For detailed information on the financial statements and notes, please see Annual Report 2005 – Financial Statements.
Fellow shareholders, colleagues, ladies and gentlemen 2005 was a remarkable year for Swiss Re. We aligned our organisation more closely with our strategy and announced our largest acquisition to date. The Group’s results were affected by extraordinary natural catastrophe claims, including Hurricane Katrina, the most devastating event in insurance history. Earnings were CHF 1.5 billion, or CHF 4.68 per share, resulting in a return on equity of 6.7%. This year demonstrated our ability to remain financially strong even after an exceptionally large claim event, drawing on the benefits of Swiss Re’s diversified portfolio.
What are your strategic ambitions going forward? Swiss Re’s business model, as I see it, will focus on profit growth. We will invest in those areas where we can best anticipate and manage risks, developing new methodologies, new tools and new talents. We will expand our reach to clients and markets via innovative products with one objective: enhancing the quality of earnings. Regulatory and other environmental advances should help the transformation of risk from a static liability into a tradable instrument, improving capital efficiency. This represents an exciting prospect for Swiss Re going forward.
Swiss Re’s Centre for Global Dialogue In 2005, the Swiss Re Centre for Global Dialogue, in Rüschlikon, Switzerland, celebrated its fifth anniversary. With over 1 700 events and more than 45 000 participants hosted since its foundation, this unique location provides a forum for Swiss Re to promote dialogue on the changing risk landscape as well as business challenges. The international conferences attract industry experts and risk analysts, scientists and policy makers. The goal of these events is to gain a better understanding of risk, build stakeholder communities around topics and assess potential challenges within the industry.
 The impact of nanotechnology on humans and the environment is not yet fully known because long-term statistics are not available
Solvency II  Solvency II is an ambitious regulatory project undertaken by the European Commission to improve solvency rules
However, the hurricanes took their toll on the reinsurance industry, particularly on those companies with a relatively large catastrophe risk exposure. The reinsurance industry is expected to post an overall combined ratio of between 110% and 115% for 2005. Without the extraordinary natural catastrophe losses, the combined ratio would have been well below 100%.
As a result of the continuing low interest-rate environment, investment returns will remain low. The insurance industry will continue to focus on cost efficiency and disciplined underwriting. Underwriting conditions in property and casualty, as well as in life, are expected to remain attractive. Catastrophe-related covers will be revised upwards following costly events like Katrina and other windstorms in 2005.
¹ Excluding assets held for linked liabilities of CHF 14.7 billion creased from 90% to 89% of total holdings; publicly traded equity holdings increased from 6% to 7%; and other investments, mainly real estate and private equity holdings, remained stable at 4%.
Personal accident primary rates remained stable in most markets; in some cases, however, ceding companies increased their retentions, putting reinsurance rates under pressure. Swiss Re’s market share declined in Europe, its major personal accident market, in the face of lower rates.
Swiss Re successfully integrated its two large Admin ReSM acquisitions from 2004: CNA’s individual life business and the Life Assurance Holding Corporation (LAHC). This included consolidating more than two million policies onto Swiss Re’s platforms. Swiss Re has successfully integrated more than 40 individual deals since 1998 and now has in excess of five million policies under management. Although 2005 saw no major Admin ReSM transactions, Swiss Re expects that further consolidation of the global life industry will offer substantial future opportunities.
In December 2005, Swiss Re completed its second securitisation of insurance and investment risks from US life portfolios. The ALPS transaction, which securitised USD 370 million of expected future profits from four blocks of Admin ReSM business, brought Swiss Re’s 2005 total for life- related insurance-linked securities to USD 615 million.
The return on operating revenues in 2004 included a provision of CHF 58 million for the Asian tsunami. The 2005 return of 9.3% reflects the release of the unused portion of this provision.
The traditional health business operating revenues grew by 4% with growth in new individual and group income protection, particularly in Europe and Asia, offsetting the run-off of exited lines, largely in North America.
portfolios and hold a prudent level of reserves. However, actual experience in any one year is subject to random, short-term fluctuations. In addition to prudentlycalculated reserves, regulators require insurers to hold a so-called “solvency margin ” to ensure they can continue to operate following adverse experience.
Credit Solutions manages its portfolio for profits throughout the economic cycle, complementing stringent credit underwriting standards with selective hedging, including credit default swaps and risk securitisation. Pursuing this strategy, it successfully completed a trade credit reinsurance securitisation in January 2006 – a first in the market.
Swiss Re transfers USD 762 million of peak life insurance risks to the capital markets
Swiss Re is limiting its exposure to these scenarios by transferring a significant proportion of extreme mortality risk to the capital markets. Two transactions, Vita I and Vita II, have transferred a total of USD 762 million to the capital markets since 2003. Through such large-scale securitisation transactions, Swiss Re is helping to diversify the world’s risk further and more effectively.
Swiss Re’s exposure to market risk increased by 17%. The change in market risk is, among other factors, due to temporarily increased net exposure to interest rates, which derived in part from a change in the structure of the liabilities. The exposure to credit, and funding and liquidity risk decreased between mid-2004 and mid-2005. This was mainly due to an improving outlook for credit markets, particularly the more favourable rating trends. The funding and liquidity risk reflects risks arising from Swiss Re’s use of letter of credit facilities. This risk arises from collateralisation obligations linked to Swiss Re’s net asset value falling below a predefined threshold. This risk decreased as Swiss Re’s financial strength improved between mid-2004 and mid-2005 (see Capital management, page 55) and risk remained stable.
Mortality (300 000 excess deaths in the US spread proportionally to base mortality of age groups across the population) –0.5
Jan 05 Feb 05 Mar 05 Apr 05 May 05 Jun 05 Jul 05 Aug 05 Sep 05 Nov 05 Dec 05Oct 05
Operational risk management Exposure to operational risk is an inevitable consequence of doing business. Swiss Re has adopted the principle to tolerate operational risk only if the cost of mitigation would exceed the expected benefits.
In connection with the financing of the GE Insurance Solutions transaction, Swiss Re is raising up to USD 7.5 billion in new capital of which GE, based on certain provisions of the transaction agreement, has agreed to take up to USD 3.9 billion. Apart from the CHF 1.0 billion mandatory convertible security issued in December 2005, Swiss Re plans to raise USD 2.0 billion in hybrid debt securities and to issue new shares to the capital markets. Exact terms will be announced at the time of these offerings.
Please refer to the “Statement of shareholders’ equity” of Swiss Reinsurance Company, Zurich on page 67 of the Financial Statements.
Increase of up to 11 million shares for bonds or similar instruments: Significant portion has already been allocated to mandatory convertible issued in December
The new capital structure following the EGM is as follows: In 2003, the company’s share capital remained at CHF 32 million. Total reserves decreased by CHF 195 million to CHF 9.9 billion. The higher profit for the financial year of CHF 1.2 billion (compared to CHF 106 million in 2002) led to an increase of disposable profit from CHF 122 million to CHF 1.2 billion. Total shareholders’ equity before allocation of profit increased from CHF 10.3 billion to CHF 11.2 billion. At the Annual General Meeting shareholders approved a dividend payment of CHF 341 million, compared to CHF 310 million in the previous year.
Mr Kielholz, a Swiss citizen born in 1951, studied business administration at the Uni versity of St. Gallen, Switzerland, and graduated in 1976 with a degree in business finance and accounting.
Thomas W. Bechtler, Director, is also a director of Bucher Industries, Conzzeta Holding, Credit Suisse Group and Sika AG.
4 Executive management a. Executive Committee Membership as at 31 December 2005
Jacques Aigrain Chief Executive Officer (from 1 January 2006) and Member of the Executive Committee; Head of the Financial Services Business Group (until September 2005), Deputy Chief Executive Officer (as of 1 January 2005 to 31 December 2005)
Stefan Lippe Head of Products Business Function and Member of the Executive Committee (from September 2005), Head of the Property & Casualty Business Group (until September 2005)
Mr Colebatch joined Swiss Re in September 2002 as a member of the Executive Board and Head of Capital Management and Advisory, a position which included responsibility for Fox-Pitt, Kelton (FPK) and Swiss Re Financial Products. Before joining Swiss Re, Mr Colebatch was with Credit Suisse Group, where he most recently served as a member of the group executive board and CEO of Credit Suisse Asset Management. Mr Colebatch began his career with Citicorp in New York and held a number of senior investment banking positions in Hong Kong and London. Mr Colebatch retired on 31 January 2006.
Jacques E. Dubois Head of Corporate Development; Chairman & CEO of Swiss Re America Holding Corporation
He joined Swiss Re in 1978 as a member of the Non-Proportional Property Treaty department. Since then, he has held various product/underwriting-related positions, as well as spending over 15 years in client management. He worked in Tokyo from 1983 to 1989 and, from 1989 to 1992, in Zurich where he was involved in marketing for the Japanese and South Korean non-life market before moving to the non-life marketing department for Germany, Central and Eastern Europe. In 1997, he was appointed head of this market department and, a year later, joined the Europe Division Executive Team as product manager for Property & Casualty. In 2001 he was also named Divisional Underwriting Officer for Europe Division. He joined the Executive Board in September 2005 as Head of Casualty in the Products Business Function.
Pierre L. Ozendo Head of Americas Property & Casualty (from 1 January 2006), Head of Asia (until 31 December 2005), Client Markets Business Function
All shares awarded to the Executive Board are subject to a four-year deferral period. The bonus plan stipulates that Executive Board members must decide on the final split between cash and shares by April. For the purpose of this disclosure, we have assumed a take-up rate of 50%, which is in line with experience from previous years. On the basis of the closing price for the financial year 2005, such shares would have a discounted taxable value of CHF 76.20.
The shares awarded have a discounted taxable value of CHF 76.20 if subject to a four year deferral period, and CHF 96.20 if not deferred.
News release 25 August Interim Reporting 2005 News release, press conference and analysts’ meeting in Zurich (including telephone conference and webcast)
Commutation Transaction in which policyholders or insurers surrender all rights and are relieved from all obligations under an insurance or reinsurance contract in exchange for a single current payment.
Diversification Risk reduction technique that limits the risk of accumulation by spreading an organisation ’s risks across different geographical locations, as well as across different lines of business in order to increase the number of mutually independent risks.
Provisions for linked liabilities and assets held for linked liabilities Provisions for linked liabilities and assets held for linked liabilities
The Group has revised the classification between cash and cash equivalents and shortterm investments. Treasury bills with a remaining maturity at the date of acquisition of three months or less and certain short-term investments in money market funds were reclassified from short-term investments to cash and cash equivalents.
The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealised loss position, as of 31 December 2004 and 2005. A continuous decline in the value of equity securities available-for-sale for longer than twelve months is considered other-than-temporary and recognised as net realised investment gains/losses in the income statement. Therefore, as of 31 December 2004 and 2005, the gross unrealised loss on equity securities available-for-sale of CHF 118 million and CHF 120 million, respectively, shown in the above table relates to declines in value for less than 12 months.
As of 31 December 2004 and 2005 investments in mortgages and other loans and real estate comprised the following: As of 31 December 2004 2005 CHF millions Carrying value Fair value Carrying value Fair value
In the year ended 31 December 2005, the assets held for linked liabilities generated net realised gains of CHF 1 396 million (2004: CHF 496 million) and net investment income of CHF 751 million (2004: CHF 257 million).
In June 2001, the Group issued a straight bond under the European Medium Term Note (EMTN) programme, totalling CHF 150 million with a coupon of 4.00% and a 14-year maturity.
Weighted average fair value of options granted during the year per share 27 20
As of 31 December 2004 and 2005, the Group had outstanding guarantees of CHF 13 650 million and CHF 18 024 million, respectively.
The Group had four guarantees as of 31 December 2004 and 2005, which primarily indemnify the purchasers of former Group entities for possible run-off losses or claims for pending litigation.
Unpaid claims and claim adjustment expenses 56 532 12 655 1 516 70 703
In our opinion, the consolidated financial statements give a true and fair view of the financial position, the results of operations and the cash flows in accordance with the Swiss GAAP FER and comply with Swiss law.
Source of shareholders’ equity (after allocation of profit) CHF millions 2004 2005
The web version of the Annual Report 2005 is available in English at: www.swissre.com/annualreport