013 compared to USD 3.3 billion in the same period of 2012, mainly driven by the expiry of a major quota share retrocession agreement at the end of 2012. Combined ratio Property & Casualty Reinsurance reported a strong combined ratio of 80.9% for the third quarter of 2013 compared to 69.3% in the prior-year period. The increase was mainly due to less favourable natural catastrophe experience and a higher impact from large man-made losses, as well as by less net reserve releases from prior years. The impact from natural catastrophes in the third quarter of 2013 was 7.2 percentage points below the expected level, and the favourable development of prior accident years improved the 2013 combined ratio by 9.0 percentage points compared to 12.5 percentage points in the same quarter of 2012. Administrative expense ratio The administrative expense ratio decreased to 10.2% in the third quarter of 2013 compared to 11.3% in the same period of 2012, mainly driven by premium growth year on year. Lines of business The property combined ratio slightly increased to 58.2% in the third quarter of 2013 compared to 57.7% in the third quarter of 2012. The impacts from the hailstorm in Germany and the floods in Canada were more than offset by prior-year reserve releases. The casualty combined ratio was 120.5% in the third quarter of 2013, compared to 93.0% in the third quarter of 2012. The increase was mainly due to reserve strengthening for US asbestos, and negative impacts in motor due to the hailstorm in Germany and reserve strengthening in the UK and France. The specialty combined ratio increased to 70.4% in the third quarter of 2013, compared to 54.5% in the same period of 2012, mainly due to large man-made losses in marine, though these losses were still below the expected level. Investment result The return on investments was 3.2% in the third quarter of 2013 compared to 3.6% in the same period of 2012, reflecting a reduction in the investment result of USD 64 million. The result in the current period was driven by net investment income from fixed income securities, markto-market gains on alternative investments and realised gains from the sale of investments. Investment-related net investment income decreased by USD 52 million to USD 233 million in the third quarter of 2013, mainly due to the transfer of Principal Investments to the Group in the first quarter of 2013 and lower mark-tomarket gains on private equity investments. Investment-related net realised gains were USD 142 million compared to USD 148 million in the third quarter of 2012, mainly as a result of realised gains from the sale of investments and active management of the listed equity portfolio, partly offset by unfavourable movements in foreign exchange rates. Return on equity The annualised return on equity for the third quarter of 2013 was 29.4% compared to 36.6% in the same quarter of 2012. The decrease was mainly due to the lower net income year on year. Outlook We are likely to continue to see an increase in retained premiums due to the expiry of a major quota share retrocession agreement at the end of 2012. Furthermore, we believe we have the expertise, knowledge and services to meet the increased demand for innovative and tailored solutions in both developed and high growth markets. Natural catastrophe reinsurance rates are currently adequate but under pressure from alternative capital and strong competition. Alternative capital capacity is mainly concentrated in the US natural catastrophe market. Favourable loss development and improvement in primary rates put pressure on casualty reinsurance business. However, primary rates for US casualty and European motor continue to increase. The rest of the market is flat or softening slightly. Our superior risk selection remains a key value driver in this environment. 8 Swiss Re Third Quarter 2013 Report
Reinsurance Life & Health Reinsurance Net income was USD 12 million in the third quarter of 2013 compared to USD 187 million in the third quarter of 2012. The reduction was primarily due to a large reserve addition of USD 121 million for Australian group disability business and lower realised gains, partly offset by lower interest expense from capital structure optimisation. Operating income of USD 129 million was consistent with the third quarter of 2012. Excluding the impact of the reserve strengthening for Australia and the positive one-off impact from recaptures and settlements in Europe, the operating income in the current period saw better than expected results on the pre- 2004 US individual life business, and asset re-balancing resulted in higher investment running yield. Net premiums earned and fee income Premiums earned and fee income increased 8.3% to USD 2.5 billion in the third quarter of 2013 compared to USD 2.3 billion in the third quarter of 2012. The increase was primarily driven by the business recaptured in the first quarter of 2013, rate increases in the yearlyrenewable term business and higher health premiums in Europe and Asia-Pacific. Benefit ratio The benefit ratio was 84.8% in the third quarter of 2013 compared to 79.0% in the same period of the prior year. The increase was primarily due to reserve strengthening for Australian group disability business and the adverse performance of the business recaptured in the first quarter of 2013. Expense ratio The management expense ratio improved to 7.9%, compared to 8.6% in the third quarter of 2012. Lines of business Operating income for the traditional life business improved to USD 113 million in the third quarter of 2013, compared to USD 60 million in the same period of 2012. The 2013 result was driven primarily by favourable mortality assumption update on pre-2004 guaranteed minimum death benefit (GMDB) business and B36 derivatives impact due to rising risk-free rates, the positive impact from recaptures in Europe and improvement in the pre-2004 US individual life results due to positive experience. This was partially offset by reserve updates in the UK and impact of client data updates in the Americas and Europe. Operating income for the traditional health business declined to USD 16 million in the third quarter of 2013, compared to USD 63 million in the third quarter of 2012. This was primarily driven by the reserve strengthening in the Australian group disability business and adverse experience in the UK health business, partly offset by favourable client data updates in all regions and higher investment income. Investment result The return on investments was 3.6% in the third quarter of 2013 compared to 5.8% in the same period of 2012, reflecting a reduction in the investment result of USD 210 million. The result in the current period was driven by net investment income on corporate and government bonds. Investment-related net investment income increased by USD 48 million to USD 285 million in the third quarter of 2013, mainly due to gains from private equity investments and the re-balancing of the investment portfolio into higher yielding assets. Investment-related net realised gains were USD 30 million compared to USD 288 million in the third quarter of 2012 mainly due to both the significant realised gains from the sale of investments and more favourable movements in foreign exchange rates which were seen in the third quarter of 2012. Shareholdersʼ equity The annualised return on equity was 0.9% for the third quarter of 2013 compared to 9.9% in the same period of the prior year. Shareholders equity increased to USD 6.3 billion as of 30 September 2013 from USD 6.2 billion as of 30 June 2013. Outlook Growth in the traditional life business is expected to be muted as cession rates are expected to decrease as primary insurers retain more risk. The low interest rate environment will also continue to have an unfavourable impact on the growth of long-term life business for our cedents. We will continue to write new business at attractive rates, including through large transactions. Swiss Re is planning to offer solutions and services in several attractive, growing markets where major demographic and socioeconomic trends are leading to increased demand for health insurance, including in Asia. The new Life & Health business management team is focused on proactively managing the in-force business in order to improve profitability. Good progress is being made on actions outlined at the Investors Day in June 2013. Swiss Re Third Quarter 2013 Report 9
Corporate Solutions Net income reached USD 71 million in the third quarter of 2013 compared to USD 110 million in the same period of 2012. The 2013 result was impacted by natural catastrophe losses, offset by continued strong earned premium growth and positive reserve development. Net premiums earned Net premiums earned increased 34.5% to USD 791 million in the third quarter of 2013 compared to USD 588 million in the same period of 2012, driven by successful organic growth across most lines of business and the expiry of a major quota share retrocession at the end of 2012. Gross premiums written net of intra-group transactions increased 13.8% in the third quarter of 2013 compared to the same period of 2012. Combined ratio The combined ratio deteriorated by 8.4 percentage points to 95.8% in the third quarter of 2013 from 87.4% in the same period of 2012 for the above mentioned reasons. The expense ratio decreased to 32.9% in the third quarter of 2013 from 36.1% in the third quarter of 2012 as investment in long-term growth begins to pay off. Acquisition expense in 2012 was negatively impacted by a profit commission effect related to a reinsurance contract. Lines of business The property combined ratio for the third quarter of 2013 was 97.5% compared to 80.1% in the same period of 2012, reflecting two large Mexican hurricane losses in 2013 compared to a more benign natural catastrophe loss experience in 2012 and a number of small to mediumsized man-made losses in both periods. The casualty combined ratio deteriorated by 19.9% to 102.1% in the third quarter of 2013, mainly due to the absence of favourable prior-year reserve development that occurred in 2012. The credit combined ratio decreased to 75.7% in the third quarter of 2013 compared to 81.7% in the same quarter of 2012, mainly driven by continued good performance in 2013 over all markets and the absence of the 2012 profit commission effect mentioned above. In other specialty, the combined ratio improved to 92.6% in the third quarter of 2013 from 106.1% in the third quarter of 2012. Specialty experienced positive reserve development in 2013 partially offset by a large aviation loss, while a large satellite loss negatively impacted the third quarter of 2012. Investment result The return on investments was 2.4% in the third quarter of 2013, compared to 3.0% in the same period of 2012 reflecting a reduction in the investment result of USD 10 million. The result in the current period was driven by net investment income on corporate and government bonds and realised gains from the active management of the listed equity portfolio. Investment-related net investment income decreased by USD 3 million to USD 25 million in the third quarter of 2013, mainly due to lower mark-to-market gains on private equity investments. Investment-related net realised gains were USD 15 million compared to USD 22 million in the third quarter of 2012, mainly due to unfavourable movements in foreign exchange rates, partially offset by higher realised gains from the sale of investments. Realised insurance derivative gains, which are not included in the return on investments, decreased to USD 30 million in the third quarter of 2013 compared to a gain of USD 35 million in the same period of 2012. These contracts offer protection against weather perils and other risks related to insurance, but are accounted for as derivatives. Return on equity Annualised return on equity was 10.8% in the third quarter of 2013, compared to 16.6% in the same period of 2012. Shareholdersʼ equity increased to USD 2.7 billion as of 30 September 2013 from USD 2.6 billion as of 30 June 2013. Outlook Pricing trends for corporate insurance are expected to remain fairly stable with some markets moderately hardening and others softening. Differences in quality between geographies and types of business exist. Corporate Solutions continues to believe it is well positioned to capture opportunities thanks to its value proposition, strong balance sheet and expanding geographic reach. 10 Swiss Re Third Quarter 2013 Report
Admin Re Admin Re reported net income of USD 151 million in the third quarter of 2013, including favourable tax impacts in the UK quarter on quarter. This net income compares to USD 823 million in the third quarter of 2012, which was driven by a gain on sale of USD 626 million from the sale of the Admin Re US business. Operating revenues Premiums and fee income were USD 281 million in the third quarter of 2013 compared to USD 427 million in the prior-year period. The decrease was mainly due to lower revenues following the sale of Admin Re US, which narrowed Admin Re s focus to the UK and Continental Europe. Gross cash generation Gross cash generation reflects the statutory surplus from life companies less working capital requirements, with Admin Re generating USD 85 million in the third quarter of 2013 compared with USD 1 065 million in the third quarter of 2012. The third quarter of 2012 included total cash proceeds and release of capital of USD 804 million from the sale of Admin Re US as well as the release of USD 99 million following the completion of the Part VII transfer of the Alico UK business. Investment result The return on investments was 5.0% in the third quarter of 2013, which remained constant compared to 5.0% for the same period of 2012. The result in the current period was driven by net investment income on corporate and government bonds and realised gains from the sale of government bonds associated with the re-balancing of the investment portfolio. Investment-related net investment income decreased by USD 78 million to USD 218 million in the third quarter of 2013 mainly due to lower income following the sale of the Admin Re US business. Investment-related net realised gains decreased by USD 40 million to USD 60 million in the third quarter of 2013, mainly due to lower realised gains from the sale of fixed income investments. Expenses Administrative expenses decreased by USD 30 million to USD 92 million in the third quarter of 2013, primarily driven by the sale of the Admin Re US business. Shareholdersʼ equity Shareholders equity increased by USD 0.4 billion to USD 6.1 billion compared to 30 June 2013, due to retained earnings in the period and movements in currency rates. Annualised return on equity was 10.3% in the third quarter of 2013. This is 1.4 percentage points lower than the prioryear period s return on equity of 11.7%, which has been adjusted to exclude the loss on the sale of the Admin Re US business. Outlook Admin Re continues to seek to fully establish its franchise value in the UK and Continental Europe and contribute to Swiss Re s financial targets to deliver on its strategic aim of being a recognised force in the closed life book business. Swiss Re Third Quarter 2013 Report 11
Outlook Over the first nine months of 2013, Swiss Re remained on or ahead of meeting its three financial targets: the target return on equity of 700 basis points above the average risk-free rate, plus 10 percent average annual growth in both earnings per share and economic net worth per share plus dividends. Swiss Re is now more than halfway through to the completion date of its 2011 2015 financial targets and we will continue devoting all necessary effort to deliver on them. We remain focused on capital management, selecting areas for growth and taking decisive action in businesses that are underperforming. 12 Swiss Re Third Quarter 2013 Report
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Financial statements Income statement (unaudited) Three months ended 30 September Nine months ended 30 September Note 2012 2013 2012 2013 Revenues Premiums earned 7 6 388 7 349 18 271 20 649 Fee income from policyholders 7 192 126 643 403 Net investment income non-participating 2 1 019 995 3 463 2 943 Net realised investment gains/losses non-participating business (total impairments for the three months ended 30 September were 53 in 2012 and 20 in 2013, of which 37 and 20, respectively, were recognised in earnings)1 2 1 163 4 893 463 Net investment result unit-linked and with-profit 2 969 701 1 952 2 486 Other revenues 84 2 184 13 Total revenues 9 815 9 177 25 406 26 957 Expenses Claims and claim adjustment expenses 7 1 660 2 588 5 500 7 057 Life and health benefits 7 2 280 2 351 6 657 6 874 Return credited to policyholders 983 755 2 183 2 712 Acquisition costs 7 1 152 1 255 3 465 3 509 Other expenses 928 848 2 350 2 450 Interest expenses 180 198 554 573 Total expenses 7 183 7 995 20 709 23 175 Income before income tax expense 2 632 1 182 4 697 3 782 Income tax expense/benefit 412 93 1 112 494 Net income before attribution of non-controlling interests 2 220 1 089 3 585 3 288 Income attributable to non-controlling interests 20 0 140 1 Net income after attribution of non-controlling interests 2 200 1 089 3 445 3 287 Interest on contingent capital instruments 18 17 39 49 Net income attributable to common shareholders 2 182 1 072 3 406 3 238 Earnings per share in USD Basic 9 6.33 3.12 9.53 9.44 Diluted 9 5.77 2.87 8.94 8.66 Earnings per share in CHF2 Basic 9 5.96 2.93 8.97 8.84 Diluted 9 5.42 2.68 8.41 8.11 1 Total impairments for the nine months ended 30 September were USD 191 million in 2012 and USD 38 million in 2013, of which USD 141 million and USD 38 million, respectively, were recognised in earnings. 2 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 three and nine months ended 30 September 2012 and 2013, respectively. The accompanying notes are an integral part of the Group financial statements. 14 Swiss Re Third Quarter 2013 Report
Financial statements Statement of comprehensive income (unaudited) Three months ended 30 September Nine months ended 30 September 2012 2013 2012 2013 Net income before attribution of non-controlling interests 2 220 1 089 3 585 3 288 Other comprehensive income, net of tax: Change in unrealised gains/losses (tax: for the three months ended 30 September 16 in 2012 and 86 in 2013; for the nine months ended 30 September 112 in 2012 and 980 in 2013) 263 213 605 2 534 Change in other-than-temporary impairment (tax: for the three months ended 30 September 12 in 2012 and 1 in 2013; for the nine months ended 30 September 43 in 2012 and 11 in 2013) 24 3 82 21 Change in foreign currency translation (tax: for the three months ended 30 September 10 in 2012 and 81 in 2013; for the nine months ended 30 September 53 in 2012 and 6 in 2013) 211 362 231 128 Change in adjustment for pension benefits (tax: for the three months ended 30 September 55 in 2012 and 41 in 2013; for the nine months ended 30 September 53 in 2012 and 52 in 2013) 165 152 155 192 Total comprehensive income before attribution of non-controlling interests 2 553 1 819 4 348 839 Interest on contingent capital instruments 18 17 39 49 Attribution of value to option on redeemable non-controlling interest1 6 132 Comprehensive income attributable to non-controlling interests 20 140 1 Total comprehensive income attributable to common shareholders 2 509 1 802 4 037 789 1 In 2000, Swiss Re and the shareholders of New California Holdings, Inc. entered into a put/call agreement for the acquisition of New California Holdings, Inc. by Swiss Re. The put/call agreement was considered a redeemable non-controlling interest; however, a value was not assigned to this instrument as the exercise was contingent on several items occurring to complete the transaction. During the second quarter of 2012, the majority of the contingencies had been resolved and the exercise of the put/call option at the predetermined price became probable. In accordance with US GAAP requirements, the difference between the carrying value of the minority interest and the redemption price, USD 126 million, was recorded against shareholders equity and as a reduction in the net income attributable to common shareholders for the purposes of calculating earnings per share. Reclassification out of accumulated other comprehensive income For the three months ended 30 September 2013 Unrealised gains/ losses1 Other-thantemporary impairment1 Foreign currency translation1,2 Adjustment from pension benefits3 Accumulated other comprehensive income Balance as of 1 July 1 660 10 4 099 913 3 362 Change during the period 373 4 280 179 836 Amounts reclassified out of accumulated other comprehensive income 74 14 60 Tax 86 1 81 41 47 Balance as of period end 1 873 7 3 738 761 2 633 For the nine months ended 30 September 2013 Unrealised gains/ losses1 Other-thantemporary impairment1 Foreign currency translation1,2 Adjustment from pension benefits3 Accumulated other comprehensive income Balance as of 1 January 4 407 28 3 609 953 183 Change during the period 2 824 32 135 200 2 727 Amounts reclassified out of accumulated other comprehensive income 690 44 646 Tax 980 11 6 52 923 Balance as of period end 1 873 7 3 738 761 2 633 1 Reclassification adjustment included in net income is presented in the Net realised investment gains/losses non-participating business line. 2 Reclassification adjustment is limited to translation gains and losses realised upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity. 3 Reclassification adjustment included in net income is presented in the Other expenses line. The accompanying notes are an integral part of the Group financial statements. Swiss Re Third Quarter 2013 Report 15
Financial statements Balance sheet (unaudited) Assets Note 31.12.2012 30.09.2013 Investments 2, 3, 4 Fixed income securities: Available-for-sale, at fair value (including 9 529 in 2012 and 10 380 in 2013 subject to securities lending and repurchase agreements) (amortised cost: 2012: 80 594; 2013: 75 406) 86 974 77 594 Trading (including 196 in 2012 and 47 in 2013 subject to securities lending and repurchase agreements) 1 874 1566 Equity securities: Available-for-sale, at fair value (including 0 in 2012 and 228 in 2013 subject to securities lending and repurchase agreements) (cost: 2012: 2 789; 2013: 5 670) 3 102 6 270 Trading 672 608 Policy loans, mortgages and other loans 2 299 2 556 Investment real estate 777 794 Short-term investments, at amortised cost which approximates fair value (including 3 464 in 2012 and 5 511 in 2013 subject to securities lending and repurchase agreements) 18 645 20 639 Other invested assets 12 968 14 601 Investments for unit-linked and with-profit business (including fixed income securities trading: 4 630 in 2012 and 4 675 in 2013, equity securities trading: 18 617 in 2012 and 19 990 in 2013) 25 501 26 300 Total investments 152 812 150 928 Cash and cash equivalents (including 75 in 2012 and 115 in 2013 subject to securities lending) 10 837 8 981 Accrued investment income 1 050 990 Premiums and other receivables 11 529 12 759 Reinsurance recoverable on unpaid claims and policy benefits 10 109 8 581 Funds held by ceding companies 13 245 12 585 Deferred acquisition costs 5 4 039 4 574 Acquired present value of future profits 5 3 023 3 507 Goodwill 4 092 4 091 Income taxes recoverable 467 455 Deferred tax assets 5 718 5 668 Other assets 4 582 3 509 Total assets 221 503 216 628 The accompanying notes are an integral part of the Group financial statements. 16 Swiss Re Third Quarter 2013 Report
Financial statements Liabilities and equity Note 31.12.2012 30.09.2013 Liabilities Unpaid claims and claim adjustment expenses 63 670 61 473 Liabilities for life and health policy benefits 3 36 117 35 632 Policyholder account balances 29 349 30 203 Unearned premiums 9 384 11 031 Funds held under reinsurance treaties 3 642 3 532 Reinsurance balances payable 3 754 2 581 Income taxes payable 604 1 036 Deferred and other non-current tax liabilities1 9 442 8 086 Short-term debt 6 3 612 3 723 Accrued expenses and other liabilities 11 617 12 925 Long-term debt 6 16 286 14 461 Total liabilities 187 477 184 683 Equity Contingent capital instruments 1 102 1 102 Common stock, CHF 0.10 par value 2012: 370 706 931; 2013: 370 706 931 shares authorised and issued2 35 35 Additional paid-in capital 7 721 4 951 Treasury shares, net of tax 995 1 096 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax 4 407 1 873 Other-than-temporary impairment, net of tax 28 7 Cumulative translation adjustments, net of tax 3 609 3 737 Accumulated adjustment for pension and post-retirement benefits, net of tax 953 761 Total accumulated other comprehensive income 183 2 632 Retained earnings 26 322 29 560 Shareholders equity 34 002 31 920 Non-controlling interests 24 25 Total equity 34 026 31 945 Total liabilities and equity 221 503 216 628 1 The Group updated its balance sheet presentation of deferred tax assets and liabilities. Deferred tax assets and liabilities are presented on a gross basis as per the first quarter 2013. The comparative period has been adjusted accordingly and is consistent with the relevant income tax disclosure in the notes to the financial statements in the prior year. 2 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 Third Quarter 2013 Report 17
Financial statements Statement of equity (unaudited) For the twelve months ended 31 December 2012 and the nine months ended 30 September 2013 2012 2013 Contingent capital instruments Balance as of 1 January 0 1 102 Issued 1 102 Balance as of period end 1 102 1 102 Common shares Balance as of 1 January 35 35 Issue of common shares Balance as of period end 35 35 Additional paid-in capital Balance as of 1 January 8 985 7 721 Contingent capital instruments issuance costs 18 Share-based compensation 29 5 Realised gains/losses on treasury shares 83 15 Dividends on common shares1 1 134 2 760 Balance as of period end 7 721 4 951 Treasury shares, net of tax Balance as of 1 January 1 096 995 Purchase of treasury shares 147 285 Issuance of treasury shares, including share-based compensation to employees 248 184 Balance as of period end 995 1 096 Net unrealised gains/losses, net of tax Balance as of 1 January 4 223 4 407 Other changes during the period 184 2 534 Balance as of period end 4 407 1 873 Other-than-temporary impairment, net of tax Balance as of 1 January 118 28 Other changes during the period 90 21 Balance as of period end 28 7 Foreign currency translation, net of tax Balance as of 1 January 3 941 3609 Other changes during the period 332 128 Balance as of period end 3 609 3 737 Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January 775 953 Change during the period 178 192 Balance as of period end 953 761 Retained earnings Balance as of 1 January 22 277 26 322 Net income after attribution of non-controlling interests 4 257 3 287 Interest on contingent capital instruments, net of tax 56 49 Cumulative effect of adoption of ASU 2010-262, net of tax 24 Attribution of value to option on redeemable non-controlling interest3 132 Balance as of period end 26 322 29 560 Shareholders equity 34 002 31 920 Non-controlling interests Balance as of 1 January 1 697 24 Change during the period4 1 946 Income attributable to non-controlling interests 141 1 Attribution of value to option on redeemable non-controlling interest3 132 Balance as of period end 24 25 Total equity 34 026 31 945 18 Swiss Re Third Quarter 2013 Report
Financial statements 1 Dividends to shareholders were paid in the form of a withholding tax-exempt repayment out of legal reserves from capital contributions. 2 The Group adopted a new accounting guidance, ASU 2010-26 Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts as of 1 January 2012, which required the release of USD 24 million of deferred acquisition costs against retained earnings. 3 In 2000, Swiss Re and the shareholders of New California Holdings, Inc. entered into a put/call agreement for the acquisition of New California Holdings, Inc. by Swiss Re. The put/call agreement was considered a redeemable non-controlling interest; however, a value was not assigned to this instrument as the exercise was contingent on several items occurring to complete the transaction. During the second quarter of 2012, the majority of the contingencies had been resolved and the exercise of the put/call option at the predetermined price became probable. In accordance with US GAAP requirements, the difference between the carrying value of the minority interest and the redemption price, USD 132 million, was recorded against shareholders equity and as a reduction in the net income attributable to common shareholders for the purposes of calculating earnings per share. In August 2012, the put/call option was exercised and New California Holdings, Inc. was acquired. 4 The sale of Swiss Re Private Equity Partners AG, the management company of Swiss Re s private equity fund-of-fund business, to BlackRock, Inc. was closed on 4 September 2012. The sale resulted in the deconsolidation of a number of private equity funds, which led to a reduction in non-controlling interests of USD 1 400 million. In addition, New California Holdings, Inc. was acquired for USD 548 million in cash on 29 August 2012. As of acquisition date, Swiss Re also fully owned Aurora National Life Assurance Company and consequently no longer reports any non-controlling interest related to this subsidiary. The accompanying notes are an integral part of the Group financial statements. Swiss Re Third Quarter 2013 Report 19