We propose to take a number of measures to reinforce our capital position in order to maintain the financial flexibility to capitalise on client opportunities. The total capital to be raised is likely to amount up to CHF 5.0 billion.
Extra Expense Protection Our Aviation & Space team – whose global services comprise direct insurance, facultative reinsurance, proportional/ non-proportional treaty reinsurance and alternative risk solutions – launched Extra Expense Protection (ExEP).
The Japanese insurance market is mature, yet only 4–5% of companies have earthquake-related cover, despite their obvious vulnerability to business interruption. Such companies have found traditional cover difficult to obtain because of the complexity of risk assessment and measurement. Swiss Re’s new parametric product is based on the Shindo earthquake intensity scale. It features a highly transparent trigger point with the guarantee of a payout without delay, and is designed to enable customers to return to business quickly after an earthquake-related loss.
About 80% of the agro policies sold in the US are revenue covers. Direct insurance companies risk high losses if policyholder revenues drop below 85% of the five-year average yield multiplied by the future crop prices in spring. To mitigate this risk, we developed a product with additional price risk protection for our clients.
How would you summarise Swiss Re’s service? Quality of products and services; global capability.
“I joined Swiss Re in early 2000. Since then I had the chance to work in various functions first in the UK, then in the USA and now in Switzerland. The cooperation and exchange with colleagues from many different disciplines in such diverse cultural environments has greatly influenced my professional and personal development.”
For us, being a responsible company is about contributing to sustainable, long-term value creation for all stakeholders. We believe there are three areas that are especially important for the achievement of this goal: corporate governance, corporate sustainability and corporate citizenship. These are the pillars of our corporate responsibility framework.
Property and casualty insurance The global property and casualty insurance industry fared comparatively well in 2008, although declining securities markets forced increased write-downs on invested assets and impairments on fixed income portfolios. Investment returns were low or negative and shareholders’ equity fell 10% to 15%. Fortunately, most insurance companies had entered the crisis with healthy balance sheets.
Per 100 units of foreign currency, as of 31 December 2008
Growth was sluggish, below GDP growth, in most mature markets, due to a gradual weakening of premium rates. Premiums in the US, the UK, Europe, and Japan grew in the low single-digit range. Hong Kong, Taiwan, and Australia were also affected by further price softening in major lines, lowering top-line premium growth. Emerging markets were an important exception to this development. With wealth and income rising, consumers and corporations increasingly discovered the value of insurance. Despite growing competition, underwriting results in the largest emerging markets were mostly positive.
The challenges to the life sector from a slowing economy and continuing turbulence in financial markets will persist into 2010. Profitability is likely to remain impaired because of pressures from declining sales, lower investment returns, lower asset management fees from equity-linked business, higher hedging costs of guarantees and possibly higher surrenders on some products. We believe this negative impact will be temporary, however, with the industry expected to return to growth in 2010‒2011. Long-term prospects are favourable in view of ageing societies worldwide.
Property Net premiums earned decreased 24.4% in 2008, reflecting the quota share arrangement with Berkshire Hathaway and continued strict underwriting discipline.
Non-traditional business The increase in non-traditional operating income to CHF 123 million in 2008 from a loss of CHF 92 million in 2007 reflected improved loss experience, including commutation effects, compared to 2007.
Net investment income for 2008 was CHF 3.6 billion, down 11.2% from 2007. Excluding currency exchange effects, net investment income was unchanged year on year. Unit-linked contracts do not affect the operating result, since their investment returns are passed straight through to contract holders as return credited to policyholders.
Admin Re® Admin Re® operating income rose CHF 89 million to a gain of CHF 268 million. This was mainly due to unrealised gains associated with an increase in the fair value of embedded derivatives associated with certain treaties that are ceded by Swiss Re on a funds withheld basis CHF 182 million which resulted mainly from widening credit spreads on the underlying investment portfolios. In addition, the 2008 results include the full-year contributions from various acquisitions closed in 2007, the fourth-quarter impact from the closing of the Barclays Life transaction and lower one-off integration costs, offset by lower investment returns and fees. Higher realised investment losses, declining fees from unit-linked business, and generally lower investment spreads all reflected difficult conditions in the financial markets. US mortality was also slightly less favourable in 2008 than in 2007.
Controlled risk taking requires a strong and independent risk management organisation and comprehensive risk management processes to identify, assess and control the Group’s risk exposures.
We are confident that our model provides an important tool for managing our business as well as a meaningful assessment of the risks to which Swiss Re is exposed. At the same time, market developments have confirmed that risk models must be supported by a clear understanding of the risks to which the business is exposed – and complemented by robust internal controls.
Swiss Solvency Test In July 2008, Swiss Re submitted its first solvency report for the Swiss Solvency Test (SST). The new SST introduces an economic, principles-based approach to Swiss insurance regulation and is thus a forerunner of the European Solvency II regime. While the SST is based on projected figures, it uses a similar approach to our internal capital adequacy assessment (see page 81), and the results of our first SST report have affirmed the fundamentals of our own capital adequacy methodology.
The table above shows the pre-tax impact of our credit default stress test on available economic capital. This scenario indicates estimated unexpected losses due to the adverse development of defaults. It is based on historical corporate default data from Moody’s and combines the worst default frequencies observed over 12 months for each of the individual rating categories. Since the end of 2007, the impact of the credit default stress test has risen slightly due to a deterioration in credit quality, which was largely offset by increased hedging.
Swiss Re is supervised by FINMA both at Group level and with regard to its legal entities domiciled in Switzerland. The supervision comprises minimum solvency capital, a wide range of qualitative assessments and risk governance requirements.
Many of our subsidiaries are regulated by their respective home regulators and subject to their respective capital requirements.
Capital management actions On 4 November 2008, with the publication of our third-quarter results, we announced the suspension of the share buy-back programme as a consequence of the high volatility in the financial markets and a significant increase in client demand for reinsurance. As of this date, the Group had completed 51.2% of the total buy-back programme.
Checks and balances Good corporate governance implies an effective system of mutual checks and balances among the top corporate bodies. Swiss Re maintains a dual board structure. It thus distinguishes clearly between the members of the Board of Directors as the supervisory body and those of management. From 1 January 2009, the Board of Directors consists entirely of non-executive and independent members. It increasingly performs its supervisory function through its committees, thus ensuring competence and effectiveness. The newly established Investment Committee, for example, allows more focused monitoring of the Group’s investment and asset management operation. Joint sessions among the Board committees enhance interaction and foster interdisciplinary exchange. In general, the Board of Directors has taken a greater role in the supervision of decision-making, not least because of the effects of financial market turbulence on the Group’s business.
Legal requirements and best practice Swiss Reinsurance Company Ltd, the parent company of Swiss Re Group, is listed in Switzerland, so its corporate governance is assessed primarily in terms of the Swiss Code of Best Practice for Corporate Governance, issued by economiesuisse in July 2002, as well as its 2007 Appendix. Swiss Re is also subject to the Directive on Information relating to Corporate Governance (including its Annex), issued by SIX Swiss Exchange, effective since 1 July 2002 and amended on 1 January 2007 (also referred to as the “SIX Directive”). Moreover, Swiss Re meets the requirements of the Provisions on Corporate Governance, Risk Management and the Internal Control System, issued by the Federal Office of Private Insurance (FOPI) and enacted on 1 January 2007. FOPI became part of the Swiss Financial Market Supervisory Authority FINMA on 1 January 2009. Last but not least, the Group complies with the applicable local rules and regulations of all the countries in which it does business.
3.1 Members of the Board of Directors as of 31 December 2008
Corporate governance and compensation report a large Swiss development foundation, and from 1987 to 2002 as Chairman of the Zurich Art Museum (Kunsthaus). Since 2005 he has been chairman of the Zurich committee of Human Rights Watch.
Corporate governance and compensation report members should not serve on audit committees of more than two other listed companies. They shall advise the Chairman in advance of accepting any further invitation to serve on the audit committee of another listed company. No member of the Audit Committee held more than two additional audit committee mandates in 2008.
e. Specific work methods of the Finance and Risk Committee The Finance and Risk Committee normally holds six regular meetings per year. The topics discussed at committee meetings depend on current developments and corporate requirements. In the reporting year, the Committee focused mainly on the implications of the financial crisis for the Group’s risk management. Amongst others, the Committee reviewed the Group’s capital adequacy, capital management initiatives, financial market and credit risks, liquidity issues, longevity and variable annuities activities, life and health key risks, reserving policy for life and non-life business, the optimal approach to the insurance price cycle and treasury issues. The Committee also discusses the Chief Risk Officer’s latest written report at almost every meeting. This report outlines the Group’s position in terms of main risk issues as well as related risk management actions and recommendations.
Besides the committee members and the company secretary, selected individuals are invited to attend Finance and Risk Committee meetings in an advisory capacity. In 2008, the following people acted in an advisory role on the Committee: Peter Forstmoser, Chairman of the Board of Directors ̤ Jacques Aigrain, Chief Executive Officer ̤ David J. Blumer, Head of Asset Management (as of 1 May 2008) ̤ Brian Gray, Chief Underwriting Officer (as of 1 September 2008) ̤ George Quinn, Chief Financial Officer ̤ Stefan Lippe, Deputy Chief Executive Officer and Chief Operating Officer ̤ Raj Singh, Chief Risk Officer ̤ Roger W. Ferguson, Head of Financial Services Products (until 30 April 2008) ̤ Benjamin Meuli, Chief Investment Officer (until 13 August 2008) ̤
He rejoined Swiss Re in 1993 as Chief of Staff. Two years later, he assumed marketing responsibilities for Austria, Italy and Switzerland. In 1997, he was appointed Managing Director of Swiss Re Italia SpA in Rome, successfully restructuring and integrating the newly acquired Italian reinsurance company Uniorias. In 1998, he assumed an additional position as Head of the Global Clients unit.
Raj Singh is a member of the International Financial Risk Institute, founding Chairman of the Chief Risk Officers Forum and an associate of the American Banking Association.
Governance The Compensation Committee of the Board of Directors approves the total remuneration philosophy of the company as well as annual and long-term incentive plans for executives. It ensures the development of a set of Group-wide compensation principles and compliance with remuneration disclosure requirements. It determines the total amount for Annual Performance Incentive (API) payments and related deferral plans, and regularly reviews and approves the Group’s compensation and pension plans. The Committee’s work is governed by its charter, which is set forth in the Corporate Bylaws of Swiss Re.
Each VAI cycle runs for three years, tracking the development of the business over that period. With the VAI, Swiss Re ensures that a significant portion of variable pay is tied to the longerterm financial results of the company. The final VAI payment can vary from 50% to 150% of the original value of the VAI with a mark-up of 25% on this value. In case of termination before date of payment, forfeiture rules apply.
Compensation of the Chief Executive Officer (extract from note 15 to the Financial statements)
Change in fair value of plans vesting over several years 4 671 –53 087 1 Includes 25% uplift on nominal value, which will be paid out at vesting after three years. 2 For 2007 disclosure, the LTI plan granted was presented net of grant which included an adjustment to fair value as at balance sheet date. For 2008 and going forward, the amounts for LTI represent the grant value of the plan for the respective year and the changes in the fair value of the LTI plan as at balance sheet date are reflected in the line “Change in fair value of plans vesting over several years”. 2007 numbers have been revised accordingly.
All required financial information on compensation, shareholdings and loans of members of the Board of Directors, the Executive Committee and the highest paid member of the Executive Committee can be found in note 15 to the Financial statements, on
189 Note 15 Compensation, participations and loans of members of governing bodies
Equity securities: Available-for-sale, at fair value (including 1 528 in 2007 and 9 in 2008 subject to securities lending and repurchase agreements) (amortised cost: 2007: 9 039; 2008: 675) 10 759 833
Premiums and other receivables 14 341 12 446 Reinsurance recoverable on unpaid claims and policy benefits 9 14 232 11 934 Funds held by ceding companies 14 205 11 230
Investment in real estate that the Group intends to hold for the production of income is carried at depreciated cost, net of any write-down for impairment in value. Impairment in value is recognised if the sum of the estimated future undiscounted cash flows from the use of the real estate is lower than its carrying value. Impairment in value, depreciation and other related charges or credits are included in net investment income. Investment in real estate held for sale is carried at the lower of cost or fair value, less estimated selling costs, and is not depreciated. Reductions in the carrying value of real estate held for sale are included in realised investment losses.
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 life-type contracts are amortised based on the present value of estimated gross profits.
Liabilities for life and health policy benefits from reinsurance business are generally calculated using the net level premium method, based on assumptions as to investment yields, mortality, withdrawals, lapses and policyholder dividends. Assumptions are set at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. The assumptions are based on projections from past experience, making allowance for possible adverse deviation. Interest assumptions for life and health reinsurance benefits liabilities range from 1% to 11%. Assumed mortality rates are generally based on experience multiples applied to the actuarial select and ultimate tables based on industry experience. Liabilities for policy benefits are increased if it is determined that future cash flows, including investment income, are insufficient to cover future benefits and expenses.
Net investment income by source (including unit-linked and with-profit business) was as follows: Dividends received from investments accounted for using the equity method were CHF 26 million and CHF 87 million for 2007 and 2008, respectively. The Group revised the classification of share in earnings and dividends from equity-accounted investments for
Net investment income includes income on unit-linked business and with-profit business, which are credited to policyholders.
Due in one year or less 6 643 4 149 6 369 6 384 Due after one year through five years 20 156 23 241 15 468 15 095 Due after five years through ten years 17 819 18 075 17 931 17 506
Depreciation expense related to income-producing properties was CHF 57 million and CHF 38 million for 2007 and 2008, respectively. Accumulated depreciation on investment real estate totalled CHF 508 million and CHF 493 million as of 31 December 2007 and 2008, respectively.
Fair value, as defined by SFAS 157, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
On 31 October 2008, the Group completed the acquisition of Barclays Life Assurance Company Ltd in a GBP 762 million cash transaction. The Group acquired 100% of the equity share capital of Barclays Life Assurance Company Ltd. The total cost of investment amounted to GBP 765 million, including GBP 3 million transaction cost.
Life and health policy benefits 50 026 50 026 39 911 39 911
Amendments –130 Actuarial gains/losses –209 27 –183 –235 –231 –22 Benefits paid –158 –204 –73 –83 –13 –15
Starting in 2006, the Group annually grants a Long-term Incentive plan (LTI) to selected employees with a three-year vesting period. The plans are expected to be settled in cash. The requisite service periods as well as the maximum contractual term for each plan is three years. The method to estimate fair value is based on a risk neutral approach that uses the current share price as an estimate of the share price at the end of the vesting period. In order to determine the fair value the following key performance indicators are also taken into consideration: three-year average return on equity (ROE) and three-year earnings per share compound annual growth rate (EPS CAGR). Fair value is revised at every balance sheet date.
Members of the Board of Directors received an honorarium, a mandatory 40% of which is in the form of shares; the remainder may be taken either in the form of cash or shares with a four-year deferral period. Prior to 2008, the Chairman and Vice Chairman were remunerated through a fixed honorarium and a variable bonus. The share price as of 2 March 2007 of CHF 107.90 and the share price as of 29 February 2008 of CHF 84.10 have been used for calculating the number of shares awarded based upon the amount of the honorarium received in shares. There was one exception for an honorarium granted in September 2008 where the share price of CHF 64.00 was used to calculate the number of shares awarded.
The following unvested restricted shares were held by members of governing bodies as of 31 December 2007 and 2008: Members of the Board of Directors Grant year
Stefan Lippe, Deputy Chief Executive Officer and Chief Operating Officer 9 125 8 750 Andreas Beerli, Head of Associated Units
With the new segment structure, the allocation of investment results has been revised. Certain investment results, including investment income and realised gains on unit-linked business, with-profit business and reinsurance derivatives, are excluded from the performance of the Asset Management business segment and directly allocated to the Property & Casualty and Life & Health business segments.
In general, third parties invested in consolidated VIEs do not have recourse to the Group in the event of a default, except in cases where the Group has protected the assets with a derivative contract or has provided a guarantee. In these cases, the recourse is limited to the notional of the guarantee or the value of the assets protected by the derivative contract.
Release of provision –24 –1 –1 –26 Costs incurred –14 –12 –39 –65 Effect of foreign currency translation –4 –1 –4 –9
Liabilities assumed and consideration provided in connection with portfolio transactions are established through the respective income statement line items. The initial recognition of the assumed outstanding claims is recorded as change in unpaid claims, with the consideration being recognised as negative claims paid. The assumption of the provision for unearned premiums is established through the change in unearned premiums, with the respective consideration accounted for as premiums written. The liability for life and health policy benefits is established as a charge against life and health benefits, with the initial premium consideration recorded as premiums written.
The overall management expenses are allocated to the reinsurance business, the investment business and to other expenses on an imputed basis.
Premiums and other receivables from reinsurance 9 464 151 9 615 8 204 118 8 322 Funds held by ceding companies 20 115 – 20 115 21 292 – 21 292
Equity securities of CHF 2 million (2007: CHF 5 681 million) and fixed income securities of CHF 1 811 million (2007: CHF 5 333 million) were held in investment funds, which are fully owned by Swiss Re Group companies. The securities in these funds and their revenues are reported in the corresponding asset category.
As of 31 December 2008, Swiss Reinsurance Company Ltd employed a worldwide staff of 3 568 (2007: 3 802). Personnel expenses for the 2008 financial year amounted to CHF 892 million (2007: CHF 1 009 million).
The disclosure requirements under Swiss Company Law in respect of management compensation to the members of the Board of Directors and of the Executive Committee of Swiss Reinsurance Company Ltd, as well as to closely related persons, are detailed on pages
Due to the termination of the Swiss Re Group’s Bermuda operations, the majority of the reinsurance business previously written by the Bermuda branch of a Swiss Re Group’s subsidiary was novated into the Company as per 31 December 2008. The Company assumed both assets and liabilities of CHF 7.9 billion and paid ceding commissions of CHF 1.2 billion.
The Board of Directors proposes to the Annual General Meeting to allocate this profit as follows: in CHF 2007 2008
General information / Cautionary note on forward-looking statements mortality and morbidity experience; ̤ policy renewal and lapse rates; ̤ extraordinary events affecting Swiss Re’s clients and other counterparties, such as ̤ bankruptcies, liquidations and other credit-related events; political risks in the countries in which Swiss Re operates or in which it insures risks; ̤ the impact of current, pending and future legislation, regulation and regulatory ̤ and legal actions; the impact of significant investments, acquisitions or dispositions, and any delays, ̤ unexpected costs or other issues experienced in connection with any such transactions, including, in the case of acquisitions, issues arising in connection with integrating acquired operations; changing levels of competition; and ̤ operational factors, including the efficacy of risk management and other internal ̤ procedures in managing the foregoing risks.
Form of proportional reinsurance in which a defined percentage of all risks held by the insurer in a specific line is reinsured.
Swiss Re received a broad range of awards in 2008. They confirm our strict client focus as well as our ability to develop customised solutions for clients.