Notes to the Group financial statements 1. Organisation and summary of significant accounting policies 9 3. Derivative financial instruments 21 4. Acquisitions and dispositions 24 5. Deferred acquisition costs and acquired present value of future profits 24 7. Unpaid claims and claim adjustment expenses 29 8. Personnel expenses 30 9. Shareholders’ equity 30 10. Income taxes 32 11. Benefit plans 33 12. Stock compensation plans 34 13. Commitments and contingent liabilities 36 14. Assets under management 38 15. Information on business segments 38 16. Subsidiaries, equity investees and variable interest entities 48 17. Restructuring provision 53
Fixed income securities: Available-for-sale, at amortised cost (fair value: 2002: 61514; 2003: 64 274) 59 282 63 131 Trading, at fair value (amortised cost: 2002: 527; 2003: 1129) 517 1 131
Shareholders’ equity Common stock, CHF 0.10 par value; 2002 and 2003: 322 057 870 shares authorised and issued 32 32 Additional paid-in capital 5 969 5 821 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of deferred tax –715 401 Foreign currency translation –913 –1 426
In January 2003, new international guidance was issued on the consolidation of variable interest entities (“VIEs”). This guidance was subsequently revised and replaced in December 2003. The guidance requires a company to consolidate a VIE if the company is defined as the primary beneficiary. The primary beneficiary absorbs a majority of the VIE’s expected losses, receives a majority of its expected residual returns, or both.
Due in one year or less 1 908 1 922 1 534 1 550 Due after one year through five years 19 757 20 237 26 167 26 297 Due after five years through ten years 17 559 18 169 17 284 17 510
The percentage of the PVFP which is expected to be amortised in each of the next five years is 7%, 7%, 6%, 6% and 5%, respectively.
(SUPERBs) Total subordinated financial debt as of 31 December 2003 3 366 Total subordinated financial debt as of 31 December 2002 3 456
In December 2003, the Group entered into a bilateral credit agreement of USD 100 million. The respective bank loan bears interest at a rate equal to six month Libor plus 3 basis points and matures in December 2006.
Benefit obligation as of 1 January 2 753 3 034 480 523
Claims and claim adjustment expenses; life and health benefits, net –2 823 –1 481 –393 –4 697 Change in equalisation reserves Claims and claim adjustment expenses; life and health benefits –12 660 –9 085 –2 238 –23 983
Expenses Claims and claim adjustment expenses –3 221 –4 178 –2 530 –847 –1 884 –12 660
United Kingdom Banian Investments UK Ltd 664 100 f Calico Leasing GB Ltd 77 100 f Cyreniac Investments (UK) Ltd 1 328 100 f Dex Hold Ltd 0 100 f European Credit and Guarantee Insurance PCC Ltd 10 100 f Fox-Pitt, Kelton Group Ltd and group companies 0 100 f Palatine Insurance Company Ltd 17 100 f Princess Management & Insurance Ltd 3 49.99 e Reassure UK Life Assurance Company Ltd 61 100 f SR Delta Investments (UK) Ltd 15 100 f SR Dorus Investment Ltd 2 100 f SR Edinburgh Ltd 0 75 f SR International Business Insurance Company Ltd 272 100 f Swiss Re (UK) House Ltd 0 100 f Swiss Re Capital Markets Ltd 260 100 f Swiss Re Financial Services Ltd 16 100 f Swiss Re GB Plc 1 414 100 f Swiss Re Investment Management Ltd 1 100 f Swiss Re Life & Health UK Ltd 421 100 f Swiss Re Services Ltd 0 100 f Swiss Re Specialised Investments Holdings (UK) Ltd 2 100 f Swiss Reinsurance Company UK Ltd 1 005 100 f The Mercantile & General Re Insurance Company Ltd 309 100 f
Ireland Pegasus Strategic Investment Company Plc 202 100 f Swiss Re International Treasury (Ireland) Ltd 0 100 f Swiss Re Ireland Ltd 131 100 f Swiss Re Life & Health (Ireland) Ltd 1 100 f
Liabilities from technical account rose by 13% to CHF 39 967 million. More than 90% of the liabilities are technical provisions; the remainder comprised payables from technical account and cash deposits. The equalisation reserve as of 31 December 2003 decreased by CHF 206 million to CHF 206 million.
Cash deposits withheld from retrocession – 226 226 – 266 266
The company has the following outstanding bonds: 33/4% interest, CHF 500 million, 2 July 1997–2007 33/4% interest, CHF 600 million, perpetual from 15 June 1999 but no less than 12 years. These bonds are included in the item “Debt”.
Retained earnings brought forward from previous year 16 405 444 6 528 835 Profit for the financial year 105 502 459 1 189 752 912
■ Total non-life premium growth of 15% (25% excluding currency exchange effects) as Swiss Re fully captured attractive fundamentals
Swiss Re was significantly impacted by the sharp decline in the US dollar against the
Property & Casualty Business Group Stefan Lippe1 Head of the Property & Casualty Business Group
Life & Health Business Group John H. Fitzpatrick1 Head of the Life & Health Business Group
■ Integrity, ensuring that the highest standards of ethical conduct are met in business activities.
■ Liability regimes: negative developments in liability regimes pose a major challenge to the industry. Swiss Re is well positioned as a thought leader in raising awareness, supporting necessary corrective actions and developing new techniques for managing liabilities.
Swiss Re’s fixed income investments (including short-term securities and mortgage loans) totalled CHF 78 billion at the end of 2003, compared to CHF 70 billion at the end of 2002. The portfolio’s credit exposure remained stable, due to the Group’s continued focus on high quality investment grade corporate bonds.
The overall number of insured losses from natural catastrophes was below expectations, although the number of events did increase in the second half of 2003.
Premium growth was restricted by foreign currency movements. While premiums reduced by a modest 2%, growth in original currencies was 8%. Most of the growth was in the Americas, where the portfolio grew by 12% in original currencies due to a large non-traditional deal. In Swiss franc terms the portfolio reduced by 4%. Both primary and reinsurance rates continued to increase, driven by rising healthcare costs and growing industry awareness of the potential impact of risk concentration, such as in earthquake prone areas.
Admin ReSM can therefore include both the acquisition of individual blocks of business and the acquisition of an entire life insurance company. The administration of the business is generally managed together with a third party administrator.
In July 2002, Swiss Re sold the Employer Stop Loss (ESL) business that had formed part of Lincoln Re, acquired in the previous year. The 83% decrease in the health operating result for 2003 reflects both the absence of the ESL business and the absence of one-off gains on recaptures experienced in 2002. The underlying health business, much of which is in runoff, continues to provide lower returns than life business and demonstrates the volatility of its large run-off component.
Swiss Re’s capital management activities strive to strike the balance between reasonable funding costs and an appropriate balance sheet structure. The company’s superior financial strength ratings attract investors to Swiss Re and encourage them to invest in its fixed income securities, thereby generating funding at attractive levels. The current low interest rate environment offers attractive debt financing opportunities. However, such opportunities need to be weighed against Swiss Re’s overall principles of prudent capital management. Standards for Letters of Credit (LoC), or alternative acceptable collateral required to support certain businesses, have become considerably stricter in recent years; providers such as banks have reassessed their portfolios and reduced their exposure to the insurance industry. This trend benefits highly rated companies such as Swiss Re, as there is a tendency for remaining LoC capacity to be shifted towards stronger market participants.
Swiss Re offers external funding solutions which help diversify business, generate new revenue and add value for clients. Funded business is disclosed in separate line items on the balance sheet: “Financial services assets” and “Financial services liabilities”. These transactions are structured with the intention of creating assets and liabilities that generate offsetting foreign exchange and interest rate risks, thereby not significantly affecting Swiss Re’s overall financial market risk profile. Group Capital Management coordinates funded business activities throughout Swiss Re.
Currently, the main source of funded business is the Capital Management and Advisory business sector of the Financial Services Business Group.
The principle of sustainability forms an integral part of Swiss Re’s long-term business perspective.
The programme combines a further 15% cut in emissions (from present levels) with a ten year investment in the World Bank Community Development Carbon Fund (CDCF) to offset the remaining emissions. This fund conforms with best practice in compensation programmes and provides financial support for projects designed to improve climate protection and living conditions for communities in developing and least developed countries.
The report goes on to discuss a cover concept which, from an underwriting point of view, might be capable of dealing with the complex risks associated with ecological damage. Swiss Re continues to explore the applicability of this concept with its clients and other interested parties.
Significant shareholders As of 31 December 2003, there were two shareholders with a participation exceeding the 5% threshold of Swiss Re’s share capital. As these shares have mostly not been registered under their name, Swiss Re is unable to track, on its own, changes in their holdings.
Cross-shareholdings There are no cross-shareholdings to report as Swiss Re does not hold 5% or more of the shares or voting rights of any company which, in turn, also owns 5% or more of Swiss Re’s shares or voting rights.
(ii) Holders may convert the bonds, due 2021 and issued in denominations of USD 10 000 principal amount and integral multiples thereof, into registered shares of Swiss Reinsurance Company (nominal value CHF 0.10 per share) at any time on and after 22 November 2001 and prior to the close of business on 21 November 2011, at a conversion price of CHF 207.19 per share and a fixed exchange rate of USD 1 = CHF 1.6641.
Members of the Executive Board Status as at 31 December 2003
Chris C. Stroup, who was in charge of Swiss Re’s North American life and health operations until 31 August 2003, decided to adjust his work/life balance and to devote more time to his family. He has remained with the company in a part-time position, focusing on strategic initiatives in Swiss Re’s Life & Health Business Group. Mr Stroup was succeeded by W. Weldon Wilson.
Audit related fees comprise, among other things, amounts for due diligences, comfort letters, accounting advice, information systems reviews and reviews on internal controls.
The vast majority of Swiss Re’s private shareholders are domiciled in Switzerland, whereas its large institutional shareholder base, holding roughly two thirds of Swiss Re’s share capital, is geographically well diversified.
Disability insurance Insurance against the incapacity to exercise a profession as a result of sickness or other infirmity.
Insurance-linked securities In risk securitisation, bonds issued by an insurance or reinsurance company or corporation and purchased by institutional investors. The underlying risk of the bond is a peak risk, and the payment of interest and/or principal depends on the occurrence or severity of an insurance event.
The Annual Report 2003 is also available in German and French.