How we do it Our success is founded on expertise, dialogue with clients and sound governance. We attract, develop and inspire the best talent to advance our performance and deliver innovative solutions.
Share price in CHF 77.05 Market capitalisation in CHF millions 26 212 Number of shares entitled to dividend 340 196 856
It is a reflection of Swiss Re’s scale and quality that such a significant loss impacted our fourth quarter earnings only – now a profit of CHF 170 million – and had no impact on the superior ratings or capital strength of the firm.
Swiss Re applies an integrated risk model to ensure prudent risk taking and an efficient allocation of capital. Our expertise in risk and capital allows us to mitigate exposures and identify business opportunities across the risk landscape.
Swiss Re’s market presence is unified under a single brand, expressing our Group-wide cohesion and our global position. This is reflected in our common values and behaviour, as well as in a distinctive visual design. Our brand is our most valuable asset and a powerful promise to all our stakeholders.
Swiss Re’s scale, strength and expertise enable the Group to offer larger, more sophisticated and more tailored solutions for our clients. This gives the Group the scope to operate competitively across a broad product range, addressing clients’ changing capital requirements and seizing opportunities for economic profit throughout the insurance price cycle.
Swiss Re continually strengthens the quality of its management through a permanent Groupwide process to identify, assess and develop high performers with leadership potential. In 2007, nearly 700 employees attended leadership training. Successful participants are added to talent pools from which candidates for management positions are selected.
The Swiss Re Academy is unique in providing a joint curriculum for employees and clients, helping to build networks and promote effective knowledge transfer not only within the Group but throughout the insurance industry.
Industry relevance Scientists and economists predict that climate change will have a severe impact on society and the global economy Climate change represents an opportunity as well as a risk for the insurance industry and capital markets alike Climate change has become an important element in many companies’ long-term risk management strategies
Through its Conning Asset Management subsidiary, Swiss Re developed and successfully closed the European Clean Energy Fund for third-party institutional clients. This mezzanine vehicle invests in green energy projects across Europe – such as wind, solar, hydro-electric, geothermal and waste-to-energy initiatives – many of which generate carbon credits or tradable renewable energy certificates. At its closing, commitments to the fund totalled EUR 354 million, with Swiss Re as a major Limited Partner.
Property and casualty insurance The global property and casualty insurance industry fared well in 2007. As in 2006 (although to a lesser extent), insurers profited from a low level of catastrophic loss events. Globally, property insurers had a slightly better-than-average loss year in 2007 with only five events in the billion-dollar range and total insured natural catastrophe claims of USD 23 billion, slightly below the recent trend. Although Europe was hit by several costly catastrophes, including winter storm Kyrill and UK floods, the US was spared major hurricane losses, as it was narrowly missed by two category five storms that went on to cause damage in Mexico and Central America.
Current demographic projections suggest that over the coming decades people will increasingly live to age 90 or above. This is good news in one respect, but anyone expecting to live that long will also face the need to ensure that current savings and anticipated pension income are sufficient to pay for late-life needs.
Outlook Currently prevailing trends are expected to continue in 2008. In the absence of extraordinary catastrophic losses, non-life underwriting results for the most important markets will remain solid in most segments, despite sustained price pressure in many areas. Price pressure may, however, keep primary insurance premium volumes subdued in industrialised countries, although premium increases in emerging markets should outpace overall economic growth.
Life and health benefits increased 16% to CHF 11.1 billion, reflecting both the full-year inclusion of GE Insurance Solutions and the acquisition of GE Life UK at the end of 2006.
Other expenses were CHF 4.1 billion in 2007, an increase of 14% over 2006. This rise was mainly due to the businesses acquired from General Electric in 2006 and their full-year inclusion in 2007, resulting in a 15% increase in the Group’s expense base compared to 2006. Variable compensation in the Property & Casualty and Life & Health segments was marginally up compared to 2006, reflecting continuing outstanding performance in these businesses.
Policy loans, mortgages and other loans 8 074 7 414 –8
Traditional volumes benefited from a 7.3% increase in facultative business. The trend from proportional to non-proportional business continued in 2007. The share of non-proportional business in the overall book increased from 36% in 2006 to 43% in 2007.
Claims ratio in % 43.3 89.1 44.8 62.2 Expense ratio in % 25.6 28.9 30.3 28.0 Combined ratio in % 68.9 118.0 75.1 90.2
In the traditional life business, operating income rose CHF 773 million to CHF 1.6 billion. The underlying business performed in line with the Group’s higher expectations based on the fullyear inclusion of GE Insurance Solutions. The good result was also boosted by a favourable change in claims assumptions in the UK, where the reserving practice was refined on a treatyby -treaty basis, resulting in a higher consistency in such practices across the Group. These positive effects were partially offset by unfavourable actuarial reserve changes in the US, where Swiss Re adjusted the valuation of its US life policy benefit reserves to a policy-by-policy approach for certain blocks of business.
Net investment income and net realised gains increased to CHF 2.3 billion from CHF 1.5 billion in 2006. This reflects the higher asset base, but also the excellent performance of public and private equities and hedge funds, as well as the sale of the London office building at 30 St Mary Axe.
The market risk balance sheet shows the Group’s actual investments on the asset side and the minimum risk portfolio as a liability, which is then used as the basis for setting the benchmark for Swiss Re’s investment activities. Combining both balance sheets reproduces the full Group balance sheet.
The Admin Re® segment will continue to see strong opportunities as primary insurers look to find capital- and cost-efficient solutions for managing closed blocks of business.
Operational risk, defined according to the Basel II causal categories, includes potential losses or reputational damage arising from inadequate or failed internal processes, people, systems, or from external events. This includes non-compliance with regulation resulting in regulatory penalties. Management of operational risk is designed to reduce exposures to an acceptable level, taking into account cost-benefit considerations, and to enhance operational excellence.
Other risks comprise: Funding and liquidity risk is the risk that Swiss Re is unable to meet its short-term financial obligations or raise funds in the markets to finance its commitments at a reasonable cost. Reputational risk is the risk that a particular event or behaviour damages stakeholders’ perception of Swiss Re, thus impairing its ability to operate effectively.
Maintaining its reputation is key to Swiss Re’s business. Upholding the clear values defined in the Group’s Code of Conduct mitigates reputational risk. These values are supported by processes that enable early identification of potential problems.
In addition to the assessment of these known risks, the Group has a framework to identify, evaluate and mitigate new or already known but potentially underestimated risks (so-called emerging risks), as well as potential surprise factors affecting known loss potentials.
Table 1 provides information on 99% Tail VaR, a change from the 2006 Annual Report, where the equivalent table showed information on the 99% VaR measure. In addition to the overall 99% Tail VaR for Swiss Re Group, the table also shows the respective figures for the sub-portfolios property and casualty, life and health, financial market, credit, and funding and liquidity risk. This clearly demonstrates the diversification effect, as the base capital requirement for the overall portfolio is lower than the sum of the base capital requirements for the individual sub-portfolios. By the end of 2007, the funding and liquidity risk was integrated into the overall liquidity risk assessment, which measures Swiss Re’s ability to meet funding requirements after a Group Tail VaR event. As a consequence, the funding and liquidity risk is no longer part of the risk capital calculation.
Swiss Re takes on life and health risk in the form of mortality and morbidity covers as well as through the acquisition of run-off business (Admin Re®). A global limit is in place for the acceptance of mortality risk, and local business units can write reinsurance within their capital plans and within clearly defined limits, such as per life retention limits for individual business. Maximum market exposure limits are in place for life and health catastrophe business. The Group pays particular attention to accumulation risk in areas of high population density and applies limits based upon expected maximum loss for exposures in individual buildings. Limits are also in force to control and monitor business with exposure to long-tailed longevity risk. Any business that falls outside of specified limits must be approved according to the risk governance framework.
Capital management The primary task of the Capital Management unit is to ensure that Swiss Re is adequately capitalised at all times and able to maintain its financial strength, even after a major loss event, and that all legal entities comply with their respective capital requirements. In doing this, internal economic and accounting views, as well as rating agency and regulatory solvency models are taken into account.
On 10 January 2008, Moody’s upgraded the financial strength rating of Swiss Re International SE (formerly SR International Business Insurance Company plc) to Aa2 (stable outlook) from Aa3, aligning the company’s rating with that of the Group. This concluded the review for possible upgrade initiated on 3 October 2007. Swiss Re International SE will continue its role as a primary insurance carrier for Fortune 2000 clients.
Swiss Re is committed to meeting the highest standards of corporate governance and actively pursues transparency towards shareholders and other stakeholders.
The information provided in this chapter of the Annual Report follows the structure of the SWX Directive: 1 Group structure and shareholders, page 82 2 Capital structure, page 83 3 Board of Directors, page 88 4 Executive management, page 107 5 Compensation, shareholdings and loans, page 110 6 Shareholders’ participation rights, page 116 7 Changes of control and defence measures, page 117 8 Auditors, page 118 9 Information policy, page 120
After 31 December 2007, and as of 22 February 2008, two additional shareholders held more than 3% of Swiss Re’s share capital each.
Convertible bonds As stated in note 6 on “Debt” on pages 153 –156 of the Group financial statements, the following convertible bonds are outstanding: Tenor Instrument Currency Nominal (millions) Exchange terms 2005 – 2008 Mandatory convertible bond CHF 1 000 ii 2006 – 2009 Mandatory convertible bond CHF 610 iii
Mr Hentsch was a general partner of Darier Hentsch & Cie, Private Bankers, Geneva from 1985 until 2001. He chaired the Swiss Private Bankers Association from 1998 to 2001. In 2004, he founded GEM – Global Estate Managers – as well as Banque Bénédict Hentsch & Cie S.A., both entities dedicated to global wealth management.
Mr Maerki joined IBM Switzerland in 1973. After some years in the sales area, he was promoted to a number of managerial positions in IBM’s Paris European Headquarters as well as in IBM Switzerland. From 1993 to 1995, he led IBM’s business in Switzerland as General Manager, before moving to IBM Europe in Paris to build the largest IT services business in the market. In August 2001, he was appointed Chairman of the Board of Directors of IBM Europe, Middle East and Africa (EMEA). From 2003 to 2005 he was also CEO of IBM EMEA.
Nominations for the election at the Annual General Meeting of 18 April 2008 The Board of Directors has decided to nominate the following candidates for re-election to the Board: Rajna Gibson Brandon, for a further term; Kaspar Villiger, for a further term.
b. Specific work methods of the Board of Directors The Board meetings are attended by members of the Board and, in an advisory capacity, by the members of the Executive Committee as well as the company secretary.
The Board of Directors, among others, determines the risk tolerance level of the Group, monitors risk development and approves the business principles to be applied in reinsurance and financial services, including asset management; defines the Group’s Guiding Principles, adopts the strategy of the Group and keeps itself informed of the strategies of the business and corporate functions, as well as of the divisions; approves consolidated medium- and short-term Group business plans based on the Group’s strategic goals and the business plans of the business and corporate functions; decides on high-level transactions in alternative investments, Admin Re®, debt issuances, credit facilities or similar instruments and capital market transactions; reviews periodic core business status reports as well as reports on major business transactions and events; 
a. Participation of Board members at executive management meetings Both the Chairman of the Board and the Vice Chairman are invited to all meetings of the Executive Committee and the Executive Board; effectively, the Board of Directors was represented at 21 of the 30 meetings in 2007. The Chairman of the Board and the Vice Chairman always receive the meeting documentation and minutes.
Roger W. Ferguson Head of Financial Services Products Member of the Executive Committee
Swiss Re takes a holistic view of rewards, including both direct financial compensation, such as base salary, annual incentives and equity, as well as other tangible and intangible benefits, including health coverage, pension and development opportunities.
The LTI is offered each year and is denominated in units that are calculated as the grant amount divided by the share price at the grant date. The final payout will be the number of units multiplied by the share price at the end of the three-year period, as well as by a factor that can vary between 0% and 200% based on a matrix of average return on equity and compound earnings per share growth over the three-year period.
8.1 Duration of the mandate and term of office of the lead auditors 8.1 Duration of the mandate and term of office of the lead auditors 8.2 Auditing honorarium8.2 Auditing honorarium 8.3 Additional honorarium8.3 Additional honorarium 8.4 Supervisory and control instruments vis-à-vis the external auditor 8.4 Supervisory and control instruments vis-à-vis the external auditor
Adjustments for pension and other post-retirement benefits Balance as of 1 January –59 –724 Change during the year –665 609 Balance as of period end –724 –115
Acquisition costs, which vary with, and are primarily related to, the production of new insurance and reinsurance business, are deferred to the extent they are deemed recoverable from future gross profits. Deferred acquisition costs consist principally of commissions. Deferred acquisition costs for short-duration contracts are amortised in proportion to premiums earned. Future investment income is considered in determining the recoverability of deferred acquisition costs for short-duration contracts. Deferred acquisition costs for long-duration contracts are amortised over the life of underlying contracts. Deferred acquisition costs for universal lifetype contracts are amortised based on the present value of estimated gross profits.
As of 31 December 2006 and 2007, the fair value of the government and corporate bond securities received as collateral, was CHF 6 502 million and CHF 17 142 million, respectively. Of this, the amount that has been sold or repledged as of 31 December 2006 and 2007 was CHF 5 450 million and CHF 16 802 million, respectively, which was used to settle short government bond positions. The sources of the collateral are highly rated banking market counterparties.
Policy loans, mortgages and other loans 8 074 8 074 7 414 7 414 Investment real estate 4 227 5 389 2 682 3 937
As of 31 December 2006 and 2007, investments in real estate included CHF 67 million and CHF 64 million, respectively, of real estate held for sale.
In conjunction with the acquisition, Swiss Re had identified certain areas, mainly with respect to property and casualty reserves, where more information was required. Having obtained this information, Swiss Re has revised the initial estimate in line with the established methodology described above.
The Group enters into long- and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines short-term debt as debt having a maturity at the balance sheet date of less than one year and long-term debt as having a maturity of greater than one year. The Group’s debt as of 31 December 2006 and 2007 was as follows: CHF millions 2006 2007
Non-life 80 391 73 171 Life and Health 14 620 15 357 Total 95 011 88 528
Claims development on prior years was broadly neutral during 2007. Adverse developments related to 2001 and prior underwriting years were balanced by the underwriting years 2002 to 2006, which continue to develop very favourably.
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are CHF 9 million and CHF 7 million, respectively. The estimated net gain and prior service credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is CHF 9 million and CHF 7 million, respectively.
Total compensation cost for share-based compensation plans recognised in net income was CHF 58 million and CHF 31 million in 2006 and 2007, respectively. The related tax benefit was CHF 13 million and CHF 7 million, respectively.
Compensation for acting members of governing bodies Compensation for acting members of governing bodies
Incentive and Long-term Incentive please refer to the text below and to page 110 of the corporate governance and compensation report.
The compensation to former members of the Executive Committee relates to social security on compensation of prior years and preferential interest rates on loans.
Peter Forstmoser, Chairman 30 000 67.7 2013 Walter B. Kielholz, Vice Chairman 337 950 133.4 2008 – 2012 John R. Coomber 207 000 128.4 2008 – 2013 Total 574 950 128.2
Operating result, excluding non-participating net realised investment gains/losses 759 272 350 1 381
Germany Swiss Re Frankona Management Service GmbH2 0 100 f Swiss Re Frankona Rückversicherungs AG2 83 100 f Swiss Re Germany AG 74 100 f Swiss Re Germany Holding GmbH2 42 100 f
Canada Swiss Re Holdings (Canada) Inc. 135 100 f Swiss Re Life & Health Canada 130 100 f Swiss Reinsurance Company Canada 12 100 f
The following table shows the total assets of VIEs of which the Group is the primary beneficiary, but does not hold a majority voting interest: As of 31 December CHF millions 2006 2007
Modified coinsurance agreement 5 324 4 022 Investment vehicles 447 8 007 Other 6 1 Total 5 777 12 030
Financial Services assets – fixed income securities, trading 23 714 –23 714 0 Other Financial Services assets 8 638 –8 638 0
Accrued expenses and other liabilities 6 470 18 407 24 877
We conducted our audit in accordance with Swiss Auditing Standards and with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
Investments Investment real estate 970 1 098 Investments in subsidiaries and affiliated companies 17 249 17 092 Loans to subsidiaries and affiliated companies 8 859 13 737 Mortgages and other loans 762 749
Liabilities for life and health policy benefits 4 11 459 11 053
Accounting principles for life and health business require that no contract is treated as an asset on the balance sheet, with the exception of specific contracts (for example modified coinsurance type of treaties), where an offsetting amount has been paid and is recoverable from the ceding company.
Allocated investment return –1 095 –1 326 Investment result 1 702 –64 3. Assets from reinsurance
Risk-based securities that allow (re)insurance companies to transfer peak insurance risks, including natural catastrophes, to institutional investors in the form of bonds. Catastrophe bonds help to spread peak exposures (see insurance-linked securities).
Liability insurance for directors and officers of an entity, providing cover for their personal legal liability towards shareholders, creditors, employees and others arising from wrongful acts such as errors and omissions.
Property and liability insurance for atomic reactors, power stations or any other plant related to the production of atomic energy or its incidental processes.
“Swiss Re has revolutionised risk transference in the reinsurance industry. Over the past 12 months, the Zurich-based reinsurer has offloaded risks linked to life span, multi-peril, wind, earthquake and credit exposure worth a whopping $7 billion.” (Risk, January 2007)