Financial strength ratings as of 23 February 2007 S&P Moody’s A.M. Best
Corporate highlights Excellent net income of CHF 4.6 billion with strong underlying performance from all businesses Successful acquisition and integration of GE Insurance Solutions Continued strong investment performance with return on investments of 5.3% Property & Casualty operating income improved to CHF 5.0 billion, reflecting strong performance across all lines of business and low levels of natural catastrophe claims; combined ratio improved to 90.4% Life & Health operating income of CHF 1.7 billion with return on operating revenues increasing to 10.0% Financial Services operating income grew 21% to CHF 460 million, driven by strong results in credit, trading and structuring businesses Shareholders’ equity increased 27% to CHF 30.9 billion on excellent earnings as well as equity raised for the financing of the GE Insurance Solutions acquisition Return on equity increased to 16.3% Dividend increase of 36% from CHF 2.50 to CHF 3.40 per share, as well as a share buy-back programme
Financial highlights CHF millions unless otherwise stated 2005 2006 Change in %
Driving performance 23 Driving performance – The CEO’s view 26 Performance for Swiss Re 28 Performance for our clients 30 Performance for partnerships 32 Performance for the future
Financial year 34 Economic environment and industry trends 37 Group results 39 Investments 42 Summary of financial statements 44 Property & Casualty business 48 Life & Health business 51 Financial Services business 53 Business outlook
All divisions contributed to the success of the 2006 results. Property & Casualty business delivered a strong operating income of CHF 5.0 billion and a combined ratio of 90.4%, an improvement of 23.7 percentage points compared with 2005. While the year benefited from a benign hurricane season, the underlying quality of our underwriting performance delivered substantially more value. Life & Health business continued to be a strong contributor to Swiss Re’s earnings with operating income of CHF 1.7 billion. Within our Client Markets teams, Europe Division, the historical bedrock of our Group with its strong client franchise, maintained its profitability track record. In the Americas, we strengthened our client base, leveraging our leadership position while maintaining pricing discipline across all lines of business. Asia Division achieved further inroads in the Chinese market and continued to build on Swiss Re’s leading presence in the region. In a highly competitive environment, Globals & Large Risks successfully grew the business, complemented by the industrial risk business of Insurance Solutions. Financial Services delivered strong results, with operating income of CHF 460 million, adding material value to the rest of the Group in terms of asset management, risk hedging and risk intermediation. The Group’s active management of duration, credit spreads and equity exposure resulted in a strong return on investments of 5.3%. We would like to express our appreciation to the respective teams for these remarkable achievements.
The 2006 results show how this powerful combination drives our performance, allowing us to deliver best in class client service and, ultimately, attractive shareholder returns.
Our strategic objectives have been embedded in all of Swiss Re’s activities, helping us to further improve our economic efficiency. Our business goals are simple: to ensure sustainable earnings per share growth and to pursue high quality business rather than volume for volume’s sake. This is further supported by continually expanding the scope and range of services we provide to clients in all lines of business and regions.
Each of these milestones was achieved smoothly, demonstrating the experience and organisational skills of the Group. Clients and brokers alike complimented our client teams on their ability to maintain a consistent and reliable partnership in the market. This resulted in highly successful renewals for 2007 with non-life premiums rising 14%.
The excellent earnings for 2006 considerably reinforced our strong capital position, and the Board of Directors will recommend both a dividend increase of 36% to CHF 3.40 per share and a share buy-back programme. This recommendation reflects Swiss Re’s policy to focus on active capital management while maintaining superior capital adequacy and credit ratings.
In December, the Executive Board was also reinforced with three additional appointments: Markus Diethelm, Group Chief Legal Officer, Philip Lotz, Head of Capital Management and Advisory, and Jonathan Isherwood, Global Head of Claims & Liability Management. Each of the new members brings deep experience and leadership to areas which are of critical value to the long-term success of Swiss Re.
Letter to shareholders her dedication and commitment during the past four years as Group CFO and throughout her outstanding career, which spans more than 25 years with Swiss Re and the former Mercantile & General Re.
Sadly, our friend and trusted Board member George Farr passed away in November. We would like to express our respect and admiration for his valuable guidance and leadership over the years.
14 February 2006 renewals Swiss Re continued to improve the quality of its non-life reinsurance portfolio during the 2006 renewals. The volume of business written grew to CHF 9.3 billion, while the focus on technical profitability achieved approximately 7% economic profit improvement.
27 February Extraordinary General Meeting Shareholders approved Swiss Re’s creation of additional capital related to the financing of the GE Insurance Solutions acquisition and for general corporate purposes. In addition, John R. Coomber and Dennis D. Dammerman were elected to Swiss Re’s Board of Directors.
2 March Swiss Re‘s 2005 results Swiss Re reported net income of CHF 1.5 billion for 2005. In a year of record natural catastrophe events, the underlying business performed well, including an excellent return on investments of 5.7% (all figures based on Swiss GAAP).
11 April 2005 embedded value Swiss Re reported an 18% increase to CHF 20.1 billion in embedded value of its life and health business. Operating profit from existing business grew 38% to CHF 1.5 billion. Returns on new business increased to 13.1% for total value added of CHF 283 million in 2005.
21 April Annual General Meeting At Swiss Re’s 142nd Annual General Meeting, shareholders approved the increase in dividend to CHF 2.50 per share. Peter Forstmoser, Chairman of the Board of Directors, Walter B. Kielholz, Executive Vice Chairman, and Robert A. Scott were re-elected to the Board.
Profile Key events 4 May Swiss Re places USD 2.0 billion equivalent of hybrid securities Swiss Re successfully placed USD 2.0 billion equivalent of hybrid securities. The innovative transaction was awarded “Deal of the Month“ in the June edition of Credit Magazine.
7 June Natural catastrophe protection through the Successor programme Swiss Re obtained USD 950 million protection against North Atlantic Hurricane, Europe Windstorm, California Earthquake and Japan Earthquake through Successor, the follow-up catastrophe bonds to the PIONEER and Arbor programmes.
9 June Swiss Re completes acquisition of GE Insurance Solutions Swiss Re completed the acquisition of GE Insurance Solutions from General Electric (GE). The acquisition created the world’s largest and most diversified global reinsurer, adding further momentum to Swiss Re’s earnings growth.
16 January Extreme mortality risk protection through Vita Capital programme Swiss Re transferred USD 705 million of extreme mortality risk to the capital markets through its Vita Capital securitisation programme. Part of the issuance replaced cover provided by Swiss Re’s first Vita issuance, which expired at the end of 2006, with the balance providing additional protection against extreme mortality risks.
We enable the risk-taking that is essential to enterprise and progress.
Founded in Zurich, Switzerland, in 1863, Swiss Re is the world’s leading and most diversified reinsurer. It operates in more than 25 countries and provides its expertise and services to clients throughout the world. The Group’s position as preferred partner in the risk transfer industry is based on value propositions that comprise risk expertise, global reach, scale, diversification, very strong capitalisation and resilience over the long term.
Swiss Re offers a wide variety of reinsurance products and financial services solutions, enabling insurers, corporations, the public sector and other partners to manage capital and risk challenges. This generates economic benefits for clients and creates value for Swiss Re’s shareholders.
The Group’s reinsurance products and related services for property and casualty as well as for life and health business are complemented by insurance-based corporate finance and risk management solutions.
Swiss Re’s market-leading position is based on accumulated expertise and continuing research. The Group anticipates and analyses risks affecting business, society, the economy and the environment. Ultimately, the Group’s success depends on the skills and commitment of its employees. Swiss Re provides an exciting and modern working environment that attracts outstanding individuals, promotes talent and inspires excellence at all levels.
Net premiums earned by region1 47% Americas 9% Asia 44% Europe (including Middle East and Africa)
Client Markets Europe Americas Property & Casualty Americas Life & Health and
Products Property & Specialty Casualty Life & Health Claims & Liability Management
Finance Capital Management Corporate Finance & Treasury Tax Investor Relations Planning, Accounting
The Financial Services business function brings together Swiss Re’s capital management expertise and risk-taking capabilities to manage the Group’s own investment assets, and create reinsurance and capital markets solutions for the Group as well as for clients.
Client Markets Products Financial Services Corporate functions * Member of the Executive Committee
Swiss Re’s strategic direction supports a disciplined approach to delivering best in class customer service and attractive shareholder returns.
Generate economic profit growth Swiss Re is committed to providing economic profit growth for its shareholders, and therefore allocates capital and other resources by assessing each business opportunity in both risk-adjusted and cost-adjusted terms.
Reduce earnings volatility As the world’s leading reinsurer, Swiss Re underwrites significant exposures. In addition to its scale and diversification, the Group applies a wide range of tools to reduce earnings volatility. Swiss Re employs hedging instruments to manage financial market risks,
Profile Strategic direction limiting downside exposure while capturing attractive risk-adjusted returns on assets. Swiss Re also uses its capital market expertise to manage volatility in structuring and underwriting the Group’s business: it remains the leader in insurance-linked securities (ILS), having underwritten over USD 10 billion since the inception of the market in 1997, both for the Group as well as for clients.
Sound risk management practices and a disciplined reserving philosophy support profitable underwriting. At the same time, a Group-level approach to volatility management lets the individual business units focus on delivering attractive solutions to clients and capturing growth opportunities. By addressing potential sources of volatility on both sides of the balance sheet, Swiss Re aims to deliver sustainable earnings to shareholders.
Advance organisational excellence The Group’s long-term success depends critically on its ability to attract and retain the best people, fostering a working culture that embraces both efficiency and effectiveness. Clients and shareholders benefit from the innovation and responsiveness of Swiss Re’s results-oriented approach, which applies global capabilities through cross-functional teams.
Efficiency and excellent client service depend, in turn, on getting the fundamentals of the business right: effective risk control and disciplined underwriting. To that end, Swiss Re has separated responsibility for client service, underwriting, reserving and reporting, allowing market-leading transparency and best in class service, as well as attractive, sustainable returns for shareholders.
USD 10 billion Swiss Re is leading the growth of insurancelinked securities (ILS) and driving the convergence of the capital and insurance markets. Swiss Re has underwritten over USD 10 billion since the inception of the ILS market in 1997, both for the Group as well as for clients.
Swiss Re employees combine expertise, creativity and sound judgement to deliver world-class solutions for clients.
Developing a best in class workforce Only the best people can deliver the best from Swiss Re’s experience, capital and technology. The Group continuously develops its workforce, striving to attract and retain the leading talent in the industry. It provides advanced technical and professional training to all levels of the organisation, combining insight from internal, industry and academic experts.
Swiss Re Academy In October 2006, Swiss Re unified its global staff and client training under a single provider. The new Swiss Re Academy combines the 40-year experience of the Swiss Insurance Training Centre (SITC), one of the world’s leading insurance training centres, with the acclaimed Insurance Leadership Institute, integrated as part of the GE Insurance Solutions acquisition. The Academy provides an efficient platform for sharing best practice internally and with clients, promoting effective knowledge transfer within the Group and the insurance industry.
Three regional training hubs – in Zurich, Hong Kong and Kansas City – support Swiss Re’s clear client focus. The opening of the new Hong Kong training centre was a landmark event in 2006, marking Swiss Re’s 50th year of operation in Asia-Pacific and demonstrating the Group’s commitment to business growth in the region. Further initiatives to bring training closer to clients include the “On Wings” programme of customised, on-site courses, as well as new web-based seminars known as “webinars. ” These courses are open to both employees and clients.
Leading in thought, leading by actions Swiss Re is a knowledge-based company and welcomes opportunities to contribute to advancing industry expertise, whether through client events, research colla boration with universities and economic research facilities, expert publications, the Swiss Re Centre for Global Dialogue or the Swiss Re Academy.
In particular, Swiss Re has established close relationships with leading educational institutions, such as the Swiss Federal Institute of Technology (ETH) in Zurich, Beijing Normal University and Rice University in Houston, to gain external perspectives on trends impacting the insurance industry.
In 2006, the Centre for Global Dialogue in Rüschlikon, Switzerland, hosted over 450 events with more than 11 500 participants assessing insurance industry challenges such as the adverse effects of developments in liability regimes, opportunities and risks of nanotechnology or trends in global energy markets. The Centre also established an external Advisory Panel comprised of distinguished scientists, politicians and business leaders, to explore emerging issues and provide strategic insights on issues of relevance to Swiss Re and the global risk industry. Also, the Swiss Re Academy provided 70 insurance courses to 1 300 participants from Swiss Re clients in 2006 and inaugurated its training centre in Hong Kong.
regime in Europe and the consolidation trend in the life insurance market. Swiss Re’s publications as well as comprehensive information on insurance industry topics are available on its website: www.swissre.com.
Client Markets Forums In 2006, Swiss Re held a series of Client Markets Forums in New York, Kansas City, Shanghai and Rüschlikon, providing a platform for sharing knowledge, developing solutions and enhancing contact between clients and Swiss Re. A wide range of topics were discussed, including insurance-linked securities, the integrated Property & Casualty and Life & Health sales model, and structured insurance and reinsurance solutions. The forums were part of a major Client Markets initiative, to focus Swiss Re’s products and financial expertise more closely on client needs and build a global sales community.
Industry relevance Scientists and economists believe 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
Insurance-linked securities (ILS) are an effective risk management tool to increase capacity and transfer peak and volume insurance risks to the capital markets ILS helps reduce capital requirements and increase capital efficiency; it reduces earnings volatility and, in the case of life insurance, can monetise intangibles
Swiss Re’s business opportunities derive from the world’s changing risk landscape. Identifying emerging issues and industry trends, and sharing Swiss Re’s knowledge are essential to the Group’s success. In 2006, the Issue Management Council recognised Swiss Re with the W. Howard Chase Award for excellence in issue management. The award honoured the Group for leadership on strategic topics that affect both business performance and stakeholder satisfaction. The table below lists a selection of Swiss Re’s Top Topics, with the Group’s related activities.
Terrorism risk is privately insurable to the extent that it can be assessed, controlled and adequately priced Long-term market solutions require a risk partnership between insureds, insurers, reinsurers, capital markets and governments; the challenge is to find the most efficient way to achieve such public/private partnerships
Swiss Re has dedicated resources to assess the potential risks of nanotechnology and promote the development of tailored risk management principles Swiss Re supports regulatory efforts to prevent increased exposure and ensure a balanced public dialogue on possible risks
As a leading reinsurer, Swiss Re diversifies the year-on-year variability inherent in natural catastrophe business Swiss Re continuously refines its modelling tools to reflect changes in risk assessment Swiss Re offers clients tailor -made solutions for their catastrophe risk portfolios
Continued business success depends on responsible value creation. In 2006, Swiss Re maintained its commitment to applying sustainability principles to its business activities and playing an active role in society. The launch of new products addressing environmental and social challenges was one of the highlights of the year.
Swiss Re is committed to its overarching corporate responsibility, which aims to create sustainable value for its shareholders and contribute to a responsible society, while providing full accountability to all its stakeholders. The Group-wide framework for meeting this responsibility comprises the three pillars of corporate governance, corporate sustainability and corporate citizenship. The following section covers Swiss Re’s key initiatives in corporate sustainability and its corporate citizenship programme.
Corporate sustainability Environmental and social trends affect the world’s sustainable economic development and thus directly influence the reinsurance business as a whole. Swiss Re analyses these trends continuously and responds to them in its operations and risk management, as well as in solutions for clients.
Clinton Global Initiative In 2005, former US President Bill Clinton and the William J. Clinton Foundation launched the Clinton Global Initiative (CGI) to address four of the world’s most urgent problems: climate change and energy, poverty, public health, and ethnic or religious conflicts. The CGI brings together the world’s leading minds and problem solvers in a shared commitment to concrete actions; Swiss Re was invited to take part because of its expertise on climate change. Represented by CEO Jacques Aigrain at the 2006 CGI Annual Meeting, Swiss Re attracted particular attention for its “COYou2 Reduce and Gain” programme, a unique initiative that offers all Swiss Re employees financial incentives to support private investment in emissions-reducing technologies (such as hybrid cars, photovoltaic solar panels and solar heat collectors), as well as for voluntary activities. The aim is to raise climate change awareness among Swiss Re employees and highlight the contribution they can make as individuals.
The Group’s long-standing commitment and expertise has made Swiss Re an influential voice in the international debate on climate change. Members of the Group’s senior management were asked to join in several major events in 2006, including discussions between Governor of California Arnold Schwarzenegger and British Prime Minister Tony Blair, which led to the establishment of a Global Warming Pact focussing on renewable energy and emissions markets, and a panel discussion with British Foreign Secretary Margaret Beckett on climate security. Furthermore, at the Annual Meeting of the Clinton Global Initiative, Swiss Re presented a unique initiative aimed at assisting its employees in cutting CO2 emissions in their private lives.
Asset management Swiss Re incorporates its sustainability expertise into its asset management activities. The Sustainability Portfolio invests in companies, funds and projects dedicated to addressing and profiting from new approaches to climate change, the low carbon economy, water quality and scarcity, and resource efficiency. In 2006, the portfolio’s value continued to grow substantially, to a total of CHF 376 million of investments and commitments.
Following the integration of Insurance Solutions, the data for the base year 2003 had to be recalculated to provide a consistent benchmark. All the data has been verified by PricewaterhouseCoopers, who will publish an Assurance Report as part of Swiss Re’s full 2006 Corporate Responsibility Report.
Corporate citizenship Swiss Re addresses environmental and social issues that are of relevance to society as a whole and the Group’s business through its “Sharing Solutions” programme. Extending risk management expertise and financial aid to selected partners, the Group supports sustainability, humanitarian and community initiatives.
Sustainability initiatives Swiss Re once again conferred its ReSource Award for Sustainable Watershed Management, originally launched five years ago. The main award went to a project in the Philippines compensating local people for environmental activities in upstream areas that help to preserve a sustainable water supply for communities further downstream. The Group also continued its support for a project promoting ecological sanitation techniques around Puzhehei Lake in Yunnan province, China, a previous award winner with significant long-term potential. Swiss Re’s contribution will help extend sanitation measures to more private households, as well as to large-scale animal husbandry and wastewater treatment.
Humanitarian initiatives Recent experience shows the importance of systematic efforts in preventing natural catastrophes from turning into humanitarian disasters. Swiss Re is committed to making a tangible contribution towards this goal. It has recently entered into two long-term partnerships with leading organisations in the field. As one of seven selected private sector members of the International Committee of the Red Cross (ICRC) Corporate Support Group, whose first annual meeting was hosted by Swiss Re, the Group supports the training and development of ICRC employees and external staff for emergency situations. A partnership with Caritas Switzerland focuses on building earthquake-proof schools in Pakistan; Swiss Re also supported the publication of an easy-to-use handbook on earthquake resistant construction.
Community initiatives Swiss Re supports local institutions and employee-initiated charity projects in the communities in which it operates. The Group gained a number of new business locations through the acquisition of GE Insurance Solutions and continues to sponsor local community-building efforts in these locations. In Kansas City, the former headquarters of GE Insurance Solutions, more than 130 employees took part in the annual “Community Day”, assisting two local charities with construction and renovation work. Continuing an established tradition, employees also collected a significant amount of money for a charity funding the health and human services safety net in the community. In line with its Group-wide policy, Swiss Re complemented the amount with a substantial contri bution.
What developments do you see affecting the performance and value proposition of the reinsurance industry? There are many developments, and they all point in the same direction: for a leading reinsurer, the key performance factors continue to be global reach, deep market knowledge, risk diversification and financial strength over the long term.
Despite a benign hurricane season in 2006, we are seeing increased risks fuelled by weather and demographic trends; these demand not just experience, but sophisticated, forward-looking assessment. The liability business equally requires a long-term focus: a genuine, shared commitment with clients, backed by adequate pricing and sound contract terms. The continued low interest rate environment, combined with greater transparency in pricing and reserving, have sharpened the focus of the industry on underwriting profitability; at the same time, clients and shareholders both benefit from increased pricing certainty. Finally, our competitive landscape is marked by increased convergence of banking, reinsurance and other capital market businesses, demanding strong additional skills from leading players.
Further, recent events have revealed shortcomings in the way both markets and governments address certain risks, such as terrorism and mega-catastrophes. Some solutions will involve state and private sector partnership, secured, where necessary, with additional capacity from the capital markets.
“Our scale, diversification and expertise are a unique advantage in enhancing earnings quality and stability.”
Advancing organisational excellence is key to our success. Efficient processes and advanced technology create a smoother-running organisation and improve speed and responsiveness to client services. Delivering our employees’ talents efficiently: that, ultimately, is what drives Swiss Re’s performance.
What is Swiss Re doing to make itself a stronger company and remain the leader? The acquisition last year of GE Insurance Solutions strengthened Swiss Re’s position as the leading reinsurer. We expanded our skills and product offerings, established greater market presence around the world and hence achieved wider diversification.
How will Swiss Re develop in a longer term? Our clients’ risks are our risks. To be their first choice reinsurer, we must know deeply, not just their needs, but the wider developments of industry, economy and society. Our continuously developing expertise and skills will support a comprehensive range of risk management and risk transfer services.
Swiss Re has long been a market leader in insurance-linked securitisation, both as a sponsor for its own needs ( accessing the capital markets for retrocession capacity) and as an arranger (structuring and placing insurance-linked securities for clients).
Members of Swiss Re’s capital markets and reinsurance teams planning the Successor transaction. New York team on screen (from left): Claudine Delavy, Markus Schmutz and Stefano Sola (Capital Management and Advisory). Zurich team (from left): Martin Bertogg, Martin Bisping and David Bresch (Property & Specialty).
Norwich Union is part of Aviva, the world’s fifth-largest insurance group and the biggest insurer in the UK. Aviva is one of the leading providers of life and pensions products in Europe, and has substantial businesses elsewhere around the world. As a fast-growing company, Aviva has a particular need for efficient capital management.
In late 2005, Norwich Union approached Swiss Re’s Structured Life Reinsurance Solutions team to discuss its 2006 capital plans. Drawing on Swiss Re’s broad range of capital solutions, the two parties created a structure that met Norwich Union’s requirements for flexibility, cost-effectiveness and, importantly, speedy execution: the arrangement was fully implemented just two months after the first meeting.
Capital restrictions can impair a life insurer ’s capacity to expand its business, so Swiss Re offers capital management solutions to life insurance clients, such as Norwich Union, that unlock future profits. This provides clients with immediate capital relief by reducing the amount of regulatory capital they must hold. Under a reinsurance financing treaty, a life insurer can pledge future profits to Swiss Re, in return for reinsurance capacity that transfers risk from the insurer to the reinsurer and satisfies the criteria for regulatory capital. For an appropriate fee, the reinsurer is liable to pay claims if profits are below a specified threshold.
Performance for partnerships Swiss Re assisted Mexico in becoming the first country to access the reinsurance and capital markets for parametric catastrophe protection.
The catastrophe bond and parametric reinsurance programme designed by Swiss Re and the FONDEN working group provides the Mexican government with a significant source of alternative insurance capacity that meets their unique requirements. By issuing a catastrophe bond, Mexico benefits from multi-year, collateralised cover at a fixed price.
Swiss Re’s reinsurance expertise and leading position in the insurance-linked securities sector made it the ideal partner to lead the structuring and bond placement. The transaction was a global effort involving teams in New York, Mexico, Barbados and Zurich.
“The CAT-Mex transaction provides an alternative that allows access to the capital markets, and a new source of capacity for the Natural Disaster Fund. The Ministry of Finance of Mexico, in conjunction with Swiss Re‘s expertise in insurance-linked securities, shows that it is possible to conceive public-private partnerships and develop innovative transactions like the Mexican transaction.” Victor Cardenas Santiago, Deputy Director of Catastrophe Risk, Ministry of Finance and Public Credit of Mexico
Located in one of the world’s most seismically active regions, Mexico faces significant challenges in managing the human and economic costs of catastrophic events. Following the devastating Mexico City earthquake in 1985, the government sought to establish a more focused disaster risk management. This led to the creation of the Natural Disaster Fund
(FONDEN), a federal trust for disaster expenses. One of FONDEN’s key strategies is to use its funding in the most cost-effective way by acquiring insurance.
In June 2006, Swiss Re structured and placed a transaction that provided FONDEN with USD 450 million of coverage through an innovative combination of a catastrophe bond issuance by CATMex Ltd. and a reinsurance placement.
Mexican government and Swiss Re representatives meeting in Mexico City: (from left) Victor Cardenas Santiago, Deputy Director of Catastrophe Risk, and Jose Antonio Gonzalez Anaya, Head of the Unit of Coordination with States (both from the Ministry of Finance and Public Credit of Mexico), Jay Green (Swiss Re, Capital Management and Advisory) and Richard Schneider (Swiss Re, Americas).
Performance for the future A partnership between Swiss Re and TTK Healthcare Services offers bestpractice solutions for the fast growing medical insurance market in India.
The Indian market will benefit from Swiss Re’s global and long-standing experience. Swiss Re offers a wide range of innovative products, access to international best practice, proven approaches to risk management and, importantly, a seamless administration service for medical insurance clients.
2006 was a good year for the global insurance industry, with solid underwriting results, a below- average burden from catastrophic events, and a stable macro-economic and financial environment.
Solid economic growth, yields moderately up, strong stock market performance, dollar devaluing The global economy continued to see solid growth in 2006, at an average rate of around 5%. The broad-based expansion finally reached Western Europe, fuelling growth rates of 2.5% to 3%. Despite a slowdown in the second half of 2006, the US still achieved an average annual rate above 3% and Japan continued its robust expansion in excess of 2%. Emerging markets grew by more than 7% – the 10.7% growth of the Chinese economy significantly contributed to global expansion, although it also sparked shortages and price increases in many commodity markets. Oil prices, which had been perceived as the most important threat to the global business cycle, peaked
Property and casualty insurance: good underwriting results led to stronger balance sheets The most notable development in the property and casualty industry was the low level of catastrophe events. Property insurers fared well in 2006 with only three events in the billion-dollar range and total insured catastrophe claims of USD 15.9 billion. This was mainly due to the quiet hurricane season in the US and surrounding areas, as well as the absence of large catastrophes in Europe.
However, the foundation for the excellent 2006 results was clearly laid by the underlying underwriting profitability, and most of the primary insurers published another year of positive underwriting results. In the US, an industry-wide combined ratio of below 95% was achieved, compared to 101% in 2005, and preliminary information suggests similarly good results in major European markets. Reinsurers, who are comparably more exposed to large events, enjoyed a quiet year and outperformed the primary sector.
Due to the sustained underwriting discipline of recent years, the quality of current non-life profits is far superior to those seen in the second half of the 1990s, when excellent results were driven by a booming stock market rather than sound technical pricing.
Although improvements in general economic activity triggered a rise in insurance demand, stable or declining primary rates in most lines of business meant that premium growth was sluggish for insurers, while reinsurers also experienced low growth as clients increased their retention of business, reflecting improved financial health.
Life insurance: back on the road of expansion Life insurance continued to expand in 2006, with positive premium growth in all major regions. First estimates indicate that markets in the developed world grew between 5% and 10%, with a global average of around 7%. However, average growth has not regained the high levels seen in the late 1990s.
Due to the ongoing restructuring of the primary life industry, the market for the management of closed blocks of business grew in 2006, particularly in the UK.
Strong underlying performance across all businesses, combined with low catastrophe losses and a solid investment performance, produced net income of CHF 4.6 billion and excellent earnings per share of CHF 13.49.
Net investment income was CHF 7.0 billion, a 14% increase over the previous year. This rise was due to increasing yields on fixed income securities, overall portfolio growth from strong operating cash flows and the GE Insurance Solutions port folio.
Net realised investment gains were CHF 1.9 billion. This represents a decrease of 44%. In 2005, realised gains on fixed income securities were higher due to sales of USD 1 billion of mostly BBBrated corporate bonds in North America. 2005 also included a large unrealised gain due to currency remeasurement.
Claims and claim adjustment expenses decreased by 20% to CHF 11.8 billion, reflecting excellent claims experience during the year. The increase in life and health benefits by 11% to CHF 9.6 billion reflects both the inclusion of GE Insurance Solutions and growth in the business.
The tax expense in 2006 was CHF 1.3 billion. This represents an effective tax rate of 22%, compared to 10% in the prior year. In 2005, the tax rate was impacted by currency exchange remeasurement gains in pre-tax income, and by deferred and current tax expense, including changes in valuation allowances and the tax treatment of goodwill and inter-company dividends.
Asset management strategy Swiss Re’s investment strategy has two goals: meeting the Group’s insurance obligations and achieving an attractive riskadjusted return. Insurance obligations are generally matched using fixed income securities, where currency, duration and credit exposure are managed to address the various liability profiles. Funds not needed to support insurance obligations are managed to generate a positive absolute risk-adjusted return through a variety of investment vehicles. Swiss Re measures and monitors investment risk in comparison with a notional minimum risk portfolio representing the liability profile of the business.
All data relating to the investments acquired with GE Insurance Solutions has been successfully migrated to Swiss Re’s platform, thus ensuring fully integrated risk management.
Investment result The investment result for assets held for linked liabilities relates to separate account business and other contracts where the Group invests the contract holder’s funds, as directed by the contract holder. All investment performance is passed through to the contract holder and does not belong to Swiss Re. Therefore, the following comments on the investment performance and the investment portfolio exclude assets held for linked liabilities.
Investment performance Swiss Re delivered a strong investment result in 2006 as higher fixed income yields offset a lower net realised investment gains.
Overall, the return on investments was 5.3%, compared with 6.3% in 2005 which benefited from a large currency exchange remeasurement gain.
² At average currency exchange rates; excluding result from assets held for linked liabilities
Fixed income Swiss Re successfully captured market movements by actively managing the duration of the portfolio as bond yields rose over the course of 2006 in the major bond markets. The Group also liquidated
the large municipal bond portfolio acquired with GE Insurance Solutions. The average running yield on Swiss Re’s portfolio increased from 4.6% in 2005 to 4.8% in 2006.
Credit spreads ended the year little changed despite market adjustments in May and June, when equity markets weakened and volatility rose. Swiss Re maintained a sizeable credit position during 2006 – largely in the US dollar life and health portfolio. The GE Insurance Solutions and the GE Life UK acquisitions added CHF 6.5 billion and CHF 6.6 billion of corporate bonds to the portfolio respectively, increasing the Group’s total gross exposure from CHF 21.0 billion at the end of 2005 to CHF 33.3 billion at the end of 2006. In addition to sales, mostly in acquired portfolios, the Group purchased credit default swaps on investment grade indices with the majority of the protection acquired in the A and BBB ratings. The net effect of the hedges was to reduce Swiss Re’s stress test exposure to widening credit spreads to CHF 1.2 billion on average in 2006.
Net unrealised gains of CHF 2.2 billion at the end of 2005 decreased to CHF 1 billion at the end of 2006. However, as a
3% Other 2% Real estate 8% Cash and cash equivalents 79% Fixed income 8% Equities
¹ Excluding assets held for linked liabilities of CHF 23.3 billion major portion of the fixed income portfolio was matched by duration to the insurance liabilities, the market movements had little economic impact.
Equities After a strong performance during the first four months of 2006, equity markets corrected in May and June before resuming their upward trend for the rest of the year. Swiss Re successfully protected its earnings during this period by using equity derivative instruments. During the second half of 2006, Swiss Re increased its gross exposure from CHF 8.4 billion at the end of 2005 to CHF 13.2 billion at the end of 2006, to take advantage of rising stock prices.
Other Other includes the costs (net realised losses) of CHF 396 million for the derivatives used to hedge the equity and corporate bond portfolios against potential large declines in equity markets or widening of spreads. In addition, costs (net realised losses) of CHF 182 million were increased for various reinsurance derivatives, reflecting the lower level of natural catastrophes in 2006. Aggregate costs on derivatives were more than offset by the performance of the underlying portfolios in 2006.
Investment expenses Investment expenses increased in line with the growth in assets under management.
Asset-liability management at Swiss Re Asset-liability management (ALM) is an integral part of the way Swiss Re monitors and manages financial market risk. It involves splitting Swiss Re’s economic balance sheet into two virtual balance sheets: one exposed to insurance risk and the other to financial market risk.
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 Asset Management. Combining both balance sheets reproduces the full Group balance sheet.
In particular, the Group monitors the potential impact from interest rate changes on its investment and minimum risk portfolios. The interest rate exposure is measured in terms of the change in value of interest rate sensitive instruments from an upward shift of key interest rates by 1 basis point (price value of 1 basis point). In addition, interest rate risk is assessed by scenario analysis, and quantified in terms of Value at Risk (VaR) and Tail VaR (expected shortfall) for various confidence levels and holding periods.
Asset-liability match of Swiss Re Group as at 31 December 2006
Changes in shareholders’ equity CHF millions 2005 2006 Change in %
Summary cash flow statement CHF millions 2005 2006 Change in %
Cash and cash equivalents as of 31 December 8 368 13 606 63
Operating income increased to CHF 5.0 billion, reflecting both strong underlying performance and the lower level of natural catastrophe events.
Terrorism exposure received continued attention. In the US, the Terrorism Risk Insurance Act legislation was extended while the industry continues to pursue a permanent public-private partnership solution. In Europe, both France and Belgium made legislative enhancements to terrorism coverage.
The casualty segment has reached a challenging point in the business cycle. Price competition increased in 2006 and there is a noticeable trend towards higher client retentions. Rate levels were mostly flat or, in some instances, decreased slightly. Swiss Re’s strong underwriting discipline ensures that it achieves its overall profit margins and deploys capital to areas that add the most economic value.
Swiss Re is responding to these developments by maintaining its strict underwriting discipline, adjusting prices and developing new products.
Clients benefited from Swiss Re’s rapid integration of Insurance Solutions, which established a uniform philosophy and underwriting approach across all lines and extended the benefit of Swiss Re’s expertise and capacity to all clients in year-end renewals.
Business results Operating income increased from CHF 0.8 billion in 2005 to CHF 5.0 billion in 2006. This improvement reflects three factors: strong performance across all lines of business, a lower level of natural catastrophe claims compared to 2005 and the contribution from GE Insurance Solutions in the second half of the year. Underlying portfolio profitability increased as a result of attractive rates, as well as the tighter terms and conditions introduced in previous years. Claims from natural catastrophes amounted to CHF 0.7 billion, or 3.8% of premiums, compared to CHF 3.0 billion or 17% of premiums in 2005. The acquisition of GE Insurance Solutions further diversified Swiss Re’s book of business, in particular in the US regional property and casualty business.
The combined ratio improved from 111.2% to 70.1% excluding the unwind of reserve discount, reflecting the lower incidence and severity of both natural catastrophes and man-made claims.
Liability experience improved significantly compared to 2005, reflected in a 27.3% decrease in the combined ratio excluding the unwind of reserves discount. Overall, liability business achieved an operating profit of CHF 1.1 billion reflecting the substantial investment income earned on the assets backing the claims reserves.
Motor pricing remained stable and terms and conditions in general were unchanged. France reported higher claims as an upward trend in bodily injury awards continued.
Premiums earned grew significantly, by 30%. Most of the increase stemmed from Asia and the Americas. GE Insurance Solutions contributed CHF 249 million to premiums earned in 2006, mostly in the US.
Reserve strengthening in the US and the impact of a large proportional contract led to an increase in the combined ratio. Swiss Re continues to manage this line carefully, including shifting to more short tail lines in the US and further reducing workers’ compensation business.
Specialty lines improved their performance significantly, particularly in marine as well as positive run-off in aviation and space. Excluding the contribution from GE Insurance Solutions, premium volume remained stable at CHF 2.8 billion.
Marine business benefited from increased rates at the 2006 renewals, due mainly to the hurricanes in the US during 2005.
Business developments In the US, premiums grew moderately year-on-year despite declining cession rates. The underwriting and risk management of primary insurers continues to improve. The mortality experience in North America for the Life & Health business was stable over the year.
The acquisition of GE Insurance Solutions significantly expanded Swiss Re’s product range and geographic reach, particularly in Europe. With more than 98% of GE Insurance Solutions’ life and health business retained since completion, the acquisition particularly increased the Group’s presence in living benefits lines. Swiss Re successfully grew its UK guaranteed critical illness business, facilitated by GE Insurance Solutions’ position as the leading reinsurer in this field, which further diversified the Group’s book by adding additional health business.
New business in Asia continued to reflect strong profitable growth throughout the region and across both life and health business lines.
Acquisition costs slightly increased to CHF 2.3 billion. The amortisation of the present value of future profits (PVFP) was reduced by the Admin ReSM securitisations, which are in the form of retrocession arrangements. This reduction was offset by the amortisation of the PVFP recognised in the GE Insurance Solutions acquisition.
Operating result, excluding nonparticipating net realised investment gains 1 333 1 517 14
Traditional life premiums and fees totalled CHF 7.9 billion in 2006, an increase of 12%, reflecting new business written in the US, the UK, and Asia as well as the European life business acquired as part of GE Insurance Solutions. Traditional health premiums grew from CHF 1.6 billion in 2005 to CHF 2.2 billion in 2006, largely due to the GE Insurance Solutions acquisition. Excluding the impact of the securitisations, Admin ReSM premiums and fees remained stable at CHF 2.1 billion.
Premiums earned and fee income in Europe increased with the acquisition of the European life and health business of GE Insurance Solutions and general growth in new business. The business growth in North America was more than offset by the European business acquired as part of GE Insurance Solutions.
The return for traditional health business rose from 9.6% in 2005 to 13.7% in 2006, reflecting excellent claims experience.
Fox-Pitt, Kelton (FPK) was sold to an investor group on 28 June 2006.
Total investment return decreased by 7% to CHF 106 million from CHF 114 million in 2005.
from third-party asset management. This growth was accompanied by improved performance, producing an excellent return on total revenues of 26.9% in 2006, compared to 8.1% in 2005.
Operating costs increased to CHF 646 million, driven by an increase in variable compensation costs resulting from strong business performance.
Swiss Re remains committed to delivering enhanced sustainable returns to its shareholders by maintaining strict underwriting discipline and withdrawing capacity where economic terms are insufficient. Also, the Group will continue to address volatility on both sides of its balance sheet by actively hedging its investment and underwriting exposures, including seeking innovative solutions in the capital markets.
In property, price levels for peak natural catastrophe exposures are expected to remain technically very strong despite the increase of the Florida Hurricane Catastrophe Fund, especially for reinsurers with strong security. Winterstorm Kyrill in January 2007 reminded the industry of European weather-related risk.
In casualty, Swiss Re continues to address the drivers of liability risks, translating the evolving risk landscape into new products for clients. One example is the EU Directive on Environmental Liability which will be adopted into the law of the member states by 30 April 2007. Swiss Re has developed a site-related model for hazard analysis, linking current models with geographic information systems.
Further consolidation in the life sector in developed markets will continue to drive the growing trend for transferring closed blocks of life business to third parties – a trend Swiss Re is well placed to take advantage of through its Admin ReSM operation.
Swiss Re’s risk and capital management ensures controlled risk taking and adequate capitalisation, maintaining the financial flexibility to profit from attractive business opportunities.
Open risk culture: risk transparency and responsiveness to change are integral to Swiss Re’s risk control process.
management principles and policies, as well as for approving Swiss Re’s overall risk tolerance. The Board committees dealing with risk management issues include the Finance and Risk Committee as well as the Audit Committee.
Within the Executive Committee, the Chief Financial Officer is responsible for the business planning process and defining asset management benchmarks. The Chief Risk Officer leads the global risk management function, which is responsible for risk controlling across the Group (see Figure 1).
Each of these departments is entrusted with Group-wide responsibility for identifying, assessing and controlling their allocated risks. The Corporate Integrated Risk Management department is responsible for assessing the combined impact of all risks and reporting on Swiss Re’s overall risk position. The Sustainability & Emerging Risks unit coordinates the monitoring and management of emerging risks that may become significant for Swiss Re as well as the Group’s sustainability activities. Finally, the Corporate Actuarial department assesses life and non-life insurance liabilities from the accounting, statutory and economic perspectives.
None of these departments executes business; they oversee risk-taking activities and set the risk management guidelines and best practice standards that the business units implement.
Governance Risk and capital management es, people, systems, external events, or non-compliance with regulation resulting in regulatory penalties or an inability to operate properly. Management of operational risk is designed to reduce it to an acceptable level, since there is no financial return for carrying operational risk.
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 Con duct mitigates reputational risk. These values are supported by processes that enable early identification of potential problems.
The model generates a probability distribution for the Group’s annual economic profit and loss, specifying the likelihood that the profit or loss will fall within any given range. From this distribution a base capital requirement is derived that captures the potential for severe, but rare, aggregate losses over a one-year time horizon. Swiss Re compares the base capital requirement with available capital to determine the adequacy of its capitalisation.
An important aspect of the SST is the recognition of the fundamental economic principle of diversification, taking legal structures and contracts into consideration. Swiss Re is tailoring its internal risk-based approach to meet the specific SST requirements.
The details of Solvency II are yet to be defined. Swiss Re is actively involved in the development of Solvency II and participated in the two Quantitative Impact Studies conducted by the European Commission. Thanks to this involvement and Swiss Re’s long experience in using an economic risk-based framework for internal purposes, the Group is well prepared for the new solvency requirements.
Insurance risk management Property and casualty risk arises predominantly from the property, casualty (including motor), and specialty lines. The Group Property & Casualty Risk Guideline in conjunction with the Group Risk Management Guideline establishes the risk governance framework for property and casualty risk. Limits to prevent excessive exposure to any individual risk, or to the same underlying risk, are monitored Group-wide. In addition, each underwriter is given a defined limit per treaty programme and
¹ Different to mid-2005, mid-2006 data includes GE Insurance Solutions (IS). Between mid-2005 and mid-2006 there have been a few model improvements and data enhancements. They include enhanced models for natural catastrophes, eg the recalibration of the Atlantic hurricane model after Katrina.
Estimated economic impact of each single loss event in CHF billions as of 31 December 2005 2006
Table 2 reports the expected pre-tax claims of Swiss Re for major natural catastrophe loss events, allowing for insurancelinked securities, industry loss warranties, retrocession and risk swaps. The figures take into account the fact that an event can trig ger claims in various lines of business. For instance, the windstorm Europe scenario includes, among others, claims from the motor line, and the California earthquake scenario also reflects – but is not limited to – additional claims arising from workers’ compensation and general liability.
The economic impact of the top natural catastrophe risk scenarios has increased greatly since the end of 2005 (see Table 2). This is primarily due to the risks assumed through the GE Insurance Solutions acquisition but also reflects model adjustments, specifically to Atlantic hurricane storm surge and storm frequency,
Pharmaceutical interventions include antibiotics and antivirals. Antibiotics have a large effect in reducing mortality from secondary infections – their effectiveness is well understood. Therefore, only a small variation in effectiveness has been assumed in the model. Pandemics with high lethality are expected to cause larger numbers of viral pneumonia deaths, affecting mostly young adults. Antivirals are in most cases expected to slow the spread of influenza, reduce the peak rate of illness, and reduce overall mortality substantially. Such therapy is now available and these drugs are being stockpiled by many governments. Nevertheless, their effectiveness against a wide range of potential viruses is not fully understood. This is accommodated in the model by assuming that antivirals would not work at all in one out of three simulated pandemics.
Governance Risk and capital management prompted by the experience of Hurricane Katrina. The significant rise in the potential impact from a California earthquake also reflects increased exposure in the portfolio due to attractive risk-adjusted market opportunities.
The GE Insurance Solutions acquisition not only influences top natural catastrophe risks but also a number of specialty lines. Swiss Re’s exposure to aviation terror risk, for example, increased significantly due to a large increase in all-risks covers and the inclusion of the GE Insurance Solutions’ third-party liability war/terror product. In a scenario such as the Heathrow terror plot thwarted in August 2006, in which two of the targeted airlines were owned by non-US carriers (US airline carriers receive governmental coverage under the Homeland Security Act) and where the airplanes potentially could have exploded over the ocean, the total potential loss to Swiss Re would have been approximately USD 125 million. If, however, five non-US airplanes had crashed into urban areas, thus creating additional third-party liability war/ terror claims, the potential loss to Swiss Re would have been ten times larger.
The Group Life & Health Risk Management Guidelines and Group Reinsurance Guidelines articulate Swiss Re’s attitude and approach towards life and health risk taking by the business units with oversight by Life & Health Risk Management. These guidelines include detailed guidance on referral procedures and approval bodies.
An integrated approach to assurance and audit across the business provides increased oversight by Swiss Re experts on the appropriateness of technical processes and decisions.
Life & Health Risk Management is responsible for the Group-wide monitoring and reporting of life and health risk. The acquired GE Insurance Solutions portfolio has been incorporated into this process. Where appropriate, Swiss Re also uses insurance-linked securities as a means of reducing peak exposures. The Vita index -linked security transactions, for example, were arranged to provide protection against extreme mortality events. This is now a well established programme. The original Vita I programme for USD 400 million expired at the end of 2006 and was successfully replaced by Vita III for USD 705 million.
US epidemic – 300 000 excess deaths, proportionally spread –0.5 –0.4
US epidemic – 300 000 excess deaths, evenly spread –2.1 –1.9
Governance Risk and capital management a more detailed set of risk limits into their business, including stop loss triggers. CMA, for instance, uses a 10-day 99% VaR to limit and monitor its financial market risk on a daily basis. Group Credit & Financial Market Risk Guidelines define minimum standards for managing financial market risk; these are supplemented by Derivative Guidelines, Investment Guidelines and business-specific guidelines.
Financial market risk is identified using a risk inventory of the various risk factors that each business unit is exposed to. Each business area is responsible for measuring the financial market risk arising from its own activities within guidelines provided by Risk Management; the results are captured in the Market Risk Aggregation & Reporting System, which is also used for risk modelling and risk reporting at Group level. The asset-liability management report summarises financial market risks at Group level. PAM reports risk on a weekly basis, while CMA uses a combination of daily and weekly reporting. These reports are the primary tools used to track exposures and monitor usage of limits. Credit & Financial Market Risk Management independently monitors limit usage. The limits are reported to the head of the business unit, who is also ultimately responsible for risk steering. The business unit heads seek to optimise their re spective portfolios within their limits, including the use of cash and derivative instruments.
The equity scenario includes traded equities, private equities, equity derivatives, Guaranteed Minimum Death Benefit products and funding obligations arising from equity holdings in Swiss Re pension funds. The significant rise in the global equity market scenario is due to increased exposures from traded equities, hedge funds and private equity. The interest rate scenario shows the net impact on assets and liabilities from a rise in interest rates. Real estate exposure includes investments in real estate and own-use property.
Deterioration of recovery levels comparable to experience of 2001 –0.2 –0.3
Governance Risk and capital management in the Group, thus providing essential transparency to allow for the successful implementation of active exposure management strategies for specific counterparties, industry sectors and geographic regions.
Operational risk management The management of operational risk is an integral part of Swiss Re’s risk management framework.
Risk tolerance: Capital and earnings protection Swiss Re’s risk tolerance represents the amount of risk the Group is willing to accept within the constraints imposed by its capital resources, its strategy, its risk appetite, and the regulatory and rating agency environment within which it operates. This risk tolerance is reflected by clearly defined targets for all relevant areas. These targets primarily aim to control risks to capital adequacy, but also consider other dimensions, such as earnings volatility.
For example, as at the end of September 2006, in the midst of the US hurricane season, Swiss Re’s overall earnings protection based on a 25-year return period for Atlantic hurricane amounted to USD 1.0 billion, which corresponds to nearly half of the expected gross claims amount from such an event (see table below). For this and other top catastrophe risks, earnings and capital protection measures are in place, such as the Successor catastrophe bond programme issued in 2006.
ensures that the top operational risks of the Group and their mitigation status are regularly monitored by the Executive Committee.
Experts in different areas of operational risk management (such as IT Security and Business Continuity Management) have their activities integrated within the overall risk governance structure. Moreover,
Capital management Capital Management’s key task is to ensure that Swiss Re is adequately capitalised at all times and able to maintain
Governance Risk and capital management financial strength even after a large loss event, and that all legal entities meet their respective capital requirements.
Available capital 32.6 40.6 1 All figures based on Swiss GAAP 2 Includes fixed income securities (excluding fixed income securities backing life and health reserves), investments in real estate, and own-use property 3 Includes discounting of non-life reserves, life and health‘s value not recognised in the balance sheet and other 4 Tax impact on the above adjustments 5 Includes GE Insurance Solutions
After the acquisition of GE Insurance Solutions was completed on 9 June 2006, both Moody’s and A.M. Best confirmed Swiss Re’s rating at Aa2 and A+. These affirmations reflect Swiss Re’s thorough due diligence process, prudent financing and well advanced integration of the acquired business.
Standard & Poor’s lowering of Swiss Re’s rating to AA-/stable on 12 June 2006 reflects the size of the acquisition. S & P in dicated that the outlook could be revised to positive, once the integration is successfully completed and the combined entity demonstrates a very strong operating performance.
On 31 October and 8 November 2006, S & P and Moody’s upgraded all acquired operating GE Insurance Solutions entities to the Group’s AA– and Aa2 ratings respectively. On 5 February 2007, A.M. Best upgraded all acquired US subsidiaries of GE Insurance Solutions to the Group’s A+ rating. These upgrades to core status within Swiss Re Group reflect the advanced stage of integration of the acquired business.
In funded transactions, foreign exchange, interest rate, equity and credit risks are typically offset. They do not significantly affect Swiss Re’s overall financial market profile. These transactions appear on the balance sheet as “Financial services assets” and “Financial services liabilities ” (see pages 110–111 of the Financial Statements) and are taken into account in Swiss Re’s risk management process.
Swiss Re also successfully renewed its European Medium Term Note (EMTN) programme with dual registration on the Euro MTF in Luxembourg and the SWX Swiss Exchange, increasing the programme limit to USD 10 billion. As of the end of December 2006, outstanding EMTN issues amounted to an aggregate book value of USD 3.6 billion.
During 2006, Swiss Re repaid USD 300 million and CHF 100 million of senior financial debt, as well as EUR 250 million of subordinated financial debt.
In the wake of major corporate failures and breakdowns, corporate governance, as well as legislative and regulatory developments, have been increasingly in the spotlight worldwide in recent years. Swiss Re takes a proactive approach to aligning investors’ expectations and interests with its own, and continues to conduct benchmarking with best practice standards.
As a Swiss publicly listed company, Swiss Re’s governance is measured primarily against the Swiss Code of Best Practice for Corporate Governance. Swiss Re is also subject to the Directive on Information relating to Corporate Governance and its Annex and Commentary, issued by SWX Swiss Exchange and effective since 1 July 2002 (also referred to as the “SWX Directive”). Additionally, Swiss Re complies with the applicable local rules and regulations of all the countries in which it does business. As the SWX Directive continues to be applicable, the information provided in this section of the Annual Report remains similar to preceding years, following the structure of the SWX Directive.
As of 31 December 2006, there were two shareholders with a participation exceeding the 5% threshold of Swiss Re’s share capital.
b. The Capital Group Companies, Inc., domiciled in Los Angeles, informed SWX Swiss Exchange on 22 November 2005 that its holdings increased to 5.1% of Swiss Re’s voting rights. As these shares have mostly not been registered under Capital Group Companies or any of their group companies, Swiss Re is unable to track, on its own, changes in this shareholder’s aggregate holdings.
There are no cross-shareholdings to report, as Swiss Re does not hold 5% or more of the shares or voting rights of any company which, in turn, also owns 5% or more of Swiss Re’s shares or voting rights.
Please refer to the Swiss Reinsurance Company, Zurich, financial statements, note 5 on “Shareholders’ equity”, page 181.
The Annual General Meeting 2004 approved an increase of conditional capital from CHF 900 000 to CHF 2 000 000, representing a maximum of 20 million registered shares, payable in full, each with a nominal value of CHF 0.10, for the exercise of con version rights and warrants granted in connection with bonds or similar instruments issued by the Group.
At an Extraordinary General Meeting (EGM) held on 27 February 2006, shareholders approved the creation of CHF 9 000 000 of authorised capital as well as an increase of conditional capital by CHF 2 000 000, thereby enabling management to execute the transaction agreement relating to the acquisition of GE Insurance Solutions Corporation and for general corporate purposes. An overview of the effects of the EGM resolutions on Swiss Re’s capital is shown in the following tables: General Electric (GE) Capital markets
Authorised capital Up to 60 million shares in favour of GE: Share component of purchase price for GEIS1
Authorisation to increase share capital over two years (remainder will lapse)
subscription rights: Possible funding of cash component of purchase price for GEIS
As of 31 December 2006, Swiss Reinsurance Company’s share capital, including shares reserved for corporate purposes, amounted to CHF 37 444 038. It is fully paid-in and divided into 374 440 378 registered shares (each with a nominal value of CHF 0.10), of which 358 256 229 are entitled to dividend. Other than the shares reserved for corporate purposes, which have no voting power and are not entitled to dividend, there are no additional types of shares with a higher or limited voting power, privileged dividend entitlement or any other preferential rights; nor are there any other securities representing a part of the company’s share capital. Swiss Re’s capital structure ensures equal treatment of all shareholders in accordance with the principle of “one share, one vote”.
Convertible bonds As stated in note 6 on “Debt” on pages 134–137 of the Financial Statements, the following convertible bonds are outstanding: Maturity Instrument Issued in Currency Nominal (m) Exchange terms 2007 Mandatory convertible bond 2004 EUR 672 ii)
(i) Holders may convert the bonds, due 2021 and issued in denominations of USD 10 000 principal amount and integral multiples thereof, into registered shares of Swiss Reinsurance Company (nominal value CHF 0.10 per share) at any time on and after 22 November 2001, and prior to the close of business on 21 November 2011, at a conversion price of CHF 207.19 per share and a fixed exchange rate of USD 1= CHF 1.6641. The exercise of this convertible bond will not affect Swiss Re’s conditional capital, as Swiss Reinsurance Company purchased a call option to hedge the underlying shares. If bond holders exercise this convertible bond, Swiss Re will exercise the hedge option purchased to obtain the necessary shares without accessing Swiss Re’s conditional capital.
of initially 18.956 shares per MCS; (ii) if the closing price is greater than or equal to the maximum conversion price of CHF 96.4968, the conversion ratio shall be equal to the minimum conversion ratio of initially 15.796 shares per MCS; and (iii) if the closing price is greater than the minimum conversion price, but less than the maximum conversion price, the conversion ratio shall be equal to EUR 1 000 multiplied by the fixed exchange rate (EUR 1 = CHF 1.5243) and divided by the closing price. Based on the closing price, Swiss Re will be required to deliver between 10.6 million and 12.7 million shares created from conditional capital or shares reserved for corporate purposes.
Unless previously converted, each MCS will be mandatorily converted on the maturity date into such number of registered shares of Swiss Re as is equal to the maturity conversion ratio. The maturity conversion ratio equals the arithmetic average of the 15 conversion ratios calculated on the basis of the CHF closing prices of the shares on the virt-x (“closing price”) on each of the 15 consecutive trading days ending on the third trading day prior to the maturity date. For the purposes of calculating such arithmetic average, the conversion ratio for a given trading day is determined as follows: (i) if the closing price is less than or equal to the minimum conversion price of CHF 95.60, the conversion ratio shall be equal to the maximum conversion ratio of initially 1 046.0251 shares per MCS; (ii) if the closing price is greater than or equal to the maximum conversion price of CHF 114.72, the conversion ratio shall be equal to the minimum conversion ratio of initially 871.68759 shares per MCS; and (iii) if the closing price is greater than the minimum conversion price, but less than the maximum conversion price, the conversion ratio shall be equal to CHF 100 000 divided by the closing price. Based on the closing price, Swiss Re will be required to deliver between 8.7 million and 10.5 million shares created from conditional capital or shares reserved for corporate purposes.
Unless previously converted, each MCS will be mandatorily converted on the maturity date into such number of registered shares of Swiss Reinsurance Company as is equal to the maturity conversion ratio. The maturity conversion ratio equals the arithmetic average of the 15 conversion ratios calculated on the basis of the CHF closing prices of the shares on the virt-x (“closing price”) on each of the 15 consecutive trading days ending on the third trading day prior to the maturity date. For the purposes of calculating such arithmetic average, the conversion ratio for a given trading day is determined as follows: (i) if the
Walter B. Kielholz Swiss 55 Executive Vice Chairman of the Board
Mr Forstmoser is also chairman of the board of directors of Hesta AG and Hesta Tex AG, Zug, and a member of the boards of Mikron Holding AG, Biel, Bank Hofmann AG, Zurich (until January 2007), Ernst Basler AG, Zollikon, Remer Holding AG, Ennetbaden, and Hyos Invest Holding AG, Zurich.
Mr Forstmoser is the author of numerous publications on business law, company law, capital markets law and data protection law. In the context of corporate and investment fund legislation, he has been engaged in numerous expert committees, some of which he presided as chairman. In addition, he frequently acts as an arbitrator in international law disputes.
Mr Kielholz, a Swiss citizen born in 1951, studied business administration at the University of St. Gallen, Switzerland, and graduated in 1976 with a master’s degree in business finance and accounting.
1 January 1997 to 31 December 2002. In June 1998 he was elected to Swiss Re’s Board of Directors, which at the same time appointed him Executive Director. His mandate was renewed for a further four-year period in 2002 and 2006. Mr Kielholz was appointed Executive Vice Chairman with effect from 1 January 2003.
In addition, Mr Kielholz is a member of the European Financial Roundtable (EFR) and president of the International Monetary Conference. Mr Kielholz is also chairman of the supervisory board of Avenir Suisse, a member of the board and the committee of the Swiss Business Federation (economiesuisse) and a member of the Center for Strategic and International Studies (CSIS), a US-based think tank. In 2005, he was elected to the Insurance Hall of Fame, which honours individuals who have exercised substantial influence on the insurance industry for the benefit of society.
Mr Baer began his career in the legal department of the Federal Finance Administration. In 1975, he joined Fides Trust Company. Following the successful planning and execution of a management buyout of Fides’ advisory business, he became a member of the management board of KPMG Switzerland in 1992. In 1994, he was appointed CEO of KPMG Switzerland and a member of KPMG’s European and international management boards. He retired from KPMG in September 2004, having reached the statutory retirement age.
Mr Coomber was elected to Swiss Re’s Board of Directors at the Extraordinary General Meeting of 27 February 2006 for a term ending at the AGM of 2009. Mr Coomber also serves as a member of the supervisory board of Euler Hermes, Paris, as a director of Pension Insurance Corporation Holdings LLP and as a trustee of The Climate Group.
Mr Dammerman was elected to Swiss Re’s Board of Directors at the Extraordinary General Meeting of 27 February 2006 for a term ending at the AGM of 2009. He also serves as a non-executive director of BlackRock Inc., New York. In addition, he is a member of the board of trustees of Skidmore College, Saratoga Springs, New York.
Ms Gibson, a Swiss citizen born in 1962, studied business and economics at the Uni versity of Geneva, graduating with a BA in 1982 and a PhD in economics and social sciences in 1987.
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 until 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 Scott is a retired group chief executive of CGNU plc, now Aviva. In the 1990s, he was group chief executive of General Accident and, following the merger with Commercial Union in 1998, was appointed group chief executive of CGU plc. Following the merger in 2000 with Norwich Union, Mr Scott became group chief executive of CGNU plc, retiring in May 2001. Mr Scott was also chairman of the Association of British Insurers in 2000– 2001, and a board member in the previous four years.
Mr Smith, a US and Swiss citizen born in 1938, received a Bachelor of Business Ad ministration from the University of Massachusetts in 1960 and a Master of Business Administration from Boston University in 1965.
Mr Villiger, a Swiss citizen born in 1941, graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a degree in mechanical engineering in 1966.
As an entrepreneur, Mr Villiger co-owned and managed two businesses from 1966 until 1989. Simultaneously, Mr Villiger had several political positions, first in the parliament of canton Lucerne and, from 1982, in the Swiss Federal Parliament. He became a Federal Councillor in 1989. He initially served as Defence Minister, with responsibility for the Federal Military Department. He then became Finance Minister in 1995, being in charge of the Federal Department of Finance until the end of 2003. Mr Villiger was President of the Swiss Confederation in 1995 and 2002.
Robert A. Scott, Director, is also chairman of the board of directors of Yell Group plc and director of The Royal Bank of Scotland Group plc and Jardine Lloyd Thompson Group plc.
Principles of the election procedure and term limits The term of office of a directorship is four years in principle. It usually begins with the date of election by a General Meeting of shareholders and ends on the fourth subsequent Annual General Meeting. Members whose term has expired are immediately eligible for re-election. Each proposed election and re-election is substantiated by the Chairman at the General Meeting and is separately voted upon.
The organisational structure is laid down in the Corporate Bylaws, which also define the responsibilities of the Board of Directors, its committees, the executive management as well as the reporting procedures. Given their significance, the Corporate Bylaws are reviewed annually by both the Governance Committee and the full Board for consideration of expediency as well as compliance with domestic and applicable international laws, regulations and best practice standards.
The committees may conduct or authorise special investigations at any time and at their full discretion into any matters within their respective scope of responsibilities, as laid down in their respective charters of duties, thereby taking into consideration relevant peer group practice and general best practice. They are empowered to retain independent counsel, accountants or other experts if deemed necessary, including for purposes of benchmarking best practice, and shall receive appropriate funding for payment of compensation to such outside advisors.
Tasks and responsibilities Formerly known as the Governance and Shareholder Relations Committee, the Governance Committee was renamed in February 2007. The committee is now also responsible for personnel matters which used to be the duty of the former Compensation and Appointments Committee. The charter of the Governance Committee was amended accordingly. The tasks and reponsibilites outlined below reflect the current status.
c. Work methods of the Board of Directors and its committees In 2006, the Board had six regular meetings on two consecutive days. The first day is reserved for committee meetings, while on the second day the full Board meets for as long as required, usually the whole day. The regular meetings are typically held in early and late February, April, June, September and December. Additional meetings were called at short notice if and when required. Each of the regular Board meetings has a special focus, broadly determined by Swiss Re’s reporting schedule, and including such topics as strategic issues, financial statements, analysis of internal results, the medium-term business plan, and corporate governance. Meeting invitations and agendas are delivered to the directors about 10 days before the meetings together with written materials, including recent financial information, to permit meaningful preparation.
Normally, the members of the Executive Committee attend the meetings of the Board in an advisory capacity. Attendance at committee meetings is normally restricted to those members of executive management with the information and expertise required for the relevant committee to perform its duties. The Head of Group Internal Audit and at least the two head auditors of the external auditor regularly participate in Audit Committee meetings.
The Executive Committee is supported by the larger Executive Board made up of 21 senior executive officers (including the seven members of the Executive Committee). All members of the Executive Board are appointed by the Board of Directors upon recommendation of the Chief Executive Officer and after consultation with the Governance Committee. The Executive Board has two objectives: Defines the most senior management team with direct accountability and responsibility for divisions; and Acts as a sounding board for strategic development and discussion, and tables Groupwide issues such as the business plan.
a. Participation of Board members at meetings of executive management Both the Chairman of the Board and the Executive Vice Chairman are invited to all meetings of the Executive Committee; effectively, the Board of Directors was represented at 24 of the 32 meetings. The Chairman of the Board and the Executive Vice Chairman always receive the meeting documentation and minutes.
b. Involvement of executive management in Board meetings and committee meetings
3.7 Information and control instruments of the Board vis-à-vis executive management 3.7 Information and control instruments of the Board vis-à-vis executive management
Finance and Risk Committee Jacques Aigrain Roger W. Ferguson Ann F. Godbehere1
¹ Until 28 February 2007 c. Description of periodic reporting by executive management At each Board meeting, the “Executive Report” is a standard agenda item, comprising a comprehensive CEO report accompanied by reports of the three business function heads. In addition, Board members receive a printed Monthly Business Update based on the electronic Management Information System.
d3. Regulatory Affairs Vested within Group Finance and headed by the Chief Regulatory Officer, Swiss Re has established a Group Regulatory Affairs function and a Group Regulatory Affairs Network to support the Group in monitoring regulatory developments with a Group impact and ensure a consistent approach to the external communication of regulatory matters. Group Regulatory Affairs assumes a coordinating role in preparing Swiss Re to address and steer current and emerging regulatory reporting standards as well as regulatory capital requirements. Its tasks include ensuring a consistent representation of Swiss Re’s regulatory interests at all levels, preparing and coordinating Swiss Re’s strategic regulatory positions, and leading major regulatory implementations. The Group Regulatory Committee steers the activities and initiatives of Group Regulatory Affairs, and decides on Swiss Re’s regulatory positions.
d4. Risk Management For the risk management organisation and its responsibilities, please see the detailed section on pages 54–55 of the Annual Report.
Mr Aigrain, a Swiss and French citizen born in 1954, received a PhD in economics in 1981 from the Sorbonne in France and a master’s degree in economics from ParisDauphine University.
Mr Aigrain is a member of the board of directors of Swiss International Air Lines Ltd., Basel, a member of the board of the International Association for the Study of Insurance Economics, Geneva (“The Geneva Association”) and a member of various advisory committees of a regional or financial nature.
Ms Godbehere joined Swiss Re in 1996, following the acquisition of the Mercantile & General Group. Until 1998, she held a number of senior positions in Swiss Re Life & Health North America, the last of which being Chief Executive Officer of Swiss Re Life & Health Canada. From 1998 to 2001, she was the Chief Financial Officer of the Life & Health Business Group based in London and, from 2002 to 2003, Chief Financial Officer of the Property & Casualty Business Group based in Zurich.
Mr Mumenthaler, a Swiss citizen born in 1969, received a PhD from the Institute of Molecular Biology and Biophysics at the Swiss Federal Institute of Technology (ETH) in Zurich. He started his professional career in 1997 as an Associate at the Boston Consulting Group before joining Swiss Re in 1999 as manager in Group Strategic Planning.
Between 1999 and 2002, Mr Mumenthaler was responsible for a number of key company projects, including securitisation solutions for the Group. In 2002, he established a new unit, Group Retro & Syndication, which was responsible for optimising the Group‘s risk and capital base through retrocession and securitisation. He was appointed Group Chief Risk Officer and Head of Risk & Knowledge Division effective 1 January 2005. At the same time, he became a member of the Executive Committee. In September 2005, he became Head of Global Risk Management.
Mr Mumenthaler’s commitments in organisations outside Swiss Re include memberships in the International Risk Governance Council (IRGC) as Vice Chairman, the World Business Council for Sustainable Development (WBCSD) and the Young Global Leaders at the World Economic Forum (WEF).
In 1994, he transferred to the non-life sector of the Southern Europe / Latin America department, where he was initially responsible for the Spanish market. He was appointed head of the same department at the beginning of 1997. He became a member of the Executive Board and Head of Latin America Division in 1998. On 1 April 2000, he was named Head of Europe Division and from 2002 to the end of 2004 he assumed the role of Chief Executive Officer of Swiss Re Germany. He was appointed to his current position in September 2005.
Mr Lippe, a German citizen born in 1955, graduated in mathematics and business administration from the University of Mannheim in 1982. He obtained his doctorate in 1982 while working as scientific assistant to the chair of insurance business management, being awarded the Kurt Hamann foundation prize for his thesis.
Mr Lippe was appointed a member of Swiss Re‘s Executive Board in 1995, as Head of the Bavarian Re Group. In 2001, he was assigned as Head of the Property & Casualty Business Group and appointed a member of the Executive Committee. In September 2005, he assumed the position of Head of the Products business function.
Prior to his employment at Swiss Re, Mr Ferguson served as Vice Chairman of the Board of Governors of the US Federal Reserve System from 1999 to 2006 and, from 1984 to 1997, was an Associate and Partner at McKinsey & Company, where he managed a variety of studies for financial institutions, and was Director of Research and Information Services. From 1981 to 1984, he was an attorney at the New York City office of Davis Polk & Wardwell, where he worked on syndicated loans, public offerings, mergers and acquisitions, and new product development.
Roger W. Ferguson Head of Financial Services (since 3 October 2006) Member of the Executive Committee
Mr Beerli, a Swiss citizen born in 1951, graduated in law in 1976 and received a doctorate in law from the University of Basel in 1983. He joined Swiss Re in 1979, serving in various marketing functions until 1984. He then worked for Credit Suisse in private banking and for the Baloise Insurance Group, where he served in the Company’s foreign operations.
In June, the retirement was announced of Jacques E. Dubois as Head of Corporate Development and Chairman of Swiss Re America Holding at the end of the year. Roger W. Ferguson joined Swiss Re to succeed him as Chairman of Swiss Re America Holding and member of the Executive Board; Mr Ferguson was subsequently appointed Head of Financial Services and member of the Executive Committee on 3 October 2006.
In December, it was announced that George Quinn would succeed Ann F. Godbehere as Chief Financial Officer and member of the Executive Committee with effect from
The Board’s Compensation Committee recommends to the Board the remuneration of the members of the Board (other than the Chairman and the Executive Vice Chairman); it determines the compensation of the Chairman, the Executive Vice Chairman, the CEO and the members of the executive management on the basis of their performance. It also ensures the development of a set of Group compensation principles and compliance with any remuneration disclosure requirements. The Compensation Committee retained Mercer Human Resource Consulting, New York, in the year under review. Mercer attended the meetings as independent expert providing advice regarding best practice and the levels of compensation, including comparisons with a peer group of companies.
The members of the Board of Directors receive an honorarium of CHF 325 000 per annum from 22 April 2006 (previously CHF 250 000 per annum). A minimum of 40% of the honorarium must be taken in Swiss Re shares with a four-year deferral period. The Chairman of the Board, the Executive Vice Chairman as well as the chairmen of the Audit Committee, the Compensation Committee and the Finance and Risk Committee receive a higher compensation to reflect their increased responsibilities and engagements. The Chairman of the Board and the Executive Vice Chairman are, in addition, eligible for a variable payment based on the company’s performance. The non-executive members are not eligible for any pension benefits or long-term incentive plans.
The members of the Executive Committee are paid a base salary as well as a variable annual performance incentive (bonus), and participate in a long-term incentive plan. The fixed salary is paid in cash, while the bonus consists of a current portion (which can be elected either in cash or deferred shares with a blocking period of four years) and a delayed portion which is allocated to the Value Alignment Incentive plan (VAI). 45% of the bonus for members of the Executive Board and 60% of the bonus for the CEO are allo cated to the VAI.
Swiss Re has stopped granting employee stock options on a regular basis. A new LongTerm Incentive plan (LTI) was introduced in 2006 for a select group of senior executives. The plan contains performance criteria based on a matrix of average return on equity and compound earnings per share growth over a three-year period. It is therefore aligned with shareholder interests. The LTI is denominated in units being the grant amount divided by the share price at the grant date. This initial grant for the members of the Executive Committee, at the date of grant (3 March 2006) was CHF 8.76 million or 97 450 units for the year ended 31 December 2006, based on the share price of CHF 89.90 at the date of grant. The final payout in 2009 will be the number of units multiplied by the share price at the end of the three-year period and by a factor that can vary between 0% and 200% based on the matrix of average return on equity and compound earnings per share growth over the three-year period.
5.2 Compensation for acting members of governing bodies 5.2 Compensation for acting members of governing bodies
In addition, the estimated fair value of the LTI granted to 6 members of the Executive Committee was as shown below. This fair value was estimated based upon the actual results for 2006 and the forecast results for 2007 and 2008. It will change based upon the actual results in 2007 and 2008.
¹ The value of the 2006 LTI payout will fluctuate until payment in 2009.
The bonus shares allotted representing the variable pay shown above are as follows Share allocation (deferred shares) 2005 2006
The total shown in the tables above includes all the remuneration components except for restricted shares and options, which are shown separately. Cash payments, allowances, variable pay, value of preferential rates on loans, other financial benefits, as well as the amount of actuarial funding needed for pensions are included in this figure. Swiss Re does not have a separate pension plan for members of the governing bodies. Please note that the actuarial funding can vary substantially from year to year, depending on age and years of service of the benefiting Executive Committee members.
The shares allotted during the year are shown in section 5.2.
Number of shares held on 31 December 2006 7 executive members (as defined in section 5.2) 479 804 11 non-executive members (as defined in section 5.2) 290 707
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 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. Adjustable-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 have been factored into the compensation sums given to the governing body members under section 5.2 Compensation for acting members of governing bodies, on pages 93–94.
The compensation of the highest paid member of the Board of Directors (Peter Forstmoser) during the reporting year can be broken down as follows: Number of shares CHF millions
The shares have an estimated discounted value of CHF 82.10. The share price of 2 March 2007 will be used for the actual allocation of the shares.
The Board of Directors announces the agenda. Shareholders with voting powers whose combined holdings represent shares with a nominal value of at least CHF 100 000 may, up to 45 days before the date of the meeting, demand that matters be included in the agenda. Such demands must be in writing and must specify the items and the proposals to be submitted.
Swiss Re has not taken any defence measures against take-over attempts. The governing bodies believe that the best protection is a fair valuation of the shares. They believe in the efficiency of a free market rather than relying on defence measures that normally have a long-term negative effect on the share price development. Therefore, there are no statutory rules on “opting up” or “opting out”. (“Opting up” is a statutory rule based on which the triggering threshold would be lifted to a higher percentage, while “opting out” is a statutory rule waiving the legal duty to submit an offer.) Should a shareholder reach the threshold of 33 1/3 % of all voting rights, then, pursuant to the Stock Exchange Act, the shareholder would be required to submit a general take-over offer.
Mr David JA Law and Ms Dawn M Kink took up office as head auditors responsible for the existing auditing mandate as of 1 January 2004 and 1 September 2006, respectively.
Audit-related fees comprise, among other things, amounts for comfort letters, accounting advice, information systems reviews and reviews on internal controls.
The external auditor is accountable to the Audit Committee, the Board of Directors and ultimately to the shareholders. PricewaterhouseCoopers has performed this function since 1991 (formerly as Revisuisse Price Waterhouse AG). The Audit Committee and Board place great emphasis on the objectivity of the Group’s auditor, PricewaterhouseCoopers AG, in their reporting to shareholders.
The Audit Committee also discusses other material written communications with management, such as management letters and management‘s responsiveness to the points raised in such letters, as well as schedules of unadjusted differences. The auditor is requested to supply a formal written statement at least once a year, delineating all relationships with the company that might affect auditor independence.
The Audit Committee actively engages in a dialogue with the auditor in respect of any disclosed relationships or services that might impact the auditor’s objectivity and independence, and recommends to the Board of Directors appropriate action in response to the aforementioned statement; it obtains from the auditor and reviews, at least annually, a report describing the auditor’s own quality control procedures, and any material issues raised by the most recent internal reviews, or inquiries or investigations by governmental or professional authorities within the preceeding five years and any steps taken to deal with any such issues. In addition, it reviews the audit fees to consider whether the level of fees is appropriate, as well as any fees paid to the auditor in respect of non-audit services.
Swiss Re maintains a close relationship with the financial community and the broader public by using all available communication channels. The company’s website includes full details of its corporate disclosure. Meetings dealing with important corporate information are held with institutional investors and analysts; they can also be followed by private shareholders via telephone conference or on the Internet.
Swiss Re is strongly committed to treating all investors equally. The Group prevents selective disclosure by observing ad-hoc publicity rules and a policy of restrictions for the so-called “close period”, during which financial information is finalised. The close period commences on a given date preceding the official publication of the financial information and lasts until such publication has been made. No meetings are held with analysts or investors during this period. In addition, members of the governing bodies, their secretariats and employees preparing or communicating material non-public financial information are subject to close period communication and trading prohibitions.
The Investor Relations unit at Swiss Re is responsible for managing all contacts with investors and analysts. For contact information, please see the inside back cover of the 2006 Annual Report.
Important dates 2007 Non-life January 2007 renewals, conference call 13 February
Corporate news in 2006 and method of dissemination Date News Method of dissemination 23 January Completion of EUR 252 million credit reinsurance securitisation
News release and telephone conference 27 February Extraordinary General Meeting approves creation of additional capital for GE Insurance Solutions acquisition
News release and telephone conference 21 April 142nd Annual General Meeting Meeting in Zurich and news release 10 May Completion of rights and global offering to finance GE Insurance
News release 4 August Interim reporting 2006 News release, press conference and analysts’ meeting in Zurich (including telephone conference and webcast)
Meeting in Rüschlikon and telephone conference 15 December Appointment of George Quinn as
Swiss Re shares On 31 December 2006, Swiss Re’s market capitalisation was CHF 37.1 billion, with 374.4 million shares outstanding. Swiss Re’s shares are listed on the main board of the SWX Swiss Exchange (SWX) and traded on virt-x in its EU regulated segment under the symbol ”RUKN”.
First quarter 2006: Swiss Re’s shares underperformed its benchmark indices by more than 10%, finishing 5.3% lower by the end of March. The quarter saw the publication of Swiss Re’s January renewals data and its 2005 annual results. Second quarter 2006: Swiss Re’s shares declined 6.2%, underperforming the SMI by 1.5% and outperforming the
STOXX Ins. Index by 2.2%. The shares reached their year low on 13 June at CHF 79.60. The Group announced its embedded value results for 2005 on 11 April and held its annual general meeting on 21 April. The global rights offering for the acquisition of GE Insurance Solutions was priced on 10 May at CHF 92.25 per share. The acquisition closed on 9 June 2006.
Fourth quarter 2006: Swiss Re shares rose 8.3%, closely tracking the SMI and the STOXX Ins. Index. In this period, the STOXX Ins. Index slightly outperformed the SMI. The insurance sector profited from a benign 2006 hurricane season in the US. On 20 November, Swiss Re held its Investors’ Day focusing on property and casualty reserving, as well as the transition to US GAAP.
The Swiss Re share price and trading volume in 2006 graph shows the price and volume development, together with key events for 2006.
Shareholder structure As of 31 December 2006 Holdings in % Free float in %
Socially responsible investors, whose portfolios expressly reflect social, environmental and corporate governance criteria, hold approximately 2% of Swiss Re’s shares.
Index representation In addition to its relevant industry indices, Swiss Re is also represented in various global, European and Swiss indices – including the SMI, Financial Times Stock Exchange (FTSE), Eurotop 100 and S & P GLOBAL 100. The composition of these indices is usually based on free-float market capitalisation. Swiss Re is also a member of various sustainability indices,
Swiss Re’s weighting in indices as of 31 December 2006 Swiss/blue chip indices Index weight (in %)
Investor Relations homepage More information on Swiss Re’s shares is available at: www.swissre.com/investorrelations
Key share statistics 2002–2007 of which reserved for of which reserved to
Price per share year high (intraday) 171.25 108.00 97.05 103.40 108.50 109.90
Swiss Reinsurance Company, Zurich 171 Annual report 173 Income statement 174 Balance sheet 176 Notes 185 Proposal for allocation of profit 186 Report of the statutory auditors
Profile ThemaSwiss Re Group financial statements 108 Swiss Re 2006 Annual Report
Fixed income securities: Available-for-sale, at fair value (including 7 770 in 2005 and 18 744 in 2006 subject to securities lending and repurchase agreements) (amortised cost: 2005: 77 124; 2006: 92 151) 79 344 93 127
Trading (including nil in 2005 and 2 234 in 2006 subject to securities
Reinsurance recoverable on unpaid claims and policy benefits 8 13 191 18 699
Financial services assets: Fixed income securities, trading (including 1 526 in 2005 and 8 746 in 2006 subject to securities lending and repurchase agreements) 15 218 23 714
Liabilities for life and health policy benefits 8 31 081 44 899
Financial services liabilities: Financial services liabilities: Short-term debt 7 217 7 201
Accumulated other comprehensive income: Net unrealised investment gains/losses, net of deferred tax 1 908 2 230
Dividends on common stock (CHF 1.60 and CHF 2.50 per share in 2005 and 2006, respectively) –497 –776
Other comprehensive income, net of tax: Change in unrealised gains/losses (tax: –180 for 2005, and 178 for 2006) –226 322
Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items 782 886
Funds held by ceding companies and other reinsurance balances –519 524
Income from equity-accounted investments, net of dividends received –407 –375 Trading positions, net –2 459 –1 674 Change in Financial services assets and liabilities: Financial services assets –4 556 –10 251
Cash and cash equivalents as of 1 January 9 681 8 368
Swiss Re 2006 Annual Report 115 1. Organisation and summary of significant accounting policies
The Swiss Re Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company (the parent company, referred to as “Swiss Re Zurich”) and its subsidiaries (collectively, the “Swiss Re Group” or the “Group”). The Group provides reinsurance and other related products and services to insurance companies, clients and others worldwide through a network of offices in over 25 countries as well as through reinsurance brokers.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and comply with Swiss law. The Group’s financial statements are stated in Swiss francs (CHF), the currency of the country in which Swiss Re Zurich is incorporated. The financial year of the Swiss Re Group ends on 31 December. All significant inter-company transactions and balances have been eliminated on consolidation.
The Group also consolidates variable interest entities where Swiss Re is the primary beneficiary. Companies which Swiss Re Zurich does not control, but over which Swiss Re Zurich directly or indirectly exercises significant influence, are accounted for using the equity method and are included in other invested assets. The Swiss Re Group’s share of net profit or loss in investments accounted for under the equity method is included in net investment income. Equity and net income of these companies are adjusted as necessary to be in line with the Group accounting policies. The results of consolidated subsidiaries and investments accounted for using the equity method are included in the financial statements for the period commencing from the date of acquisition.
For consolidation purposes, assets and liabilities of subsidiaries with functional currencies other than CHF are translated from the functional currency to CHF at closing rates. Revenues and expenses are translated at average exchange rates. Translation adjustments are reported in shareholders’ equity.
Derivative financial instrument assets are generally included in other invested assets or financial services assets. Derivative financial instrument liabilities are generally included in accrued expenses and other liabilities or financial services liabilities.
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.
The acquired present value of future profits (“PVFP”) of business in force is recorded in connection with the acquisition of life and/or health operations. The initial value is determined actuarially by discounting estimated future gross profits as a measure of the value of business acquired. The resulting asset is amortised on a constant yield basis over the expected revenue recognition period of the business acquired, generally over periods ranging up to 30 years, with the accrual of interest added to the unamortised balance at the earned rate. The carrying value of PVFP is reviewed periodically for indicators of impairment in value. Adjustments to reflect impairment in value are recognised in earnings during the period in which the determination of impairment is made.
The excess of the purchase price of acquired businesses over the estimated fair value of net assets acquired is recorded as goodwill, which is reviewed periodically for indicators of impairment in value. Adjustments to reflect an impairment in value are recognised in earnings in the period in which the determination of impairment is made.
The Group uses debt for general corporate purposes and also to fund “Financial services assets and liabilities“ (funded business). “Financial services assets and liabilities“ are structured with the intention of creating assets and liabilities that generate offsetting market risks (foreign exchange, interest rate, equity, credit). Debt that is strictly used for funded business is classified as operational debt. “Financial services assets and liabilities “ are valued according to the relevant principles for the underlying instruments.
Profile Thema 120 Swiss Re 2006 Annual Report estimates are regularly reviewed, and adjustments for differences between estimates and actual payments for claims and for changes in estimates are reflected in income in the period in which the estimates are changed or payments are made.
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 13%. 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.
Policyholder account balances relate to universal life-type contracts and investment contracts. Interest crediting rates for policyholder account balances range from 3% to 10%.
Property and casualty reinsurance premiums are recorded when written and include an estimate for written premiums receivable at period end. Premiums earned are generally recognised in income over the contract period in proportion to the amount of reinsurance provided. Unearned premiums consist of the unexpired portion of reinsurance provided.
On 6 June 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Group will adopt the provisions of FIN 48 in the first quarter of 2007.
Net investment income by source was as follows: CHF millions 2005 2006
Net investment income includes income on unit-linked business of CHF 751 million and CHF 670 million in 2005 and 2006, respectively, which is credited to unit-linked policyholders.
Realised gains and losses for fixed income, equity securities and other investments were as follows: CHF millions 2005 2006
Proceeds from fixed income securities available-for-sale amounted to CHF 53 720 million in 2006 (2005: CHF 35 098 million) and sales of equity securities available-for-sale amounted to CHF 7 881 million in 2006 (2005: CHF 4 874 million).
Net realised gains include income on unit-linked business of CHF 1 396 million and CHF 1 319 million in 2005 and 2006, respectively, which is credited to unit-linked policyholders.
Trading revenues mainly generated by the trading activities of the Financial Services business segment were as follows: CHF millions 2005 2006
Net realised and unrealised investment gains/losses on other assets –13 366
Amortised cost or cost and estimated fair values of investments in fixed income and equity securities classified as available-for-sale were as follows: As of 31 December 2005 CHF millions
The amortised cost or cost and estimated fair values of investments in fixed income securities by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2005 and 2006, CHF 2 148 million and CHF 5 426 million, respectively, of fixed income securities were callable.
Due after one year through five years 21 779 21 266 26 196 26 171
As of 31 December 2005 and 2006, investments with the carrying value of CHF 663 million and CHF 1 565 million, respectively, were on deposit with regulatory agencies in accordance with local requirements.
Mortgage and asset-backed securities 7 253 184 1 153 49 8 406 233
Mortgage and asset-backed securities 4 939 51 4 138 139 9 077 190
An assessment of whether an other-than-temporary decline in the value of equity and fixed income securities available-for-sale has occurred is based on a case-by-case evaluation of the reasons for the decline in value. This evaluation includes: (a) an assessment of the duration and extent of the decline in value; (b) review of the financial performance and outlook for the economic environment and industry in which the issuer operates; (c) review of the financial performance and outlook for the issuer compared to industry peers; and (d) analysis of any other factors, including credit rating, that may adversely affect the ability of the security to recover in value in the short term. Other-than-temporary declines in the value of equity and fixed income securities available-for-sale are recognised as net realised investment gains/losses in the income statement.
Depreciation expense related to income-producing properties was CHF 36 million and CHF 34 million for 2005 and 2006, respectively. Accumulated depreciation on investment real estate totalled CHF 446 million and CHF 444 million as of 31 December 2005 and 2006, respectively.
Profile Thema 128 Swiss Re 2006 Annual Report 3. Derivative financial instruments
The fair value of derivatives outstanding as of 31 December 2005 and 2006 is as follows: As of 31 December 2005 As of 31 December 2006
The Group has reviewed the right of offset arrangements in certain derivative related collateral contracts and concluded that the Group has both the right and the intent to offset collateral assets/liabilities and derivative assets/liabilities. As a result, the Group has changed the presentation of the relevant assets/liabilities to a net presentation. The equivalent impact to the 2005 balances would be to decrease the carrying value of derivative assets/liabilities to minus CHF 788 million. The balance sheet impact in 2005 would have been to reduce both financial services assets and liabilities by CHF 1 552 million. The change has no impact on net income or shareholders’ equity.
As of 31 December 2005 and 2006, other financial services assets include derivative financial instruments with a fair value of CHF 2 367 million and CHF 2 086 million respectively.
As of 31 December 2005 and 2006 other accrued expenses and other liabilities include derivative financial instruments with a fair value of CHF 394 million and CHF 555 million, respectively.
As of 31 December 2005 and 2006, other financial services liabilities include derivative financial instruments with a fair value of CHF 2 891 million and CHF 2 612 million respectively.
These derivative financial instruments include cash flow hedges with a fair value of CHF 60 million and CHF 31million as of 31 December 2005 and 2006, respectively.
For the years ended 31 December 2005 and 2006, the Group recorded net unrealised foreign currency transaction losses of CHF nil and CHF 96 million, respectively, in foreign currency translation related to hedges of the foreign currency exposure of its net investments in foreign operations.
Total cost of investment 10 750 8 772 1 Swiss Re had agreed that in the event that General Electric (i) provided capital to the GE Insurance Solutions business in response to an increase in any rating agency’s capital requirements for the insurance or reinsurance industry or (ii) otherwise provided capital to the GE Insurance Solutions business, Swiss Re would pay General Electric an amount equal to such capital increase, net of any capital distributions.
The purchase price has been allocated based on a preliminary estimate of the fair value of assets acquired and liabilities assumed at the date of acquisition. The allocation requires significant judgement and it is possible that the preliminary estimates will change as the purchase price allocations are finalised. The allocation of the purchase price included adjustments to the following assets and liabilities: CHF millions GE Insurance Solutions GE Life UK
Adjustments to assets acquired and liabilities assumed: Unpaid claims and claim adjustment expenses gross discounting, net of capital cost 2 284
Unpaid claims and claim adjustment expenses adjustments and reinsurance payables / receivables and funds held –1 545
Tax impact of above adjustments and other tax adjustments –646 7
Historic intangible assets including goodwill, deferred acquisition costs and present value of future profits have been eliminated. Qualifying purchased intangible assets, including customer related intangibles, present value of future profits and goodwill have been established.
The unaudited pro forma financial information as of 31 December 2006 is presented to illustrate the effect on the Group’s income statement of the GE Insurance Solutions acquisition. The GE Insurance Solutions information is based on the estimated revenues and net income of the acquired business in 2005 and 2006 and includes estimates for the impact of purchase accounting. The 2005 pro forma net income includes USD 3.8 billion of property and casualty reserve strengthening, made by GE Insurance Solutions in 2005, gross of tax. This pro forma information is not necessarily indicative for what would have occurred had the acquisition and related transactions been made on the dates indicated, or of future results of the company.
Property and casualty reserves gross and retrocession and reinsurance payables/receivables and funds held
Financial statements Notes to the Group financial statements 5. Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
The amortisation of DAC in 2006 represents CHF 3 427 million, CHF 309 million, and CHF 364 million for the Property & Casualty, Life & Health, and Financial Services business segments, respectively.
Placement 2009 EMTN 2006 CHF 300 3M Libor + 2009 Mandatory Convertible
Total senior debt as of 31 December 2005 7 183 1 Assumed in the acquisition of GE Insurance Solutions 2 Assumed in the acquisition of Life Re Corporation
Interest expense on long-term debt for the years ended 31 December 2005 and 2006, respectively, was as follows: CHF millions 2005 2006
In April 2006, the Group issued a credit linked note of USD 735 million, due in March 2011, bearing interest of 5.01%.
In May 2006, the Group issued a EUR 1 000 million subordinated Loan Note with a perpetual term, bearing interest at the rate of 5.25% and a USD 752 million subordinated Note with a perpetual term, bearing interest at the rate of 6.85%. Further, the Group structured and underwrote an insurance linked security of USD 59 million, bearing interest at the rate of Libor plus 2.30 – 2.35% , maturing in three years.
In June 2006, the Group issued CHF 300 million under the EMTN programme, with a three-year maturity and a coupon of three-month Libor plus 0.5 basis points, and CHF 200 million with a three-year maturity and a coupon of 2.50%. Further, the Group issued a mandatory convertible bond totalling CHF 610 million to General Electric with an interest rate of 9.80%. The securities will automatically convert into Swiss Re shares in three years. The Group also assumed in the acquisition of GE Insurance Solutions USD 400 million senior notes due in March 2019, bearing interest at the rate of 6.45%, USD 600 million due in February 2026, bearing interest at the rate of 7.00%, USD 350 million due in June 2010, bearing interest at the rate of 7.50%, and USD 350 million due in June 2030, bearing interest at the rate of 7.75%. These newly assumed senior notes are used for funded business and therefore classified as operational debt.
In November 2006, the Group issued JPY 12 340 million under the EMTN programme, with a two-year maturity and a coupon of three-month Libor, and CHF 100 million with a two-year maturity and a coupon of three-month Libor plus 1 basis point.
In December 2006, the Group issued GBP 35 million under the EMTN programme, with a two-year maturity and a coupon of three-month Libor plus 3.5 basis points, and JPY 5 000 million with a two-year maturity and a coupon of six-month Libor plus 2.7 basis points. Further, the Group issued a private placement of CHF 175 million, with a threeyear maturity and a coupon of 2.59%.
Financial statements Notes to the Group financial statements 7. Unpaid claims and claim adjustment expenses
The liability for unpaid claims and claim adjustment expenses is analysed as follows: CHF millions 2005 2006
Effect of acquisitions, disposals, new retroactive reinsurance and other items 507 19 790
The Group maintains an active commutation strategy to reduce exposure. When commutation payments are made, the traditional “survival ratio” is artificially reduced by premature payments which does not imply a reduction in reserve adequacy.
Change in unpaid claims and claim adjustment expenses; life and health benefits, net –3 028 –915 –3 943 1 592 –1 694 –102
Change in income available to common shares due to convertible bonds 72 140
Change in average number of shares due to convertible bonds and employee options 22 943 994 37 275 628
Financial statements Notes to the Group financial statements 10. Income taxes
The following table reconciles the expected tax expense at the Swiss statutory tax rate to the actual tax expense in the accompanying income statement: CHF millions 2005 2006
Income tax at the Swiss statutory tax rate of 21.3% 545 1 247
Deferred taxes have not been recognised on the undistributed earnings of certain foreign subsidiaries to the extent the Company considers such earnings as being indefinitely reinvested abroad and does not expect to repatriate these earnings in the foreseeable future. The amount of such earnings included in consolidated retained earnings as of 31 December 2006 was approximately CHF 7 572 million. It is not practicable to estimate the amount of additional tax that might be payable if such earnings were not reinvested indefinitely.
As of 31 December 2006, the Group had CHF 6 241 million foreign net operating tax loss carryforwards, expiring as follows: CHF 298 million in 2007, CHF 61 million in 2008, CHF 32 million in 2009, CHF 64 million in 2010, CHF 55 million in 2011 and CHF 5 731 million after 2011. The Group also had capital loss carryforwards of CHF 364 million, expiring as follows: CHF 10 million in 2007, CHF 4 million in 2008, CHF 303 million in 2009, CHF 43 million in 2010 and CHF 4 million after 2010.
Net Operating losses of CHF 678 million were utilised or expired during 2006.
Effective from 1 January 2007, Swiss Re has changed the structure of its Swiss pension plan to a defined contribution scheme. The plan will continue to be accounted for as a defined benefit plan under US GAAP.
The Group also provides certain health-care and life insurance benefits for retired employees and their dependants. Employees become eligible for these benefits when they become eligible for pension benefits.
Incremental effect of the newly issued generally accepted guidance on employee benefit plans as of 31 December 2006: CHF millions Before application Adjustments After application
The measurement date of these plans is 30 September for each year presented (except for one UK pension plan with a measurement date as of 31 December).
Fair value of plan assets as of 1 January 2 362 2 678 944 1 191
Amounts recognised in the balance sheet in 2006 consist of: CHF millions Swiss plans
Amounts recognised in accumulated other comprehensive income in 2006 consist of, gross of tax: Prior service cost/credit 79 2 –46 35
Components of net periodic benefit cost and other amounts recognised in other comprehensive income: Swiss plans pension benefits
Other changes in plan assets and benefit obligations recognised in other comprehensive income: CHF millions Swiss plans
Other benefits weighted average a) Assumptions used to determine obligations at the end of the year b) Assumptions used to determine net periodic pension costs for the year ended
Effect on total of service and interest cost components 14 –11
The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2005 and 2006, are as follow: Swiss plans actual allocation
As of 31 December 2006, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees voluntary contributions, are as follows: CHF millions Swiss plans pension benefits Foreign plans pension benefits Other benefits
The Group sponsors a number of defined contribution plans to which employees and the Group make contributions. The accumulated balances are paid as a lump sum at the earlier of retirement, termination, disability or death. The amount expensed in 2005 and in 2006 was CHF 19 million and CHF 28 million, respectively.
Plan asset allocation by asset categoryPlan asset allocation by asset category
As of 31 December 2005 and 2006, the Group had the share-based compensation plans described below.
Under the fixed option plan, the exercise price of each option equals the market price of the shares on the date of the grant. Options issued vest at the end of the fourth year and have a maximum life of ten years.
The weighted average fair value of options granted per share was CHF 20 and CHF 13 in 2005 and 2006 respectively.
Effect of adoption of fair value recognition Effect of adoption of fair value recognition
The amount of cash received from exercise of the options in 2006 is CHF 8 million.
A restricted share plan was granted in 2006 to certain former GE Insurance Solutions executives to replace their former GE plan.
Starting from 2006, the Group granted a long term incentive plan (LTI) to selected employees with a three year vesting period. The plan is expected to be settled in cash. The requisite service periods as well the maximum contractual term is 3 years. The method to estimate fair value is based on a risk neutral approach which uses the current share price as an estimate of the share price at the end of the vesting period.
As 31 December 2006, the total unrecognised compensation cost (net of expected forfeitures ) related to non vested share based compensation awards and the weighted average period over which that cost is expected to be recognised is as follows: Name of plan
The number of shares authorised for the Group’s share-based payments to employees was 529 138 and 806 179 as of 31 December 2005 and 2006, respectively.
In 2005 and 2006, 1 068 610 and 519 991 options, respectively, were issued to employees and the Group contributed CHF 15 million and CHF 14 million, respectively, to the plan.
Financial statements Notes to the Group financial statements 13. Commitments and contingent liabilities
As part of its normal business operations, the Group enters into a number of lease agreements. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: As of 31 December 2006 CHF millions
The following schedule shows the composition of total rental expenses for all operating leases as of 31 December (except those with terms of a month or less that were not renewed ): CHF millions 2005 2006
The Group directly underwrote approximately 25% of USD 3.5 billion in excess property insurance coverage for the World Trade Center (“WTC”). Following the WTC’s destruction, the insured lessees of the complex claimed entitlement to two policy limits for a total of USD 7 billion in coverage. The Group initiated litigation in the United States District Court for the Southern District of New York for a declaration that Swiss Re could only be
The insureds have claimed entitlement to receive Swiss Re’ share of one policy limit in an immediate lump sum distribution rather than as rebuilding costs are incurred, plus approximately USD 250 million in prejudgment interest. On 8 June 2005, the US District Court denied the insureds’ motion for summary judgment that they are entitled to a lump sum payment from Swiss Re. Swiss Re subsequently moved for summary judgment that the insureds are only entitled to collect insurance proceeds as rebuilding costs are incurred. Swiss Re’s motion is fully submitted to the court and awaits a decision.
On 9 June 2006, Swiss Re completed the acquisition of GE Insurance Solutions, which included the acquisition of GE Insurance Solutions affiliate Industrial Risk Insurers (“IRI”). IRI provided USD 237 million of the USD 3.5 billion WTC insurance program. On 6 December 2004, a jury found that nine insurers, including IRI, bound coverage on terms that treated the WTC terrorist attack as two occurrences, subject to a maximum of two policy limits of coverage. On 18 October 2006, the U.S. Court of Appeals for the Second Circuit affirmed the jury’s verdict. The amount of the loss and IRI’s proportionate share will be determined by separate appraisal proceedings which remain in progress. The Group has recorded its best estimate of ultimate liability, which it will update as further information becomes available.
Financial Services provides structuring support for certain transactions, for example insurance -linked securities, issued on behalf of the business segments. The Financial Services business segment includes the fees charged in net investment income. The business segments provide origination services for certain transactions underwritten and accounted for within another business segment. The commissions are included in acquisition costs.
Claims and claim adjustment expenses; life and health benefits –14 430 –8 668 –328 –23 426
Other operating costs and expenses –924 –765 –558 -834 –3 081
Net realised investment gains/losses 752 1 521 27 –352 1 948
Claims and claim adjustment expenses –2 781 –3 721 –1 448 –1 051 –1 808 –10 809 –497 –11 306
Other operating costs and expenses –433 –387 –148 –85 –231 –1 284 –89 –1 373
Financial statements Notes to the Group financial statements c) Life & Health business segment – by line of business
Claims and claim adjustment expenses; life and health benefits –5 276 –1 453 –6 729 –1 939 –8 668
Net realised investment gains - non-participating 89 82 171 141 312
Return on operating revenues in % 9.4 9.6 9.4 10.2 9.6 1 Operating revenues exclude net investment income and net realised investment gains from unit-linked business as these are passed through to contract holders via interest credited to policyholders and therefore do not have an impact on the operating result.
Net realised investment gains – unit-linked 410 410 909 1 319
Return on operating revenues in % 7.7 13.7 9.2 12.8 10.0 d) Net premiums earned and fees assessed against policyholders by country
CHF millions 2005 2006 1 Operating revenues exclude net investment income and net realised investment gains from unit-linked business as these are passed through to contract holders via interest credited to policyholders and therefore do not have an impact on the operating result.
Financial statements Notes to the Group financial statements 15. Subsidiaries, equity investees and variable interest entities
Swiss Re Life & Health America Holding Company 5 100 f
Other investment vehicles consist of private equity limited partnerships and hedge funds. The Group’s variable interests arise through an ownership interest in the vehicle or a guarantee of the value of the assets held by the vehicle. The maximum exposure to loss equals the carrying amount of the ownership interest or the maximum amount payable under the guarantee.
The consolidation of the VIEs resulted in a minority interest in the balance sheet of CHF 702 million in 2006 (2005: CHF 586 million). The minority interest is included in accrued expenses and other liabilities. The net minority interest in income was CHF 39 million in 2006 (2005: CHF 16 million) net of tax. The income statement impacts are generally included in the relevant segment with the underlying movement in income or expenses.
Financial statements Notes to the Group financial statements 16. Restructuring provision
The Group has recognised restructuring provisions for the acquired activities of GE Insurance Solutions, which is part of the allocation of the purchase price, and for the existing activities of Swiss Re, which is a charge to earnings.
The Insurance Solutions provision includes real estate related expenses of CHF 44 million, for planned adjustments to the properties owned or leased by the former Insurance Solutions, and CHF 49 million for leaving benefits related to the Insurance Solutions business. Expenses of CHF 29 million have been charged in 2006 against the provision for Insurance Solution activities.
Financial statements Notes to the Group financial statements 17. Change in accounting basis
Reconciliation of previously published 2005 Swiss GAAP figures to US GAAP
Discounting of certain property and casualty reserves reversed 5) 34 –1 030
References 1) Under Swiss GAAP, available-for-sale fixed income securities are carried at amortised cost. Under US GAAP, available-for-sale fixed income securities are carried at fair value with changes in fair value recognised in shareholders’ equity.
6) With the adoption of US GAAP the Group designated certain fixed income securities as trading. Trading securities are remeasured through earnings rather than shareholders’ equity, including the associated foreign exchange effect. Future mark- to-market movements on such trading securities will be reflected in earnings.
As auditors of the Group, we have audited the consolidated financial statements (income statement, balance sheet, statement of shareholders’ equity, statement of comprehensive income, statement of cash flow and notes to the Group financial statements /pages 109 to 168) of the Swiss Re Group for the year ended 31 December 2006.
The business year was characterised by a substantially improved reinsurance result mainly due to the lower natural catastrophe claims compared with the previous year. The investment result in contrast decreased mainly as a consequence of lower realised gains on sale of investments.
Swiss Reinsurance Company, Zurich, modified its accounting policy in 2006, with respect to the valuation methodology for determining liabilities for life and health policy benefits. For details on the accounting policy refer to page 177. The transition impact and the prior-year comparative figures are disclosed in note “Change of accounting policy for liabilities for life and health policy benefits” on page 184.
Gross premiums written decreased from CHF 23.1 billion to CHF 19.9 billion. The 2005 premium peak resulted mainly from the portfolio transaction with Swiss Reinsurance Company’s life and health subsidiaries in connection with the ALPS II securitisation. In the year under report, the absence of this one-off effect was partly compensated by the extension of Group internal retrocession as a result of the acquisition of GE Insurance Solutions.
Claims and claim adjustment expenses decreased by 10% to CHF 11.2 billion, reflecting mainly the quiet hurricane season in the United States as well as lower catastrophes in Europe.
Life and health benefits and acquisition costs were affected by the change in the valuation methodology for determining the liabilities for life and health policy benefits. In addition, the reduction of life and health benefits reflects the non-recurring impact of the portfolio transaction in connection with the ALPS II securitisation in 2005.
Other interest income and expenses both increased due to financing transactions in connection with the acquisition of GE Insurance Solutions.
Total assets rose by 10% to CHF 92.2 billion. This increase is reflected in the higher investments in equity and fixed income securities. Higher investments in subsidiaries and affiliated companies and other receivables resulted from the acquisition of GE Insurance Solutions.
Shareholders’ equity at 31 December 2005 amounted to CHF 12.8 billion before allocation of profit. After the dividend payment of CHF 776 million for 2005, the issuance of new shares, and the inclusion of the profit for the 2006 financial year, shareholders’ equity increased to CHF 18.4 billion at year-end 2006. Other reserves increased from CHF 11.0 billion to CHF 15.5 billion in 2006, due to the newly issued shares, mainly in connection with the acquisition of GE Insurance Solutions.
Premiums and other receivables from reinsurance 3 7 411 7 295
The accompanying notes are an integral part of the financial statements. The company has revised the classification between certain balance sheet categories, as described in the notes on page 177, and adjusted the comparative balance sheet positions.
The financial statements are prepared in accordance with Swiss Company Law. Swiss Reinsurance Company, Zurich, modified the presentation of its financial information. The previously reported 2005 financial year figures have been adapted accordingly. Details are shown under “Balance sheet/Assets classification” on page 177.
The result of life and health reinsurance is the amount that has been earned over the coverage period. Provisions for life and health business are determined by actuarial methods.
Technical provisions are valued in accordance with the following principles: Unpaid claims are based on information provided by clients and own estimates of expected claims experience, which are drawn from empirical statistics. These include provisions for claims incurred but not reported. Unpaid insurance obligations are set aside at the full expected amount of future payment.
Liabilities for life and health policy benefits are determined on the basis of actuarially calculated present values taking experience into account. For external business, liabilities are the greater of cedent-reported information and estimates of own experience drawn from internal studies. With respect to the business ceded by the Company’s life and health subsidiaries, a prospective gross premium valuation is applied taking into account expected future cash flows inherent in the reinsurance contract from the valuation date until expiry of the contract obligations. Cash flows include premiums, claims, commissions, investment income and expenses, with a margin added for prudence to reflect the uncertainties of the underlying best estimates. The gross premium valuation approach could result in a negative liability provision which is typically set to zero.
Premiums written relating to future periods are stated as unearned premiums and are normally calculated by statistical methods. The accrual of commissions is determined correspondingly and is reported in the line item deferred acquisition costs.
Assets and liabilities denominated in foreign currencies are translated at the rates of exchange on the balance sheet date into Swiss francs. Participations are maintained in Swiss francs at historical exchange rates.
Revenues and expenses are translated at average exchange rates of the year under report into Swiss francs.
All currency differences arising from the revaluation of the opening balance sheet, the adjustments from application of year-end or average rates and foreign-exchange transactions are booked via a corresponding provision.
The currency exchange rates applicable for key currencies are shown on page 116.
Claims and claim adjustment expenses –14 740 2 306 –12 434 –12 933 1 723 –11 210
Income from fixed income securities, mortgages and other loans 660 789
The company has revised the classification between certain balance sheet categories, as described in the notes on page 177, and adjusted the comparative income statement positions.
Premiums and other receivables from reinsurance 7 274 137 7 411 7 039 256 7 295
Funds held under reinsurance treaties – 2 885 2 885 – 2 574 2 574 5. Shareholders’ equity
Shareholders’ equity on 31 December (previous year) 12 227 12 802
Shareholders’ equity on 31 December before allocation of profit 12 802 18 409
Shareholders’ equity on 31 December after allocation of profit 12 026 17 191
To secure the technical provisions on the 2006 balance sheet date, securities of CHF 11 286 million (2005: CHF 11 112 million) were deposited in favour of ceding companies, of which CHF 6 906 million (2005: CHF 6 758 million) was to Group companies.
Under securities lending agreements, on 31 December 2006, securities of CHF 5 503 million (2005: CHF 6 048 million) were lent with the right to be sold or pledged by the borrowing entity, of which CHF 3 362 million (2005: CHF 4 542 million) was to Group companies. The securities which were held and lent by the Swiss Re Institutional Fund, a separate legal entity, are excluded.
Equity securities of CHF 5 789 million (2005: CHF 4 325 million) and fixed income securities of CHF 4 607 million (2005: CHF 5 199 million) were held in investment funds, which are fully owned by Swiss Re Group companies and the Swiss Re Pension Fund. The securities in these funds and their revenues continue to be reported in the corresponding asset category.
The insurance value of tangible assets, comprising the real estate portfolio and other tangible assets, amounted on 31 December 2006 to CHF 2 364 million (2005: CHF 2 453 million).
Other liabilities include CHF 6 million (2005: CHF 6 million) payable to the employee pension funds.
Details on the Swiss Re Group‘s subsidiaries are disclosed on pages 161 to 165.
Deposit arrangements generated the following balances which are included in: CHF millions 2005 2006
The undisclosed reserves on investments and on provisions decreased by a net amount of CHF 159 million in the year under report (2005: no net release).
General Electric Company, Fairfield, Connecticut, held, directly or indirectly through group subsidiaries, 33 300 957 Swiss Re shares on 31 December 2006, representing 8.89% of Swiss Reinsurance Company’s voting rights.
The Capital Group Companies, Inc., Los Angeles, informed SWX Swiss Exchange on 22 November 2005 that its holdings increased to 5.10% of Swiss Reinsurance Company’s voting rights.
Franklin Resources, Inc., Ft. Lauderdale, Florida, known as Franklin Templeton Investments, announced on 20 March 2006 that its aggregate holdings in Swiss Re shares fell below the threshold of 5% of Swiss Reinsurance Company’s voting rights.
In connection with the integration of GE Insurance Solutions, restructuring charges of CHF 59 million were recognised in 2006. As at 31 December 2006 a respective restructuring provision of CHF 34 million remained on the Company’s books.
The valuation methodology for determining the liabilities for life and health policy benefits was modified in 2006 to ensure consistency of the Company’s liabilities and thus to improve accuracy and comparability of valuations among different lines. The transition impact of CHF 92 million is included in the 2006 income statement. On a comparative basis, the previous year’s balance sheet positions for deferred acquisition costs and liabilities for life and health policy benefits amounted to CHF 916 million and CHF 11 356 million respectively. The corresponding gross amounts were CHF 1 215 million for deferred acquisition costs and CHF 12 591 million for liabilities for life and health policy benefits.
The Annual General Meeting, to be held in Zurich on 20 April 2007, has at its disposal the following profit: in CHF 2005 2006
Retained earnings brought forward from the previous year 14 544 084 7 895 490
The Board of Directors proposes to the Annual General Meeting to allocate this profit as follows: in CHF 2005 2006
¹ The number of registered shares eligible for dividend at the dividend payment date has increased since the proposal for allocation of profit, dated 1 March 2006, due to the issuance of new registered shares from options being exercised. This resulted in an additional dividend of CHF 139 515 compared to the Board of Directors’ proposal and in lower retained earnings brought forward from the previous year by the same amount.
If the Board of Directors’ proposal for allocation of profit is accepted, a dividend of CHF 3.40 per share will be paid.
As statutory auditors, we have audited the accounting records and the financial statements (income statement, balance sheet and notes/pages 173 to 184) of Swiss Reinsurance Company for the year ended 31 December 2006.
Net realised investment gains/losses 2 509 3 588 4 275 2 665 –730 376 1 116 3 474 1 948
Income/loss before income tax expense 2 808 3 229 3 655 –104 36 2 336 3 367 2 559 5 856
Unpaid claims and claim adjustment expenses 45 866 54 072 59 600 68 618 62 652 63 474 61 619 71 759 95 011
Liabilities for life and health policy benefits 15 143 23 279 29 300 41 370 37 269 37 244 43 239 31 081 44 899
Earnings/losses per share in CHF 7.35² 8.55² 10.39² –0.57 –0.29 5.48 8.00 7.44 13.49
¹ Numbers are based on the Group’s previous accounting standards ² Adjusted by 20-for-1 share split
Acquisition of a closed block of in-force life and health insurance business either through acquisition or reinsurance, typically assuming the responsibility to administer the underlying policies. Admin ReSM can also extend to the acquisition of an entire life insurance company.
Maximum amount of risk that can be accepted in insurance. One factor in determining capacity is government regulations that define minimum solvency requirements. Capacity also refers to the amount of insurance coverage allocated to a particular policyholder or in the marketplace in general.
Branch of insurance, mainly comprising accident and liability business, which is separate from property, engineering and life insurance. In the US this term is used for non-life insurance other than fire, marine and surety business.
All claims payments plus the adjustment in the outstanding claims provision as well as expenses for evaluating and settling claims.
Insurance covering the construction and erection of objects, and the insurance of machinery in operating plants.
Directors’ and officers’ liability insurance (D & O) Directors’ and officers’ liability insurance (D & O)
Insurance against fire, lightning or explosion; it can also include insurance against windstorm, earthquake, flood and other natural hazards or political risks.
In risk securitisation, bonds for which the payment of interest and/or principal depends on the occurrence or severity of an insurance event. The underlying risk of the bond is a peak or volume insurance risk.
Form of reinsurance in which coverage is not in direct proportion to the original insurer’s loss; instead the reinsurer is liable for a specified amount which exceeds the insurer’s retention; also known as “excess of loss reinsurance”.
The payment, or one of the periodical payments, a policyholder makes for an insurance policy.
Insurance for insurance companies which spreads the risk of the direct insurer. Includes various forms such as facultative, financial, non-proportional, proportional, quota-share, surplus and treaty reinsurance.
Investment result excluding result from assets held for linked liabilities divided by average invested assets. Invested assets include investments, funds held by ceding companies, net cash equivalents and net reinsurances assets. Average assets are calculated as opening balance plus one half of the net asset turnover at average foreign exchange rates.
Life and Health business operating result (operating income excluding non-participating realised gains and losses) divided by operating revenues (premiums earned, fee income, net investment income, and participating realised gains and losses excluding unit-linked investment income and realised gains and losses).
Initiative launched by the European Commission to revise current EU insurance solvency rules. Solvency II focuses on capital requirements, risk modelling, prudential rules, supervisory control, market discipline and disclosure.
Swiss Re uses some of the definitions provided by the glossary of the International Association of Insurance Supervisors (IAIS). For additional insurance terms, please refer to Swiss Re’s online glossary of technical terms at www.swissre.com
Certain statements and illustrations contained herein are forward-looking. These statements and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact. Forward-looking statements typically are identified by words or phrases such as “anticipate“, “assume“, “believe“, “continue“, “estimate“, “expect“, “foresee“, “intend“, “may increase“ and “may fluctuate“ and similar expressions or by future or conditional verbs such as “will“, “should“, “would“ and “could“. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re‘s actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others: 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; cyclicality of the reinsurance industry; changes in general economic conditions, particularly in our core markets; uncertainties in estimating reserves; the performance of financial markets; expected changes in our investment results as a result of the changed composition of our invested assets or changes in our investment policy; the frequency, severity and development of insured claim events; acts of terrorism and acts of war; mortality and morbidity experience; policy renewal and lapse rates; changes in rating agency policies or practices; the lowering or withdrawal of one or more of the financial strength or credit ratings of one or more of our subsidiaries; changes in levels of interest rates; political risks in the countries in which we operate or in which we insure risks; extraordinary events affecting our clients, such as bankruptcies and liquidations; risks associated with implementing our business strategies; changes in currency exchange rates; changes in laws and regulations, including changes in accounting standards and taxation requirements; and changes in competitive pressures.