Through its three business groups Property & Casualty, Life & Health and Financial Services, Swiss Re offers a wide variety of products to manage capital and risk. Traditional reinsurance products, including a broad range of property and casualty as well as life and health covers and related services, are complemented by insurance-based corporate finance solutions and supplementary services for comprehensive risk management.
Net income/loss –165 –91 45 Earnings/losses per share in CHF –0.57 –0.29 49 Dividend per share in CHF 2.50 1.00* –60
Swiss Re last reduced its dividend in 1906, when earnings declined by 20% following the San Francisco earthquake. In respect of business year 2002, some 96 years later, the Board will reluctantly recommend the same action. Two consecutive years of loss, caused by the 11 September tragedy in 2001, and now in 2002 by an historic three-year decline in equity markets, have created the unsatisfactory situation whereby dividends must be paid out of retained earnings rather than current income. In these circumstances, the Board believes a reduction of the dividend is in line with Swiss Re’s tradition of prudent financial management. Paradoxically, the events giving rise to this situation have produced exceptional opportunities for Swiss Re’s core products, and it is clear that, in today’s business environment, we can put capital to work on attractive terms. Although 2003 earnings may be impacted by a smaller asset impairment charge, we are optimistic regarding future earnings prospects.
■ be the premier provider of capital, risk and asset management solutions in business-to-business financial services, with a specific focus on insurance and other financial institutions; ■ deliver attractive returns to shareholders while maintaining top financial strength and credit ratings; and
As a significant institutional investor, the insurance and reinsurance industry is affected by the financial environment, which was unfavourable for the third year in a row in 2002. The decline in stock market values meant that many insurers, particularly those in Europe, suffered losses on their equity portfolios. Cash flows from underwriting for the industry, however, rose in 2002 and are likely to be higher in 2003.
30 October Resolution of dispute with Lincoln National Corporation Swiss Re resolved its dispute with Lincoln National Corporation related to the December 2001 acquisition of Lincoln Re. In keeping with earlier statements, Swiss Re confirmed that the resolution had a favourable effect on Swiss Re’s financial position and results of operations.
Claims and claim adjustment expenses and life and health benefits decreased from CHF 24.8 billion to CHF 24.6 billion, a drop of 1%. The absence of an event such as the terrorist attack of 11 September 2001 and the strengthening of the Swiss franc were the main reasons for this decrease in expenses. The decreases more than offset the impact of the growth in non-life business, increased losses in credit and surety business and increases in the Life & Health Business Group following the Lincoln Re acquisition and the loss on the guaranteed minimum death benefit business.
The tax expense in 2002 was CHF 127 million, compared to an expense of CHF 61 million in 2001. The Group tax rate is the result of current and deferred taxes in a wide range of jurisdictions.
The Group recorded a net loss of CHF 91 million, compared with a net loss of CHF 165 million in 2001. Losses per share were CHF –0.29, compared with losses per share of CHF –0.57 in 2001.
Shareholders’ equity decreased from CHF 22.6 billion to CHF 16.7 billion. The main reasons for the decrease were the change in unrealised gains and losses on securities, net of deferred taxes, of CHF 3.0 billion due to continuing weakness in world stock markets in 2002, and the foreign currency revaluation impact of CHF 2.2 billion due to the strength of the Swiss franc. The 17% decline in US dollar is the principal reason for the decline in assets and liabilities.
Since early in 2000, when equity markets peaked, Swiss Re has significantly reduced its exposure to equities from 34% of the portfolio in December 1999 to 18% by mid-year 2002. In June 2002, Swiss Re hedged a considerable portion of its remaining equity exposure by means of buying puts and selling calls, thus partly protecting itself from the impact of the ensuing equity downturn. At the same time, the equity portfolio was reduced further to reflect Swiss Re’s revised risk/ return assessment. The actions resulted in significant net realised gains from equity sales of CHF 1 billion, and significant gains on the equity hedges of CHF 0.6 billion.
For the years ended 31 December CHF millions 2001 2002 Change in %
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The global trend towards higher insurance rates continued with average increases of 10–20% in the major markets such as the US, the UK, France and Germany. The rise was stronger in the commercial and industrial sector, which started at a much lower level than the personal insurance area. The increase was driven primarily by the capital constraints experienced by most of the industry following several years of poor results and sharply lower investment yields. Several companies experienced an adverse development, which led to significant reserve increases, particularly for asbestos-related claims.
During 2002, the reinsurance industry as a whole demonstrated a strong focus on risk selection and rate adequacy. The rise in reinsurance prices seen in 2001 continued, and coverage narrowed through, more restrictive wordings, increased retentions and reduced capacity.
The combined ratio improved by 19 percentage points over 2001, to 106%.
At Swiss Re, the focus on capital utilisation and capacity deployment, underwriting discipline and bottom-line profitability will continue. Through the local business units, the business group is close to the markets and the underwriting philosophy is quickly adapted to reflect changing conditions. With its leadership position developed over many years, Swiss Re is well equipped to take advantage of the hard market and to continue its drive for profitability.
The primary markets in India and China are growing at an increasing rate, spurred by the granting of new direct insurer licences and the maturing of their regulatory environments. These countries represent two of the most important future growth markets in the world. Excluding Japan, Asia’s life insurance business is expected to grow by close to 9% per annum in real terms over the next five years. Asia’s strong economic growth, high savings rate, the region’s favourable demographics and the success of the bancassurance model are fuelling this growth.
Stochastic models are used to calculate the reserve, using assumptions for mortality, lapses and investment returns in line with the recently proposed US GAAP accounting guidance. The reserve as at 31 December 2002 was based on an S&P 500 Index of 880 and resulted in a charge of approximately CHF 280 million in 2002. This reserve will continue to fluctuate with the S&P 500 Index.
A CHF 633 million operating loss for 2002 reflects contrasting trends. In Corporate Risk Underwriting, property and aviation underwriting improved significantly leading to a total combined ratio of 97%, and also Financial Products had a stronger than expected operational year. By contrast, Credit Solutions, due largely to provisions for the Lloyd’s Central Fund cover, claims on US surety business relating to prior treaty years, and credit losses on corporate defaults including Holzmann and Kmart led to poor performance. The result also suffered from a much lower investment return (CHF 183 million in 2002 compared to CHF 837 million in 2001).
■ Structured Risk Finance operations were restructured to focus on fewer product categories and will concentrate on large insurance companies and corporates in selected industries.
Financial Products achieved its revenue target in its first year of operation. Its areas of major activity were credit- and assetbacked securities, with a focus on insurance -linked securitisation.
Manipulating individual atoms and molecules with the tip of a scanning tunnelling microscope, scientists create nanometre-sized structures with the goal of making functional devices such as transistors and biosensors.
Swiss Re continues to be very strongly capitalised and is committed to maintaining its financial strength.
The increase in “Additional paid-in capital” results from shares reserved for corporate purposes (see also comments in section 2.7 below).
In respect of Group finance, the Committee reviews cash management; it reviews the relationships with banks; it reviews all open derivatives positions of the Group; and it comlies with any formalities required of the Board of Directors by applicable laws, regulations or obligations to counterparties.
Swiss Re Annual Report 200260 c. Work methods of the Board of Directors and its Committees The Board typically meets six times per year for two consecutive days. The first day is reserved for the Committees, while on the second day the full Board meets for as long as required, mostly the whole day. The regular meetings are typically held in February, March, April, May, August and December. Additional meetings are called at short notice if and when required. Each of the Board meetings has a special focus, which is basically related to Swiss Re’s reporting schedule. Such focuses are the financial statements, the analysis of internal results, interim results, the medium-term business plan, strategic issues and corporate governance. The Committees meet, on average, three to four times per year.
Walter Anderau Member of the Executive Board, Head of the Communications & Human Resources Division
Mr Fitzpatrick joined Swiss Re in July 1998 as Chief Financial Officer. Before joining, he was senior managing director and co-head of Securitas Capital, a joint venture between Swiss Re and Credit Suisse focusing on private equity opportunities in the insurance industry. From 1996 to 1998 he was a senior managing director at Zurich Centre Resources Ltd., where he focused on start-ups of new insurance companies. From 1990 to 1996 he was CFO and a member of the board of directors of Kemper Corporation. Originally he had started with Kemper as a financial analyst in 1978, rising to the position of vice president in corporate finance in 1986.
Pierre L. Ozendo Member of the Executive Board, Head of the Asia Division within the Property & Casualty Business Group
Pierre Ozendo joined the Swiss Re Group in 1995, taking on an assignment as chief executive officer of the subsidiary Union Re, effective 1 January 1996. Mr Ozendo was appointed to Swiss Re’s Executive Board on 1 July 1996. Following Union Re’s integration with Swiss Re, he was named Head of the Group’s Asia Division in 1998. Before joining Swiss Re, Mr Ozendo worked for General Reinsurance
All classes of insurance business with the exception of life insurance.
Premiums earned less sum of claims paid, change in the provision for unpaid claims and claim adjustment expenses and expenses (acquisition costs and other operating costs and expenses).
Expenses Claims and claim adjustment expenses 7, 15 –16 266 –14 485 Life and health benefits 15 –8 532 –10 084
The Group’s investments in fixed-income securities are classified as available-for-sale (“AFS”) or trading. Fixed-income securities AFS are reported at amortised cost. Trading fixed-income securities are carried at fair value with unrealised gains and losses being included in the income statement.
Life reinsurance premiums are earned when due. Related policy benefits are recorded in relation to the associated premium or gross profits so that profits are recognised over the expected lives of the contracts. For investment-type contracts, charges assessed against policyholders’ funds for the costs of insurance, surrender charges, actuarial margin and other fees are recorded as income.
Carrying value as of 1 January 1 183 1 261 1 422 2 373 Foreign currency translation adjustments –14 –69 22 –146 Depreciation –28 –30 Additions/sales/interest in equity 117 –231 993 –1 182 Unrealised gains/losses –34 23 Realised gains/losses 3 270 –30 169 Transfers 336 –477 Carrying value as of 31 December 1 261 1 537 2 373 760
The notional amount and the fair value of derivatives outstanding at 31 December 2001 and 2002 are as follows: Contract/ Carrying As of 31 December 2001 notional Positive Negative value assets/ CHF millions amount fair value fair value liabilities
– Subordinated Perpetual Loan 1998 DEM 340 6M Libor 2008 252
A summary of the activity of the Group’s fixed stock option plan is as follows: Weighted Weighted average average exercise 2001 exercise 2002 price in CHF shares price in CHF shares
Notes to the Group financial statements 13. Commitments and contingent liabilities (continued)
Under the terms of the settlement, Lincoln paid the Group USD 295 million in cash. The payment satisfied the Group’s demand for additional assets to support the closing balance-sheet liabilities delivered by Lincoln and extinguished Lincoln’s obligation to indemnify the Group for adverse development on certain exited lines of business. The payment resulted in a reduction in the effective purchase price of Lincoln Re.
The Group provides reinsurance and financial services throughout the world, through three business groups, which are determined by the organisational structure.These are the Property & Casualty Business Group; the Life & Health Business Group, which includes life, health and disability reinsurance; and the Financial Services Business Group, which includes the Asset Management, Advisory & Capital Markets, Credit Solutions and Risk Solutions business units.The Corporate Centre provides direction and Group-wide support to the business groups.
Net investment income and realised gains/losses are allocated to the business groups based on the net investment income and realised gains of the legal entities that are operated by these business groups.Where one entity is utilised by two or more business groups, the investment income and realised gains are allocated to these business groups using technical reserves and other information as a key for the allocation. The Financial Services Business Group provides investment management services to the other business groups, and includes the fees charged in investment income. The fees are based on service contracts.
Germany Gerling NCM Credit and Finance AG 73 25 e Swiss Re Asset Management KAG mbH 4 100 f Swiss Re Germany AG 65 100 f Swiss Re Germany Holding AG 73 100 f
During December 2002 the Financial Services Business Group announced that Swiss Re Capital Partner’s business activities would be restructured. The business group established a provision of CHF 23 million. The provision was established to provide for severance and other personnel-related costs, and related asset charges.
Shareholders’ equity at 31 December 2001 amounted to CHF 10 945 million before allocation of profit. After deduction of the dividend payment of CHF 776 million and the inclusion of the profit for the financial year 2002, shareholders’ equity equalled CHF 10 287 million at year-end 2002.
Other income and expenses 3 Other interest income 37 22 Other interest expenses –221 –158 Other income and expenses 137 2 603 Result from other income and expenses –47 2 467
Income before tax 946 230 Tax –16 –124 Net income 930 106