Ensure capital strength Restore our capital strength ̤ We have fully restored our capital strength. In October 2010, Standard & Poor’s confirmed its ‘A+’ financial strength rating for Swiss Re and revised the outlook from ‘stable’ to ‘positive’.
De-risk our asset portfolio ̤ We have substantially reduced risk in the asset portfolio.
̤ USD 5.4 billion of non-agency securitised products were sold in 2010.
April Swiss Re shareholders re-elect Walter B. Kielholz and Robert A. Scott to the Board at their Annual General Meeting. New members elected are Malcolm D. Knight, Carlos E. Represas and Jean-Pierre Roth.
Reto Schneider: Risks can emerge suddenly or slowly and be difficult to quantify. Society’s vulnerability to cyberattacks; the risks associated with smart grids and renewable energies; nanotechnology, already used in many products without much knowledge of its potential long-term effects – these all qualify as emerging risks.
Swiss Re’s model computes potential loss based on the nature of the hazard, the expected damage from varying intensities, the location and value of insured objects and the terms and conditions of insurance cover. For a given insurance portfolio, it calculates an expected loss for each catastrophe scenario and then relates the loss severity to the likelihood of its occurrence. This relationship then provides the basis for setting premiums.
Swiss Re 2010 Business Report 29 for capital market investors. These insurance-linked securities transform insurance and reinsurance risks into an investor-friendly asset class. Our unmatched capabilities in structuring such transactions give us a competitive edge in helping our clients to expand their business.
̤ In 2010, Property & Casualty operating income decreased 30% to USD 2.5 billion in 2010 from USD 3.5 billion in 2009. The decrease in operating income was driven by the higher loss experience in 2010, and the reduction in investment income.
̤ In 2010, Life & Health reported operating income of USD 810 million, compared to USD 687 million in 2009.
Turning risk into profitable growth Recently, Swiss Re applied its life and health expertise to tailor a tele-underwriting solution based on Magnum for clients in Brazil. Developed by Swiss Re and its partner Advance Medical, this solution helps clients achieve high acceptance rates and process large volumes of business quickly and efficiently. Life insurance can be underwritten without the need for expensive medical evidence, reducing the time required to issue a policy from weeks to just a few hours. Tele-underwriting allows clients to apply more sophisticated underwriting (and therefore risk selection) techniques, while still keeping costs low – a clear net benefit and another example of how Swiss Re helps to turn risk into profitable growth.
Professor Zinkernagel, how well do you think societies are prepared for a global pandemic, along the lines of the most recent outbreaks of the H5N1 and H1N1 viruses? We are as well or better prepared now than we have been during the past thirty years. All influenza infections behave like classical pandemics: they vary in their morbidity and mortality; the full severity of the pandemic is only recognised once it is in full swing – or even over. This makes swift assessment critical: If the WHO and its associated laboratories can quickly determine which strains of influenza to include in the next annual vaccine – and if the vaccine is then produced in bulk and effectively distributed – we are all better prepared for the next outbreak.
Bill Emmott, former Chief Editor of The Economist and member of the Swiss Re Advisory Panel, on growth opportunities – and risks – for institutional investors.
The second concern is linked to that memory of the 1997 – 1998 crisis. For a board able to take a long-term view, it may well often be the case that business expansion in China, India, Brazil and other emerging markets offers the best prospect of sustained growth, and that failure to establish strong market positions in those countries would itself pose a big risk to the business’s future. This also applies to boards in the insurance sector. But the case for asset managers is quite different.
̤ At the end of 2010, Asset Management’s investment portfolio totalled USD 143.7 billion, excluding unit-linked and with-profit business.
Swiss Re’s commitment to acting responsibly: Key facts and figures …
̤ The Sensitive Business Risks process forms an essential element of our framework to manage environmental, social and ethical risks. In 2010 a total of 140 transactions were submitted to the process for a detailed review of potential sustainability and ethical risks, up from 75 in 2009 and 95 in 2008.
Innovations for success / The place to succeed interview it became clear to me how important insurance is to structuring and funding commercial satellite projects. In a nutshell: no insurance, no loan; no loan, no satellite.“
Swiss Re strives to ensure that employees have the right skills for today and capabilities for the future. Motivating and developing talent is the key to our company’s success.
Robert A. Scott Robert A. Scott joined Swiss Re’s Board of Directors in 2002. He is also a Director of Pension Insurance Corporation Limited and an advisor to Duke Street Capital.
Christian Mumenthaler Chief Marketing Officer Reinsurance as of 1 January 2011
For﻿more﻿information,﻿visit swissre.com 2010 Business Report Innovations for success 2010 Financial Report
Reinsurance underwriting profitability is eroding. Rates have generally been softening since the last hard market in 2002–2003, a downward trend only interrupted in the wake of the financial crisis in 2009. The one segment that showed a significant rise was property catastrophe business in the US – which, with hindsight, was essentially underpriced before hurricane Katrina in 2005. Nevertheless, the underwriting profitability of reinsurance markets held up better than many primary markets.
 Weather-related Nat Cats  Earthquakes  Man-made disasters Source: Swiss Re
P&C gross premiums earned in 2010 by type of insurance 45% Proportional 30% Non-proportional 25% Facultative/direct
Cession rates on new business remained stable in most markets. Life insurers’ capital positions have improved from the lows of two years ago, but many still look to reinsurance solutions for capital relief. In Europe, insurers will face increased capital requirements with the upcoming implementation of Solvency II.
Premiums earned and fee income Premiums and fees decreased to USD 9.7 billion from USD 10.7 billion in 2009. The decrease was largely due to the US individual life retrocession transaction announced in January 2010. Excluding this and the effect of foreign exchange movements, premiums and fee income increased 6%, reflecting new business growth, with a high contribution from Asia, as well as increased fee income in Admin Re® as financial markets improved.
Credit and rates Swiss Re’s credit and rates investment portfolio decreased to USD 85.7 billion in 2010 from USD 90.8 billion at the end of 2009 as a result of net sales of government bonds and continued de-risking of securitised products. Net investment income from fixed income decreased USD 0.9 billion, and the running yield for Asset Management declined to 4.1% in 2010 from 4.3% during 2009. This was mainly due to lower yields on new purchases, as well as to the impact of mark-to-market gains and foreign exchange movements. This reduction in net investment income was more than offset by realised gains on the sale of investments of USD 1.1 billion, primarily of government bonds.
Mark-to-market gains in the credit and rates portfolios in 2010 increased shareholders’ equity by USD 3.2 billion, mainly as a result of credit spread tightening and lower interest rates.
At Swiss Re, we treat capital and liquidity management, risk management, sustainability, and regulatory dialogue as linked elements in our central mission.
The amount of spot liquidity held is largely determined by internal liquidity stress tests, which estimate the potential short-term cash and collateral requirements stemming from a severe insurance event or a financial market crisis. These cash and collateral requirements under stress would include: ̤ cash and collateral outflows, as well as potential capital and funding support required by subsidiaries as a result of the insurance or financial market event; ̤ repayment or loss of all maturing unsecured debt and credit facilities; in the event of a financial market crisis, it is assumed that funding is only available against high-quality collateral, such as government and agency bonds; ̤ additional collateral requirements associated with a potential ratings downgrade of Swiss Re Group; ̤ further contingent funding requirements related to asset downgrades; and
Composition of spot liquidity in the central liquidity pool as of 31 December 2010 Total USD 26.4 billion
Insurance risk Insurance risk management includes overseeing risk-taking activities, as well as ensuring that an appropriate risk governance framework is defined and operated.
Management Swiss Re writes property and casualty business using assigned authority levels, based on the four-eye principle: Each transaction must be approved by at least two authorised individuals. Each underwriter is assigned an individual underwriting authority based on technical skills and experience; any business exceeding this authority triggers a well-defined escalation process that extends up to the Group Products and Limits Committee.
Life and health insurance risk Life and health insurance risk arises from business Swiss Re takes on by providing mortality (death), longevity (annuity) and morbidity (illness and disability) coverage as well as by acquiring run-off business (Admin Re®). In addition to shock events, we also monitor and manage underlying risks that are inherent in life and health contracts, such as pricing and reserving risks, which arise when mortality, morbidity or lapse experience deviates from the expectation used for setting premiums or reserves. The investment risk that is part of some life and health business is monitored and managed as financial market risk.
Risk developments The table on page 42 shows that Swiss Re’s exposure to a severe lethal pandemic decreased in 2010. The decline was mainly due to a retrocession deal that transferred the risk of a closed book of US individual life reinsurance business to Berkshire Hathaway as well as the issuance of extreme mortality bonds through our established Vita programme.
We have a long-standing commitment to sustainable business practices, responsible corporate citizenship and good governance. We mitigate potential damage to our reputation through clear corporate values, robust internal controls and active dialogue with external stakeholders. All our employees are required to commit to and comply with the values and rules of behaviour defined in the Group’s Code of Conduct. We support these values with processes that enable us to identify potential problems early.
̤ Working instructions and roadmaps, describing work methods, governance processes and time schedules of the Board and Board committees.
Significant shareholders and shareholder structure Under the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA), anyone holding shares in a company listed on the SIX Swiss Exchange is required to notify the company and the SIX if their holding reaches, falls below or exceeds the following thresholds: 3%, 5%, 10%, 15%, 20%, 25%, 33⅓%, 50% or 66⅔% of the voting rights entered into the commercial register, whether or not the voting rights can be exercised (that is, notifications must also include certain derivative holdings such as options or similar instruments). Upon receipt of such notifications, the company is required to inform the public. The following table provides a summary of the disclosure notifications. In line with the SESTA requirements, the percentages indicated were calculated in relation to the share capital reflected in the commercial register at the time of the respective notification. Details of the notifications are provided in Note 7 to the Financial statements of Swiss Reinsurance Company Ltd on page 216.
Profit-sharing certificates Swiss Reinsurance Company Ltd has not issued any profit-sharing certificates.
John R. Coomber started his career with the Phoenix Insurance Company. He joined Swiss Re in 1973. Having qualified as an actuary in 1974, he first specialised in the company’s life reinsurance area. He was Swiss Re UK’s appointed actuary from 1983 to 1990. In 1987, he assumed responsibility for the Life division and, in 1993, was made Head of the company’s UK operations. John R. Coomber was appointed a member of the Executive Board in April 1995, responsible for the Group’s Life & Health division. In June 2000, he became a member of the Executive Committee. He was Swiss Re’s Chief Executive Officer from 2003 to 2005, when he retired after 33 years of employment with Swiss Re.
Rajna Gibson Brandon Non-executive and independent director Rajna Gibson Brandon, a Swiss citizen born in 1962, was elected to Swiss Re’s Board of Directors in June 2000.
Jean-Pierre Roth is Chairman of the Board of Directors of Geneva Cantonal Bank. In addition, he serves on the Boards of Directors of Nestlé S.A. and Swatch Group AG.
Members John R. Coomber, Chair Jakob Baer Rajna Gibson Brandon Malcolm D. Knight (as of 7 April 2010) Hans Ulrich Maerki Robert A. Scott (until 7 April 2010)
The Compensation Committee makes recommendations to the Board of Directors on the Groupʼs overall remuneration approach. It also oversees the development of and compliance with Group-wide compensation principles as well as compliance with remuneration disclosure requirements. The Committeeʼs work is governed by its Charter and Working Instructions.
In accordance with its governance framework, the Compensation Committee submits its proposal for the CEOʼs compensation to the Board of Directors for approval, along with the aggregate sum of variable compensation awards proposed for the remainder of the Executive Committee.
Stefan Lippe, Chief Executive Officer 66 121 David J. Blumer, Chief Investment Officer 54 000 Agostino Galvagni, CEO Corporate Solutions 11 747 Brian Gray, Chief Underwriting Officer 15 912 Michel M. Liès, Chief Marketing Officer 60 358 George Quinn, Chief Financial Officer 20 103
The peer group comprises Ace, Allianz, Allstate, Aviva, AXA, Credit Suisse, Generali, Hannover Re, ING, MetLife, Munich Re, Prudential Financial, UBS, and Zurich Financial Services.
Income before income tax expense 920 2 675 Income tax expense 10 –221 –541 Net income before attribution of non-controlling interests 699 2 134
1 The Group changed its reporting currency from CHF to USD. Please refer to Note 1. 2 The CPCI was reclassified from equity to short-term debt upon termination in the fourth quarter of 2010. Please refer to Note 9 Earnings per share for details on the accounting for the CPCI.
Interest paid during 2009 and 2010 was USD 957 million and USD 1 278 million, respectively. Tax paid was USD 696 million and USD 476 million for the twelve months ended 31 December 2009 and 2010, respectively.
Cash flows from investing activities Fixed income securities: Net purchase/sale/maturities of short-term investments –4 118 –10 621
For assets or derivative structures at fair value, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Whilst management considers that appropriate values have been ascribed to such assets, there is always a level of uncertainty and judgment over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations. As of 31 December 2010, the Group had not provided any collateral on financial instruments in excess of its own market value estimates.
The balance of gross unrecognised tax benefits as of 31 December 2010 presented in the table above is less than the liability for unrecognised tax benefits reflected in the deferred and other non-current taxes section due to the removal of interest expense (USD 216 million).
Balance as of 1 January 465 95 560 Realised/unrealised gains/losses: Relating to assets still held at the reporting date 16 8 24 Relating to assets sold during the period 0
Value alignment incentive In 2009, the Group issued a compensation plan to selected employees. The plan has a requisite service period of three years and is paid out in cash. The payout is based on a three-year risk free interest rate, the Swiss Re share price performance and dividend yield over the vesting period. The grant price was based on the closing share price as of 19 February 2009 of CHF 16.74. A total of 337 427 units were granted in 2009, and as of 31 December 2010 140 570 units were outstanding.
The number of shares authorised for the Group’s share-based payments to employees was 10 052 510 and 12 619 829 as of 31 December 2009 and 2010, respectively.
Total operating lease commitments 719 Less minimum non-cancellable sublease rentals –82 Total net future minimum lease commitments 637
Net realised investment gains/losses 22 3 121 –717 39 –1 590 875
Expenses Claims and claim adjustment expenses –2 904 –2 692 –1 346 –6 942 –258 –7 200 Acquisition costs –571 –655 –551 –1 777 –82 –1 859 Other expenses –489 –424 –220 –1 133 –51 –1 184
Net realised investment gains/losses –78 192 3 007 3 121 Other revenues
United States Facility Insurance Corporation, Austin 0 0 100 f Facility Insurance Holding Corporation, Dallas 0 0 100 f First Specialty Insurance Corporation, Jefferson City 5 5 100 f North American Capacity Insurance Company, Manchester 4 4 100 f North American Elite Insurance Company, Manchester 4 3 100 f North American Specialty Insurance Company, Manchester 13 12 100 f Reassure America Life Insurance Company, Fort Wayne 3 2 100 f Rialto Re I Inc, Burlington 0 0 100 f Sterling Re Inc., Burlington 0 0 100 f Swiss Re America Holding Corporation, Wilmington 0 0 100 f Swiss Re Atrium Corporation, Wilmington 1 0 100 f Swiss Re Capital Markets Corporation, New York 0 0 100 f Swiss Re Financial Products Corporation, Wilmington 2 127 1 983 100 f Swiss Re Financial Services Corporation, Wilmington 0 0 100 f Swiss Re Life & Health America Holding Company, Wilmington 0 0 100 f Swiss Re Life & Health America Inc., Hartford 4 4 100 f Swiss Re Partnership Holding, LLC, Dover 368 343 100 f Swiss Re Solutions Holding Corporation, Wilmington 9 8 100 f Swiss Re Treasury (US) Corporation, Wilmington 0 0 100 f Swiss Reinsurance America Corporation, Armonk 6 6 100 f Washington International Insurance Company, Manchester 4 4 100 f Westport Insurance Corporation, Jefferson City 6 6 100 f
Based on current information, Swiss Re provisionally estimates its claims cost from the earthquake in Christchurch, New Zealand on 22 February 2011 to be approximately USD 800 million, net of retrocession and before tax.
Life and health claims and claim adjustment expenses as well as life and health benefits increased, mainly as a result of the initial recognition of the technical provisions assumed at the inception of a portfolio from a Swiss Re Group subsidiary, offsetting the initial premium received. The previous year benefited from a more favourable mortality experience, a one-time gain related to an arbitration award as well as the positive recapture impacts of the alignment of internal Group retrocession programmes.
Liabilities Technical provisions Unpaid claims 4 31 014 27 548 Liabilities for life and health policy benefits 4 11 655 12 658
Foreign currency translation Assets and liabilities denominated in foreign currencies are translated into Swiss francs at year-end exchange rates with the exception of significant participations which are maintained in Swiss francs at historical exchange rates.
206 Swiss Re 2010 Financial Report 3 Assets from reinsurance 4 Liabilities from reinsurance 5 Shareholders’ equity
Shareholders’ equity as of 1 January 17 079 18 720 Dividend paid for the previous year –34 –343 Capital increase including premium 605 0 Profit for the financial year 1 070 380 Shareholders’ equity on 31 December before dividend payment 18 720 18 757 Dividend payment –343 –9421 Shareholders’ equity on 31 December after dividend payment 18 377 17 815 1 Board of Directors’ proposal to the Annual General Meeting of 15 April 2011, subject to the actual number of shares outstanding and eligible for dividend. The difference between the proposed dividend payment in the previous year and the actual dividend payment in the year under report is described on page 218.
Highest paid member of the Executive Committee In 2009 and 2010, Stefan Lippe, Chief Executive Officer, was the highest paid member of the Executive Committee. His respective compensation was: Total Compensation of the Board of Directors The Chairman and Vice Chairman receive half of their fees in the form of a three-year performance share plan and the balance in cash. The remaining members of the Board of Directors receive a mandatory 40% of their fees in shares which have a four-year deferral period.
Restricted shares Swiss Re grants restricted shares on an ad hoc basis which are subject to a vesting period with a risk of forfeiture during the vesting period. Restricted shares granted to Raj Singh, Chief Risk Officer, and David J. Blumer, Chief Investment Officer, have a three-year vesting period. Additionally, restricted shares granted in 2008 to David J. Blumer, have a three-year stepped vesting period.
Loans to members of governing bodies The following loans were granted to members of governing bodies as of 31 December: All credit is secured against real estate or pledged shares. The terms and conditions of loans and mortgages are the same as those available to all Swiss Re Group employees in the respective locations. Fixed-rate mortgages have a maturity of five years and interest rates that correspond to the five-year Swiss franc swap rate plus a margin of 10 basis points. Variable-rate mortgages have no agreed maturity dates. The basic preferential interest rates equal the corresponding interest rates applied by the Zurich Cantonal Bank minus one percentage point. To the extent that fixed or adjustable interest rates are preferential, such values were factored into the compensation sums given to the governing body members.
Management fee contribution In 2010, management expenses of CHF 171 million (2009: CHF 153 million) were recharged to Group companies and third parties. These recharges were reported net under “Operating costs”, “Investment expenses” and “Other expenses”.
The dividend will be paid exempt from Swiss withholding tax of 35% from 26 April 2011 by means of dividend order to shareholders recorded in the Share Register or to their deposit banks.
Swiss Re and its subsidiaries are regulated in a number of jurisdictions in which they conduct business. New legislation as well as changes to existing legislation have been proposed and/or recently adopted in a number of jurisdictions that are expected to alter, in a variety of ways, the manner in which the financial services industry is regulated. Although it is difficult to predict which proposals will become law and when and how new legislation ultimately will be implemented by regulators (including in respect of the extra-territorial effect of reforms), it is likely that significant aspects of existing regulatory regimes governing financial services will change. These may include changes as to which governmental bodies regulate financial institutions, changes in the way financial institutions generally are regulated, enhanced governmental authority to take control over operations of financial institutions, restrictions on the conduct of certain lines of business, changes in the way financial institutions account for transactions and securities positions, changes in disclosure obligations and changes in the way rating agencies rate the creditworthiness and financial strength of financial institutions.
A number of lawsuits have been filed against financial service firms raising claims tied to the unprecedented market turmoil. The Group cannot predict whether it could be subject to further claims arising out of the market turmoil or otherwise.
Insurance, operational and other risks As part of the Group’s ordinary course of operations, the Group is subject to a variety of risks, including risks that reserves may not adequately cover future claims and benefits, risks that catastrophic events (including hurricanes, windstorms, floods, earthquakes, industrial accidents, explosions, industrial actions, fires and pandemics) may expose the Group to unexpected large losses, competitive conditions, cyclicality of the industry, risks related to emerging claims and coverage issues, risks arising from the Group’s dependence on policies, procedures and expertise of ceding companies, and risks related to the failure of
Swiss Re –10.2 0.8 Swiss Market Index –2.5 –1.7 STOXX Europe 600 Insurance Index –6.0 2.0
Dear shareholders Swiss Re has come a long way over the last two years: We have restored our capital strength, a fact that was acknowledged in the improved ratings outlooks given by Standard & Poor’s and A.M. Best. By the end of 2010, our capital is over USD 10 billion in excess of S & P’s ‘AA’ requirements, and S & P refers to Swiss Re’s capital as above ‘AAA’ level.
Walter B. Kielholz Stefan Lippe * Swiss withholding tax exempt distribution out of reserves from capital contributions.
Management as we move towards our medium-term asset allocation; and ̤ Emerging market growth will provide opportunities for Reinsurance and Corporate
Property﻿claims﻿activity﻿was﻿near﻿normal﻿﻿ for﻿both﻿natural﻿catastrophe﻿and﻿man-made﻿ claims.﻿Notable﻿large﻿natural﻿catastrophe﻿ events﻿for﻿the﻿year﻿included﻿winter﻿storm﻿ Xynthia,﻿which﻿hit﻿Europe﻿in﻿February﻿2010,﻿ strong﻿earthquakes﻿in﻿Chile﻿(March﻿2010)﻿ and﻿New﻿Zealand﻿(September﻿2010),﻿as﻿ well﻿as﻿hailstorms﻿in﻿Melbourne﻿and﻿Perth﻿ and﻿floods﻿in﻿Queensland,﻿Australia.﻿﻿ The﻿tropical﻿storm﻿season﻿in﻿the﻿northern﻿ hemisphere﻿saw﻿an﻿above-average﻿number﻿ of﻿storms,﻿but﻿none﻿produced﻿significant﻿ claims.﻿This﻿comparatively﻿benign﻿claims﻿ activity﻿delayed﻿the﻿correction﻿of﻿declining﻿ rate﻿levels.
Revenues Premiums﻿earned 4﻿913 2﻿087 1﻿513 520 1﻿072 2﻿148 12﻿253 516 12﻿769
Life & Health results by line of business 2009﻿ USD﻿millions Life﻿traditional
Asset﻿Management﻿also﻿selectively﻿ extended﻿external﻿mandates﻿to﻿leading﻿ asset﻿managers﻿to﻿manage﻿specific﻿ corporate﻿credit﻿and﻿equity﻿portfolios.﻿ External﻿mandates,﻿including﻿the﻿initial﻿ credit﻿and﻿securitised﻿mandates﻿awarded﻿﻿ in﻿2009,﻿now﻿comprise﻿USD﻿31﻿billion﻿﻿ in﻿assets,﻿placed﻿with﻿a﻿total﻿of﻿15﻿external﻿ managers.﻿The﻿overall﻿performance﻿of﻿ external﻿managers﻿in﻿2010﻿was﻿very﻿ positive,﻿with﻿aggregate﻿returns﻿exceeding﻿ their﻿corresponding﻿benchmarks.
Income taxes payable 608 708 Deferred and other non-current taxes 928 1 716
For securitised products, cash flow projection analysis is conducted integrating forward-looking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities, and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and similar hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecast economic environment is used for securities identified as creditimpaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and net present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.
Fixed income securities available-for-sale 89 031 2 568 –3 815 –602 87 182 Equity securities available-for-sale 392 188 –26 554
Amount offset Where a right of setoff exists –5 437 5 437 Due to cash collateral –1 123 335
Life & Health business segment – by line of business For the year ended 31 December
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