14 December Acquisition of GE Life UK business Swiss Re completed the acquisition in the UK of the GE Life business of General Electric (GE). The cash purchase price of GBP 465 million included GBP 260 million for statutory net assets. The trans action provides further scale and infrastructure for Swiss Re’s Admin ReSM business in the UK and is the largest Admin ReSM deal to date.
4 January CO2 reduction programme As part of its commitment to the Clinton Global Initiative, Swiss Re launched a worldwide programme to support measures taken by employees to reduce their personal CO2 emissions.
Swiss Re aspires to be the leading force in the reinsurance industry by combining expertise and financial strength with a committed client focus to deliver sustainable economic profit growth.
Reinsurance is an indispensable part of the insurance system, providing an important contribution to economic growth and society. Insurers, corporate clients and the public sector benefit from risk transfer and capital relief, as well as from the product development and risk expertise that Swiss Re provides. Through its global reach, the Group diversifies risk portfolios, allowing risks to be covered more efficiently and securely. Ultimately, policyholders benefit from enlarged and more sustainable protection.
Combining expertise and creativity Expertise only becomes effective once it is shared, turning abstract knowledge into concrete benefits for others. Understanding clients is the key to delivering effective services. Swiss Re’s Group-wide network of experts has the creative resources to develop new solutions and open up new markets. This innovative thinking goes beyond product design to encompass risk management, investment, client service and technology; in all areas, the Group seeks the most efficient way to connect its skills with each client’s specific needs.
Engagement for performance Skills are only one part of Swiss Re’s culture; understanding and dedication are what mobilises those skills. The Group emphasises and supports employee engagement with its strategic direction and key objectives: it is of the utmost importance that all employees understand the Group’s global course and see clearly how their own work contributes to fulfilling Swiss Re’s mission and aspiration. This shared understanding gives each unit of Swiss Re a mandate to seek the local solution that best supports global performance.
After the record losses from hurricanes Katrina, Rita and Wilma in 2005, the 2006 hurricane season was relatively
Driving performance The CEO’s view industry requires a more holistic approach to client needs: not just meeting the increased demand for coverage, but providing pro-active solutions to changing needs.
We are actively seeking to enlarge our market scope by developing innovative products and identifying new clients and opportunities – again, aiming to make best use of our unique strength and industry knowledge developed over the past 143 years. A recent transaction with the Mexican government shows how financial strength and expertise opens the way to new markets. Such hybrid transactions, merging traditional products with securitisation, provide governments with an effective new tool for mitigating potential catastrophe losses. We envisage that other governments will likely seek to follow Mexico’s example.
Representing the next generation of catastrophe bond programmes for Swiss Re, Successor not only provides the Group with protection against higher-layer capital events, but also is an important driver in Swiss Re’s strategy to reduce earnings volatility.
The record hurricane losses in 2005 dramatically changed the insurance and reinsurance markets. The industry faced rising premiums and a significant con traction in capacity at the same time as model adjustments and changes in rating agency methodologies were tightening capital requirements. Insurers and reinsurers turned to the capital markets to fill the
Driving performance Performance for Swiss Re gap, as these have come to represent an important new source of capacity.
The Successor programme completed in June 2006 enabled Swiss Re to gain access to significant capital in a period of tight capacity and allowed the Group to actively manage its potential earnings volatility.
In 2006, the US currency resumed its devaluation against the major European currencies (EUR –10%, CHF –7%, GBP –12%).
While Swiss Re continued to favour European equities during 2006, it tactically lowered its exposure to Asian equities and increased its appetite for US equities, especially in financial, technology and health care stocks. Listed real estate also performed very well.
Deferrred acquisition costs and other intangible assets 11 928 12 820 7
Airline facultative accounts, many of which renew in the fourth quarter, saw significant price reductions. Swiss Re responded by reducing its market share by 30 percent in this segment. Treaty reinsurance and smaller general aviation accounts on the other hand experienced only modest reductions, enabling Swiss Re to maintain its leading position in this highly profitable segment.
The combined ratio is not a suitable measure for some non-traditional treaties, since the source of profits typically arises from a combination of investment performance and underwriting performance. Overall, there was a significant reduction in nontraditional premiums in all lines, mainly due to the non-renewal of certain large quota share agreements. Profitability decreased compared to the previous year, reflecting the lower volume of business.
Capital Management and Advisory (CMA) retained its position at the forefront for intermediating insurance risk, supported by growing capacities for trading and structuring other asset classes. CMA originates, structures, trades and distributes interest rate, equity, credit, insurance and weather risks. 2006 was another year of strong growth for the insurance-linked securities market and CMA retained its lead underwriter position for Swiss Re’s own risks (eg Crystal Credit, Successor and Australis programmes), as well as third-party risks (eg OSIRIS Capital). CMA also significantly increased trading revenues across most product lines.
Total revenues rose 26% to CHF 2 billion, due to higher trading revenues from CMA, premium growth in Credit Solutions and increased fees from third-party asset management in Conning Asset Management.
Business developments Fundamentals for 2007 remain strong. Swiss Re will benefit from growth provided by the first full year inclusion of the GE Insurance Solutions and GE Life UK acquisitions. Developments in the European regulatory framework, including the EU Reinsurance Directive and the move towards Solvency II, will create new opportunities for strongly capitalised companies like Swiss Re to support clients with efficient capital management solutions.
In Asia, a combination of regulatory, market and social changes suggests continued strong prospects for volume and growth. As a key example, the agreement to purchase a 26% stake in TTK Healthcare Services Pvt Ltd demonstrates Swiss Re’s commitment to India and marks a milestone in Swiss Re’s strategy to enter the private medical insurance business in Asia.
Swiss Re’s risk landscape Risk management is essential to Swiss Re’s strategic planning and is embedded in the Group’s management discipline.
The risks classified under operational risks and other risks are ancillary and arise as a consequence of undertaking business.
Risk management per core risk category Risk appetite and risk tolerance at Group level are defined by a set of limits approved by the Executive Committee and the Board of Directors. The relevant Group bodies allocate capacity to lower levels.
Financial strength is a central component of Swiss Re’s value proposition to clients and therefore of the Group’s franchise. Swiss Re aims to hold sufficient capital to ensure that it is financially strong, even after an extreme loss event. Swiss Re manages 99% Tail VaR and 99.5% VaR measures of required capital in addition to the 99% VaR. Based on these more conservative measures for required capital, the Group’s CAR on 30 June 2006 amounted to 239% for the 99% Tail VaR and 291% for the 99.5% VaR. In addition to the considerations on an internal economic value basis, Swiss Re must allow for external constraints from rating agencies and regulators.
revision of Swiss corporate law in 1992. These shares were paid in only at a nominal value of CHF 0.10 for a total amount of CHF 794 228 and are not entitled to dividend.
Independence Swiss Re requires a majority of the Board of Directors to be independent. Nominations are submitted to General Meetings of Shareholders accordingly. To be considered independent, a director may not be, and may not have been in the past three years, employed as an executive officer of the Group. In addition, he or she must not have a material relationship with any part of the Group (either directly or as a partner, director or shareholder 3.1 Members of the Board of Directors Membership as at 31 December 2006 3.1 Members of the Board of Directors Membership as at 31 December 2006
Mr Kielholz was elected to the board of directors of Credit Suisse Group in 1999. Since 1 January 2003 he has been Chairman of that company’s board of directors.
Mr Baer was elected to Swiss Re’s Board of Directors in May 2005. He also serves on the boards of directors of Adecco S.A., Chéserex, Rieter Holding AG, Winterthur, Allreal Holding AG, Baar, Emmentalische Mobiliar Versicherungs-Gesellschaft, Konolfingen, and IFBC – Integrated Financial Business Consulting AG, Zurich.
Mr Breu is Chief Financial Officer of the Novartis Group and a member of the company’s executive committee, positions he assumed when Novartis was created in December 1996. He joined the group treasury of Sandoz, a predecessor company of Novartis, in 1975. Ten years later, he was appointed CFO of Sandoz Corporation in New York. In 1990, he became group treasurer of Sandoz Ltd, and, in 1993, head of group finance and a member of the Sandoz executive board.
Nominations for the election to be held at the Annual General Meeting of 20 April 2007 The Board of Directors has decided to nominate the following candidates for re-election to the Board: Raymund Breu, for a further four-year term; John F. Smith, Jr., for a one-year term, in consideration of his age.
Jakob Baer, Director, is also a director and chairman of the audit committees of Adecco SA and Allreal Holding AG, as well as a director of Rieter Holding AG.
Executive Vice Chairman The Executive Vice Chairman liaises between the Board and executive management in matters not reserved to the Chairman; he may attend the meetings of the Executive Committee and the Executive Board and receives the relevant documentation and minutes. Other responsibilities include supervising management’s preparation and execution of Board resolutions in operational matters, supervising management’s development of Group strategies and overseeing management development for the Group’s senior executives.
The Committee keeps itself informed on corporate governance developments; it measures the Group’s governance against relevant best practice standards and informs the Board of its findings and emerging trends; it makes proposals that ensure an adequate size and a well-balanced composition of the Board and further ensures that a majority of the Board is independent; it evaluates candidates for Board membership and makes recommendations to the Board; it evaluates proposals made to the Board for the appointment and removal of members of executive management; it ensures the effectiveness of executive succession and emergency planning processes; it ensures compliance with corporate governance disclosure requirements; it annually reviews the company’s Articles of Association and the Corporate Bylaws and informs the Board of its findings and proposals; it reviews the Group’s communication policy; it periodically reviews the Group’s guiding principles, the corporate citizenship activities and the corporate sustainability plan; it monitors investor relations activities and the relationship with rating agencies; it examines how public reports are perceived, especially with regard to whether they fulfil the needs and expectations of international investors; it monitors the shareholder structure; it has initial responsibility for assessing any merger and take-over proposals submitted to the Group; it has initial responsibility for reviewing material transactions with any of the Group’s significant shareholders; and it establishes a procedure for the directors to comment on the Board’s performance. The Governance Committee reviews its own performance annually.
The average attendance rate at the regular Board meetings was 98.7% throughout the year. Including the extraordinary meetings that were convened at relatively short notice, the average attendance rate was 94.2%.
Swiss Re’s Board of Directors has delegated the responsibility for managing the Group’s operations to the Executive Committee (see section 4 below). In 2006, it comprised seven members. The Executive Committee has, as a rule, two meetings per month, except when the Executive Board meets and in holiday seasons. In 2006, the Executive Committee met 32 times; it involved the members of the larger Executive Board in 16 of these meetings, some of which extended to two or more consecutive days. One meeting to consider strategic issues was held over a period of four days.
In brackets: number of participating members 5.3 Compensation for former members of governing bodies 5.3 Compensation for former members of governing bodies 5.4 Share allotment in the year under review 5.4 Share allotment in the year under review 5.5 Share ownership5.5 Share ownership 5.6 Options and related instruments5.6 Options and related instruments
The Board of Directors established the Audit Committee in 1992. The Audit Committee holds regular meetings throughout the year to which the two head auditors are regularly invited. The Committee held six regular and three extra meetings in 2006. Starting in 2007, the Audit Committee will meet eight times a year. The Audit Committee evaluates the external auditor annually and recommends one firm to the Board for election at the following Annual General Meeting of shareholders. The lead audit partner is rotated from his or her role on a five-year basis to ensure that independence is maintained.
Meeting in Monte Carlo 3 October Appointment of Roger Ferguson as Head of Financial Services and member of Executive Committee
Swiss Re share trading The average daily traded share volume for 2006 was 1.6 million shares on-exchange
Institutional shareholders, including nominee accounts, represent roughly twothirds of Swiss Re’s share capital. These shareholders are geographically diverse: 24% are based in Switzerland, 28% in Europe (excluding Switzerland), 44% in North America and 4% throughout the rest of the world. The top ten institutional shareholders hold 33% of Swiss Re’s shares, up six percentage points from the previous year; the top 100 hold 54% of total outstanding shares.
On 31 December 2006, Swiss Re had 43 834 registered private shareholders,
¹ Nominal value of CHF 0.10 per share ² Dividend divided by year-end share price of corresponding year ³ Based on shares entitled to dividend ⁴ All data as of 23 February 2007 ⁵ Subject to approval at the Annual General Meeting on 20 April 2007 ⁶ Figures for 2002-2004 represent the previously applied accounting policy
Cash and cash equivalents as of 31 December 8 368 13 606
The Group has reclassified CHF 2 451 million from cash to Financial services assets related to the assumption of the debt of GE Insurance Solutions. Interest paid during 2006 was CHF 812 million. There were several non-cash investment activities in 2006. The major transactions included the issuance of equity of CHF 2 916 million and a mandatory convertible of CHF 610 million to General Electric directly.
The Group has a long term incentive plan, a fixed option plan, a restricted share plan, and an employee participation plan. These plans are described in more detail in note 11. The Group accounts for share based payment transactions with employees using the fair value method. Under the fair value method, the fair value of the awards is recognised in earnings over the vesting period.
Less than 12 months 12 months or more Total As of 31 December 2005 CHF millions
The life and health policy benefit reserves have been adjusted based on best estimate assumptions at the time of the acquisition. The present value of future profits has been estimated based on the best estimate of expected future profits adjusted for expected cost of holding capital to support the reinsurance assets and liabilities.
Weighted average common shares outstanding 309 827 189 337 961 019
The components of deferred income taxes were as follows: CHF millions 2005 2006
Equity securities include Swiss Re common stock of CHF 12 million (0.3% of total plan assets) and CHF 20 million (0.4% of total plan assets) as of 31 December 2005 and 2006, respectively.
A summary of shares relating to outstanding awards granted under the foregoing plans as of December 2006 is presented below: Number of shares Weighted average grant date fair value
4) Under Swiss GAAP, reserves prescribed by local regulatory authorities for future claims fluctuations and for large and catastrophic losses are established and included in the unpaid claims and claim adjustment expenses liability. Under US GAAP, equalisation reserves are not recognised as a liability.
The investment result decreased slightly to CHF 1.7 billion. The significantly increased income from subsidiaries and affiliated companies was offset by the absence of the large net realised gains achieved in 2005 on the sale of investments. The investment result includes the impact of derivative financial instruments to cover certain reinsurance exposures. These contracts predominantly refer to insurance-linked securities, which provide protection against lower-layer earnings volatility events as well as higher-layer capital events.
Other provisions are determined according to business principles and are based on estimated needs and in accordance with tax regulations. Provisions for taxation contain prospective taxes on the basis of the financial year just ended.
As these shares have mostly not been registered under General Electric Company or Capital Group Companies or any of their respective group companies, Swiss Re is unable to track, on its own, changes in these shareholders’ aggregate holdings.
Cost of acquiring, maintaining and renewing insurance business: it includes the intermediaries ’ commission, the company’s sales expense, and other related expenses.
Feature of variable annuity business. The benefit is a predetermined minimum amount that the beneficiary will receive upon death.