Population growth Urbanisation offers opportunities to manage risk in locations of high population and infrastructure concentration. By focusing on the risks we understand best, we enable the risk-taking that is essential to urban environments.
Property & Casualty Premiums earned 14 379 13 885 –3 Combined ratio, traditional business in % 97.9 88.3 –
Net income/loss attributable to common shareholders –864 506 – Earnings per share in CHF –2.61 1.49 –
 Full-year 2009 net income of CHF 506 million; earnings per share of CHF 1.49
 Shareholders’ equity increased significantly by CHF 5.7 billion to CHF 26.2 billion
 Capital strength fully restored; over CHF 9 billion excess capital to AA requirement estimated as of 31 December 2009
The quick read 12 The reinsurance model 14 Our business 16 Our priorities in 2009 18 Market dynamics 20 Segmental performance 24 Our people and expertise 26 Executive Committee 28 Board of Directors 30 Sustainability in our business 32 Engaging with the world 36 Key events
Risk and capital management 70 Introduction 71 Capital management 73 Liquidity management 75 Risk management 77 Risk assessment
Financial statements 137 Group financial statements 144 Notes to the Group financial statements 223 Annual Report Swiss Reinsurance Company Ltd
Undoubtedly, this resulted in a crisis of confidence for all of our stakeholders, and ultimately in the loss of our AA rating. This prompted concerns over Swiss Re’s client franchise and capital adequacy, as well as over potential future losses from our asset exposures.
Where we stand today We set out to build on our traditional strengths in 2009, and can be proud of what we have achieved. First, we have fully restored our capital position. Second, we have significantly and successfully de-risked and strengthened the balance sheet. And third, we have maintained the strong earnings power of our core business through underwriting profitability and strict cost discipline. This strong record of achievement for the year has enabled us to support our clients and to generate value for our shareholders.
In 2009, we took every step necessary to restore Swiss Re’s reputation and to regain our position as the leading innovator in the industry
We were careful to engage in an early dialogue with our clients over the decision to reduce business that fell short of our profitability targets. The fact that we were able to maintain premium income and significantly increase operating profit in 2009 clearly demonstrates that our clients have remained loyal and that we continued to meet their needs.
Our drive for innovation continues to underpin our client orientation and strong reputation. In 2009, we were the first reinsurer to provide longevity risk protection to a public pension fund in the UK and the first to combine earthquake and hurricane risk based on parametric triggers in an insurance-linked securitisation for the Mexican government. We also entered into a public-private partnership with a municipal government body in China to protect agricultural production against natural catastrophe events. We further strengthened our position in Sharia compliant insurance through the establishment of a dedicated Retakaful operation in Kuala Lumpur in October 2009.
Letter to shareholders from the Structured CDS. We also commuted the majority of Financial Guarantee Re business. We continue to actively manage the remaining positions and expect to achieve a further significant reduction in 2010.
Walter B. Kielholz Stefan Lippe Chairman of the Chief Executive Officer Board of Directors
Letter to shareholders underlying economic improvement is far more substantial and is masked by rising interest rates that reduced the value of our government bond holdings by CHF 4 billion.
Asset Management achieved a return on investments of 1.8%. Total return on investments was 2.3%. As liquidity returned to the financial markets in the second half of 2009, we started to optimise our asset allocation and adjust our hedging programme. For the full year, the hedges on corporate bonds had a negative mark-tomarket impact of CHF 1.9 billion, but were more than offset by a market value increase of CHF 2.6 billion in the underlying asset values reflected in shareholders’ equity.
Outlook With our regained capital strength, the quality of our insurance portfolio and our track record of cycle management, we were well equipped for the January 2010 non-life treaty renewals. For 2010, we expect non-life treaty business to be better priced than in 2009, and a Property & Casualty combined ratio of 93%.
The strong fundamentals of our business and Swiss Re’s restored capital strength put us in a leading position to respond to clients’ needs and current market trends. Few reinsurers can match the size and diversification of our portfolio. Fewer still can match our underwriting performance, our ability to innovate, and our ability to provide the capacity to conduct large transactions. It is on these strengths that we build our competitive advantage.
In particular, innovation will continue to be a very important part of our culture, combined with a clear focus on risk management.
Having made considerable progress in the past year, we believe now is an appropriate time to re-establish targets. We aim to achieve a return on equity of 12% over the cycle. This target reflects the lower yield environment and the shift in Swiss Re’s asset portfolio towards lower-risk and shorter duration assets. There is still work to be done in 2010, including the continuing optimisation of the investment portfolio and the further unwinding of the remaining Legacy positions. We expect this process to be largely completed in the course of the year.
The fact that we were able to reinforce our strong reputation in the market in such a short period is thanks to the dedication, the skills and the expertise of our employees. The past year has required an enormous amount of flexibility and stamina on their part. They have met this challenge, applying their talent to position Swiss Re as an innovation leader. We truly appreciate their efforts.
New technologies in renewable energy projects create special challenges for reinsurers. The complexity of offshore wind power technology requires extensive risk assessment. We are able to provide comprehensive reinsurance solutions that are tailored to individual project needs.
Weather windows High waves and winds create changing risk scenarios for offshore environments. We have the expertise to evaluate engineering, marine and natural catastrophe risks to deliver solutions that protect the viability of complex projects.
Rising life expectancies We recently extended our service to help clients manage their longevity exposure, concluding several longevity swap transactions in the UK and Australia.
Volatile yields, volatile prices No matter how plentiful the crop, farmers can never be sure of market prices. We back farmers’ insurers with crop shortfall and commodity-price covers to cushion the impact of volatility.
We enable our clients to: ̤ reduce peak risks ̤ reduce earnings volatility ̤ free up capital and finance growth ̤ achieve capital management targets for solvency and ratings
We constantly monitor the risk landscape to develop innovative solutions that address our clients’ needs.
We apply asset-liability matching techniques to align the duration and currency of invested assets to the duration and currency of our insurance liabilities, ensuring that we deliver on our promises to our clients.
We have effective claims management procedures in place that are based on industry best practice, providing speed of payment when clients need us most.
Swiss Re has a strong reputation in innovative (re)insurance and risk management solutions. We provide wholesale (re)insurance products, insurance-based capital market instruments, and supplementary risk management services to Property & Casualty and Life & Health clients and brokers around the globe.
We manage the assets Swiss Re generates through its business activities. Our Asset Management division sets the Group’s investment strategy, ensuring that assets match our reinsurance liabilities while generating optimal investment returns.
We are the leading provider of reinsurance to life insurance companies worldwide. With specialist knowledge of mortality and morbidity trends, we support clients with sustainable, pragmatic solutions. We also acquire closed life and health books of business which we administer through Admin Re®.
̤ exited variable annuity business ̤ repriced US regulation “XXX” life business ̤ discontinued third-party asset management activities
Generate sufficient organic capital to avoid the potential dilution of our existing shareholders’ capital
Free up capital from business which does not meet our profitability target, and re-deploy for the highest returns
We have delivered on our promises: Our capital strength is restored, exposures in Legacy have been significantly reduced, and our cost efficiency programme is ahead of plan >1 >9
Net reduction in expenses in CHF millions (additional CHF 100 million on full year basis including sale of subsidiaries)
̤ closed several longevity risk transactions in the UK and Australia which hedge our exposure to mortality risk
̤ outsourced management of our credit and non-agency securitised products portfolio
̤ closed 14 offices and reduced staff by 4% year-on-year (9% including sale of subsidiaries)
Reinsurance offered an alternative source of capital when primary insurers could no longer raise funding through the capital markets. Large quota share treaties became a cost effective option for insurers to improve their capital situation rapidly.
This market environment posed a twofold challenge to industry profitability. The severe recession in the first half of 2009 reduced demand for insurance, while the historically low interest rate environment prevented making up for lower premium income with higher investment returns.
Though the insurance industry suffered sharp declines in asset values in 2008 and the first half of 2009, it recouped large parts of its unrealised losses by the end of 2009
In USD billions: ̤ 13.5 Storms ̤ 4.2 Hail ̤ 1.7 Flood ̤ 3.0 Other
In USD billions: ̤ 1.6 Fire, explosion ̤ 0.8 Aviation ̤ 1.4 Maritime ̤ 0.1 Other
Although insurers bolstered their capital base, optimistic reserving practices and releasing of reserves to shore up profits in recent years could produce adverse results in the near future, reducing profitability and weakening balance sheets.
̤ Life insurers’ recapitalisation efforts will continue in 2010. Given that little alternative capacity is still available, demand for capital relief remains strong.
̤ Demand for transfer of longevity risk to reinsurers holds strong potential for securitisation solutions. Natural catastrophe ILS is likely to grow steadily.
Interest rates for ten-year government bonds 2005–2009 Source: Datastream 40 See Financial year
̤ United States ̤ United Kingdom ̤ Eurozone ̤ Japan ̤ Switzerland
In May 2009, the European Parliament adopted the Solvency II framework Directive. The Directive will improve risk management in the insurance industry, since it is based on economic principles that more accurately reflect the risks borne by insurers and reinsurers than did the old, statutory framework. Solvency II is expected to become fully operational by October 2012.
P & C net premiums earned by region Total: CHF 13 885 million
Property premium volume rose in 2009 thanks to successful renewals and strong client demand for capital relief. In Casualty, Marine, and Engineering, the recession resulted in reduced revenues, lower shipments and less investment in large infrastructure projects.
The 2009 hurricane season was unusually benign, with favourable claims experience. Winter storm Klaus in France and Spain, wildfires in Australia, the crash of an Air France passenger airplane and severe hailstorms over Central and Eastern Europe were the most significant Property and Specialty claims events in 2009 for Swiss Re. Casualty claims related to the financial crisis evolved in line with expectations.
Market opportunity: public-private partnership with the World Bank Swiss Re supported the World Bank in developing their MultiCat Program – a platform that simplifies the issuance of catastrophe bonds to protect against the risk of natural disasters. The programme gives governments from developing and emerging countries, where insurance penetration is usually low, access to funding for relief and reconstruction in the event of natural catastrophes. For the World Bank, this programme broadens its range of funding instruments, such as emergency loans and development aid, helping countries particularly exposed to natural disasters to reduce their vulnerability.
The MultiCat transaction is proof of our commitment to working with governments and development banks to help them manage their risks using reinsurance and the capital markets.
Operational performance Our Property & Casualty operating income rose 39% to CHF 3.8 billion year-on-year. The main drivers were the excellent underwriting performance, supported by a lower cost base as a result of our cost efficiency programme, which more than compensated for the lower investment income. 2009 results also benefited from a benign natural catastrophe season which contributed to an exceptionally good underwriting result and a combined ratio of 88.3%.
Life & Health Life and Health delivered a strong underwriting result on the base of good mortality experience and improvements in the financial markets.
Business development Demand for capital relief remained strong throughout 2009. We concluded several large transactions, predominantly in the US and the UK, providing solutions both through traditional quota share treaties and through structured non-proportional covers.
We also responded to clients’ needs by launching a major update of Magnum, our point of sale underwriting system that helps insurers make their products easier for the consumer by automating and accelerating the underwriting process (see Magnum text box on page 23).
Magnum – Real time, real data, real results Swiss Re’s life and health underwriting tool is used by our clients to assess new applications for life, critical illness and disability insurance. With Magnum, several of the steps involved in reaching underwriting decisions are automated, which means clients can take advantage of high-volume processing, improved turnaround times, consistent underwriting standards and lower underwriting costs. In the UK, Magnum clients have increased the proportion of cases where the system takes the decision to 70% from a market norm of about 40%. Used by more than 30 insurers across 16 countries and translated into 10 languages, Magnum processes more than a million applications every year.
Legacy generated operating income of CHF 139 million in 2009, compared to a net operating loss of 5.9 billion in 2008.
Outlook We expect market conditions to remain differentiated for the various lines of business. While Property and Specialty will be stable or slightly softer, natural catastrophe capacity is likely to remain well priced. Casualty, on the other hand, will generally continue not to meet our profitability targets, except for some improvements in individual markets.
We see continued demand for capital relief through reinsurance in 2010, particularly in Europe, as a means of fulfilling Solvency I
capital requirements. With the introduction of Solvency II in 2012, we expect this demand to further increase.
Average length of service in years, as of 31 December 2009
We cultivate a working environment that attracts truly outstanding individuals, promotes talent and inspires excellence at all levels >80 10 552 employees from more than 80 nations
Diversity Fresh ideas depend critically on a diverse workforce. Swiss Re brings together dedicated people from many countries, with a wide range of cultural and educational backgrounds.
“The development programme enabled me to meet colleagues from all functional areas within Swiss Re, expanding my network and broadening my understanding of the organisation. Since graduating from the programme, I have reduced my working time to 80% to allow me to focus on my two young children. My career, however, has continued and I now have a job at a higher level, with a broader role and more responsibilities.” Elisabeth Auclair, Zurich
From top left: Stefan Lippe Chief Executive Officer Michel M. Liès Chief Marketing Officer Brian Gray Chief Underwriting Officer David J. Blumer Chief Investment Officer George Quinn Chief Financial Officer Raj Singh Chief Risk Officer Agostino Galvagni Chief Operating Officer
W. Weldon Wilson (until 31 December 2009) Michel M. Liès a.i. (as of 1 January 2010)
Based on Swiss Re’s independence criteria, in 2009 all directors of Swiss Re qualified as independent.
Chairman’s and Governance1 – 4 1 The Chairman’s and Governance Committee was established with effect from 8 June 2009 and the Governance Committee was dissolved at the same time.
Mathis Cabiallavetta Vice Chairman Mathis Cabiallavetta was elected to Swiss Re’s Board of Directors in 2008. He was nominated Vice Chairman as of 13 March 2009. He is also a member of the Board of Philip Morris International and BlackRock, Inc., a member of the Executive Advisory Board of General Atlantic Partners (GAP) in New York and a Senior Advisor of Marsh McLennan Companies, Inc. (MMC).
Raymond K. F. Ch’ien Raymond K. F. Ch’ien was elected to Swiss Re’s Board of Directors in 2008. He is Chairman of CDC Corporation and also serves as Chairman of the Boards of Directors of MTR Corporation Limited, Hang Seng Bank Limited and HSBC Private Equity (Asia) Limited. He is also a member of the Boards of Directors of the Hong Kong and Shanghai Banking Corporation Limited, Convenience Retail Asia Limited, The Wharf (Holdings) Limited and the Hong Kong Mercantile Exchange.
Development (IBRD) and the largest of several transactions we have recently completed in partnership with the World Bank. These solutions allow governments to establish effective disaster risk management.
In China, we entered into an agreement with the Beijing Municipal Government to reinsure its liabilities under a multi-peril crop insurance cover it provides to direct insurers operating in the Beijing area. In case of a severe drop in crop production, Swiss Re directly compensates the individual direct insurers.
Global sector leader 2009/2010 We retained the position of insurance sector leader in the Dow Jones Sustainability Indexes. This achievement reflects Swiss Re’s ongoing efforts to achieve excellence in all three dimensions of sustainability: economic, environmental, and social.
1 Figures are calculated on the basis of full-time equivalents (FTE)
Asset management We continued to manage a portfolio of sustainability and infrastructure investments, identifying growth opportunities in alternative energy, resource efficiency as well as sustainable agriculture and forestry. The total value of the sustainability portfolio was CHF 487 million at the end of 2009.
Reducing our environmental footprint We take care to minimize the environmental impact of our own operations. A main focus of this effort has been the reduction of greenhouse gas emissions. Since launching our Greenhouse Neutral Programme in 2003, we have continuously reduced our per-capita CO2 emissions, mainly by switching to renewable energy at many of our largest locations. In total, our per-capita emissions from power consumption decreased by 59% in total from 2003.
Our CO2 Reduce and Gain Programme, launched three years ago to encourage our employees to reduce emissions themselves, had another successful year. We awarded a further 792 grants to employees for emission-reducing private investments, bringing the total number of grants since 2007 to 2023.
Dialogue We regularly share our understanding of key sustainability risks with the wider public. In the climate change debate, in particular, Swiss Re has become an influential and trusted voice. In 2009, Swiss Re represented the Swiss Insurance Association as an official member of the Swiss delegation at the Copenhagen Climate Summit in December (COP 15).
̤ 34% Defence ̤ 29% Extractive industries ̤ 9% Dams and infrastructure ̤ 9% Medicine and health ̤ 19% Other
By engaging in dialogue with the world we learn more about the risks that we and our clients face as well as the most appropriate ways to confront them. In addressing selected issues, we aim to capture business opportunities as well as to pre-empt and even influence potential future sources of losses.
We continually monitor the risk landscape and scan the horizon for emerging threats, focusing on those issues and trends that we believe have the greatest potential to affect our business or that of our clients. Our systematic approach to identifying and analysing risk forms the basis of our research and publishing activities, making us a recognised thought leader in our industry.
We are a leading consortium partner in the recently renewed Caribbean Catastrophe Risk Insurance Facility. This innovative risk-transfer initiative involving 17 Caribbean states was launched in 2007 on behalf of the Caribbean Community (CARICOM)
Global risks: a World Bank perspective The developing world needs more than charity, said Ambassador Michel Mordasini, Executive Director at the World Bank, speaking at Swiss Re’s Centre for Global Dialogue in June 2009. Problems like unsustainable public debt, costs of pandemics, climate change, corruption, and natural and man-made disasters all require a globally coordinated approach, calling on multilateral institutions like the World Bank.
He praised Swiss Re for its role in promoting economically feasible, market-based approaches to these problems and helping make sustainable solutions possible. Swiss Re’s approach has been on alleviating poverty in developing and transition economies but always with solutions linked to the market and with a clear focus on business. He noted that charity plays its role, but consistent and transparent business solutions are also needed to solve the many problems facing the developing world.
Since 2006, Swiss Re has participated in the Clinton Global Initiative (CGI), making concrete annual commitments in the area of sustainability. Founded in 2005 by former
In December 2009, Swiss Re took part in the COP 15 Climate Change Conference in Copenhagen. As no legally binding agreement was reached on cutting global CO2 emissions, awareness has been growing that effective adaptation to the consequences of climate change will become even more important, especially in developing countries. At the conference, developed countries made a promise to mobilise a total of USD 30 billion between 2010 and 2012 to fund various climaterelated activities in developing countries, to be raised to USD 100 billion per year by 2020. The “Economics of Climate Adaptation” study, which we recently conducted with several partner organisations, presents a methodology that allows policy makers to quantify local climate risks and develop effective adaptation strategies.
Living up to our responsibilities Swiss Re occupies a unique position as a socially responsible company: our daily business is to manage the risks that societies around the world face – but we are also, as individuals, members of local communities, neighbours and friends. We are aware of social needs and our skills give us the ability to make meaningful contributions, whether as financial partners or volunteers.
Disaster preparedness The changing climate makes disaster preparedness ever more critical in developing nations. In 2009, we continued
Water management project in Afghanistan wins 2009 ReSource Award Heavy rain causes the erosion of mountain slopes, which are barren of forests after several decades of war, in the Bamiyan province causing destruction of arable land and villages.
Through this award, Swiss Re supports a project by Swiss NGO Helvetas, whose goal it is to protect scarce water resources in cooperation with the rural population through a combination of measures including headwater retention, reforestation, as well as improved pasture management.
The quick read / Engaging with the world our support for disaster prevention projects in Guatemala (with Foundation Vivamos Mejor) and Honduras (with the Swiss Red Cross). The aim of both projects is to increase the risk awareness of local communities and authorities, and to help protect the local environment through educational programmes and preventive measures. The more we can inform the potential victims of a natural disaster about its mitigation, the better they can cope with its potential devastation.
ReSource Award Launched in 2002, Swiss Re’s ReSource Award for Sustainable Watershed Management aims to raise awareness of the ecological, social, and economic importance of water management in developing and emerging countries. The award is worth USD 150 000 and is granted to one or several projects that raise awareness of water issues and generate or exchange relevant know-how, extending best practices in water management.
This year’s ReSource Award went to a project in the Bamiyan province, Afghanistan, for the improved management of degraded watersheds to prevent downstream flood damage (see box on page 34).
Swiss-South African Cooperation Initiative Since 2001, the Swiss-South African Cooperation Initiative (SSACI) has provided financial and technical support to a wide range of vocational training projects for unskilled, unemployed young South Africans from disadvantaged backgrounds. Official statistics put unemployment for people aged 16 – 35 at over 50%. The main aim of these projects is to prepare out-of-school youths for skilled employment in commerce and industry.
7 May Net profit for first quarter 2009 Swiss Re reported a net profit of CHF 150 million for the first quarter of 2009. Shareholders’ equity increased 15% to CHF 23.6 billion, compared to year end 2008.
9 June Swiss Re enters Lead Umbrella marketplace in US, offering net capacity for large corporate accounts Swiss Re now offers Lead Umbrella coverage to retail brokers and risk managers in the US. Lead Umbrella coverage from Swiss Re’s Industrial Risk Insurer (IRI) is available on an admitted basis in 46 states.
12 June Swiss Re transfers USD 100 million natural catastrophe risk for ACE with World Bank collateral investment Swiss Reinsurance America Corporation obtained USD 100 million protection against US hurricane and earthquake risks in the US from Calabash Re III Ltd, financed through the offering of insurance-linked securities. Swiss Reinsurance America Corporation will use the reinsurance as a source of capacity for a reinsurance agreement that provides ACE American Insurance Company and its affiliates with USD 100 million of coverage over three years.
16 June Swiss Re sells third-party asset manager Conning In line with Swiss Re’s strategy to focus on core business, the Group reached an agreement to sell its third-party asset manager Conning & Company and its affiliates. The transaction was closed on 9 October 2009.
8 October Swiss Re acquires Retakaful licence and sets up Retakaful operation in Kuala Lumpur Swiss Re received a composite licence from Bank Negara Malaysia to write Retakaful business. The licence allows Swiss Re to offer Family and General Retakaful solutions worldwide.
24 November Swiss Re obtains USD 75 million of extreme mortality risk protection through new Vita Capital programme Swiss Re announced the transfer of USD 75 million of extreme mortality risk in the US and UK through a new VITA securitisation programme. The agreement covers a five-year risk period starting in the issuance year and ending in 2014.
5 January Swiss Re obtains USD 150 million of natural catastrophe protection through the issuance of catastrophe bonds by Redwood Capital XI Ltd. Swiss Re entered into a transaction with Redwood Capital XI Ltd to receive up to USD 150 million in payments in the event of a California earthquake in the covered area that meets specific criteria. The transaction covers a one-year risk period ending 31 December 2010.
18 January Swiss Re transfers risk from closed block of US individual life reinsurance business to Berkshire Hathaway The transaction builds on Swiss Re’s tradition of portfolio steering and reinsurance risk transformation and will improve its capital efficiency.
10 March Swiss Re announces anticipated losses of USD 600 million from natural catastrophes in the first quarter of 2010. Swiss Re provisionally estimated its loss arising from the earthquake in Chile to be approximately USD 500 million and the loss from the European winter storm Xynthia to be approximately USD 100 million.
Financial year 40 Market environment 46 Group results 48 Summary of financial statements 50 Property & Casualty 56 Life & Health 61 Asset Management 65 Legacy 66 Share performance
In 2009, we focused on our core business and took measures to de-risk our investment portfolio and reduce our cost base. Very strong technical results, along with the market rally in the second half of the year, resulted in a significant improvement in the results we reported for the year.
Risky assets rallied after first quarter Stock markets recovered sharply as the banking system stabilised and it became clear that the world economy had avoided a 1930s-style Great Depression. By the end of 2009, the world’s major stock markets had risen between 7% and 23% from the end of 2008.
Government bond yields rose gradually during 2009, reflecting the improved economic outlook, after plunging in the last few months of 2008. Credit spreads, which had remained volatile in the first few months of 2009, narrowed sharply during the remainder of the year as risk appetite returned to the markets.
The US dollar had strengthened in the second half of 2008 due to its status as a safe haven currency. It weakened slightly during 2009, however, dropping 1% against
Per 100 units of foreign currency, as of 31 December 2009 1 Yearly average 2 Year-end Source: Swiss Re Economic Research & Consulting, Datastream
Financial year / Market environment the Euro. It also lost value against the Swiss franc (–3%) and the British pound (–10%), but strengthened slightly versus the Japanese yen (+2%).
Recession ended in second half of 2009 After contracting sharply in the first half of 2009, growth in most developed economies returned to positive territory in the second half of the year. Inflation was low or even negative in nearly all developed economies for most of 2009 due to general economic weakness and comparatively low oil prices.
Primary and reinsurance industry The insurance industry did not emerge unscathed from the financial crisis and the subsequent sharp recession, but it proved remarkably resilient. The majority of companies that entered the crisis with healthy balance sheets withstood the downward pressure that extended into the first quarter of 2009, absorbing a contraction of up to 20% in their capital base.
Property and casualty insurance Primary non-life premium growth in 2009 was sluggish, with an estimated worldwide inflation-adjusted rate of 0%. Commercial lines suffered a double impact from the economic crisis: demand decreased significantly, yet competition remained strong. Insurers found it difficult to enforce necessary rate adjustments while their commercial clients were suffering from a severe recession. Trade contraction and a drop in large infrastructure projects particularly affected the specialty insurance segments. The negative impact was not universal, however, as some markets, such as Germany and France, saw increasing demand for accident and health insurance, which compensated for declines in property, liability and motor premiums.
The difficult economic environment also affected emerging markets. Premium growth, which had been 12% in 2007 and 7% in 2008, was only 2% in 2009 – and this was almost entirely due to China, where premiums rose by an estimated 20%. Developments elsewhere were mixed: South East Asia and Latin America rose, but Eastern Europe declined.
Industry profitability was low in 2009, although it showed signs of improvement in the second half of the year. Two factors contributed to lower profits: reduced investment income due to historically low interest rates; and declining premium income, which drove down profitability because of fixed expenses and rising claims costs.
Natural catastrophe claims were, fortunately, comparatively low, mainly due to a calm US hurricane season. The costliest event was winter storm Klaus, which struck France and Spain in January and caused
Reinsurers’ combined ratios benefited from below-average claims from natural catastrophes (see left), but otherwise showed an erosion of underwriting profitability similar to that of primary insurers. The industry average combined ratio for the nine months through September 2009 was 88%, down from 93% in 2008, and approximately at par with 2006 and 2007. Calendar year combined ratios, however, include significant releases from prior years’ loss reserves which artificially boost reported profitability. When adjusted for fluctuations in catastrophe losses and reserves releases, underwriting profitability declined.
Investment performance in 2009 of non-life insurers was subdued, with assets significantly affected by write-downs. However, as capital markets rebounded, insurance companies were able to recover part of the huge unrealised losses they had registered at the end of 2008. Overall profitability of major markets improved, with return on equities of between 5% and 10% – an improvement against very low levels in 2008, but not at 2003 – 2007 levels.
Investment returns, although gaining from the resurgence of capital markets, remained depressed by a low interest rate environment and unusually high impairments. Overall, the industry’s average return on equity recovered to 2007 levels, with an estimated average return on equity of 13%: a good result for 2009.
Life insurance Premiums for in-force life insurance fell in 2009 by an estimated 3% in real terms, marking an unprecedented second consecutive year of negative growth. Sales of products with equity-linked returns, such as unit-linked savings products, were most affected, due to poor returns and continuing high stock market volatility. This was especially true in countries where single premium business prevails. In many markets, there has been a marked shift to fixed benefit savings products, which were less affected by the economic downturn. In Italy, France and Germany premiums rose because guaranteed return savings products provided attractive returns for policyholders.
Sales of traditional protection products remained steady: in Europe, term sales were at the same level as in 2008. In the UK, the decline in mortgage-related policies was mostly offset by a rise in non-mortgagerelated business. In the US, term sales were down only slightly, while group business continued to be held back by high and rising unemployment and a lack of salary growth.
Life reinsurance Life reinsurance performance correlates most closely with sales of protection-related products and is therefore less exposed to the wide swings in demand for savingsrelated products that affected primary life insurers. Life reinsurance premiums continued to grow through the crisis despite the drop in demand for primary life products. Moreover, the difficult capital situation faced by many primary insurers at the beginning of 2009 created additional reinsurance demand as a means to relieve pressure on balance sheets. Reinsurers completed more than a dozen large in-force deals in North America, the UK, Germany, and Asia with a combined premium income of about USD 3 billion.
Reinsurers enjoyed more stable premium income than primary insurance, avoiding some of its negative price trends and benefiting from increased reinsurance demand
Swiss Re actively engages in dialogue with key stakeholders at national and European level. As a member of the European Justice Forum, Swiss Re works towards the introduction of balanced systems of collective redress with built-in safeguards against claims without merit.
This Focus report can be downloaded or ordered as a print copy in English from www.swissre.com
The US Treasury has published a plan for financial regulatory reform, addressing – among many other issues – systemic risk regulation. The details of the new regulatory regime are subject to ongoing debate in the US Congress and it is likely to affect not only the banking, but also the (re)insurance industry. The plan advocates the creation of an Office of National Insurance (ONI), with a mandate to promote national and international coordination of insurance supervision. The ONI would manage US government international agreements on the insurance sector and report systemically risky insurers to the Federal Reserve Board. Insurance supervision itself, however, is likely to remain the responsibility of regulators in the individual states.
Regulatory developments The financial crisis has accelerated some existing regulatory initiatives while introducing proposals for further reforms to make the financial system more resilient to future crises. Both the EU and the US have been considering “macro-prudential” supervision that identifies risks to financial stability and makes recommendations on potential sources of systemic risk. These reforms mainly apply to the banking sector, but also to insurance. Our industry could be affected if banking criteria are extended to the insurance industry.
Proposed systemic risk regulators in the EU and the US The EU has introduced a new supervisory framework by establishing the European Systemic Risk Board (ESRB). Members will include the president of the European Central Bank and the central bank governors
Adoption of Solvency II in the EU The adoption of the Solvency II framework Directive in May 2009 was a major milestone for the insurance industry. A risk-based regime structured on economic principles, Solvency II more accurately reflects the risks borne by insurers and reinsurers and marks a significant improvement over the previous supervisory framework. It is designed to encourage sound risk management practices and proper governance structures. Implementation measures are being developed and the insurance industry has raised concerns about a risk of potential over-calibration of requirements. Solvency II is expected to become operational by October 2012.
Swiss Re reported annual net income of CHF 506 million in 2009, up CHF 1.4 billion from a net loss of CHF 864 million in the previous year. Earnings per share were CHF 1.49, CHF 4.10 higher than in 2008.
Property & Casualty continued to deliver an excellent underwriting result. Life & Health reported a solid performance, impacted by unfavourable results from the discontinued variable annuity business. A lower return on investments reflected increased allocation to lower risk assets as well as impairments and mark-to-market losses on corporate bond hedges. These losses were more than offset by the increased market value of the underlying credit portfolio, reported directly in shareholders’ equity.
As a result, shareholders’ equity increased to CHF 26.2 billion. The Group’s de-risking strategy made significant progress in 2009 with a substantial reduction in Legacy exposure.
Return on equity increased to 2.3% from –3.4% in 2008, resulting from improved performance compared to the net loss in 2008.
Full-year 2009 group results In 2009, premiums earned decreased 4% to CHF 24.6 billion. Excluding foreign currency movements, Property & Casualty premiums declined 1% to CHF 13.9 billion, reflecting the quota share arrangement with Berkshire Hathaway and disciplined underwriting, partially offset by a selective increase in business volume. In the Life & Health segment, premiums and fee income from policyholders increased 3% to CHF 11.6 billion at constant foreign exchange rates.
The Group’s net investment income and net realised gains include the investment result from assets backing unit-linked and with-profit policies. These returns are credited to policyholders’ accounts and are therefore excluded from the following comments on the investment performance of the Group.
Net realised investment losses decreased to CHF 3.0 billion from CHF 4.7 billion in the prior year. Asset Management was impacted by mark-to-market losses on derivatives hedging the Group’s credit exposure, as well as by impairments mainly in the securitised products portfolio, partly offset by realised gains on the sale of investments. 2008 was impacted by losses reported in Legacy. Foreign exchange remeasurement reported in realised gains had a significant unfavourable impact in 2009 compared to 2008. The losses are mainly attributable to the depreciation of the US dollar against the Euro and the British pound during 2009.
Other revenues were CHF 193 million, a decrease of 29% compared to the prior year.
Property & Casualty claims and claim adjustment expenses decreased 12% to CHF 8.7 billion, or 10% at constant foreign exchange rates, reflecting the low impact of natural catastrophes, absence of adverse prior year development in casualty lines, and lower volumes following selective underwriting and higher retrocession.
Acquisition costs decreased 9% to CHF 4.9 billion. The acquisition cost ratio was 19.8% in 2009 compared to 21.0% in 2008.
The decrease in administrative expenses includes the savings achieved in 2009 through the Group’s cost efficiency programme. Other expenses increased driven by restructuring charges and other non-recurring items including non-income related taxes.
For 2009, we reported a tax expense of CHF 231 million. This represents a tax rate of 24.2%, compared to an effective tax rate benefit of 36% in the prior year. The decrease in the tax rate in 2009 was primarily due to the allocation of income between different jurisdictions, an increase in provision for uncertain tax positions, and a change in tax basis of subsidiaries.
Changes in shareholders’ equity CHF millions 2008 2009 Change in %
Net income/loss –864 723 – Change in unrealised gains/losses on securities, net –5 493 1 386 – Change in foreign currency translation –2 300 255 – Dividends –1 331 –34 –97 Convertible perpetual capital instrument 3 000 – Purchase/sale of treasury shares and shares issued under employee plans –533 446 – Other changes in equity –893 –28 –97
Income/loss before income tax expense –1 350 954 – Income tax expense/benefit 486 –231 – Net income/loss –864 723 –
Interest on convertible perpetual capital instrument –217 – Net income/loss attributable to common shareholders –864 506 –
Policy loans, mortgages and other loans 6 611 5 795 –12
Short-term investments, at amortised cost which approximates fair value 5 802 10 487 81
Liabilities Unpaid claims and claim adjustment expenses 75 510 70 721 –6 Liabilities for life and health policy benefits 39 911 41 292 3
Income taxes payable 769 629 –18 Deferred and other non-current taxes 1 329 959 –28
Summary of cash flow statement CHF millions 2008 2009 Change in %
Cash flow from operating activities –6 089 –8 166 –34 Cash flow from investing activities 18 819 15 546 –17 Cash flow from financing activities –6 910 4 775 – Effect of foreign currency translation –83 –674 – Change in cash and cash equivalents 5 737 11 481 100 Cash and cash equivalents as of 1 January 11 531 17 268 50 Cash and cash equivalents as of 31 December 17 268 28 749 66
Market environment The impact of the financial crisis on market conditions continued during the first half of 2009. For many companies, lower asset values and weaker balance sheets shrank their capacity and available risk capital. Lower investment returns with near-zero interest rates drove a moderate price increase in many markets and segments. In this low-return environment, Swiss Re saw increased demand for solvency-type quota share transactions.
In the second half of the year, the trend in rate hardening eased as financial markets and asset values recovered, restoring industry capital. On the liability side of the balance sheet, we saw below-average natural catastrophe claims in 2009, with an exceptionally benign Atlantic hurricane season, further bolstering industry results and risk capital.
Property claims activity, both for natural catastrophe and man-made events, was favourable. Significant large claim events in 2009 included winter storm Klaus in Spain and France (January), wildfires in Australia (January), the crash of an Air France passenger aircraft in the Atlantic (June), and severe hailstorms over Central and Eastern Europe (July). Casualty claims for current underwriting years provided few surprises. Claims related to the economic crisis are emerging in line with expectations.
Strategy and priorities Our essential priorities remain cycle management and portfolio steering: shifting capacity to those segments where we expect to achieve the most attractive returns on our capital. We have therefore reduced our exposures in areas like Credit
P & C gross premiums earned in 2009 by distribution channel
P & C gross premiums earned in 2009 by type of insurance
Market opportunity: public-private partnership in China In July 2009, Swiss Re entered into an agricultural reinsurance agreement with the Beijing Municipal Government. Under the agreement, the Beijing Municipal Government will pool all agricultural insurance business within Beijing, and provide funding for purchasing reinsurance cover directly from reinsurers. Thereby, the government is able to transfer substantial agricultural risks to the private sector. The beneficiaries will be the insurance companies under the government-subsidised agricultural insurance scheme in Beijing. In the event of a catastrophe loss, Swiss Re, as lead reinsurer, will settle with the insurance companies directly. This public-private partnership facilitates the sustainable development of agricultural insurance, stimulating agricultural productivity in China amid global concern over food security.
With pressure on their balance sheets and low margins on current business, many insurance companies are looking to free up the capital they have tied up in historical casualty exposures – often seen as a non-core activity that puts a strain on financial and managerial resources. In response, we are helping our clients to
structure appropriate run-off solutions. Given our underwriting expertise, capital strength, and track record on claims management, we are well positioned to address these needs.
Our essential priorities remain cycle management and portfolio steering: shifting capacity to those segments where we expect to achieve the most attractive returns on our capital
 issued ILS covering both earthquake and hurricane risks, under the MultiCat Program by the World Bank in partnership with the Mexican government and Swiss Re
Net premiums earned Net premiums earned declined 3%, reflecting selective underwriting and increased ceded premiums under the quota share agreement with Berkshire Hathaway. At constant foreign exchange rates, net premiums earned decreased 1% in 2009 compared to 2008.
2009 premiums earned by region were similar to 2008, with a slight increase in the Americas and Asia driven by large transactions.
Lines of business Active cycle management, the focus on profitability, favourable natural catastrophe experience and the absence of adverse prior year development in Casualty contributed to very strong underwriting results in 2009.
The combined ratio for Specialty business improved to 92.1% in 2009 from 94.7% in 2008.
The expense ratio before acquisition costs for 2009 remained stable at 10.4%. The ratio was impacted by reductions in the cost base and the net premiums earned decrease in 2009 compared to 2008.
P & C net premiums earned in 2009 by line of business
Net realised investment gains/losses –145 28 – Other revenues 54 38 –30
Claims ratio in %, including unwind of discount 68.9 60.5 Expense ratio in % 29.0 27.8 Combined ratio in %, including unwind of discount 97.9 88.3 Combined ratio in %, excluding unwind of discount 96.1 86.5
Acquisition costs –807 –392 –242 –131 –338 –408 –2 318 –76 –2 394 Other expenses –403 –457 –111 –102 –75 –233 –1 381 –124 –1 505
Outlook The outcome of the January 2010 renewals confirms our provisional outlook. In the absence of large claims, we expect that market conditions for the Property and Specialty lines of business will be stable or slightly softer. Capacity for peak natural catastrophes is likely to remain scarce and well priced. In other segments, such as Commercial Risks, prices will reflect reduced demand. Marine and Engineering business is likely to suffer from the delayed effects of the depressed world economy. The Major Airline segment should experience continued price hardening, following above-average loss activity in 2009.
We will continue to drive the ILS market as a sponsor, underwriter and innovation leader. We expect that our strong client franchise, our expertise in structuring innovative products, and our ability to assume large risks will allow us to benefit from the expected growth in this segment. We are working with PERILS AG, the catastrophe insurance market data specialist, to create a European windstorm index to greatly facilitate risk trading and broaden the scope of new ILS products.
The main drivers for the strong performance in 2009 were excellent underwriting results as well as a lower cost base following our cost efficiency programme
Market environment The economic downturn has seen sales of new life insurance policies fall in most North American and European markets. This is particularly true in countries like the UK, where life cover is sold in combination with mortgage loans. Asian and Australian life insurance markets have proved more resilient, although not immune from the recession. The volume of business ceded to reinsurers reflected the sales drop in the primary market. Nevertheless, as primary insurers face rising pressure on their capital positions from investment losses, many have turned to reinsurance for capital relief by increasing cession rates or reinsuring existing portfolios.
Strategy and priorities 2009 saw continued strong demand for capital relief through reinsurance. We concluded several large transactions, predominantly in the US and the UK, providing solutions both through traditional quota share treaties and through tailored non-proportional covers (see Innovation and major transactions in 2009 table on page 57).
Market opportunity: Longevity risk cover One of the biggest issues facing many societies today is longevity risk. Life expectancy is increasing, putting a strain on organisations obliged to pay retirement benefits. Pension fund managers are increasingly aware of the financial consequences of longevity risk and are looking to the private sector for solutions to reduce the risk of cash shortfalls. Demand from pension funds and life insurers for reinsurance has grown as a result, but private sector supply for longevity risk cover remains scarce.
In December 2009, Swiss Re completed its first pure longevity transaction with the UK’s Royal County of Berkshire Pension Fund (RBPF). This marks the first transaction worldwide written for a public sector pension fund. Under the agreement, RBPF pays an agreed premium to Swiss Re. In practice, if the value of the pensions paid out by RBPF each year are lower than the agreed premium, the pension fund pays the difference to Swiss Re. Conversely, if the value is higher, Swiss Re covers the financial impact. Both premiums and claims are inflation-linked.
Swiss Re has been writing longevity risk since 2007. Longevity risk diversifies Swiss Re’s large book of mortality reinsurance, which is recognised by our regulators and rating agencies.
L & H gross premiums earned and fee income in 2009 by line of business
Financial year / Life & Health business. Our primary focus is now on Yearly Renewable Term reinsurance; we will consider new “XXX“ term coinsurance on a case-by-case basis, while also supporting clients with product redesign and actively participating in industry efforts at regulatory reform.
 further expanded a portfolio of medical reinsurance business, with significant new transactions across a number of markets, most notably China
In India and China, we continue to expand our medical insurance portfolio, and we are exploring opportunities to support government-sponsored micro-insurance schemes.
Our Admin Re® business continued to seek out attractive opportunities, primarily in the US and the UK. Despite difficult market conditions, we closed a small transaction in the US during 2009.
Risk transformation plays a central role within our portfolio steering and we utilise several tools to enhance capital efficiency in Life & Health, including embedded value securitisations and third-party retrocessions.
2 The benefit ratio is calculated as claims divided by premiums earned, both of which exclude unit-linked and with-profit business.
Financial year / Life & Health impact the operating result. However, as the market value of assets underlying the unit-linked contracts change, the fee income generated will vary.
Acquisition costs decreased 5.3% to CHF 2.5 billion from CHF 2.6 billion in 2008. At constant foreign exchange rates, acquisition costs increased 0.9%, primarily driven by new business within the traditional life segment, partially offset by lower amortisation of the present value of future profits (PVFP) within the Admin Re® segment, due to improvements in equity markets in 2009.
a disability income reinsurance treaty, and the positive impact of a change in the benefit reserves underlying certain guaranteed minimum death benefits (GMDB) products, driven by lapse of pre-2000 GMDB contracts. Traditional mortality experience was in line with the favourable results recorded in the prior year.
Premiums earned and fee income Premiums and fees decreased to CHF 11.6 billion from CHF 11.9 billion in 2008. At constant foreign exchange rates, premiums and fee income increased 2.7%.
Traditional health premiums fell to CHF 2.1 billion from CHF 2.4 billion in 2008, largely due to foreign exchange movements, changes in cedents’ reporting data and commutations.
Admin Re® premiums and fees increased to CHF 1.8 billion from CHF 1.6 billion in 2008, primarily due to the full year inclusion of the Barclay’s Life business, acquired during the fourth quarter of 2008.
In developing markets, we expect continued solid sales growth in primary business, particularly for health insurance products, as the emerging middle classes demand a higher level of protection and service than provided by public health systems.
Market environment During 2009, financial markets recovered from the wide credit spreads, depressed and volatile equity values, and very low government bond yields that marked the end of 2008. For asset managers, it was a challenging year of deciding when and by how much to divest or acquire assets with greater risk.
Many higher-risk asset values rallied after the first quarter of 2009; stock markets recovered sharply as the banking system stabilised and global depression seemed averted. Government bond yields rose gradually through the year, reflecting the improved economic outlook. Credit spreads, which had remained volatile in the first few months of 2009, narrowed sharply during the remainder of the year as markets regained their risk appetite.
Our emphasis was to concentrate on core activities while working to establish a more robust and transparent business platform. We significantly de-risked our portfolio, improved operational efficiency and strengthened our infrastructure.
Against the background of unprecedented market conditions and the perceptions they created, we moved to re-establish stakeholder confidence to be able to meet client needs and reinforce shareholder value.
In mid-2009, we decided to outsource CHF 22 billion in credit and securitised portfolios to BlackRock, a global asset management company. BlackRock’s mandate took effect on 1 December 2009; it covers asset management services such as security selection, and research and analytics based on granular investment guidelines provided by Swiss Re. The Chief Investment Officer (CIO) continues to set the investment strategy, retains responsibility for overall portfolio steering and for compliance with regulatory requirements. We expect this step will increase operational efficiency by releasing resources to concentrate on our core asset management function as well as improve access to world-leading asset management expertise.
Reduced exposure We have reduced our exposure to selected markets and financial instruments with a focus on economic value preservation. We have made a determined effort to de-risk and strengthen the balance sheet, re-investing proceeds, for the time being, primarily in government bonds.
Investment portfolio as of 31 December 2009 Total CHF 154 080 million
 12% Structured products  12% Corporate bonds  1% Equity  14% Other
We materially improved our performance analytics with our new Risk Budgeting framework, which allows us to match the
shape of our insurance liabilities with optimised asset performance on a very granular level. Risk Budgeting also improves the control of our many detailed investment mandates. This process will govern all our investment activities in the future – balancing investment, risk, and legal entity requirements and restrictions.
We also strengthened our oversight and valuation analytics in conjunction with our Finance and Risk Management functions.
Financial year / Asset Management exchange movements and net mark-tomarket gains. Net investment income declined to CHF 4.6 billion from CHF 6.3 billion in 2008. The decrease was mainly due to reducing the risk profile through an increased allocation to higher quality issuers, short-term investments, and cash equivalents. The net realised loss on credit and rates investments was CHF 639 million in 2009, compared to a net realised gain of CHF 807 million in 2008. The net realised loss in 2009 related mainly to losses on hedges of CHF 1.7 billion and impairments of CHF 1.3 billion, offset by realised and unrealised gains of CHF 2.4 billion.
The net change in shareholders’ equity of CHF 0.8 billion was a result of the net mark-to-market gains in the credit portfolio attributable to credit spread tightening, partially offset by losses in the rates portfolio as interest rates increased. Net unrealised loss in shareholders’ equity decreased by CHF 0.8 billion to CHF 1.6 billion at the end of 2009 from a net unrealised loss of CHF 2.4 billion at the end of 2008.
Equities and alternative investments We reduced Swiss Re’s gross exposure to CHF 7.5 billion at the end of 2009, mainly by reducing our exposure in hedge funds and private equity funds. During 2009, there were net redemptions of CHF 0.6 billion of hedge funds. Operating loss decreased to CHF 0.1 billion in 2009, compared to CHF 1.3 billion in 2008.
Investment result For 2009, return on investments was 1.8%, compared to 4.7% in the prior year. The losses from the hedging of the corporate bond portfolio, although more than offset by gains in shareholders’ equity reflected in the balance sheet, contributed to a decrease in return, as did the impact of foreign exchange movements, which were only partially offset by realised gains. The lower return on investments was also due to lower net investment income as proceeds from net sales and principal repayments in the credit portfolio were primarily allocated to lower yielding bonds, shorter term investments and cash equivalents.
Credit and rates Swiss Re’s Credit & Rates investment portfolio decreased to CHF 93.8 billion in 2009 from CHF 108.7 billion in 2008 as a result of net sales and maturities in the credit portfolio, partially offset by foreign
Outlook After the global recession, economic growth turned generally positive in 2009, following unprecedented monetary and fiscal stimulus in many countries. The global economy appeared to have embarked on the road to recovery in the third quarter of the year. Financial markets were impacted by central bank efforts at reflation, which drove down liquidity risk premiums and thus supported asset values.
We do not expect the extraordinary global stimulus to disappear in the short term, despite signs of recovery, most importantly in the US. We believe that global policymakers, in particular the Federal Reserve Bank, will err on the side of caution in raising interest rates; most share the International Monetary Fund’s view that the cost of moving too early would be greater, in terms of lost output growth and increased market volatility, than the cost of moving too late. In our view, this stance will thus remain conducive for markets in 2010. That said, markets are likely to anticipate tighter monetary policy conditions well ahead of their actual appearance. This could mean renewed volatility and greater differentiation among companies in their credit and equity values, making winners of companies with healthy balance sheets.
Net realised investment gains/losses 807 –327 480 Fees, commissions and other revenues 80 –8 72
Net realised investment gains/losses –639 –162 –801 Fees, commissions and other revenues 74 3 77
1 The return on investments includes currency exchange rate remeasurements and designated trading portfolios. The designated trading portfolios comprise trading fixed income securities denominated in foreign currencies, which back certain liabilities denominated in foreign currencies. The overall impact of the currency exchange remeasurements was CHF 1 338 million in 2008 and CHF –1 316 million in 2009.
Expenses Investment and operating expenses decreased by 9% to CHF 84 million in 2009 from CHF 92 million in 2008.
Share RUKN VX RUKN RUKN.VX ADR level I1 SWCEY US SWCEY SWCEY.US
Share price performance The downward pressure on share prices seen in 2008 continued in early 2009 and particularly affected Swiss Re. Investors were concerned about the impact turbulent financial markets would have on Swiss Re’s investment portfolio, its capital position and whether the underwriting franchise would be affected. Swiss Re shares, which had opened the year at CHF 50.30, hit an intra-day low for the year of CHF 11.88 on 9 March 2009. These concerns eased over the following months as spreads continued to tighten, the Group’s capital position strengthened and Swiss Re reported successful renewals of its (re)insurance business. Swiss Re shares recovered during the course of the year, reaching CHF 49.91 as of 31 December 2009.
Index representation In addition to its relevant industry indices, Swiss Re is also represented in various global, European and Swiss indices – including the SMI, FTSEurofirst 300 Insurance and the Dow Jones STOXX 600 Insurance. The composition of these indices is usually based on free-float market capitalisation. Swiss Re is also a member of various sustainability indices, including the Dow Jones Sustainability and FTSE4 Good index families.
Information for investors More information on Swiss Re’s shares is available in the Investor Relations section on Swiss Re’s website.
Insurance indices Dow Jones STOXX 600 Insurance 4.07 Bloomberg Europe 500 Insurance 4.30 FTSEurofirst 300 Insurance 4.35
Sustainability indices Dow Jones Sustainability World 0.19 Dow Jones Stoxx Sustainability 0.44 FTSE4Good Global 0.15 KLD Global Climate 100 1.00
Key share statistics 2005 – 2009 of which Treasury shares and shares reserved for corporate purposes 11 678 802 16 184 149 23 720 789 27 850 261 27 994 167
Price per share year-end 96.20 103.60 80.45 50.30 49.91 Price per share year high (intraday) 103.40 108.50 119.40 93.95 53.10 Price per share year low (intraday) 75.10 79.60 78.70 35.38 11.88 Daily trading volume (in CHF millions) 126 153 253 214 98 Market capitalisation5 (in CHF millions) 30 985 38 792 29 798 18 285 18 502 ADR price at year-end (in USD) 73.25 85.25 71.00 47.80 48.19 1 Nominal value of CHF 0.10 per share.
70 Introduction 71 Capital management 73 Liquidity management 75 Risk management 77 Risk assessment
In 2009, we restored our capital strength, comfortably exceeding both internal targets and external requirements. This was achieved by increasing our available capital, by de-risking our asset portfolio to mitigate the impact of recent market volatility and by reducing our insurance and credit risk. We also significantly improved our liquidity position. In addition, we further strengthened our executive-level oversight of asset-liability and balance sheet management across Swiss Re by establishing the Group Asset-Liability Committee.
The Risk Management function continued to be fully embedded in all steps of our business process, from strategic planning through to performance measurement. In 2009, we further strengthened the risk management role in business decisions by refining the approval process for large transactions.
In addition, we have taken an active part in industry discussions to support developments in insurance risk management and regulation. This encompassed a broad range of efforts, from raising awareness of emerging risks such as climate change to contributing expertise in consultations on the new Solvency II regulatory regime in Europe.
Our integrated risk and capital management ensures the reliability of Swiss Re as a partner for our clients and enables us to benefit from attractive business opportunities
In 2009, we successfully restored our capital strength. All major capital adequacy ratios comfortably exceed both internal targets and the requirements of regulators and rating agencies. This is a result of effective financing, de-risking our balance sheet and improved financial market conditions.
Swiss Re’s external capital adequacy Swiss Re comfortably exceeds regulatory capital requirements and holds substantial capital in excess of the Standard & Poor’s AA rating requirement.
Regulatory capital requirements Swiss Re is supervised by the Swiss Financial Market Supervisory Authority (FINMA), both at Group level and for its legal entities domiciled in Switzerland. The supervision comprises minimum solvency levels, a wide range of qualitative assessments and governance requirements.
In addition, our subsidiaries are subject to local regulatory constraints. Our EU subsidiaries Swiss Re Europe SA, Swiss Re International SE and Windsor Life Assurance Company Ltd will be required to comply
We actively manage our capital to ensure that the Group and all its subsidiaries are adequately capitalised at all times with Solvency II, the forthcoming risk-based solvency regime in Europe. Similar to the SST, Solvency II is based on an economic view.
Swiss Re’s financial strength ratings As of 12 February 2010 Financial strength rating Outlook Last rating action
A. M. Best, Moody’s and S&P rate Swiss Re’s financial strength based upon interactive relationships. The insurance financial strength ratings shown in the table reflect our excellent franchise and prudent risk management.
Swiss Re’s internal capital adequacy Swiss Re’s capital management aims to ensure our ability to continue operations following an extremely adverse year of losses from insurance or financial market events; our internal target is to have an economic capital adequacy ratio (available capital divided by required capital) in the range of at least 175–200%. As of 31 December 2009, available capital is estimated to be CHF 37.8 billion, and required capital is estimated to be CHF 16 billion, resulting in an internal capital adequacy of 236%.
Available capital is based on our economic net worth – as determined by our proprietary Economic Value Management (EVM) methodology – adjusted for additional risk-bearing items. Required capital is calculated by our internal risk model, based on 99% Tail VaR (see page 80).
Capital management actions The restoration of our capital strength in 2009 mainly stems from increasing available capital through the following actions: ̤ Capital raising: We issued a CHF 3 billion convertible perpetual capital instrument to Berkshire Hathaway in March 2009. This is generally eligible as risk-bearing capital under all relevant capital adequacy views and therefore significantly increased all regulatory, rating agency and internal ratios.
̤ Hedging: We maintained a reduced level of hedges on corporate bonds in 2009. While the mark-to-market of the hedges was slightly negative over the year due to credit spread tightening, the hedges reduced required capital for economic based ratios and ensured protection in still uncertain credit markets.
We prudently manage liquidity to ensure that Swiss Re is able to meet its financial obligations efficiently when they fall due. As a reinsurance company, our core business generates liquidity primarily through premium income. Swiss Re’s exposure to liquidity risk stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group. To manage these risks, we have a range of liquidity policies and measures in place. In particular, we aim to ensure that: ̤ sufficient excess liquidity, mainly in the form of unencumbered liquid assets, is held centrally to meet Group liquidity requirements that could result from a range of potential stress events; ̤ funding is charged at an appropriate market rate through our internal transfer pricing; ̤ diversified sources are used to meet Swiss Re’s residual funding needs; and
̤ We issued CHF 5.8 billion of senior debt. See note 6 on pages 174 – 177 of the Group financial statements. We also issued a USD 1.0 billion long-term Letter of Credit facility to support our US life business.
̤ We actively reduced Legacy exposures through sales and commutations. See Financial Year, page 65.
We prudently manage our liquidity risk to ensure that Swiss Re is able to meet its financial obligations efficiently
Swiss Re also maintains a variety of other committed facilities not reflected in these liquidity stress tests. As of 31 December 2009, Swiss Re had a total of CHF 2.2 billion of unutilised credit facilities and a further CHF 1.9 billion of unutilised committed repurchase agreement facilities.
The amount of spot liquidity held is largely determined by internal liquidity stress tests, which estimate the potential short-term cash and collateral requirements stemming from an extreme insurance event or a financial market crisis. These cash and collateral requirements under stress would include: ̤ cash and collateral outflows, as well as potential capital and funding support required by subsidiaries as a result of the insurance or financial market event; ̤ repayment or loss of all maturing unsecured debt and credit facilities; in the event of a financial market crisis, it is assumed that funding is only available against high-quality collateral, eg government and agency bonds; ̤ additional collateral requirements associated with a potential ratings downgrade of Swiss Re Group; ̤ further contingent funding requirements related to asset downgrades; and
The market value of spot liquidity within the central liquidity pool was CHF 22.6 billion as of 31 December 2009, compared to CHF 17.3 billion on the same date in 2008.
The Executive Committee (EC) is responsible for implementing the risk management framework through four further committees: ̤ The Group Risk and Capital Committee has responsibility for allocating capital and insurance risk capacity, for approving investment risk limits, and for determining changes to the internal risk and capital methodology.
The global Risk Management function operates via dedicated units for property and casualty risk, life and health risk, and financial market and credit risk. Each unit is entrusted with Group-wide responsibility for the identification, assessment, and controlling of their allocated risks and for risk governance at the risk category level. The units also work closely with each other where necessary on transaction reviews and other cross-category issues. Actuarial management is part of the insurance risk units, ensuring reserving adequacy.
Liquidity risk, capital adequacy and emerging risks are managed at the Group level. In addition, various risk management activities are performed globally, across all risk categories. These include risk governance at group level, risk modelling, risk reporting and the steering of our regulatory activities.
Across these categories we identify and evaluate emerging threats and opportunities through a systematic framework that includes the assessment of potential surprise factors that could affect known loss potentials.
We mitigated the impact of higher market volatility by de-risking our asset portfolio and also reduced our insurance and credit risk
The table below shows 99% Tail VaR for each of Swiss Re’s core risk categories on a standalone basis: ̤ Property and casualty risk decreased by 11% to CHF 7.0 billion, mainly as a result of the adverse development cover provided by Berkshire Hathaway.
Our internal model takes correlation and diversification between individual risks into account. The effect of diversification at the category level is demonstrated in the table below, which shows that the capital requirement for the Group’s overall portfolio is lower than the sum of the capital requirements for individual sub-portfolios. The extent of diversification depends on the level at which it is measured.
We use the Group’s 99% Tail VaR in the definition of our risk tolerance, which is the maximum amount of risk we are willing to accept within the constraints imposed by our capital resources, as well as by the regulatory and rating agency environment
Risk assessment within which we operate. Both risk tolerance and risk appetite (ie the amount of risk we seek to take) are clearly defined and are translated into a consistent limit framework across all risk categories, which is approved at Executive Committee level through the Group Risk and Capital Committee. The individual limits are established through an iterative process to ensure that the overall framework complies with our Group-wide policies on capital adequacy and risk accumulation.
Insurance risk Insurance risk management includes overseeing risk-taking activities as well as ensuring that an appropriate risk governance framework is defined and operated.
The risk management role is embedded in the business process. Prior to business being transacted, Risk Management is involved in the annual planning process and reviews underwriting guidelines, costing parameters and large individual transactions. Total risk exposure is monitored against the agreed exposure limits.
Setting and monitoring of reserving levels is a key component of the insurance risk and actuarial management function, including the communication of trends back to the
Insurance risk stress tests Single events with a 200-year return period CHF billions, as of 31 December 2008 2009 Change in %
Life insurance Lethal pandemic –3.5 –3.6 3 risk-taking functions to ensure appropriate costing. Regular and actionable internal risk and issue reporting ensures transparency at all levels. Underwriting systems across the Group provide timely information on assumed risks and committed capacity.
Risk developments The table below shows Swiss Re’s exposure to a set of major natural catastrophe events net of retrocession and securitisation. The risk measures take account of the fact that such an event triggers claims in various lines of business. For example, European windstorm includes, among others, claims from Motor business, while Californian earthquake also reflects – but is not limited to – additional claims arising from Workers’ Compensation and General Liability.
Management Swiss Re writes property and casualty business using assigned authority levels and following the “four-eyes” principle. The limit framework for the property and casualty business includes an aggregate Group limit governing the acceptance of all risks within this category. Each underwriter is assigned an individual underwriting authority; any business exceeding this authority triggers an escalation process that extends up to the Group Products and Limits Committee. Any large individual transaction that could materially affect Swiss Re Group’s risk exposure requires independent review and sign-off by Risk Management before it can be authorised. This is now part of a new three-signature sign-off process, introduced in 2009, that reinforces the accountability of each of the functions (Client Markets, Products Underwriting and Risk Management) for significant transactions. In addition, we monitor accumulated exposure to single risks or to an underlying risk factor (eg Californian earthquake) on a Group-wide basis.
Life and health insurance risk Life and health insurance risk arises from business that Swiss Re takes on by providing mortality (death), longevity (annuity) and morbidity (illness and disability) covers as well as by acquiring run-off business (Admin Re®).
Financial market risk Financial market risk is the risk that Swiss Re’s assets or liabilities may be impaired by movements in financial market prices or rates such as equity prices, interest rates, credit spreads, foreign exchange rates or real estate prices. Credit spreads have been an important driver of financial market risk in 2009. Swiss Re’s financial market risk originates from two main sources: our investment activities and the sensitivity of the economic value of liabilities to financial market fluctuations.
Management The Group Risk and Capital Committee defines Group-wide risk limits. All activities involving financial market risk are subject to a first limit by risk factor and a second limit by business area. Individual limits are expressed in terms of 10-day VaR, stress testing and sensitivity analysis. The asset management function determines a more detailed set of risk limits for its businesses.
Swiss Re’s risk model assesses the potential economic loss at a specific confidence level. There is thus a possibility that actual losses may exceed the selected threshold. In addition, the reliability of the model may be limited when future conditions are difficult to predict, for example in an extremely volatile market environment. For this reason, we continuously review and update our model and its parameters to reflect changes in the risk environment as well as current best practice.
We are confident that our model is an important tool for managing our business as well as providing a meaningful assessment of the risks to which Swiss Re is exposed. At the same time, market developments have confirmed that risk models must be supported by a clear understanding of those risks – and complemented by robust internal controls.
The risk measures derived from the model are expressed as economic loss severities taken from the total economic profit and loss distribution. Swiss Re measures its total capital requirement at 99% Tail VaR (expected shortfall). This represents an estimate of the average annual loss likely to occur with a frequency of less than once in one hundred years. A less conservative measure is the 99% value at risk (VaR), which measures the loss likely to be exceeded in only one year out of one hundred.
Credit risk Credit risk is primarily the risk of incurring a financial loss from the default of Swiss Re’s counterparties or of third parties. In addition, we take account of the increase in risk represented by any negative migration of credit ratings. Credit risk arises directly from our investment activities as well as from liabilities underwritten by our business units.
Management Our risk management standards require the assignment of aggregate credit limits by business unit, by corporate counterparty and, for emerging markets, by country. These limits are based on a variety of factors, including the prevailing economic environment, the nature of the underlying credit exposures and, in the case of corporate counterparties, a detailed internal
Risk and capital management / Risk assessment assessment of the counterparty’s financial strength, industry position and other qualitative factors. We regularly monitor counterparty credit quality and exposures, and compile watch lists of cases that merit close attention.
Our dedicated risk management units are responsible for overseeing the management of operational risks which arise in their area of control. We apply a centrally co-ordinated methodology to identify and assess risks. Appropriate controls and contingency plans are in place to reduce the Group’s exposures to an acceptable level, taking into account the cost-benefit considerations of risk mitigation.
Our operational risk management is based on controlling key processes. Risk and control self-assessments by risk owners go through a formal challenge process by operational risk management experts at Group level, and areas with significant risks are subject to independent testing by Group Internal Audit.
We have a long-standing commitment to sustainable business practices, responsible corporate citizenship and good governance. We mitigate potential damage to our reputation through clear corporate values, robust internal controls and active dialogue with external stakeholders. All our employees are required to commit to and comply with the values and rules of behaviour defined in the Group’s Code of Conduct. We support these values with
Credit default stress test –3.0 –2.5 –17 processes that enable us to identify potential problems early. Transactions that could potentially compromise our values or impair Swiss Re’s reputation are subject to the Sensitive Business Risks process (for more information, see the Sustainability in our business chapter, page 30–31). In addition, potential reputational impact is a key factor in assessing and controlling operational issues within our operational risk management framework.
Emerging risks Pre-emptive identification of emerging threats and opportunities for Swiss Re is an important element of our integrated approach to risk management. We have an established Group-wide process to capture and monitor emerging risks in our business environment, such as risks related to developments in climate change, future energy provision and nanotechnology.
84 Overview 86 Group structure and shareholders 88 Capital structure 92 Board of Directors 107 Executive management 110 Shareholders’ participation rights 111 Changes of control and defence measures 112 Auditors 114 Information policy
The information provided in this chapter of the Annual Report 2009 follows, in principle, the structure of the SIX Directive. Information on compensation, shareholdings and loans, as required by the Directive, can be found in the compensation chapter on pages 117 – 133.
̤ working instructions and road maps, describing work methods, governance processes and time schedules of the Board and Board committees.
On the managerial side, we established an Asset and Liability Committee consisting of members representing such key disciplines as risk management and finance whose responsibility is to supervise Swiss Re’s balance sheet, particularly its liquidity, capital, and funding positions. The committee also supervises the Group’s legal entity structure.
Organisation and process In 2009, the Board of Directors reviewed the allocation of tasks at the Board and executive management level, as well as the Group’s governance framework. The review yielded a revised set of Corporate Bylaws, charters of duties of the Board and executive management committees, and working instructions for some of these committees. The new framework of governing documents came into force on 24 December 2009.
The Board of Directors formally and rigorously evaluated its performance. An external independent management consultant, assisted by the Company Secretary, interviewed each Board member individually. The self-evaluation mainly covered the Board’s structure and composition, the effectiveness and performance of the Board and its committees, the interaction and communication within the Board, vision and strategy, human resources and talent management, and culture and values. The Board discussed the findings of the interviews in depth, drew the relevant conclusions and, based on these conclusions, defined specific goals for the Board and its committees for 2010.
Risk Management Operations ̤ Claims & Liabilities ̤ Human Resources ̤ Information Technology ̤ Legal ̤ Logistics ̤ Technical Accounting
Legal structure – listed and non-listed Group companies Swiss Reinsurance Company Ltd, the Group’s parent company, is a joint stock company, listed on the SIX Swiss Exchange (ISIN CH0012332372), domiciled at Mythenquai 50/60 in 8022 Zurich and organised in accordance with Swiss laws. The other companies of the Group are not listed, see note 17 to the Group financial statements, on pages 208 – 212.
Swiss Reinsurance Company Ltd has a level I American Depositary Receipts (ADRs) programme in the US. The ADRs are traded over the counter (ISIN US8708872051). Neither the ADRs nor the underlying Swiss Re shares are listed on a securities exchange in the US.
In addition, Swiss Reinsurance Company Ltd holds, as of 31 December 2009, directly and indirectly 28 629 654 shares, representing 7.7% of voting rights and share capital. The company cannot exercise the voting rights of own shares.
Shareholder Number of shares % of voting rights and share capital Date of notification
Franklin Resources, Inc. (Franklin Templeton Investments) 10 970 364 3.11 6 December 2008 National Indemnity Company (Berkshire Hathaway Inc.) 11 262 000 3.10 26 March 2009
Registered – unregistered shares As of 31 December 2009 Shares in %
Registered shares with voting rights by shareholder type As of 31 December 2009 Shareholders in % Shares in %
Registered shares with voting rights by country As of 31 December 2009 Shareholders in % Shares in %
Registered shares with voting rights by size of holding As of 31 December 2009 Shareholders in % Shares in %
Conditional capital for bonds and similar in favour of Berkshire Hathaway Inc. 16 000 000.00 160 000 000
Conditional capital in favour of Berkshire Hathaway Inc. Conditional capital of CHF 16 000 000 was available to settle conversion rights granted in connection with a convertible perpetual capital instrument (CPCI) issued by Swiss Reinsurance Company Ltd in favour of Berkshire Hathaway Inc. and certain of its subsidiaries. Shareholders’ preemption rights and advance subscription rights with respect to the CPCI are excluded in favour of Berkshire Hathaway Inc. and certain of its subsidiaries. Further information on this instrument can be found in the section Convertible bonds and options on page 91.
Authorised capital Authorised capital of CHF 18 000 000 was available, expiring on 13 March 2011. Increases by underwriting as well as partial increases are permitted. The subscription rights of shareholders remain. The issue amount, the dividend entitlement, the type of the contribution and any possible acquisition of assets are determined by the Board of Directors.
In order to settle the conversion in June 2009 of the CHF 610 million Mandatory Convertible Securities issued by Swiss Re Treasury Luxembourg S. A., Swiss Reinsurance Company Ltd issued 7 184 407 shares from conditional capital for bonds or similar instruments.
Changes in 2008 In 2008, the company’s fully paid-in share capital decreased from CHF 37 038 675.50 to CHF 36 351 603.60, resulting from the cancellation of 17 349 000 shares repurchased via the second trading line, as approved by shareholders at Swiss Re’s 2008 Annual General Meeting, the creation of 10 460 076 shares from conditional capital in connection with the conversion of a mandatory convertible bond and the creation of 18 205 shares from conditional capital for employee participation purposes. No conditional and no authorised capital was created in 2008.
Free transferability Swiss Reinsurance Company Ltd’s shares are freely transferable, without any limitations, provided that the buyers declare that they are the beneficial owners of the shares and comply with the disclosure requirements of the Federal Act on Stock Exchanges and Securities Trading (SESTA).
b. In 2009, Swiss Re issued in favour of Berkshire Hathaway Inc. and certain of its subsidiaries (Berkshire Hathaway) a convertible perpetual capital instrument (CPCI) in an aggregate face amount of CHF 3 000 000 000. The instrument can be converted by Berkshire Hathaway into shares beginning three years after the date of issuance of the instrument. Swiss Re has the right to repurchase the CPCI on or after the second anniversary at a 20% premium or, subject to the occurrence of certain events, before that time at a 40% premium. If and when Berkshire Hathaway elects to convert the CPCI, the conversion price will be CHF 25 per share (subject to customary anti-dilution adjustments). Had it been converted in full as of 31 December 2009, the CPCI would have converted into 120 million shares, or 24.5% of shares issued, on an as converted basis.
Raymund Breu Swiss 64 Member of the AC and IC 2003 2011 Raymond K. F. Ch’ien Chinese 57 Member of the AC and IC 2008 2011 John R. Coomber British 60 Chairman of the FRC 2006 2012
Member of the CGC and AC Rajna Gibson Brandon Swiss 47 Member of the FRC and IC 2000 2011 Hans Ulrich Maerki Swiss 63 Member of the CC and FRC 2007 2011 Robert A. Scott British / 67 Chairman of the CC 2002 2010
Corporate governance / Board of Directors reinsurance, finance, risk management, and capital markets, thus providing a solid foundation for decision making. Newly elected Board members receive a general introduction to the responsibilities of Board and committee members. In the course of the year, the Board members also meet with experts regularly to update and enhance their knowledge on emerging business trends and risks.
Walter B. Kielholz’s career began at the General Reinsurance Corporation, Zurich. After working in the US, the UK and Italy, he assumed responsibility for the company’s European marketing. In 1986, he joined Credit Suisse, Zurich, where he was responsible for client relations with large insurance groups in the multinational services department.
Mathis Cabiallavetta was elected to Swiss Re’s Board of Directors at the Annual General Meeting of 18 April 2008, with effect from 1 September 2008. He was nominated Vice Chairman as of 13 March 2009.
Raymund Breu was Chief Financial Officer of the Novartis Group and a member of that company’s executive committee from December 1996, when Novartis was created, until January 2010. He joined the group treasury of Sandoz, a predecessor company of Novartis, in 1975. Ten years later, he was appointed Chief Financial Officer of Sandoz Corporation in New York. In 1990, he became Group Treasurer of Sandoz Ltd and, in 1993, Head of Group Finance and a member of the Sandoz Executive Board.
Raymund Breu was elected to Swiss Re’s Board of Directors in 2003. In addition, Raymund Breu serves on the Swiss Takeover Board.
Raymond K. F. Ch’ien also serves as Chairman of the Boards of Directors of MTR Corporation Limited, Hang Seng Bank Limited and HSBC Private Equity (Asia) Limited. He is also a member of the Board of Directors of the Hong Kong and Shanghai Banking Corporation Limited, Convenience Retail Asia Limited, The Wharf (Holdings) Limited, and the Hong Kong Mercantile Exchange. In addition, Raymond K. F. Ch’ien holds positions in several public service institutions. He is Chairman of the Hong Kong/European Union Business Cooperation Committee, honorary President of the Federation of Hong Kong Industries, and a member of the Standing Committee of the Tianjin Municipal Committee of the Chinese People’s Political Consultative Conference. He became a Trustee of the University of Pennsylvania in 2006.
John R. Coomber started his career with the Phoenix Insurance Company. He joined Swiss Re in 1973. Having qualified as an actuary in 1974, he first specialised in the company’s life reinsurance area. He was Swiss Re UK’s appointed actuary from 1983 to 1990. In 1987, he assumed responsibility for the Life division and, in 1993, was made Head of the company’s UK operations. John R. Coomber was appointed a member of the Executive Board in April 1995, responsible for the Group’s Life & Health Division. In June 2000, he became a member of the Executive Committee. He was Swiss Re’s Chief Executive Officer from 1 January 2003 until 31 December 2005, when he retired after 33 years of employment with Swiss Re.
John R. Coomber was elected to Swiss Re’s Board of Directors in February 2006. John R. Coomber also serves as Chief Executive Officer of Pension Insurance Corporation Limited, and is a director of MH (GB) Limited, Parhelion Capital Ltd, telent Ltd, and Qatar Insurance Services. He is also a trustee of The Climate Group, and a member of the Deutsche Bank Climate Advisory Panel. John R. Coomber is an Honorary Fellow of the Chartered Insurance Institute.
Hans Ulrich Maerki was elected to Swiss Re’s Board of Directors at the Annual General Meeting of 20 April 2007. He is also a member of the Boards of ABB Ltd, Mettler-Toledo International and the Menuhin Festival AG Gstaad. He serves on the Foundation Board of Schulthess-Klinik in Zurich, on the Board of Trustees of the Hermitage Museum in St. Petersburg as well as on the international advisory boards of the Ecole des Hautes Etudes Commerciales (HEC) Paris, the IESE Business School University of Navarra (IESE) and Bocconi University in Milan. He is currently a Senior Fellow of Advanced Leadership at Harvard University, Cambridge, Massachusetts, USA.
Robert A. Scott, a British and Australian citizen born in 1942, was educated at Scots College, Wellington, New Zealand. He has been a Senior Associate of the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) since 1965 and was made a Commander of the British Empire (CBE) in 2002.
Robert A. Scott joined Swiss Re’s Board of Directors in 2002. He is also a director of Pension Insurance Corporation Limited and an adviser to Duke Street Capital.
Thomas W. Bechtler, Bénédict G. F. Hentsch and Kaspar Villiger retired from the Board of Directors at the Annual General Meeting of 13 March 2009. At the same time, the shareholders re-elected Jakob Baer and John R. Coomber members of the Board of Directors for a three-year term. Peter Forstmoser, who had been Chairman of the Board of Directors, retired from the Board on 30 April 2009. Walter B. Kielholz was nominated Chairman of the Board of Directors as of 1 May 2009, and Mathis Cabiallavetta was nominated Vice Chairman as of 13 March 2009.
Chairman of Deutsche Bank since 2008. He was the General Manager of the Bank for International Settlements from 2003 to 2008 and served as Senior Deputy Governor of the Bank of Canada from 1999 to 2003. Before 1999, he held various senior positions at the International Monetary Fund.
̤ Carlos E. Represas, Mexican citizen, born in 1945. Carlos E. Represas has been the Chairman of Nestlé Group Mexico since 1983. He also serves on the Boards of Directors of Bombardier Inc. and Merck & Co. Inc., and on the Board of the Mexican Health Foundation A.C. He was Executive Vice President and also Head of the Americas of Nestlé S.A. from 1994 to 2004.
The Chairman’s and Governance Committee evaluates candidates for Board membership and makes recommendations to the Board with regard to their nomination for election or re-election. The Board submits nominations for new directors for election at the General Meeting that ensure an adequate size and a well-balanced composition of the Board and comply with the requirement that a majority of the Board be independent. At the General Meeting, each proposed election or re-election is presented by the Chairman and voted upon separately. The Chairman and Vice Chairman of the Board, as well as the chairpersons and members of the Board committees are elected to those positions by the Board of Directors.
Vice Chairman The Vice Chairman deputises for the Chairman in his absence or in the event of a conflict of interests of the Chairman. He prepares and executes Board resolutions on request of the Board and liaises between the Board and executive management in matters not reserved to the Chairman.
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, 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 advisers.
Chairman’s and Governance Committee The Board of Directors established the Chairman’s and Governance Committee with effect from 8 June 2009. The former Governance Committee was dissolved at the same time. The responsibilities of the Governance Committee were transferred to the Chairman’s and Governance Committee. The Board delegated additional responsibilities to the new committee, primarily in the area of counselling the Chairman as to emerging business issues and Board related organisational matters.
Responsibilities The Chairman’s and Governance Committee’s primary function is to act as counsellor to the Chairman, address the corporate governance issues affecting the Group, and develop and recommend to the Board a set of corporate governance guidelines. It is in charge of the succession planning process on Board level, proposes to the Board the appointment of members of the Executive Committee and oversees the annual performance assessment of both the Board and the Executive Committee.
Members The Chairman’s and Governance Committee is headed by the Chairman of the Board and consists, beside the Chairman, of the Vice Chairman and the chairpersons of all other Board committees: Walter B. Kielholz, Chair Mathis Cabiallavetta Jakob Baer John R. Coomber Robert A. Scott
Compensation Committee Responsibilities The Compensation Committee proposes to the Board compensation principles for the Group and determines the establishment of compensation plans, thereby ensuring that plans do not encourage inappropriate risk taking. The committee also defines, or proposes as appropriate, individual compensation at the Board and management level as well as overall variable compensation pools for the Group and executive management. Furthermore, it reviews the effectiveness of performance management processes and ensures compliance with compensation related disclosure requirements.
Members John R. Coomber, Chair Jakob Baer Rajna Gibson Brandon Walter B. Kielholz (until 30 April 2009) Hans Ulrich Maerki Robert A. Scott Kaspar Villiger (until 13 March 2009)
Investment Committee Responsibilities The Investment Committee approves the strategic asset allocation and reviews the tactical asset allocation decisions. It reviews the monthly performance of all financial assets of the Group and makes recommendations to the Board on strategic holdings. It reviews the risk analysis methodology as well as the valuation methodology related to each asset class and ensures that proper management processes and controlling mechanisms in Asset Management are in place.
Members Mathis Cabiallavetta, Chair Thomas W. Bechtler (until 13 March 2009) Raymund Breu Raymond K. F. Ch’ien Rajna Gibson Brandon Bénédict G. F. Hentsch (until 13 March 2009)
The Board of Directors and its committees meet at the invitation of the Chairman of the Board as often as business requires. The Board holds, on average, one meeting per month, including conference calls on the days preceding the publication of quarterly results. Each Board committee meets between four and twelve times per year. Extraordinary meetings are called at short notice if and when required. A quorum is constituted when at least half the members of the Board or the Board committee are present in person or participate using some alternative means of communication.
In addition to the regular and extraordinary meetings, the Board and its committees can make decisions in writing. Resolutions by written agreement of the Board of Directors may be adopted if no Board member calls for discussion of the motion. A quorum is constituted when at least half the members express their agreement or disagreement with the resolution. Written resolutions of Board committees may be adopted if all committee members express their agreement or disagreement with the resolution.
The Chairman of the Board is responsible for defining the agendas for the meetings of the Board and its committees in close cooperation with the chairpersons of the committees and in consultation with the Chief Executive Officer.
Minutes are kept of the discussions and the resolutions of each meeting and are usually approved at the next Board or Board committee meeting.
Governance Committee The Governance Committee held two regular meetings and one extraordinary meeting in 2009, before it was replaced with the Chairman’s and Governance Committee. On average, the meetings lasted one hour. Attendance was 100%. Besides the committee members and the Company Secretary, the Chief Executive Officer and the Chief Financial Officer were invited to attend Governance Committee meetings in an advisory capacity.
Compensation Committee The Compensation Committee held six regular and three extraordinary meetings in 2009. One resolution was taken by written agreement. The meetings lasted on average two hours. Attendance was 97.2% during the reporting year. Besides the committee members and the secretary, the Chief Executive Officer and the Head of Human Resources were invited to attend Compensation Committee meetings in an advisory capacity. The Committee enlisted the help of the human resources consulting firm Mercer and Niederer Kraft & Frey Law Firm (NKF) to provide support and advice for compensation issues during the reporting year. Mercer supported the Committee in organising benchmark studies and reviewing and amending the compensation philosophy. NKF provided support in disclosure matters. Representatives of Mercer participated in seven committee meetings in 2009, representatives of NKF in four meetings.
Finance and Risk Committee The Finance and Risk Committee held six regular meetings in 2009. On average, the meetings lasted 2.5 hours. Attendance was 100% during the reporting year. Besides the committee members and the Company Secretary, the Chief Executive Officer, the Chief Financial Officer, the Chief Investment Officer, the Chief Underwriting Officer and the Group Treasurer were invited to attend Finance and Risk Committee meetings in an advisory capacity.
Investment Committee The Investment Committee held eight regular meetings in 2009. On average, the meetings lasted three hours. Attendance was 90.6% during the reporting year. Besides the committee members and the Company Secretary, the Chief Executive Officer, the Chief Financial Officer, the Chief Investment Officer, the Chief Risk Officer and the Head of Financial Markets Risk Management were invited to attend Investment Committee meetings in an advisory capacity.
Involvement of executive management in Board committee meetings At the meetings of the Board committees, executive management members participate in an advisory capacity. For a detailed listing of Executive Committee member participation in Board committee meetings and the number of meetings, see the relevant paragraphs in the section Work methods of the Board of Directors and its committees, on pages 101 – 103.
Information and control instruments of the Board with respect to executive management
Right to obtain information At Board meetings, any member of the Board of Directors can demand information on any aspect of the Group’s business. Any member may, in such meetings, request that books and records be produced for timely inspection. Outside Board meetings, any member can direct a request for production of business records to the Chairman of the Board. In the event the request is denied, the Board decides whether such information shall be produced.
GIA staff govern themselves in accordance with the Code of Ethics established by the Institute of Internal Auditors (IIA). The IIA’s International Standards for the Professional Practice of Internal Auditing constitute the operating guidance for the department.
The Executive Committee consisted of the following members as of 31 December 2009: Stefan Lippe, a German citizen born in 1955, graduated in mathematics with business administration from the University of Mannheim. He obtained his doctorate in 1982 while working as a scientific assistant to the chair of insurance business management, being awarded the Kurt Hamann foundation prize for his thesis.
Before joining Swiss Re, he worked at Credit Suisse from 1993 to 2008 and held a number of positions in Zurich, London and New York. In private banking, he established an industry leading alternative investment platform. He was appointed Head of Trading and Sales in 2004 and headed Asset Management at Credit Suisse from 1 January 2006. He held the position of Chief Executive Officer of Asset Management and was a member of the Executive Board of Credit Suisse.
Brian Gray, a Canadian citizen born in 1962, has a degree in economics from Wilfrid Laurier University and an MBA from the University of Toronto.
George Quinn, a British citizen born in 1966, holds a degree in engineering from the University of Strathclyde and is a member of the Institute of Chartered Accountants in England and Wales.
He is also a Board member of IMD, a leading international business school.
From 1989 to 2001, he worked for Citigroup, where he held a number of senior positions, primarily in the area of credit and structured finance and ultimately as Managing Director Risk/Merger & Acquisitions for Citibank Northern Europe with site responsibility for Citibank Belgium. From 2002 to 2007, he was Group Chief Risk Officer at Allianz SE.
He is the former Chairman of the International Financial Risk Institute and was the founding Chairman of the Chief Risk Officers Forum. He represents Swiss Re at the World Economic Forum, The Climate Group, the Institute for International Finance, the United Nations Environment Program, and the Board for Actuarial Standards (UK), among others. He also serves on the Boards of Directors of Oman International Bank S.A.O.G., Muscat National Holding Company S.A.O.G., and Hoerner School Society, Luchnow, India.
The Board of Directors appointed Agostino Galvagni to succeed Stefan Lippe as Chief Operating Officer, as of 1 May 2009. Andreas Beerli retired from the Executive Committee at the end of June 2009.
To the extent that members of the Executive Committee are engaged in activities in governing and supervisory bodies, institutions and foundations, or perform permanent management and consultancy functions for important interest groups or accepted official functions and political posts, such information is included in the curricula vitae on pages 107 – 109.
The Articles of Association do not provide for any statutory quorums. Any General Meeting of shareholders passes resolutions irrespective of the number of shareholders present or shares represented by an absolute majority of the votes validly cast, subject to the compulsory exceptions provided by law. The Chairman of the General Meeting shall determine the voting procedure. As a rule, voting is usually carried out electronically. When this is not the case, votes shall be cast by ballot if more than 50 of the shareholders present so demand by a show of hands.
There is no statutory rule on the deadline for registering shareholders in connection with the attendance of the General Meeting. In recent years, Swiss Re acknowledged the voting rights of shares which were registered at least two working days before the General Meeting. In 2009, the qualifying date for the Annual General Meeting held on Friday, 13 March 2009, was Wednesday, 11 March 2009.
Unvested incentive shares, share options, and certain other employee benefit programmes would vest upon a change of control. Rights of members of the governing bodies are identical to those of employees.
Mr David J. A. Law and Ms Dawn M. Kink became lead auditors responsible for the existing auditing mandate as of 1 January 2004 and 1 September 2006, respectively.
In addition to the fees described above, aggregate fees of CHF 0.6 million were billed by PricewaterhouseCoopers AG during the year ended 31 December 2009, primarily for the following: ̤ Income tax compliance and related tax services CHF 0.1 million ̤ Other fees CHF 0.5 million (including permitted advisory work related to a range of projects including due diligence)
Responsibilities The Board of Directors reviews the professional credentials of the external auditor. The Audit Committee assists the Board in fulfilling its oversight of the auditor. The auditor is accountable to the Audit Committee, the Board of Directors and ultimately to the shareholders.
Duration of the mandate and term of office of the lead auditors
Evaluation of the auditor The Audit Committee, who is responsible for recommending an audit firm to the Board of Directors for election at the Annual General Meeting of shareholders, annually assesses the auditor and presents its findings to the Board. The assessment covers the auditor’s qualification, independence and performance.
Performance The performance-related assessment is based on the input of key people involved in the financial reporting process and the observations of the Audit Committee members. The auditor is measured against a number of criteria such as the understanding of Swiss Re’s business, the technical knowledge and expertise, the comprehensiveness of the audit plans, the quality of the working relationship with management and the clarity of communication.
One of Swiss Re’s core values is integrity through an uncompromising commitment to transparency and ethical principles. As a result, the Group’s information policy goes beyond legal requirements, aiming to meet best practice standards.
Important dates for 2010 18 February 2009 annual results 12 March Publication of 2009 Annual Report 7 April 146th Annual General Meeting 6 May First quarter 2010 results and EVM 2009 results 11 June Investors’ Day 5 August Second quarter 2010 results 4 November Third quarter 2010 results
For a number of years Swiss Re has adopted the principles of value-based management for steering its business. In line with regulatory recommendations the economic profit of the firm and of the individual lines of business have become the main focus of the Compensation Committee when assessing performance. This has the advantage that adequate capital charges are embedded in the reporting of results. However, from time to time it may have the drawback of causing timing differences between value as reflected in our published results, derived under generally accepted accounting principles, and our achievements as measured using value-based management. This applied particularly in 2009 as the Group’s main focus was on de-risking and recapitalisation. It is the view of the Compensation Committee that while acknowledging this potential tension, on balance the company’s focus on economic value creation is in line with the interests of shareholders.
At the Annual General Meeting on 7 April 2010, this Compensation report will be subject to a non-binding vote. The Compensation Committee believes this will provide an opportunity to engage in dialogue with you, our shareholders.
As a result of significantly increased shareholder scrutiny, strengthening of governance practices over compensation programmes in financial services companies became a priority. The Board of Directors’ Compensation Committee focused on reviewing the company’s compensation policy and programmes, to ensure alignment with the compensation principles and standards, as endorsed by the Financial Stability Board and G20, as well as FINMA's proposed standards for remuneration schemes.
The Compensation Committee has taken these proposals into consideration while ensuring that the compliance with the proposed regulation brings its intended practical benefits, such as aligning the interests of employees with the long-term interests of shareholders.
The regulators highlighted a number of areas that require supervision, such as preventing inappropriate risk taking. Swiss Re’s assessment of its compliance with these requirements did not reveal any material flaws in the Group’s governance structures; nevertheless, the Compensation Committee implemented a number of changes to further strengthen its role in this respect, while working closely with executive management to ensure that management is held to account for its decisions without compromising operational effectiveness. The main thrust of these changes was to improve transparency and control, ensuring clear, properly supported delegation of authority.
The Compensation Committee emphasises financial results and risk metrics in setting variable compensation awards. Shareholder value considerations make it important that the Compensation Committee consider these results in context: Swiss Re needs to retain key talent and protect strongly performing business areas if it is to sustain and grow long-term shareholder value.
The approach contributes to the success of the business by: ̤ supporting a culture of high performance with a clear focus on financial results; ̤ ensuring a clear link between business results, individual contribution, and reward; ̤ supporting Swiss Re’s commitment to key talent; and ̤ aligning the interests of employees with those of Swiss Re’s shareholders.
The Compensation Committee makes recommendations to the Board of Directors on the Group’s overall remuneration approach. It also oversees the development of and compliance with group-wide compensation principles as well as compliance with remuneration disclosure requirements. The Committee’s work is governed by its Charter.
Each meeting starts with a closed session of the Committee members. The Committee held nine meetings during 2009 after each of which a summary of decisions was submitted to the full Board of Directors. The Committee has a predetermined annual agenda to ensure that important reviews take place at the appropriate time throughout the year. The Compensation Committee also undergoes a periodic self-review to ensure continued high effectiveness.
Remuneration of the members of the Board of Directors (incl. Chairman and Vice Chairman)
Overview of the compensation components Each element of compensation is designed to encourage individual performance, company achievement, and shareholder alignment. Annual and long-term incentives are balanced to reflect the performance of the Group, the business function, and the individual.
Swiss Re offers its employees a share purchase programme, the Employee Participation Plan (EPP), to help align employee with shareholder interest and encourage an ownership culture across the firm. Employees may purchase a limited number of Swiss Re shares at favourable prices, from their salary.
Annual Performance Incentive The Annual Performance Incentive (API) is a discretionary, variable component of the compensation package for employees. Combined with the base salary, it provides competitive total cash compensation when performance targets are achieved. The API provides an additional incentive for exceptional performance.
The cash API for each year’s service is paid after the publication of the Group’s annual results for that year.
Employees also have the opportunity to take some or all of their cash API in the form of Swiss Re shares at a discount of 10% (the incentive share plan), encouraging alignment with shareholder interest. At the end of a one-year period, the employee assumes full ownership of the shares.
Value Alignment Incentive The VAI – introduced in 2006 – brought a time component into the API. This supports the business model of the Group by aligning a substantial portion of the API with long-term results. The aim is to ensure that the ultimate value of the VAI, though awarded for short- term performance, is significantly affected by the longer-term performance of the Group.
The greater the responsibility within the organisation, the greater the portion of the API that remains at risk: The VAI supports the company’s aims by providing a claw-back mechanism. The VAI award is adjusted at the end of a three-year performance period. In those cases where performance during this period is less than expected, a reduction in VAI will apply; conversely, where performance is better than expected, a premium will apply. The adjustment can range between 50% and 150% of the original award. The final VAI payment may also contain an additional mark-up element to assist with retention and compensate for time value of money.
Chief Executive Officer 50% 50% Executive Committee 55% 45% Group Managing Board and awards above CHF 500 000 threshold 60% 40% Awards at or above CHF 100 000 threshold 75% 25% Awards below CHF 100 000 threshold 100% 0%
Awards vest after three years and are paid in Swiss Re shares, provided the performance thresholds are met.
The LTI pool is approved by the Board of Directors and focuses on the achievement of three-year growth goals for earnings per share (EPS) and return on equity (RoE). A performance scale around a pre-defined target for both measures determines the level of reward earned at the end of each three-year cycle. The level of reward can range from zero to 200% of the award at the end of the three-year period.
The Compensation Committee reviews the LTI annually to ensure that it remains appropriate, and that the measures and performance targets are well aligned with the company’s goals and shareholders’ interests.
Consistent with the regulators' guidance on evaluating "economic profit which takes into account the cost of capital" (risk-adjusted metric), the Board of Directors has elected economic value management (EVM) as the Group’s key metric for assessing annual business performance and determining the subsequent payout of deferred bonuses over a three-year period. This ensures that rewards are linked to true economic profit contributions rather than GAAP accounting results. In addition, other quantitative and qualitative evaluation factors are taken into account.
The Compensation Committee will propose to the Board of Directors a total LTI award pool including the proposed award to the CEO and the total allocation to the Executive Committee.
Aggregate variable compensation expense The Compensation Committee takes its decisions to award variable compensation on an economic value basis at the time of grant. In the financial statements the recognition of deferred compensation follows the accrual principles as defined under GAAP. Compensation cost accrued under US GAAP for LTI plans is based on three-year average return on equity (RoE) and earnings per share (EPS) compound growth as set out in the Group’s three-year plan. These assumptions might change according to Group plan’s review over the vesting period of the awards. The financial statements reflect the aggregate value of variable compensation for the year under review as follows: The entire Long-term Incentive awarded during 2009 remains at risk and will only result in a payment if the performance criteria are sustained over a three-year period. Furthermore, the Value Alignment Incentive award remains subject to a potential claw-back depending on the multi-year performance of Swiss Re. These amounts cover the variable compensation for all 10 552 employees of the Group as of 31 December 2009.
Cash API 20081 n.a. -682 –68 1 Plans were granted in prior years 2 Reversal of overaccrual in prior year
Executive Committee compensation The CEO and the other members of the Executive Committee are remunerated under the same arrangements and guiding principles as all other Swiss Re employees. The CEO and the other members of the Executive Committee are paid a fixed base salary and are eligible to receive a variable API award. They also participate in the LTI.
The Compensation Committee assesses the performance of the CEO and the Executive Committee members against a set of quantitative and qualitative objectives. The main financial performance indicators are based on the Group’s net income, economic profit, RoE and EPS. The qualitative criteria are a set of leadership, compliance, and client relationship objectives in areas vital to the overall success of the Group. These objectives are agreed at the beginning of the year and aligned with the financial plan of the Group.
The API awards to all Executive Committee members totalled CHF 23.4 million for 2009, compared to CHF 12.3 million in 2008. As we explained in the previous section, a material part of the API is deferred for three years as VAI; the remainder of the API can be taken either in cash or in incentive shares. The following table covers payments to 9 members, including the CEO, compared to nine members in 2008. This also takes changes in the composition of the Executive Committee into account.
The LTI figures represent the grant value as of the award date. LTI grants made in 2009 may lead to a payment in March 2012 subject to the company’s reported financial performance from 2009 to 2011.
Contractual commitments due to new members represent long-term incentives granted to new employees, replacing agreements with their former employers that were forgone when they joined Swiss Re.
Shares held by members of the Executive Committee The following table reflects total current Swiss Re share ownership by members of the Executive Committee as of 31 December: Compensation for the highest paid member (Extract from Note 6 to the Financial Statements of Swiss Reinsurance Company Ltd) CHF thousands 20081 2009
Unvested restricted shares held by members of the Executive Committee Swiss Re does not grant employee stock options or restricted stock units (RSUs) on a regular basis, but reserves the right to provide ad hoc grants based on events such as exceptional business cycles, significant acquisitions or the replacement of forfeited equity for new executive hires.
Vested options held by members of the Executive Committee The following table reflects total vested option ownership by members of the Executive Committee as of 31 December: Long-term Incentive units held by members of the Executive Committee The following table reflects total outstanding Long-term Incentive units held by members of the Executive Committee as of 31 December: Loans to members of the Executive Committee 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 employees of the Swiss Re Group in their particular 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.
Stefan Lippe, Chief Executive Officer 351 650 David J. Blumer, Chief Investment Officer 179 100 Agostino Galvagni, Chief Operating Officer 80 950 Brian Gray, Chief Underwriting Officer 170 550 Michel M. Liès, Chief Marketing Officer 202 300 George Quinn, Chief Financial Officer 152 600 Raj Singh, Chief Risk Officer 71 650
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.
Compensation for former members of the Executive Committee In 2009 no compensation was paid to former members of the Executive Committee.
Compensation for members of the Board of Directors This section describes the compensation arrangements for the Board of Directors. As with all Swiss Re compensation arrangements, the objective in compensating members of the Board of Directors is to attract and retain experienced individuals who are motivated to perform, to their best ability, a critical role in the strategic management of the company. The structure of compensation for members of the Board of Directors must, however, take account of the way their contribution to the success of Swiss Re differs from that of the Executive Committee.
The fees for the members of the Board of Directors reflect differing levels of responsibility and engagement in the various Board Committees. Unlike the annual performance incentive for the Executive Committee (explained in the previous section), which is determined in arrears based on the results of the performance year, fees are determined in advance at the start of the financial year. The fee level is reviewed bi-annually to ensure that it remains appropriate.
The aggregate compensation for members of the Board of Directors was: Compensation for the Chairman and Vice Chairman The Chairman and the Vice Chairman receive half of their overall fee in the form of a three-year performance share plan which is measured against total shareholder return (TSR). For 2009, these performance shares were granted at a reference price of CHF 36.00 the market price at the time the Board approved the award.
Fees are set at the beginning of each year and as such are not directly correlated with the performance of the company.
As of April 2009, Walter B. Kielholz ceased to accrue benefits under the company’s pension plan.
The individual compensation for the remaining members of the Board of Directors for 2009 was: CHF thousands 2008 2009
Funding of pension benefits 167 57 1 These shares were awarded for a full-year cycle between two Annual General Meetings, and therefore also cover a period in 2010.
CHF thousands Total 2008 Fees and allowances in cash Fees in shares Total 2009
Jakob Baer, Chairman of the Audit Committee 800 480 320 800 Raymund Breu, Member 325 365 365 Raymond K. F. Ch’ien, Member 228 219 146 365 John R. Coomber, Chairman of the Finance and Risk Committee 655 419 276 695 Rajna Gibson Brandon, Member 325 207 138 345 Hans Ulrich Maerki, Member 325 325 325 Robert A. Scott, Chairman of the Compensation Committee 425 291 194 485 Thomas W. Bechtler, Former member1 325 38 26 64 Peter Forstmoser, Former Chairman2 3 300 550 550 Bénédict G. F. Hentsch, Former member1 325 64 64 John F. Smith, Jr., Former member3 96 Kaspar Villiger, Former member4 325 38 26 64 1 Term of office expired as of 13 March 2009 and did not stand for re-election. 2 Resigned from the Board of Directors as of 1 May 2009. Amounts include 50% of 2009 fee foregone. 3 Retired from the Board of Directors at the Annual General Meeting of 18 April 2008. 4 Resigned from the Board of Directors as of 13 March 2009.
Shares held by members of the Board of Directors The numbers of shares held by members of the Board of Directors as of 31 December were: Performance shares held by members of the Board of Directors The numbers of performance shares held by members of the Board of Directors as of 31 December were: Vested options held by members of the Board of Directors The vested options held by members of the Board of Directors as of 31 December were: As of 31 December 2009, the range of expiry years for vested options held by members of governing bodies was 2009 to 2014.
Walter B. Kielholz, Chairman 155 301 Mathis Cabiallavetta, Vice Chairman 1 961 Jakob Baer, Chairman of the Audit Committee 23 030 Raymund Breu, Member 26 214 Raymond K. F. Ch’ien, Member 5 144 John R. Coomber, Chairman of the Finance and Risk Committee 124 302 Rajna Gibson Brandon, Member 16 821 Hans Ulrich Maerki, Member 16 789 Robert A. Scott, Chairman of the Compensation Committee 16 663
Walter B. Kielholz, Chairman 69 444 Mathis Cabiallavetta, Vice Chairman 41 667
Weighted average strike price in CHF as of grant date 120.36 Walter B. Kielholz, Chairman 220 000 John R. Coomber, Chairman of the Finance and Risk Committee 314 000
Performance shares The final number of shares to be released after three years can vary between 0% and 150% of the original award, depending on Swiss Re’s relative TSR ranking against a peer group. Performance on this measure must exceed the median to vest at 100% of the original award.
Options Swiss Re granted options to Senior Management between the years 2000 and 2006. The remaining vested options will expire between 2010 and 2015, and have an average exercise price of CHF 110.44 (within a range between CHF 67.65 and CHF 186.00).
Financial statements 137 Group financial statements 137 Income statement 138 Balance sheet 140 Statement of shareholders’ equity 142 Statement of comprehensive income 143 Statement of cash flow 144 Notes to the Group financial statements 144 Note 1 Organisation and summary of significant accounting policies 154 Note 2 Investments 160 Note 3 Fair value disclosures 167 Note 4 Derivative financial instruments 172 Note 5 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
Net realised investment gains/losses (total impairments for year ended 31 December 2009: 3 846 of which 2 015 recognised in earnings) 2, 16 –9 482 733
Fixed income securities: Available-for-sale, at fair value (incl. 8 188 in 2008 and 9 315 in 2009 subject to securities lending and repurchase agreements) (amortised cost: 2008: 106 216; 2009: 92 034) 103 438 90 124 Trading (including 33 in 2008 and 536 in 2009 subject to securities lending and repurchase agreements) 13 961 11 952
Equity securities: Available-for-sale, at fair value (including 9 in 2008 and 0 in 2009 subject to securities lending and repurchase agreements) (cost: 2008: 675; 2009: 406) 833 573
Shareholders’ equity Convertible perpetual capital instrument 3 000 Common stock, CHF 0.10 par value
Convertible perpetual capital instrument Balance as of 1 January 0 0
Issue of common shares1 992 338 Cancellation of shares bought back –1 453 Convertible perpetual capital instrument issuance costs –10 Share-based compensation 78 –11 Realised gains/losses on treasury shares –49 63 Balance as of period end 10 776 11 156
Net unrealised gains/losses, net of tax Balance as of 1 January 3 119 –2 407 Cumulative effect of adoption of FSP SFAS 115-23 –280 Other-than-temporary impairment, non-credit related4 –136 Cumulative effect of adoption of SFAS 159 –33 Other changes during the period –5 493 1 386 Balance as of period end –2 407 –1 437
3 Retained earnings as of 31 December 2008 were increased by CHF 75 million to reflect the release of a valuation allowance against deferred tax assets associated with investment impairment losses.
Net income/loss attributable to common shareholders –864 506 Other comprehensive income, net of tax: Change in unrealised gains/losses (tax: – 963 in 2008 and – 4 in 2009) –5 526 970 Change in foreign currency translation (tax: – 238 in 2008 and 80 in 2009) –2 300 255 Change in adjustment for pension benefits (tax: – 123 in 2008 and 13 in 2009) –414 60
Cash flows from financing activities Issuance/repayment of long-term debt 1 327 3 440 Issuance/repayment of short-term debt –5 354 –1 383 Equity issued 1 1 Proceeds from the issuance of convertible perpetual capital instrument, net of issuance cost 2 990 Purchase/sale of treasury shares –1 553 2 Interest on convertible perpetual capital instrument –241 Dividends paid to shareholders –1 331 –34 Net cash provided/used by financing activities –6 910 4 775
Interest paid during 2009 was CHF 1 072 million. A mandatory convertible bond with a book value of CHF 610 million matured in 2009 and was settled in equity. The impact on cash flow upon conversion was nil.
The Group’s financial statements include the consolidated financial statements of Swiss Re Zurich and its subsidiaries. Entities which Swiss Re Zurich directly or indirectly controls through holding a majority of the voting rights are consolidated in the Group’s accounts. 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’s 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.
The preparation of financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the related disclosure including contingent assets and liabilities. The Swiss Re Group’s liabilities for unpaid claims and claim adjustment expenses and policy benefits for life and health include estimates for premium, claim and benefit data not received from ceding companies at the date of the financial statements. In addition, the Group uses certain financial instruments and invests in securities of certain entities for which exchange trading does not exist. The Group determines these estimates based on historical information, actuarial analyses, financial modelling, and other analytical techniques. Actual results could differ significantly from the estimates described above.
Transactions denominated in foreign currencies are remeasured to the respective subsidiary’s functional currency at average quarterly exchange rates. Monetary assets and liabilities are remeasured to the functional currency at closing exchange rates, whereas non-monetary assets and liabilities are remeasured to the functional currency at historical rates. Remeasurement gains and losses on monetary assets and liabilities and trading securities are reported in earnings. Remeasurement gains and losses on available-for-sale securities, investments in consolidated subsidiaries and investments accounted for using the equity method are reported in shareholders’ equity.
The Group considers both the credit risk of its counterparties, and own risk of non-performance in the valuation of certain financial instruments. In determining the fair value of the financial instruments, the assessment of the Group’s exposure to the credit risk of its counterparties incorporates consideration of existing collateral and netting arrangements entered into with each counterparty. The measure of the counterparty credit risk is estimated for derivative instruments and other over-the-counter financial assets with incorporation of the observable credit spreads, where available, or credit spread estimates derived based on the benchmarking techniques where market data is not available. The impact of the Group’s own risk of non-performance is analysed in the manner consistent with the aforementioned approach; with consideration of the Group’s observable credit spreads. The value representing such risk is incorporated into the fair value of the financial instruments (primarily derivatives), in a liability position as of the measurement date. The change in this adjustment from period to period is reflected in realised gains and losses in the income statement.
There can also be differences between the market values implied by collateral requested by counterparties and the prices observed in the markets. The Group has provided collateral on all financial instruments in excess of the market value estimate of CHF 43 million. For these assets or derivative structures, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Whilst management considers that appropriate values have been ascribed to such assets, current market conditions increase the level of uncertainty and judgement over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations.
For debt securities AFS which are other-than-temporary impaired and where there is not an intention to sell, the impairment is separated into (i) the estimated amount relating to credit loss, and (ii) the amount relating to all other factors. The estimated credit loss amount is recognised in earnings, with the remainder of the loss amount recognised in other comprehensive income. In cases where there is an intention or requirement to sell, the accounting of the other-than-temporary impairment is the same as for equity securities AFS described above.
Policy loans, mortgages and other loans are carried at amortised cost (effective yield method), net of any allowance for the estimated uncollectible amounts.
Admin Re® blocks of business can be acquired in different legal forms, either through an acquisition of an entity's share capital or through a reinsurance transaction. The Group’s policy is to treat these transactions consistently regardless of the form of acquisition. Accordingly, the Group records the acquired assets and liabilities directly to the balance sheet. Premiums, life and health benefits and other income statement items are not recorded in the income statement on the date of the acquisition.
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 12%. 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 9%.
The Group accounts for its pension and other post-retirement benefit costs using the accrual method of accounting. Amounts charged to expense are based on periodic actuarial determinations.
In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification (ASC) as the single source of authoritative non-governmental US GAAP effective from 1 July 2009. The Codification is not intended to change US GAAP, but it will change the manner in which authoritative accounting guidance is organised, presented and referenced. These financial statements have been updated accordingly. However, certain references to recently adopted standards have not been changed as equivalent references do not exist under the Codification.
In March 2008, the FASB issued an updated accounting standard (SFAS No. 161) that requires enhanced disclosures about an entity’s derivative and hedging activities. The Group adopted the new standard as of 1 January 2009. The new disclosure requirements are reflected in Note 4.
In June 2008, the FASB issued an accounting standard (EITF Issue No. 07-5) that addresses how to determine whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock and therefore may not be accounted for as a derivative instrument. The Group adopted the new standard as of 1 January 2009. The cumulative effect upon adoption is recorded in opening retained earnings and treasury stock and is presented in the statement of shareholders’ equity.
Financial statements / Notes to the Group financial statements 2 Investments
Net investment income by source (including unit-linked and with-profit business) was as follows: Dividends received from investments accounted for using the equity method were CHF 87 million and CHF 54 million for 2008 and 2009, respectively.
Net investment income includes income on unit-linked and with-profit business, which is credited to policyholders.
Fixed income securities available-for-sale: Gross realised losses –2 443 –1 945
Equity securities available-for-sale: Gross realised gains 927 210 Gross realised losses –1 250 –34
Other-than-temporary impairments –2 868 –2 015 Net realised investment gains/losses on trading securities –2 689 –56 Change in net unrealised investment gains/losses on trading securities –5 712 4 667 Other investments: Gross realised/unrealised gains/losses 1 799 –2 775 Foreign exchange gains/losses 1 338 –1 316 Net realised investment gains/losses –9 482 733
Net realised investment gains/losses include income on unit-linked and with-profit business, which is credited to policyholders.
For securitised products, cash flow projection analysis is conducted integrating forwardlooking evaluation of collateral performance drivers, including default rates, prepayment rates and loss severities, and deal-level features, such as credit enhancement and prioritisation among tranches for payments of principal and interest. Analytics are differentiated by asset class, product type and security-level differences in historical and expected performance. For corporate bonds and similar hybrid debt instruments, an expected loss approach based on default probabilities and loss severities expected in the current and forecast economic environment is used for securities identified as creditimpaired to project probability-weighted cash flows. Expected cash flows resulting from these analyses are discounted, and net present value is compared to the amortised cost basis to determine the credit component of other-than-temporary impairments.
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 22 545 2 962 –339 25 168 States of the United States and political subdivisions of the states 45 –4 41
Other-than-temporary impairments recognised in other comprehensive income column only include securities with a credit related loss recognised in earnings. Subsequent recovery in fair value of securities previously impaired in other comprehensive income are presented in the other-than-temporary impairments column.
Fixed income securities and equity securities classified as trading as of 31 December were as follows: Fixed income securities and equity securities classified as trading as of 31 December include securities held for unit-linked and with-profit business: The amortised cost or cost and estimated fair values of investments in fixed income securities available-for-sale 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 2008 and 2009, CHF 22 730 million and CHF 18 794 million, respectively, of fixed income securities available-for-sale were callable. The Group revised the 2008 presentation of callable fixed income securities available-for-sale in the previous period to conform with the 2009 presentation.
As of 31 December 2008 and 2009, investments with the carrying value of CHF 1 566 million and CHF 1 763 million, respectively, were on deposit with regulatory agencies in accordance with local requirements.
Debt securities issued by governments and government agencies 9 026 7 930
Mortgage-backed and asset-backed securities 1 506 1 698 Fixed income securities trading 13 961 11 952
Fixed income securities trading held for unit-linked business 2 230 2 460 Fixed income securities trading held for with-profit business 1 597 1 674 Fixed income securities trading 3 827 4 134 Equity securities trading held for unit-linked business 13 229 17 918 Equity securities trading held for with-profit business 1 005 1 243
Due in one year or less 6 369 6 384 4 492 4 499 Due after one year through five years 15 468 15 095 19 798 19 931 Due after five years through ten years 17 931 17 506 15 606 15 921
Mortgage and asset-backed securities with no fixed maturity 30 157 26 943 21 228 19 252 Total fixed income securities available-for-sale 106 216 103 438 92 034 90 124
As of 31 December 2008 and 2009, investments (including cash and cash equivalents) with a carrying value of approximately CHF 8 689 million and CHF 9 319 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities.
As of 31 December 2008 and 2009, the fair value of the government and corporate bond securities received as collateral, was CHF 8 272 million and CHF 12 633 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2008 and 2009 was CHF 2 554 million and CHF 783 million, respectively, which is used to settle short government bond positions. The sources of the collateral are typically highly rated banking market counterparties.
The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position as of 31 December 2008 and 2009. As of 31 December 2008, the gross unrealised loss on equity securities available-for-sale of CHF 26 million relates to declines in value for less than 12 months. As of 31 December 2009, CHF 16 million of the gross unrealised loss on equity securities available-for-sale relates to declines in value for less than 12 months and CHF 11 million to declines in value for more than 12 months.
Depreciation expense related to income producing properties was CHF 38 million and CHF 42 million for 2008 and 2009, respectively. Accumulated depreciation on investment real estate totalled CHF 493 million and CHF 516 million as of 31 December 2008 and 2009, respectively.
Certain financial instruments are classified within level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity, less liquid corporate debt securities and certain asset-backed securities. Certain over-the-counter derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more
Financial statements / Notes to the Group financial statements difficult. Such instruments are classified within level 3 of the fair value hierarchy. Pursuant to the election of the fair value option, the Group classifies certain Life & Health policy reserves to level 3 of the fair value hierarchy. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.
The fair values of assets are adjusted to incorporate the counterparty risk of non-performance. Similarly, the fair values of liabilities reflect the risk of non-performance of the Group, captured by the Group’s credit spread. For the year ended 31 December 2009, these valuation adjustments have resulted in a net realised loss from assets and liabilities measured at fair value using significant unobservable inputs. Whenever the underlying assets or liabilities are reported in a specific business segment, the valuation adjustment is allocated accordingly. Valuation adjustments not attributable to any business segment are reported in Group Items.
As of 31 December 2008 and 31 December 2009, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: The Group revised the 2008 presentation of the netting of derivative financial instruments assets and liabilities in the current period to conform with the 2009 presentation.
Liabilities for life and health policy benefits –303 –303 Accrued expenses and other liabilities –614 –1 378 –1 992 Total liabilities at fair value –1 087 –9 191 –5 511 7 111 –8 678 1 The netting of derivative receivables and derivative payables is permitted when a legally enforceable master netting agreement exists between two counterparties. A master netting agreement provides for the net settlement of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default or on the termination of any one contract.
Transfers in and/or out of level 3 5 877 273 106 493 6 749 Impact of foreign exchange movements –733 –92 –179 –26 –1 030
Transfers in and/or out of level 3 –61 –3 600 –997 –253 –14 513 84 –663 –61 –5 052 Impact of foreign exchange movements 55 –253 404 49 –367 –23 –358 5 –488
Purchases, issuances, and settlements 245 245 Transfers in and/or out of level 3 907 907 Impact of foreign exchange movements 13 496 509
The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) for the twelve months ended 31 December 2008 and 2009 were as follows: The investments in private equity funds, hedge funds and real estate funds are actively managed and comprise a globally diversified investment portfolio. Hedge fund investment strategies include, among others, equity long/short, macro, emerging markets, credit, event driven and insurance-linked-securities (ILS).
Non-redeemable investments are considered investments which the Group cannot readily exit and remain subject to the terms of each of the respective investment agreements. Underlying assets in each fund are expected to be liquidated based on the anticipated life of the fund. The average life of the Group’s private equity funds is approximately ten years.
The Group elected the fair value option for positions in the following line items in the balance sheet: Fixed income securities trading In the second quarter of 2008, the Group elected the fair value option for the specific investments acquired within a transaction. These securities are classified as debt securities under the Group’s accounting policies. Upon election of the fair value option the securities are classified as trading, with changes in fair value recorded in earnings. The primary reason for electing the fair value option is to mitigate volatility in earnings as a result of using different measurement attributes.
Liabilities for life and health policy benefits As of 1 January 2008, the Group elected the fair value option for existing guaranteed minimum death benefit (GMDB) reserves related to certain variable annuity contracts which are classified as universal life-type contracts. The Group has applied the fair value option as the equity risk associated with those contracts is managed on a fair value basis, and it is economically hedged with derivative options in the market.
Pursuant to the election of the fair value option for the items described, the balances as of 31 December 2008 and 31 December 2009 were as follows: Total gains/losses included in earnings for the twelve months ended 31 December 2008 and 2009, including foreign exchange impact, were CHF –1 150 million and CHF 706 million, respectively.
Assets Fixed income securities trading 13 961 11 952 of which at fair value pursuant to the fair value option 681 809 of which at fair value pursuant to the fair value option 121 508 Liabilities Liabilities for life and health policy benefits –39 911 –41 292 of which at fair value pursuant to the fair value option –494 –303
Financial statements / Notes to the Group financial statements 4 Derivative financial instruments
3 The fair value amounts that were offset are CHF 6 189 million for assets and CHF 3 765 million for liabilities as of 31 December 2008. The fair value amounts that were not offset are nil as of 31 December 2008 and 31 December 2009, respectively.
4 The fair value assets are included in other invested assets and the fair value liabilities are included in accrued expenses and other liabilities.
For the year ended 31 December 2008 and 31 December 2009, the Group recorded net unrealised foreign currency remeasurement losses in shareholders’ equity of CHF 210 million and CHF 46 million, respectively. These offset translation gains and losses on the hedged net investment.
In consideration of the rights of setoff and the qualifying master netting arrangements with various counterparties, the maximum potential loss as of 31 December 2009 was approximately CHF 6 682 million. The maximum potential loss is based on the positive market replacement cost assuming non-performance of all counterparties, net of cash collateral.
The Group writes/sells credit derivatives, including credit default swaps, credit spread options and credit index products, and total return swaps. The total return swaps, for which the Group assumes asset risk mainly of variable interest entities, qualify as guarantees under FASB ASC Topic 460. These activities are part of the Group’s overall portfolio and risk management strategies. The events that could require the Group to perform include bankruptcy, default, obligation acceleration or moratorium of the credit derivative’s underlying.
The fair values of the credit derivatives written/sold do not represent the Group’s effective net exposure as the ISDA master agreement and the cash collateral netting are excluded.
The Group has purchased protection to manage the performance/payment risks related to credit derivatives. As of 31 December 2008 and 31 December 2009, the total purchased credit protection based on notional values was CHF 169 682 million and CHF 46 996 million, respectively. Thereof CHF 90 491 million and CHF 14 567 million, respectively, was related to identical underlyings for which the Group sold credit protection. For tranched indexes and baskets, only matching tranches of the respective index were determined as identical. In addition to the purchased credit protection, the Group manages the performance/payment risks through a correlation hedge, which is established with non-identical offsetting positions.
As of 31 December 2008 CHF millions 0 – 5 years 5 – 10 years Over 10 years
4 The Group has revised the credit spreads for credit index products. 5 The Group enters into total return swaps mainly with variable interest entities which issue insurance-linked and credit-linked securities.
Total credit derivatives written/sold –1 050 19 492 11 025 1 489 32 006 1 The maximum potential payout is based on notional values of the credit derivatives. 2 The Group terminated substantially all Portfolio CDS in the second quarter of 2009. 3 The Group settled substantially all Structured CDS in the first quarter of 2009. 4 The Group enters into total return swaps mainly with variable interest entities which issue insurance-linked and credit-linked securities.
The amortisation of DAC in 2009 represents CHF 2 342 million and CHF 319 million for the Property & Casualty and Life & Health business segments, respectively.
Opening balance as of 1 January 5 152 6 769 4 311 6 139 Cumulative effect of adoption of FSP SFAS 115-2 6 Cumulative effect of adoption of SFAS 163 –25
The Group enters into short- and long-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines short-term debt as debt having a maturity at the balance sheet date of less than one year and long-term debt as having a maturity of greater than one year. Interest expense is classified accordingly.
Total senior debt as of 31 December 2009 8 778 Total senior debt as of 31 December 2008 7 542 1 Assumed in the acquisition of GE Insurance Solutions.
Interest expense on long-term debt for the periods ended 31 December 2008 and 2009 was as follows: Subordinated long-term debt
Senior financial debt 36 48 Senior operational debt 271 294 Subordinated financial debt 330 297 Subordinated operational debt 323 272
Subordinated perpetual loan note 2006 EUR 1 000 5.25% 2016 1 476 Subordinated perpetual loan note 2006 USD 752 6.85% 2016 777 Subordinated perpetual loan note 2007 GBP 500 6.30% 2019 831 2 subordinated perpetual loan notes
In June 2009, the Group issued CHF 300 million under the EMTN programme, due in December 2010, with a coupon of 2.75%. Due to the remaining maturity, this position was reclassified to short-term debt as of 31 December 2009. Also in June, CHF 700 million senior notes were issued under the EMTN programme, with a four-year maturity and a coupon of 4.25%.
As additional resources to meet funding requirements, the Group has access to the US commercial paper market through its USD 1.5 billion programme, as well as back-up credit lines and committed repurchase facilities in place with various banks.
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: A reconciliation of the opening and closing reserve balances for non-life unpaid claims and claim adjustment expenses for the period is presented as follows: The Group does not discount liabilities arising from prospective property and casualty insurance and reinsurance contracts, including liabilities which are discounted for US statutory reporting purposes. Liabilities arising from property and casualty insurance and reinsurance contracts acquired in a business combination are initially recognised at fair value in accordance with the purchase method of accounting.
Paid related to: Current year –1 521 –1 546 Prior year –12 131 –11 112
Foreign exchange –6 527 –260 Effect of acquisitions, disposals, new retroactive reinsurance and other items 578 –1 546
Claims incurred development on prior years includes the impact of the adverse development cover (ADC) entered into with Berkshire Hathaway, covering non-life claims reserves for accident years 2008 and prior, with limited exceptions. The net prior year development after the ADC cover was mainly influenced by Financial Guarantee developments. Most of the remaining exposure to Financial Guarantee business was commuted during 2009.
Financial statements / Notes to the Group financial statements 9 Financial guarantee reinsurance
As of 1 January 2009, Swiss Re Group adopted SFAS No. 163 “Accounting for Financial Guarantee Insurance Contracts” (SFAS 163). SFAS 163 provides new guidance on the recognition and measurement of premium revenue and claim liabilities of financial guarantee reinsurance contracts and requires certain related disclosures.
The Group tracks and monitors credit deterioration in insured financial obligations. This is based on the surveillance activities of its cedents and internal reviews of its reinsured portfolio. Each cedent maintains a process for identifying credits that require higher levels of scrutiny or intervention. The cedent is required to notify the Swiss Re Group when a transaction falls under increased scrutiny.
The Group maintains a watch list based on the information provided by the cedents and the Group’s internal monitoring activities. Obligations with credit deterioration are split into two categories. Category 1 (Special mention) encompasses transactions that are still currently performing, but where indicators point to an increased risk of default. Category 2 (Workout) includes insured financial obligations that are characterised as non-performing and a reserve has been reported by the cedent. A default may have occurred or is seen as likely to occur in the future.
As of 31 December 2009, the notional exposures and claims liabilities allocated to categories 1 and 2 were as follows: Compared to the amount recognised as of 31 December 2008, notional exposures in category 1 increased CHF 373 million. The movement shows the net result of adopting the new recognition and measurement guidance, commutations, changes to the credit quality of remaining obligations insured by our cedents and updates to parameters supporting our loss estimates. The decrease of the notional amount of exposures in category 2 by CHF 553 million is mainly attributable to commutations.
Dividends are declared in Swiss francs. For the years ended 31 December 2008 and 2009, the Group’s dividends per share were CHF 4.00 and CHF 0.10, respectively.
Earnings per share for the periods ended 31 December were as follows: The effects of debt and equity instrument conversion, which totalled 104 723 290 shares for the year ended 31 December 2009, have not been included in the diluted earnings per share calculation because the impact of including these shares was antidilutive.
Basic earnings per share Net income/loss –864 723 Interest on convertible perpetual capital instrument –217 Income available to common shares –864 506 Weighted average common shares outstanding 331 024 378 339 543 341 Net income/loss per share in CHF –2.61 1.49
Effect of dilutive securities Change in income available to common shares due to convertible bonds 0 Change in average number of shares due to convertible bonds and employee options 2 846 457
Financial statements / Notes to the Group financial statements 11 Income taxes
The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: The following table reconciles the expected tax expense at the Swiss statutory tax rate to the actual tax expense in the accompanying income statement: Tax rate reconciliation
Current tax expense 560 734 Deferred tax expense/benefit –1 046 –503 Income tax expense/benefit –486 231
As of 31 December 2009, the Group had CHF 12 753 million net operating tax loss carryforwards, expiring as follows: CHF 27 million in 2010, CHF 43 million in 2011, CHF 13 million in 2012, CHF 0 million in 2013, CHF 0 million in 2014, CHF 7 847 million after 2014 and CHF 4 823 million do not expire. The Group also had capital loss carryforwards of CHF 492 million, expiring as follows: CHF 45 million in 2010, CHF 15 million in 2011, CHF 271 million in 2012, CHF 158 million in 2013, CHF 0 after 2013 and CHF 3 million never expire. Net operating tax losses of CHF 1 773 million were utilised or expired during the period ended 31 December 2009.
Income taxes paid in 2008 and 2009 were CHF 120 million and CHF 741 million, respectively.
FIN 48 liabilities including interest and penalties –1 449 –1 255
Additions based on tax positions of current year 123 –22 Additions for tax positions of prior years 33 95 Reductions for tax positions of prior years –538 –304 Settlements –174 –1
Financial statements / Notes to the Group financial statements 12 Benefit plans
The Group also provides certain healthcare and life insurance benefits for retired employees and their dependants. Employees become eligible for these benefits when they become eligible for pension benefits.
Benefit obligation as of 1 January 2 743 2 827 2 212 1 642 462 325 Adjustment to retained earnings 48 39 11
Fair value of plan assets as of 1 January 3 169 2 676 1 970 1 362 Adjustment to retained earnings 38 29 Actual return on plan assets –432 257 –294 239
Acquisitions/disposals/additions 4 –29 –1 Effect of foreign currency translation –404 58 Fair value of plan assets as of 31 December 2 676 2 815 1 362 1 726 0 Funded status –151 36 –280 –254 –325 –315
Non-current assets 36 102 138 Current liabilities –15 –15 Non-current liabilities –356 –300 –656 Net amount recognised 36 –254 –315 –533
Adjustment to retained earnings Net gain/loss –129 146 –14 3 Prior service cost/credit –1 –1 Amortisation of: Net gain/loss –34 –74 12 –96 Prior service cost –11 –1 23 11 Exchange rate gain/loss recognised during the year 9 1 10 Total recognised in other comprehensive income, gross of tax –174 80 21 –73 Total recognised in net periodic benefit cost and other comprehensive income, gross of tax –107 120 7 20
Net gain/loss 545 322 –172 695 Prior service cost/credit 52 –130 –78
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are CHF 30 million and CHF 7 million, respectively. The estimated net gain and prior service credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is CHF 12 million and CHF 12 million, respectively.
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was CHF 4 282 million and CHF 4 633 million as of 31 December 2008 and 2009, respectively.
Pension plans with an accumulated benefit obligation in excess of plan assets consist of: The expected long-term rates of return on plan assets are based on long-term expected inflation, interest rates, risk premiums and targeted asset category allocations. The estimates take into consideration historical asset category returns.
Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one percentage point change in assumed health-care cost trend rates would have had the following effects for 2009: The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2008 and 2009, are as follows: Actual asset allocation is determined by a variety of current economic and market conditions and considers specific asset class risks.
Equity securities include Swiss Re common stock of CHF 3 million (0.1% of total plan assets) and CHF 4 million (0.1% of total plan assets) as of 31 December 2008 and 2009, respectively.
Effect on total of service and interest cost components 1 –1 Effect on post-retirement benefit obligation 28 –23
As of 31 December 2009, the fair values of pension plan assets by level of input were as follows: Assets measured at fair value
Debt securities issued by the US government and government agencies 5 22 27 Debt securities issued by non-US governments and government agencies 1 040 1 040
Total assets at fair value 839 3 024 579 4 442
As of 31 December 2009, the reconciliation of fair value of pension plan assets using significant unobservable inputs were as follows: The employer contributions expected to be made in 2010 to the defined benefit pension plans are CHF 128 million and to the post-retirement benefit plan are CHF 15 million.
As of 31 December 2009, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees voluntary contributions, are as follows: 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 2008 and in 2009 was CHF 48 million and CHF 44 million, respectively.
Assets measured at fair value using significant unobservable inputs (Level 3)
Total compensation cost for share-based compensation plans recognised in net income was CHF 41 million and CHF 106 million in 2008 and 2009, respectively. The related tax benefit was CHF 9 million and CHF 29 million, respectively.
The Group issued 772 248 and 153 109 restricted shares to selected employees in 2008 and 2009, respectively. Moreover, as an alternative to the Group’s cash bonus programme 389 506 and 400 663 shares were issued during 2008 and 2009, respectively.
A summary of the movements in shares relating to outstanding awards granted under the restricted share plans as of 31 December 2009 were: The weighted average fair value of restricted shares, which equals the market price of the shares on the date of the grant, was CHF 84 and CHF 57 in 2008 and 2009, respectively.
The LTI plan granted in 2009 is expected to be settled in shares. The compensation costs recognised for this plan continue to take into consideration the change in key performance indicators, while the share price used for measurement, CHF 42.40, was set as of the date the share settlement decision was made in November 2009. 2 503 750 units were granted under this plan in 2009.
In 2009, the Group issued a compensation plan to selected employees. The plan has a requisite service period of three years and is paid out in cash. The payout is based on a three-year risk free interest rate, the Swiss Re share price performance and dividend yield over the vesting period. The grant price was based on the closing share price as of 19 February 2009 of CHF 16.74. A total of 337 427 units were granted in 2009 and as of 31 December 2009 171 489 units were outstanding.
In 2006, the Group issued 3 million stock appreciation rights (SAR) as an extraordinary grant following the Insurance Solutions acquisition. The plan will be settled in cash. The requisite service period is two years, while the maximum contractual term is five years. The plan vested in 2008, however holders of the award are still able to exercise their rights until the maximum contractual period expires. The fair value of the appreciation rights is estimated at date of grant using a binomial option-pricing model and is revised at every balance sheet date until exercise.
As of 31 December 2009, the total unrecognised compensation cost (net of expected forfeitures) related to non-vested, share-based compensation awards was CHF 127 million and the weighted average period over which that cost is expected to be recognised was 2.2 years.
The number of shares authorised for the Group’s share-based payments to employees was 649 773 and 10 052 510 as of 31 December 2008 and 2009, respectively.
In 2008 and 2009, 1 222 339 and 8 703 959 options, respectively, were issued to employees and the Group contributed CHF 18 million and CHF 59 million, respectively, to the plan.
Total operating lease commitments 785 Less minimum non-cancellable sublease rentals –83 Total net future minimum lease commitments 702
On 14 August 2009, Plumbers’ Union Local No. 12 Pension Fund, a Swiss Re shareholder, filed a second amended complaint in the federal securities class action lawsuit against Swiss Re, Swiss Re’s former Chief Executive Officer and Swiss Re’s Chief Financial Officer arising out of Swiss Re’s announcement, on 19 November 2007, that it would report a CHF 1.2 billion mark-to-market loss on two credit default swaps. The lawsuit is pending in New York federal court. Plaintiff alleges that defendants violated the anti-fraud provisions of the U.S. federal securities laws. Specifically, it contends that Swiss Re made false and misleading statements about its financial condition between March and November 2007, and that it failed to disclose that the Credit Solutions division had engaged in two credit default swaps that exposed the company to financial risk. Plaintiff seeks to certify a class of all U.S. residents or citizens that purchased Swiss Re stock between 1 March 2007 and 19 November 2007. Swiss Re plans to vigorously defend the lawsuit. On 4 September 2009, Swiss Re filed a motion to dismiss and requested oral argument. Plaintiff filed an opposition to that motion on 25 September, to which Swiss Re submitted a reply brief on 9 October. The parties await a date for oral argument and/or the Court’s decision on the motion to dismiss.
In mid 2007, a Swiss Re subsidiary commenced an arbitration proceeding against Lincoln National Reinsurance Company (Barbados) Ltd. (“Lincoln”) seeking relief from an individual disability income indemnity retrocessional agreement of 1 October 2001. In late January 2009, the arbitration panel awarded Swiss Re total rescission of the affected treaty and retained limited jurisdiction to resolve any interim disputes between the parties regarding the implementation of the panel’s award. In early February 2009, Swiss Re filed a petition to confirm the arbitral award in the United States District Court for the Northern District of Indiana, Ft. Wayne Division. Lincoln has opposed Swiss Re’s petition to confirm the arbitral award on procedural grounds. In July 2009, Lincoln sought clarification of the arbitral award to require Swiss Re to return to Lincoln an amount equal to the original ceding commission, plus interest. By order dated 25 September 2009 the panel denied Lincoln’s request for clarification and reaffirmed its order dated 24 January 2009 granting Swiss Re’s request for total rescission of the affected treaty. On 15 December 2009, the District Court granted Swiss Re’s Petition and entered an order confirming the panel’s arbitration ruling.
Financial statements / Notes to the Group financial statements 16 Information on business segments
Group items include certain costs of Corporate Centre functions not allocated to the business segments, certain foreign exchange items, interest expenses on operating and financial debt and other items not considered for the performance of the operating segments.
The allocation is based on technical reserves and other information, including duration of the underlying liabilities, and was allocated in the years ended 31 December of 2008 and 2009 as follows: CHF millions, for the year ended 31 December 2008 Property & Casualty Life & Health Asset Management Allocation
Net realised investment gains/losses 28 3 209 –801 46 –1 749 733
Expenses Claims and claim adjustment expenses; life and health benefits –8 686 –9 348 –397 –18 431 Return credited to policyholders –4 823 –4 823
Other expenses –1 505 –844 –791 –58 –3 198 Interest expenses –1 094 –1 094
Financial statements / Notes to the Group financial statements b) Property & Casualty business segment – by line of business For the years ended 31 December
Life & Health business segment – by line of business For the years ended 31 December
Expenses Claims and claim adjustment expenses; life and health benefits –5 742 –1 284 –2 322 –9 348 Return credited to policyholders –534 –4 289 –4 823 Acquisition costs –1 708 –455 –325 –2 488 Other expenses –377 –150 –317 –844
Operating result, excluding non-participating net realised investment gains/losses 611 640 40 1 291
Net investment income – unit-linked 30 571 601 Net investment income – with-profit business 166 166 Net investment income – non-participating 761 397 1 520 2 678 Net realised investment gains/losses – unit-linked 478 2 979 3 457 Net realised investment gains/losses – with-profit business 297 297 Net realised investment gains/losses – non-participating –571 212 –186 –545
Benefit ratio2 in % 82.4 1 Operating revenues exclude net investment income and net realised investment gains/losses from unit-linked and with-profit business as these are passed through to contract holders and therefore do not have an impact on the operating result. Operating revenues also exclude net realised investment gains/losses from non-participating business.
Revenues Net investment income/loss 6 297 –937 5 360 Net realised investment gains/losses 807 –327 480 Other revenues 80 –8 72
Denmark Swiss Re Denmark H ApS, Copenhagen 0 100 f Swiss Re Denmark Services A/S, Copenhagen 0 100 f
Germany ASS Assekuranz, Service- und Sachverständigengesellschaft mbH, Sundern 1 49 e EXTREMUS Versicherungs-Aktiengesellschaft, Cologne 74 15 e Paarl Grundbesitzverwaltung GmbH & Co. KG Objekt Köln Sterrenhofweg, Munich 2 22 e ROLAND Partner Beteiligungsverwaltung GmbH, Cologne 0 20 e Swiss Re Germany AG, Unterföhring bei München 67 100 f Swiss Re Germany Holding GmbH, Unterföhring bei München 38 100 f
Hungary Swiss Re Treasury (Hungary) Group Financing Limited Liability Company, Budapest 0 100 f
Ireland ALPS Capital II Plc, Dublin 1 100 e Swiss Re International Treasury (Ireland) Ltd., Dublin 0 100 f Swiss Reinsurance Ireland Limited, Dublin 119 100 f
Luxembourg Securitas de Milo S.a.r.l., Luxembourg 0 100 e Swiss Re Europe S.A., Luxembourg 519 100 f Swiss Re Finance (Luxembourg) S.A., Luxembourg 1 100 f Swiss Re Funds (Lux) I, Senningerberg 1 10 771 100 f Swiss Re International SE, Luxembourg 266 100 f Swiss Re Management (Luxembourg) S.A., Luxembourg 295 100 f Swiss Re Treasury (Luxembourg) S.A., Luxembourg 156 100 f
Netherlands Algemene Levensherverzekering Maatschappij nv, Amsterdam 7 100 f Atradius N.V., Amsterdam 84 25 e
United Kingdom Admin Re UK Limited, Shropshire 122 100 f Banian Investments UK Limited, London 2 100 f Barclays Life Assurance Company Limited, London 50 100 f Calico Leasing (GB), London 0 100 f Cyrenaic Investments (UK) Limited, London 0 100 f Dex Name Limited, London 20 100 f European Credit and Guarantee Insurance PCC Limited, St. Peter Port 9 100 f NM Insurance Holdings Limited, Shropshire 219 100 f NM Life Group Limited, Shropshire 250 100 f NM Life Limited, Shropshire 159 100 f NM Pensions Limited, Shropshire 250 100 f Reassure UK Life Assurance Company Limited, London 644 100 f SR Delta Investments (UK) Limited, London 6 100 f SRNY Limited, London 56 100 f Swiss Re BHI Limited, London 0 100 e Swiss Re Capital Markets Limited, London 62 100 f Swiss Re Financial Services Limited, London 12 100 f Swiss Re Frankona LM Limited, London 12 100 e Swiss Re GB Plc, London 1 067 100 f Swiss Re Life & Health Limited, London 0 100 f Swiss Re Services Limited, London 4 100 f Swiss Re Specialised Investments Holdings (UK) Limited, London 2 100 f Swiss Re Specialty Insurance (UK) Limited, London 30 100 f Swiss Reinsurance Company UK Limited, London 0 100 f The Mercantile & General Reinsurance Company Limited, Glasgow 31 100 f The Palatine Insurance Company Limited, London 13 100 f Windsor Life Assurance Company Limited, Shropshire 439 100 f XSMA Limited, London 25 100 f
Barbados Accra Holdings Corp, Bridgetown 17 100 f European Finance Reinsurance Company Ltd., Bridgetown 5 100 f European International Holding Company Ltd., Bridgetown 3 188 100 f European International Reinsurance Company Ltd., Bridgetown 3 183 100 f Gasper Funding Corporation, Bridgetown 18 100 f Underwriters Reinsurance Company (Barbados) Inc., Bridgetown 17 100 f
Bermuda CORE Reinsurance Company Limited, Hamilton 0 100 f Old Fort Insurance Company, Ltd., Hamilton 0 100 f Swiss Re Global Markets Limited, Hamilton 0 100 f SwissRe Capital Management (Bermuda) Ltd., Hamilton 0 100 f SwissRe Investments (Bermuda) Ltd., Hamilton 0 100 f
Canada Swiss Re Life & Health Canada, Toronto 112 100 f SwissRe Holdings (Canada) Inc., Toronto 116 100 f
Cayman Islands Ampersand Investments (UK) Ltd., George Town 1 002 100 f Cobham Funding Limited, George Town 0 100 f Dunstanburgh Finance (Cayman) Limited, George Town 0 100 f Epping Funding Limited, George Town 0 100 f Kilgallon Finance Limited, George Town 0 100 f SR Alternative Financing I SPC, George Town 0 100 f SR Alternative Financing II SPC, George Town 0 100 f SR Cayman Holdings Ltd, George Town 0 100 f SR York Limited, George Town 0 100 f Swiss Re Strategic Investments UK Limited, George Town 0 100 f
United States Facility Insurance Corporation, Austin 0 100 f Facility Insurance Holding Corporation, Dallas 0 100 f First Specialty Insurance Corporation, Jefferson City 5 100 f Industrial Risk Insurers, Windsor 0 100 f North American Capacity Insurance Company, Manchester 4 100 f North American Elite Insurance Company, Manchester 4 100 f North American Specialty Insurance Company, Manchester 13 100 f Rialto Re I Inc, Burlington 147 100 f SR PA Finance Inc., Wilmington 155 100 f Sterling Re, Inc., Burlington 0 100 f Swiss Re America Holding Corporation, Wilmington 0 100 f Swiss Re Atrium Corporation, Wilmington 1 100 f Swiss Re Capital Markets Corporation, New York 0 100 f Swiss Re Financial Products Corporation, New York 2 713 100 f Swiss Re Financial Services Corporation, Wilmington 0 100 f Swiss Re Life & Health America Holding Company, Wilmington 4 100 f Swiss Re Life & Health America Inc., Hartford 4 100 f Swiss Re Partnership Holding, LLC, Dover 380 100 f Swiss Re Solutions Holding Corporation, Wilmington 9 100 f Swiss Re Treasury (US) Corporation, Wilmington 0 100 f Swiss Reinsurance America Corporation, Armonk 6 100 f Washington International Insurance Company, Manchester 4 100 f Westport Insurance Corporation, Jefferson City 12 100 f
South Africa Swiss Re Africa Limited, Johannesburg 1 100 f Swiss Re Life and Health Africa Limited, Johannesburg 0 100 f
China Beijing Prestige Health Consulting Services Company Limited, Beijing 6 100 e
When analysing the status of an entity, the Group mainly assesses if (1) the equity is sufficient to finance the entity’s activities without additional subordinated financial support, (2) the equity owners have the right to make significant decisions affecting the entity’s operations, and (3) the holders of the voting rights substantively participate in the gains and losses of the entity. When one of these criteria is not met, these entities need to be assessed for consolidation as required by the Variable Interest Entities section of the Consolidation Topic.
The party that will absorb the majority of the expected losses, receive the majority of the expected residual return, or both, is considered the primary beneficiary according to the Variable Interest Entities section of the Consolidation Topic. To determine the primary beneficiary of a VIE, a qualitative analysis is performed in which the nature and design, capital structure, contractual terms and relationships among the variable interest holders are evaluated. When the qualitative analysis is not conclusive, a quantitative analysis is performed. For this, the Group determines under various probability-weighted scenarios the cash flows that the variable interest holders will receive based on the explicit and implicit variable interests they hold. The Group consolidates a VIE when it is the primary beneficiary.
that changes the characteristics of the Group’s involvement; ̤ the Group’s assumption of additional variable interests; and ̤ the Group’s sale or disposal of variable interests, or the issuance of variable interests
In general, third parties invested in consolidated VIEs do not have recourse to the Group in the event of a default, except in cases where the Group has protected the assets with a derivative contract or has provided a guarantee. In these cases, the recourse is limited to the notional amount of the guarantee or the value of the assets protected by the derivative contract.
The securitisation vehicle generally retains the issuance proceeds as collateral. To determine if the Group is the primary beneficiary or has a significant variable interest, the Group considers the insurance or credit risk assumed by the bondholders of the vehicles, the investment risk of the securities held as collateral, and any derivative contracts or other guarantees the Group has entered into with the VIE. Typically, the variable interests held by the Group arise through ownership of insurance-linked and credit-linked securities, or through protection provided for the value of the collateral held.
The collateral held predominantly consists of investment grade securities. The Group would incur losses when some or all of these securities drop in value or default. The Group’s maximum exposure to loss equals the higher of the carrying amount of the collateral protected or the carrying amount of the insurance-linked or credit-linked securities held.
Debt financing vehicles Debt financing vehicles issue preference shares or loan notes to provide the Group with funding. The Group is partially exposed to the asset risk by holding equity rights or by protecting some of the assets held by the VIEs via guarantees or derivative contracts. The assets held by the VIEs consist of investment grade securities, structured products, hedge fund units and others.
Others The VIEs in this category were created for various purposes. Generally, the Group is exposed to the asset risk of the VIEs by holding an equity stake in the VIE or by guaranteeing a part or the entire asset value to third-party investors. A significant portion of the exposure of the Group is either retroceded or hedged. The assets held by the VIEs consist of investment grade securities, private equity investments, residential real estate and others.
The following table shows the total assets and liabilities on the Group’s balance sheet relating to VIE’s. The Group is the primary beneficiary of the VIE’s but does not hold the majority voting interest as of 31 December 2008 and 2009. For investment vehicles, the assets and liabilities are presented net of minority interest.
Unpaid claims and claim adjustment expenses 19 Liabilities for life and health policy benefits 1 327 1 259
Reinsurance balances payable 11 Deferred and other non-current taxes 162 54 Accrued expenses and other liabilities 525 487
The following table shows the total assets of VIEs of which the Group is the primary beneficiary, but does not hold the majority voting interest for periods ended 31 December
The following table shows the Group’s maximum exposure to loss and the liabilities related to VIEs in which the Group holds a significant variable interest as of 31 December 2008 and
In 2009, the Group set up total provisions of CHF 271 million, related to the cost savings and efficiency programmes announced in early 2009, and released CHF 31 million, mostly attributable to business acquired from Insurance Solutions and the realignment of the former Financial Markets unit announced in 2007.
The increase of the provision in the Property & Casualty and the Life & Health business segments of CHF 124 million and CHF 54 million, respectively, are related to leaving benefits, office structure simplification costs and cost for the concentration of support resources allocated to the Property & Casualty and the Life & Health business segments.
Financial statements / Notes to the Group financial statements 19 Risk assessment
The Executive Committee (EC) is responsible for implementing the risk management framework through four further committees: ̤ The Group Risk and Capital Committee has responsibility for allocating capital and
̤ The Group Products and Limits Committee determines Swiss Re’s product policy and standards, sets reinsurance and counterparty credit risk limits, and decides on large or non-standard transactions.
̤ The Group Regulatory Committee is the central information and co-ordination platform for regulatory matters. It ensures a consistent approach to external communication on regulatory issues.
The Chief Risk Officer (CRO), who is a member of the EC, participates in the four committees described above and chairs both the Group Risk and Capital Committee and the Group Regulatory Committee. In addition, the CRO leads the global Risk Management function, which is responsible for risk oversight and control across the Group.
The global Risk Management function operates via dedicated units for property and casualty risk, life and health risk, and financial market and credit risk. Each unit is entrusted with Group-wide responsibility for the identification, assessment, and controlling of their allocated risks and for risk governance at the risk category level.
On March 10, 2010, the Group announced preliminary estimates in respect of the earthquake in Chile and European winter storm Xynthia. A magnitude 8.8 earthquake hit Chile on 27 February 2010, causing several hundred fatalities and triggering severe property damage along a coastal stretch of 600 km. Xynthia was a violent European windstorm that crossed Western Europe on 26 – 28 February 2010, reaching its peak intensity over northern Spain and France and triggering massive storm surges along the French Atlantic coast. The Group’s preliminary estimate of industry losses for the earthquake in Chile is in the range of USD 4 – 7 billion, and the estimate of the Group’s losses, net of retrocession and before tax, is USD 500 million. The Group’s preliminary estimate of its losses for Xynthia, net of retrocession and before tax, is USD 100 million. In its release the Group noted that, particularly with respect to the earthquake in Chile, the estimates are preliminary and subject to update as more information becomes available.
Report of the statutory auditor on the Consolidated Financial Statements As statutory auditor, we have audited the consolidated financial statements of Swiss Re Group, which comprise the income statement, balance sheet, statement of shareholders’ equity, statement of comprehensive income, statement of cash flow and notes (pages 137 to 220), for the year ended 31 December 2009.
As discussed in Notes 1 and 2 to the consolidated financial statements, Swiss Re Group changed the manner in which it recognises and reports other-than-temporary impairments in 2009.
David JA Law Dawn M Kink Audit expert Audit expert Auditor in charge
The following commentary on the 2009 financial year of the parent company thus complements the review of the financial year of the Swiss Re Group.
Property and casualty net claims and claim adjustment expenses decreased during 2009, mainly driven by good claims experience and low natural catastrophe claims.
Additionally, the intragroup profit allocation agreement was terminated in 2009, resulting in a smaller investment result, compared to the prior year period.
Other net expenses remained at the previous year‘s level of CHF 0.8 billion. The increase in net interest expenses mainly reflects the impact of the convertible perpetual capital instrument issued to National Indemnity Company, a subsidiary of Berkshire Hathaway Inc., and a lower net interest income from the Company’s subsidiaries. This increase was more than offset by the substantially lower other expenses compared to the prior year, which was negatively affected by a loss incurred in connection with the merger with a Swiss Re Group subsidiary.
This development was mainly driven by a decrease in reinsurance receivables and funds held by ceding companies, both in connection with intragroup business. The decline in other receivables also reflects lower balances with the Company’s subsidiaries.
Other reserves increased by CHF 0.6 billion to CHF 15.5 billion in 2009, due to the creation of new shares for the conversion of a mandatory convertible bond and newly issued shares from options being exercised.
The nominal share capital of the Company increased slightly due to the creation of 7 184 407 new shares from the conditional capital for the conversion of a mandatory convertible bond, and newly issued shares from the conditional capital for employee participation programmes. As of 31 December 2009, the nominal share capital amounted to CHF 37 million.
Allocated investment return –1 136 –1 054 Investment result –661 –379
Other income and expenses Other interest income 313 74 Other interest expenses –554 –775 Other income 213 171 Other expenses –848 –301 Result from other income and expenses –876 –831
Investments in subsidiaries and affiliated companies 17 403 16 560 Loans to subsidiaries and affiliated companies 16 188 15 396 Mortgages and other loans 756 722
Current assets Premiums and other receivables from reinsurance 3 8 322 6 283 Funds held by ceding companies 3 21 292 18 362 Deferred acquisition costs 3 837 605 Cash and cash equivalents 3 422 6 069
Liabilities for life and health policy benefits 4 13 550 11 655
Non-technical provisions Provision for taxation 191 161 Provision for currency fluctuation 2 040 1 555 Other provisions 363 444 Total non-technical provisions 2 594 2 160
The 2009 financial year comprises the accounting period from 1 January to
The following assets are carried at cost, less necessary and legally permissible depreciation: ̤ Investment real estate ̤ Investments in subsidiaries and affiliated companies ̤ Equity securities ̤ Fixed income securities ̤ Investments in funds ̤ Alternative investments ̤ Assets in derivative financial instruments
Modified coinsurance arrangements are treated on a gross basis with the separate recognition of the funds withheld, as well as the liabilities for life and health policy benefits. Details on the change of accounting policy for modified coinsurance type treaties are disclosed on page 249.
The equalisation provision is established to achieve a protection of the balance sheet and to break peaks of incurred claims in individual financial years with an exceptionally high claims burden by releasing appropriate amounts from the provision.
The provision for taxation contains taxes on the basis of the financial year under report.
The provision for currency fluctuation comprises 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.
Included in this position are reinsurance contracts or features embedded in reinsurance contracts that fulfil the characteristics of derivative financial instruments. For such contracts, premiums received may be recognised as income prior to contract expiration or settlement, in cases where the recorded commitment has already reached the maximum liability amount potentially payable under the terms of the respective contracts. Decreases in the liability amounts prior to expiration or settlement are only recognised as income for contracts for which hedges are in place. Details on the change of accounting policy for derivative financial instrument liabilities are disclosed on page 249.
The allocated investment return contains the calculated interest generated on the investments covering the technical provisions. The interest rate reflects the currency-weighted, five-year average yield on five-year government bonds.
Claims and claim adjustment expenses –16 169 2 838 –13 331 –9 058 –354 –9 412
Premiums and other receivables from reinsurance 8 204 118 8 322 5 922 361 6 283 Funds held by ceding companies 21 292 – 21 292 18 362 – 18 362
Shareholders’ equity as of 1 January 18 981 17 079 Dividend paid for the previous year –1 331 –34 Capital increase/decrease including premium –586 605 Profit for the financial year 15 1 070 Shareholders’ equity on 31 December before allocation of disposable profit 17 079 18 720 Dividend payment –34 –3431 Shareholders’ equity on 31 December after allocation of disposable profit 17 045 18 377 1 Board of Directors’ proposal to the Annual General Meeting of 7 April 2010, subject to the actual number of shares outstanding and eligible for dividend. The difference between the proposed dividend payment in the previous year and the actual dividend payment in the year under report is described on page 250.
From other allocations 299 299 Shareholders’ equity on 31 December after allocation of disposable profit 17 045 18 377
Financial statements / Swiss Reinsurance Company Ltd 6. Compensation, participations and loans of members of governing bodies
Article 663bbis of the Swiss Code of Obligations requires disclosure of total compensation paid to members of the Board of Directors and the Executive Committee. Compensation to members of the Board of Directors and the highest paid members of the Executive Committee are shown by individual. For a description of the elements of this compensation, see page 122, Compensation.
Members of the Board of Directors received fees of which in 2008 the Chairman and Vice Chairman received a mandatory 40% in the form of shares with the remainder taken in cash or shares with a four-year deferral period. In 2009 the Chairman and Vice Chairman received half of their fees in the form of a three-year performance share plan and the balance in cash. The remaining members of the Board of Directors receive a mandatory 40% of their fees in shares and the balance is taken in cash or shares with a four-year deferral period.
Fees and allowances in cash 5 772 4 922 Fees in blocked shares 4 561 1 880 Performance shares1 4 000 Funding of pension benefits 167 57 1 These shares were awarded for a full-year cycle between two Annual General Meetings, and therefore also cover a period in 2010.
Kaspar Villiger, Member 195 130 325 John F. Smith, Jr., Former member2 48 48 96 1 Elected to the Board of Directors at the Annual General Meeting of 18 April 2008. 2 Retired from the Board of Directors at the Annual General Meeting of 18 April 2008.
Members of the Executive Committee are granted Long-term Incentive (LTI) plans. The plans can be settled in cash or shares and the requisite service periods as well the maximum contractual term for each plan is three years. The method to estimate the fair value is based on a risk neutral approach that uses the current share price as an estimate of the share price at the end of the vesting period. In order to determine the fair value, the following key performance indicators were also taken into consideration: three-year average return on equity and three-year earnings per share compound annual growth rate (EPS CAGR). The fair values of the LTI plans were based on the actual results for those years and the forecast years covered by the plans. For further information on LTI plans see page 124, Compensation.
For US GAAP and Statutory reporting purposes, the cost of the incentive shares, VAI and LTI awards are accrued over the period during which they are earned. For the compensation disclosure purposes, the value of awards granted was included as compensation in the year of grant.
Certain members of the Board of Directors and the Executive Committee are in a defined contribution scheme and their pension funding compensation in the remuneration tables above reflects the actual employer contributions. Where defined benefit arrangements exist, the funding is determined on an actuarial basis, which can vary substantially from year to year depending on age and years of service of the benefiting members.
Contractual commitments1 6 998 Funding of pension benefits 111 1 Represents long-term incentives granted by the former employer which were replaced in the form of Swiss Re shares at CHF 86.40 per share.