looking﻿statements 01 Overview 02﻿ ﻿Delivering﻿on﻿our﻿promises 04﻿ Our﻿mission 06﻿ Letter﻿to﻿shareholders 10﻿ Review﻿of﻿the﻿year﻿2010
What we set out to do What measures we have taken How we have done
Solve Legacy issues ̤ We have substantially completed de-risking in Legacy.
Fit to compete Increase operational efficiency ̤ We completed our cost saving programme, reducing running costs by an estimated CHF 420 million (initial target: CHF 400 million).
̤ During the 2010 renewals, we maintained or further increased the profitability of our reinsurance portfolio, despite underlying market softening.
̤ Over 3 600 responses from clients and broker partners to our annual client survey revealed a more than 30% improvement from 2007 in average satisfaction ratings for our flexibility and our tailoring of coverage, and over 20% for our account management, ease of doing business and claims service.
̤ To strengthen Swiss Re’s core capabilities and market focus, our client facing operations – Reinsurance, Corporate Solutions and Admin Re® – are now represented by dedicated Executive Committee members.
̤ In November 2010, we reached an agreement for the early repayment of the convertible perpetual capital instrument (CPCI) issued to Berkshire Hathaway, with no additional charge for bringing forward the repayment date. In its report of 17 November 2010, Standard & Poor’s states that, even after repayment of the CPCI, Swiss Re’s capitalisation is ‘very strong’.
̤ In December 2010, A.M. Best affirmed its financial strength rating of A (Excellent) for Swiss Re and revised the outlook from ‘stable’ to ‘positive’.
We have delivered on our promises. We successfully turned around the company’s performance and secured a solid foundation on which we can build our future.
What ‘wholesale’ means to us: focusing on large and complex re/insurance transactions with insurance clients, corporate clients and public sector clients – as well as with pension funds. We anticipate extreme scenarios and enable the risk taking that is essential to the development of enterprise and progress in society. This is what Swiss Re is all about.
An excellent investment For our investors, we want to be an excellent investment. Investor confidence is fundamental to our success. In November 2010, we reached an agreement for the early repayment of the convertible perpetual capital instrument (CPCI) issued to Berkshire Hathaway, with no additional charge for bringing forward the repayment date from March 2011, thereby removing a risk of dilution to our investors. In 2011, we have taken steps to normalise our dividend, offering attractive returns to investors.
A trusted partner For society, we want to be a trusted partner. This means being socially responsible and a leader in creating public-private partnerships that help secure prospects of societies in the event of a disaster. In 2010, for example, Swiss Re introduced an index-based insurance programme – a first in Southeast Asia – that was developed for the Vietnam Agribank Insurance Joint Stock Company to cover loans to rice farmers in Vietnam.
We want to deliver superior performance in Reinsurance, Admin Re® and Asset Management.
Reinsurance On the reinsurance side, we want to outperform the market with our proven capabilities in cycle management and portfolio steering. By putting our global diversification to work, we have a proven track record in managing the cycle for profit.
Admin Re® Our Admin Re® solutions benefit clients by reducing administrative costs and freeing capital. We can outperform in this field through our proven execution capability in more than 50 transactions. We expect to see growth in the availability of portfolios and will pursue further deals when sellers offer suitable closed books at attractive market valuations.
Asset Management Our Asset Management concentrates on its primary mandate of prudently managing the assets the company generates through its business activities, using a robust asset-liability management framework.
What makes us integral to the success of our clients: ̤ Significant risk capacity ̤ Risk knowledge and expertise ̤ Innovation and best-in-class solutions ̤ Financial strength and capital efficiency ̤ High counterparty security ̤ Targeted client approach
2010 was not just about turnaround measures, however. It was also a year for investing in Swiss Re’s future. In June, we set out clear strategic priorities and communicated how and where we want to grow. We reinforced this in October by realigning our management structure accordingly, strengthening the representation of key business areas at senior management level. We are now announcing the next important milestone: A new legal structure for the group that will support the implementation of the company’s strategy and take full advantage of our strong market position.
Property & Casualty delivered very strong results due to strong underwriting discipline and despite the unfavourable loss experience in the first half of 2010. Operating income was USD 2.5 billion, compared to USD 3.5 billion in the prior-year period, while the combined ratio was 93.9%, compared to 88.3% in 2009. The impact of natural catastrophes was 3.0 percentage points above the expected level and was partially compensated by 0.8 percentage points from positive run-off.
New legal structure aligned to strategic priorities Over the past two years, Swiss Re has strengthened its balance sheet, set new strategic priorities and aligned its management structure. We are now taking the next step, adjusting our legal structure. The plan is to establish a new holding company, Swiss Re Ltd, in place of the current Swiss Reinsurance Company Ltd, comprising three legally separate Business Units: Reinsurance, Corporate Solutions and Admin Re®. This new corporate set-up aims to enhance our client focus, increase capital efficiency, further improve transparency and create long-term value for our shareholders. Clients will benefit from the greater flexibility Swiss Re has to manage and develop our distinct business segments.
̤ Transparency – A significant benefit of the new legal set-up will be to create a simplified corporate structure that further improves transparency with respect to the performance of Swiss Re’s three main Business Units. Furthermore, it will increase clarity as to how capital and assets are allocated between them. The increase in transparency comes at a time of intensified regulatory focus on the component parts of large cross-border insurance and reinsurance groups.
Positioned to capture future earnings growth Having fulfilled our promises and invested in the company’s future in 2010, we believe that Swiss Re is in an excellent position to capture future earnings growth. Over the next three years, the following growth drivers will provide opportunities for Swiss Re’s Business Units: ̤ Hardening in the property and casualty market in 2012/2013 will benefit Reinsurance and Corporate Solutions; ̤ Expiration of the quota share with Berkshire Hathaway at end 2012 will add 25% growth potential in P&C Reinsurance and Corporate Solutions; ̤ Higher capital demands and further industry consolidation will provide opportunities for
Based on our capital strength, our global market position, our outstanding re/insurance expertise and our innovation power, we are well placed to improve returns and create value, for you, our shareholders.
Market environment: On 12 January, a magnitude 7.0 earthquake hits Haiti, claiming more than 222 000 lives; the deadliest natural catastrophe in 2010.
February Swiss Re reports net income of USD 496 million (CHF 506 million) for the full year 2009. Swiss Re’s core business continues to demonstrate strong earnings power in 2009.
Market environment: A magnitude 8.8 earthquake hits Chile on 27 February, costing the insurance industry USD 8 billion, according to Swiss Re estimates.
Market environment: The Deepwater Horizon oil rig explodes off the Gulf of Mexico. Swiss Re estimates property claims alone for the insurance industry at USD 1 billion, but, given the complexity of the event, claims remain subject to substantial uncertainty.
Market environment: To preserve financial stability in Europe, the EU and the IMF decide on a comprehensive package of measures with a total volume of up to EUR 750 billion.
Market environment: The Geneva Association, the leading insurance think tank, tells the G-20 that core insurance activities do not pose a systemic risk. The statement, based on extensive research, reflects the views of 80 leading international insurers and reinsurers.
Market environment: The US President signs the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most significant financial services supervision reform since the Great Depression.
August Swiss Re’s business performs well in the second quarter of 2010. The company reports strong net income of USD 812 million for the second quarter of 2010.
September Swiss Re highlights increasing M & A activity, low interest rates and regulatory changes as opportunities and challenges for the insurance sector at Les Rendez-Vous de Septembre in Monte Carlo.
October Swiss Re establishes a new leadership structure. Its client-facing operations – Reinsurance, Corporate Solutions and Admin Re® – are now represented at Executive Committee level.
December Swiss Re’s economists predict that growth in the insurance and reinsurance industry will continue to accelerate in 2011, but warn that financial turmoil could derail the global economic recovery.
Changing client needs Alongside the challenges that lie ahead for the re/insurance industry, such as regulation, re/insurance clients are demanding services – ranging from comprehensive to standardised solutions – that meet the specific needs of their business models.
Our product offerings encompass traditional reinsurance as well as insurance products for corporate clients. We are a pioneer in insurance-based capital market solutions and public sector risk transfer. Combining global expertise and local knowledge, we provide all our clients with financially sound risk transfer solutions.
We are a leading provider of reinsurance to life insurance companies worldwide. With specialist knowledge of mortality, morbidity and longevity trends, we offer our clients sustainable, viable solutions to their risk and capital management needs, as well as support for product development. We also acquire closed life and health books of business, which we administer through Admin Re®.
Americas: % of total net premiums earned and fee income in 2010
Asia-Pacific: % of total net premiums earned and fee income in 2010
Growth in emerging markets continues to be healthy. Together with rising social aspirations in these markets, this offers broad opportunities for insurers and reinsurers. The changing role of government in risk mitigation opens avenues for innovative approaches that combine private and public expertise. With nearly 150 years of experience in risk science – in modelling and structuring ways to mitigate the unavoidable dangers facing human development – Swiss Re is well placed to help its clients adapt to a challenging present and evolve toward a promising future.
In this environment, Swiss Re maintains its rigorous commitment to underwriting discipline. We continuously shift capacity to those segments where we expect the most attractive return on our capital. We also offer the market innovative product structures – such as parametric coverage for natural catastrophes – that combine transparency, speed of response, and ease of administration, making them efficient both for our clients and for us. The ability to provide such ‘future solutions’ depends crucially on our past: the years we have spent refining our risk models.
Emerging markets will see increasing demand for the protection products that consumers in the developed world take for granted. Profiting from these growth opportunities will require demographic expertise, efficient distribution methods, and clear paths for transferring risk.
Making a measurable difference Swiss Re’s solutions combine natural catastrophe expertise with innovative approaches for transferring risks to capital markets. See page 26
The other side of reinsurance Managing almost USD 144 billion is no small deal: how Swiss Re’s Asset Management team invests in a challenging environment. See page 34
The place to succeed Jan Schmidt used to send satellites into space – but found that he could go further at Swiss Re. See page 42
Tomorrow’s risks require new approaches. Swiss Re works with governments and academia to develop solutions.
Emerging risks are a huge challenge for society. By improving risk understanding and working in public-private partnerships, the insurance industry provides innovative solutions that enable continued social and economic development.
Sir John Scarlett, Professor Antoine Bommier and Reto Schneider, what are emerging risks and why are they so challenging? Sir John Scarlett: Emerging risks are risks not seen before, or ones that develop in unexpected ways. In geopolitics, these risks emerge from technology and economic change. Ideas can be transmitted more widely and faster than before; technology has turned extremist violence from a local to a global activity very quickly. Shifts in economic power, especially over resources like energy, will have global security implications.
Reto Schneider: Swiss Re has worked with the Mexican government and the World Bank, with governments of Caribbean nations, and recently with the US State of Alabama to develop insurance products that release funds quickly after a natural catastrophe, so that the emergency response is not delayed. We have created similarly innovative structures to protect farmers in developing countries from weather losses. When it comes to an ageing population, our longevity data and expertise in structuring capital market solutions can help unlock new sources of funding. Insurance and reinsurance definitely have a vital role to play.
How does society respond to emerging risks? Reto Schneider: Usually our reaction is to ramp up controls: 9/11 produced a widespread increase in security procedures and consequent erosion of trust. This has a price: It slows down business and increases administrative burdens. Rather than just increasing controls, we need to apply active risk management to adapt our response to changing overall conditions.
“Rather than just increasing controls, we need to apply active risk management to adapt our response to changing overall conditions.”
Making a measurable difference Swiss Re solutions combine natural catastrophe expertise with innovative approaches to transferring risks to capital markets.
Natural catastrophes claim thousands of lives every year and cost billions in property damage. Insured losses from earthquakes, floods and storms are rising as population and wealth become more concentrated in hazard-prone regions. The changing climate may also bring increasingly frequent, intense events. Despite scientific progress, natural catastrophes remain unpredictable – but reinsurers are ever more skilled at modelling their impact on clients’ portfolios and helping to mitigate the volatility they cause.
2010 saw many and severe natural catastrophes, claiming nearly 304 000 victims, with the earthquake in Haiti alone claiming over 222 000 lives. Floods in China and Pakistan and prolonged heat waves in Russia contributed to the toll. European windstorm Xynthia and major earthquakes in Chile and New Zealand claimed fewer lives but caused significant damage to insured property. Three storms in the United States, two hailstorms and the floods in Australia at the end of the year each caused losses in excess of USD 1.0 billion. Topped by Haiti’s devastation, natural catastrophes and man-made disasters cost society more than USD 200 billion in 2010, well above the annual average for the past two decades.
Such a powerful and sophisticated model has many uses: When combined with detailed online maps and country-specific disaster and insurance data, it provides a clear picture of an insurance portfolio’s exposure to various perils, which Swiss Re makes available to clients as CatNet™. We also use it to support business decisions: By aggregating Swiss Re’s entire portfolio across all lines of business and regions and comparing it to our target prices, we can navigate toward the most profitable segments. With this active portfolio steering, we aim to have our Property portfolio outperform the market consistently.
A global leader in sophisticated natural catastrophe modelling Assessing the impact of natural catastrophes on insurance and reinsurance portfolios demands a deep and evolving knowledge. For 25 years Swiss Re has continuously researched and developed the global natural catastrophe model that we use to gain a clearer view of the risks. We employ and consult with natural scientists, engineers, meteorologists and seismologists, all dedicated to understanding floods, earthquakes, hurricanes, and the damage they cause. Merging data from past events with research of future trends (including climate change), Swiss Re’s expert programmers design computer simulations running hundreds of thousands of catastrophe scenarios, each based on slightly differing initial conditions. For example, a hundred years of data on North Atlantic tropical cyclones have generated 50 000 years’ worth of simulated future hurricane activity. Some of these simulated scenarios are much more extreme than any storm we have seen in the past.
Merging data from past events with research of future trends, Swiss Re’s experts design computer simulations running hundreds of thousands of catastrophe scenarios.
Innovative solutions for a growing market Parametric products pay when a pre-defined trigger is reached – such as a specific earthquake magnitude or hurricane wind speed. These products offer transparent structures and speedy payment, and are available both as bonds and reinsurance. Swiss Re has been at the forefront of such alternative risk transfer for many years. In 2010, we agreed with the US State of Alabama to provide parametric hurricane protection with fast payouts if an event occurs. The three-year programme is triggered when winds reach 111 mph (179 km/h) in a defined region, and the size of payment is determined by the official hurricane category. The value of such an arrangement is obvious: for communities devastated by a hurricane, prompt cash payment spendable at government discretion can make a real difference.
Another form of risk transfer – insurancelinked securities – first appeared 15 years ago and has since been focused mainly on US risks. Recently though, PERILS (an insurance data organisation that Swiss Re helped to establish) has created a pan-European loss index that enables new growth in securitisation and parametric coverage for European windstorms. Here too, Swiss Re is an innovator, and in 2010 underwrote a bond for AXA that provides the insurer with European wind protection using a PERILS index trigger.
Swiss Re’s Property & Casualty business segment provides coverage against perils such as natural catastrophes for insurance companies (reinsurance) as well as for large and mid-size corporates (direct insurance).
Our cycle management and portfolio steering skills make us successful in this market: we continuously shift capacity to those segments where we expect the most attractive return on our capital. Thanks to these efforts, Swiss Re has shown above-average underwriting results for five consecutive years.
̤ Net premiums earned decreased 15% to USD 10.9 billion in 2010, compared to USD 12.8 billion in 2009, largely driven by Swiss Re’s decisions taken during the January 2010 renewal season and less premium earnings in prior years.
̤ The combined ratio in 2010 increased to 93.9%, compared to 88.3% in 2009. The increase mainly reflected the higher impact from natural catastrophe losses in 2010 compared to 2009.
For full details on Property & Casualty performance, please see 2010 Financial Report 2.5 billion Operating income in USD (USD 3.5 billion in 2009)
Thinking ahead to meet life’s challenges In a period of fundamental change, a global leader in life and health reinsurance helps its clients grow.
Swiss Re’s Life & Health business segment is comprised of three lines of business, Traditional Life, Traditional Health and Admin Re®. The Traditional Life and Traditional Health lines of business include reinsurance contracts for individual and group life, disability income, critical illness and annuity products. Admin Re® comprises closed blocks of in-force life and health insurance business, acquired through either purchase of legal entities or via reinsurance contracts.
̤ Premiums and fees decreased to USD 9.7 billion from USD 10.7 billion in 2009. The decrease was largely due to the US individual life retrocession transaction announced in January 2010.
Benefit ratio up bearing the financial risk. This offers an opening for insurers to develop longevity products that are simple, transparent and robust. Swiss Re is expanding its product range to help insurers and pension funds turn this challenge into an opportunity.
Leading expertise based on experience since 1863 In a changing market, profitable growth depends on product innovation. Here Swiss Re, with its expert knowledge and risk transfer capabilities, provides essential support. Swiss Re is, for instance, a pioneer in life insurance securitisation, having already transferred EUR 1.5 billion of extreme mortality risk to the capital markets through its groundbreaking Vita securitisation programme. Furthermore, Swiss Re issued the first bond covering longevity trend risk to the capital markets in December 2010.
Is there more that can be done in terms of prevention? Three conditions would improve prevention: improved hygiene; improved education – and the acknowledgement that global funding is necessary to bring about the first two conditions. Education in developing countries, particularly for girls, is key to improving health and reducing pandemics. Mothers have the biggest impact on health, because they traditionally look after hygiene within the house, the family, the village and the community. In the developed world, an excellent investment would be to improve not just vaccines, but the acceptance of vaccines prior to the outbreak of a pandemic.
“Three conditions would improve prevention: improved hygiene; improved education – and the acknowledgement that global funding is necessary to bring about the first two conditions.”
The other side of reinsurance Managing almost USD 144 billion is no small deal: how Swiss Re’s Asset Management team invests in a challenging environment.
The business of reinsurance has two sides: one is taking on insurance risks; the other is managing assets to cover those risks. At the end of 2010, Swiss Re’s Asset Management team oversaw a portfolio worth nearly USD 144 billion. To put this figure in perspective, it is greater than the GDP of New Zealand and the equivalent of almost one fifth of all equities listed on the Swiss Market Index.
This may appear a straightforward task, but assets and liabilities move: The values of invested reserves and estimated future claims can both change significantly with fluctuations in the capital markets. Moreover, the team is not only balancing assets and liabilities: It is expected to manage Swiss Re’s portfolio to optimise risk-adjusted investment returns within
36 Swiss Re 2010 Business Report the given constraints. Insurance, by its nature, is a business with variable earnings; Asset Management helps to minimise earnings volatility through prudent long-term investment.
Other reforms, however, may make an already demanding environment even more challenging for insurers and reinsurers. Increased regulatory and capital requirements and higher capital charges for some asset classes could force insurers to allocate more of their portfolios to government securities at a time when yields on these securities are extremely low – and some hardly qualify as ‘risk free’. Too rigid regulation of investments could jeopardise the stabilising role in financial markets that insurance and reinsurance companies often play, thanks to their long-term investment perspective. It could also hamper growth, because insurance and reinsurance play an important role in financing the real economy through premiums they invest in the financial markets. Worldwide, insurers hold around USD 23 trillion of assets. Together with mutual funds and pensions funds, they are by far the world’s biggest investors.
Looking ahead 2010 was challenging for investors, with economic recovery proving bumpy and sometimes even uncertain. Many government balance sheets, particularly among developed nations, were stretched by the financial crisis, when the public sector took on private sector risks. The months ahead are likely to see fiscal consolidation and renewed governmental efforts to steer the global recovery into calmer waters. With uncertainty remaining, however, Swiss Re Asset Management will continue to pursue an investment strategy based on fundamentals; after all, as many investors discovered in 2010, ‘risk free’ does not always mean risk free.
As economies get larger, as financial systems become more sophisticated, with deeper pools of liquidity and more diverse sources of capital, and as more countries come to share in broad-based economic development, the time will surely come when diversification is possible and correlations decline. But we will not really know whether that time has come until the next crisis occurs. The time to study this issue and to prepare for that crisis is now.
During 2010, there was a continued reduction of securitised products, a reduction of hedges on the corporate credit portfolio, and a deployment of cash to additional corporate credit and newly created equity mandates. Navigating the financial markets in 2010 with a low investment risk profile proved to be the right strategy.
Bill Emmott, former Chief Editor of The Economist and member of the Swiss Re Advisory Panel
Living up to our responsibilities We work closely with our partners to tackle key environmental and social challenges.
Supporting developing countries to become more resilient to major risks is a key objective for us. Given the current lack of efficient local insurance markets, partnerships with public sector organisations – governments, NGOs, microfinance institutions or supranational organisations – play a central role in meeting this objective. Over recent years, we have built a solid track record of creating innovative risk transfer solutions based on public-private partnerships.
Effective disaster protection for the Caribbean Swiss Re is the lead reinsurer for the Caribbean Catastrophe Risk Insurance Facility (CCRIF). Owned and operated by 16 Caribbean governments, this riskpooling facility aims to limit the financial impact of catastrophic hurricanes and earthquakes. CCRIF is a parametric solution, which uses the physical parameters of events (strength of earthquakes, wind speeds) to calculate overall losses and determine payout levels. Such products enable governments to plan ahead and secure guaranteed levels of funding before catastrophes occur; CCRIF marks the first time this approach has been taken by a whole region.
For full details, please see our 2010 Corporate Responsibility Report (available May 2011)
̤ Through our Greenhouse Neutral Programme we achieved a total reduction in CO2 emissions per employee (FTE) of 50.6% against the baseline of 2003. All remaining emissions since the start of the programme have been compensated. Emissions per employee from power consumption have been reduced by 65.2% since 2003, from heating by 29.7% and from business travel by 32.5%.
Total reduction in CO2 emissions per employee (FTE) since 2003 baseline
Climate adaptation in Ethiopia In partnership with Oxfam America and Columbia University, we expanded a programme to help smallholder farmers in Ethiopia cope with climate change. The initiative combines risk reduction measures, drought insurance and loans.
The place to succeed Jan Schmidt used to send satellites into space – but found that he could go further at Swiss Re.
“Every year sees the launch of up to 25 new commercial communications satellites,” Jan explains. “They cruise in very harsh conditions, 36 000 kilometres above the equator, and have a service life of 10 to 15 years. These ‘birds’ provide essential services that directly drive the economy, including the things we take for granted in our daily lives: mobile phones, television, e-mail, online news and web commerce.”
No insurance, no satellite Jan’s journey from rocket science to insurance began at a party, chatting briefly with someone who worked for a company that, among other things, dealt in space insurance. “To be frank, insurance didn’t seem all that compelling at the time – but we exchanged business cards, and I went for an interview a few days later. During that
“One of the things I appreciate about Swiss Re is that the business has so many facets. You never stop exploring new fields and developing new solutions.”
The persuasive factors for joining Swiss Re were the wealth of expertise within the company and the broad spectrum of activities it covered. “One of the things I appreciate about Swiss Re is that the business has so many facets. You never stop exploring new fields and developing new solutions. We work hard here – and, in return, the company invests a lot in its employees’ professional development and well-being.”
The Space team is part of Corporate Solutions, Swiss Re’s business unit for commercial insurance – an area where Swiss Re can play to its strengths in underwriting large and complex risks and thus sees potential for profitable growth.
Today, Jan heads the Space team at Swiss Re and lectures at external events on the role of insurance and reinsurance in structuring and financing commercial satellite projects. “To give a flavour of the market, there are currently some 160 insured satellites in orbit, worth approximately USD 23 billion in total. The insured value of a geostationary satellite is usually between USD 150 million and USD 400 million. Depending on the risks involved, this will translate into a premium of around 10% of the value.”
Jan has been working in insurance for almost a decade, but rocket science continues to fascinate him: “Imagine being at a hypermodern launch facility in the jungle of French Guyana, watching a thundering rocket shoot into space – it certainly makes my heart beat faster! Commercial satellites aren’t just cutting edge technology, though, they can break through other frontiers as well. Recent projects aim to reach populations that don’t yet have access to the information and financial services that the rest of us do. I’m thrilled at the potential of satellites to expand access to education and to support growth and stability in deprived parts of the world – and at the fact that we can help unlock this potential with our insurance solutions.”
Training at management level % of staff at management level who attended leadership training courses
% of staff at management level who attended professional training courses
At Swiss Re we invest in employees’ professional development through a wide range of training opportunities that include technical, professional and leadership programmes. We are pleased to see that the percentage of those attending courses has increased, especially for professional training at management level, and we will continue to explore new ways to encourage the development of our over 10 000 employees.
Investing in employee development Swiss Re’s commitment is to attract outstanding individuals, promote talent, and give our people continual opportunities to learn in a diverse enterprise offering a wide range of experiences and challenges. Of new staff joining the company in 2010, 73% have within the first year received personal, professional, or leadership development training. Our training aims to be available globally and aligned with Swiss Re’s business priorities. During 2010, Swiss Re Academy created new learning paths for professional and leadership development through a blend of personal reading, e-learning and classroom training. A learning path, like a roadmap, provides a clear, effective route to develop or enhance specific competencies.
Joining Swiss Re Our Graduates Programme was launched in 2007 as the entry point for highly qualified graduates. The programme actively supports Swiss Re’s commitment to attract fresh talent and new ideas to the company. It provides a unique opportunity to discover the world from Swiss Re’s perspective and learn what it is like to work in a market-leading global company. Each graduate attends on average 35 days of class-based training as well as a 16 – 20 week job rotation. Swiss Re also sponsors an intern’s programme with selected universities, giving us access to promising undergraduates early in their studies.
Corporate governance We established a new governance framework for our Group companies and branch offices in 2010. The framework aligns management structures within the Group and optimises intra-Group information exchange and reporting processes.
Corporate governance framework at Swiss Re Good corporate governance requires an effective system of mutual checks and balances among the top corporate bodies. Swiss Re maintains a dual Board structure, with the Board of Directors responsible for oversight and the Executive Committee responsible for managing operations. Our corporate governance principles and procedures are defined in a series of documents governing the organisation and management of the company. They include: ̤ Code of Conduct, setting the framework and defining the basic legal and ethical compliance principles and policies we apply globally; ̤ Articles of Association, defining the purpose of the business and the basic organisational framework; ̤ Corporate Bylaws, defining the governance structure within Swiss Re Group, the responsibilities of the Board of Directors, Board committees and executive management, as well as the relevant reporting procedures; ̤ Board committee charters, outlining the duties and responsibilities of the Board committees; ̤ Group committee charters, outlining the duties and responsibilities of the committees on executive management level; and
In 2010, we consolidated our governance framework for the Group’s legal entities and we substantially enhanced our introduction programme for Board members.
Good corporate governance requires an effective system of mutual checks and balances among the top corporate bodies.
Knight, Carlos E. Represas and JeanPierre Roth new members of the Group Board of Directors.
Corporate governance reviews The Board of Directors assesses the Group’s corporate governance on an annual basis against relevant best practice standards. It receives updates on developments affecting corporate governance from selected jurisdictions and considers the relevant studies and surveys on corporate governance. The high quality of Swiss Re’s corporate governance was confirmed in the 2010 Dow Jones Sustainability Indexes assessment where Swiss Re maintained its leadership position for the insurance sector.
For full details on Corporate governance, please see Financial Report 2010
Board of Directors 14 Chairman’s and Governance Committee 6 Audit Committee 11 Compensation Committee 6 Finance and Risk Committee 5 Investment Committee 8
Changes in 2010 The shareholders elected three new Board members at the Annual General Meeting of 7 April 2010: ̤ Malcolm D. Knight ̤ Carlos E. Represas ̤ Jean-Pierre Roth
John R. Coomber John R. Coomber was elected to Swiss Re’s Board of Directors in 2006. He also serves as Chief Executive Officer of Pension Insurance Corporation Limited, and is a Director of MH (GB) Limited and Qatar Insurance Services. John R. Coomber was Swiss Re’s Chief Executive Officer from 2003 to 2005.
Hans Ulrich Maerki Hans Ulrich Maerki was elected to Swiss Re’s Board of Directors in 2007. He is also a member of the Boards of ABB Ltd, MettlerToledo International and the Menuhin Festival Gstaad AG.
Walter B. Kielholz Chairman Walter B. Kielholz was elected to Swiss Re’s Board of Directors in 1998. He was nominated Chairman as of 1 May 2009. From 1997 to 2002, he was Swiss Re’s Chief Executive Officer. He has also been a member of the Board of Directors of Credit Suisse Group since 1999 and served as Chairman of the bank’s Board of Directors from 2003 to 2009.
Jakob Baer Jakob Baer was elected to Swiss Re’s Board of Directors in 2005. He also serves on the Boards of Directors of Adecco S.A., Rieter Holding AG, Allreal Holding AG, Barry Callebaut AG and Stäubli Holding AG.
Executive Committee changes in 2010 Thomas Wellauer joined Swiss Re as Chief Operating Officer on 1 October 2010. He succeeded Agostino Galvagni who was appointed CEO Corporate Solutions. David J. Blumer, Chief Investment Officer, assumed additional responsibility for Admin Re® as of 1 October 2010. David Cole joined Swiss Re as Deputy Chief Risk Officer on 1 November 2010.
Executive Committee changes in 2011 Christian Mumenthaler, previously Head of Life & Health, was appointed Chief Marketing Officer Reinsurance as of 1 January 2011. He succeeded Michel M. Liès, who became Chairman Global Partnerships. David Cole took over the position of Chief Risk Officer from Raj Singh as of 1 March 2011.
São Paulo Alameda Santos, 1940 –10° andar CEP 01418-200 São Paulo SP
Forward-looking statements typically are identified by words or phrases such as “anticipate“, “assume“, “believe“, “continue“, “estimate“, “expect“, “foresee“, “intend“, “may increase“ and “may fluctuate“ and similar expressions or by future or conditional verbs such as “will“, “should“, “would“ and “could“. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others: ̤ further instability affecting the global financial system and developments related thereto; ̤ changes in global economic conditions; ̤ Swiss Re’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debtlike arrangements and collateral calls under derivative contracts due to actual or perceived deterioration of Swiss Re’s financial strength; ̤ the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on Swiss Re’s investment assets; ̤ changes in Swiss Re’s investment result as a result of changes in its investment policy or the changed composition of its investment assets, and the impact of the timing of any such changes relative to changes in market conditions; ̤ uncertainties in valuing credit default swaps and other credit-related instruments; ̤ possible inability to realise amounts on sales of securities on Swiss Re’s balance sheet equivalent to its mark-to-market values recorded for accounting purposes; ̤ the outcome of tax audits, the ability to realise tax loss carryforwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings;
Compensation﻿Committee 88﻿ ﻿Activity﻿review 91﻿ ﻿Compensation﻿framework 96﻿ Decisions﻿by﻿the﻿ ﻿ Compensation﻿Committee 108 Financial statements 111﻿ ﻿Group﻿financial﻿statements 118﻿ ﻿Notes﻿to﻿the﻿Group﻿financial﻿
Company﻿Ltd 220 General information 222﻿ Business﻿contact﻿details 223﻿ Corporate﻿calendar 224﻿ Glossary 230﻿ ﻿Cautionary﻿note﻿on﻿
We are a leading provider of reinsurance to life insurance companies worldwide. With specialist knowledge of mortality, morbidity and longevity trends, we offer our clients sustainable, viable solutions to their risk and capital management needs as well as support for product development. We also acquire closed life and health books of business, which we administer through Admin Re®.
Net income in USD millions attributable to common shareholders (USD 496 million in 2009)
Market environment A deep understanding of the economic and industry environment is essential not only to steer Swiss Re’s business and asset management decisions, but is also key to providing effective support to our re/insurance clients. As financial markets and the industry continue to recover from the crisis, challenges remain in the form of low interest rates, which put pressure on investment yields, and a soft-pricing cycle which demands disciplined underwriting and innovative solutions.
Major central banks kept interest rates at extremely low levels. The US Federal Reserve resumed its quantitative easing, which involved the purchase of large amounts of government bonds to fight deflationary pressures. As a consequence, long-term government bond yields declined to extremely low levels during the first three quarters of 2010, before a reassessment of growth and inflation expectations triggered a partial reversal of this decline in the fourth quarter.
The economic recovery continued in 2010 amid worries about fiscal deficits in industrialised countries. In this environment, growth returned to all segments of the insurance and reinsurance industry.
Stock markets dipped whenever fears intensified about sovereign defaults and a resurgence of the banking crisis. Overall, the performance of the world’s major stock markets varied between –6% and 13% in 2010, with the European and the Japanese stock markets ending the year in negative territory.
Primary non-life insurance: Underwriting results further deteriorated Non-life primary insurers’ capitalisation, growth and profitability continue to be driven by macroeconomic forces. In industrialised markets, 2010 was characterised by sluggish growth and subdued investment returns, with deteriorating underwriting results. Industry performance was better in emerging markets: After a dip in 2009, premiums grew by an average of 7% – although this was mainly due to the rapidly expanding Chinese market; elsewhere, premiums grew 3% on average.
Underwriting results generally deteriorated further in 2010. The average combined ratio of the eight leading markets was approximately 102% in 2010, compared to 101% in 2009 – and 95% as recently as 2006. Underwriting profitability fell more in the US than in Europe.
The largest European markets all suffered from worsening underwriting results and the current negative performance of the motor business.
Other European personal lines gave insurers stable, risk-adequate earnings, as did commercial insurance in general and commercial property in particular – although this line’s profitability is declining.
Per 100 units of foreign currency, as of 31.12.2010 1 Yearly average 2 Year-end
Financial year / Market environment recovered from the troughs of the financial crisis, stands at record high levels; its growth continues to outpace cedant demand.
Non-life reinsurance premium income continued to grow, but weakly: Preliminary estimates suggest an increase of 1% in real terms, with a slight decline in industrialised countries offset by a rise in emerging markets. As in the primary insurance industry, most of this rise came from China.
2010 combined ratios suffered from aboveaverage claims from natural catastrophes, mainly the high-loss events during the first quarter.
Insured losses from catastrophic events were generally in line with their 20-year average. High earthquake losses in Chile and New Zealand contrasted with unusually modest US hurricane losses. Eight events triggered insurance losses in excess of USD 1 billion, including the February 2010 earthquake in Chile, which cost the insurance industry an estimated USD 8 billion; the September 2010 earthquake in New Zealand (USD 2.7 billion); and winter storm Xynthia in Western Europe (USD 2.8 billion). The largest man-made disaster was the explosion of the BP Deepwater Horizon oil rig, which caused immense environmental damage in the Gulf of Mexico. Given the complexity of this event, claims remain subject to substantial uncertainty, but property claims alone are estimated at USD 1 billion.
Reinsurers’ return on equity (ROE) remained significantly higher than primary insurers’, with an average ROE of 11% for 2010, down from 13% in 2009 but up significantly from 2% in 2008.
Although investment yields declined due to the low interest rate environment, the reinsurance industry reaped capital gains from rising capital markets.
The non-life reinsurance industry premium income, which largely follows the premiums in the primary sector, will be subdued due to the weak growth in industrialised markets. The increasing reinsurance demand in emerging markets, on the other hand, will boost growth for global reinsurers.
The non-life reinsurance outlook for 2012 is more optimistic. With an improving macroeconomic environment, growth is expected to normalise, pushing interest rates up, and reinsurance premium income growth and investment performance will improve. However, the most critical factor will be the turning of the underwriting cycle. Many of the factors that can harden markets will have intensified by the end of 2011, making a change in market sentiment more likely.
Life primary insurance: Moderate growth in 2010 The capital situation of the primary insurance industry improved substantially, reaching the pre-crisis level at the end of 2010. The recovery of stock markets and corporate bond markets, both severely hit in the crisis, contributed significantly to the improved capital situation. A sharp rise in the value of government bonds, due to the decline in risk-free rates to record low levels in 2010, also helped improve the capital base of the industry. Further, insurers raised capital and, in some cases, lowered dividend payments.
The primary life insurance industry returned to positive growth with 4% in real terms in 2010, according to preliminary estimates. In industrialised countries, premium growth was moderate at 3%. In emerging markets, premium growth surged 17%.
New business recovered robustly in many countries. In Germany, pensions and annuity products were the main growth drivers. Disability and supplementary long-term care insurance (LTCI) also saw increased sales, while term insurance declined. In Italy, new business rose sharply: Guaranteed traditional products, which drove the market to record growth levels in 2009, started to slow significantly, but demand for unit-linked products increased. Protection product growth accelerated, confirming a highly positive long-term trend. In the UK, single premium pensions and retirement income products sold well, while savings business further declined for tax reasons. In the US, however, new business revenues for 2010 are driven mainly by weak annuity sales, since fixed annuities fell sharply due to low interest rates. Variable annuities are recovering, but only at a moderate pace.
Sales of protection products, which held up relatively well during the crisis, developed differently in the main markets in 2010. In the US, term sales were down 10% in 2010, partly reflecting price increases and fewer product offerings as well as the economic downturn. In markets like the UK and Ireland, sales continued to be subdued as a result of the weak housing market. By contrast, Canada and Italy, where sales are less dependent on mortgages, posted double-digit growth.
Operating profitability improved in 2010. The operating margins of life companies recovered in the second half of 2009, largely due to the improvement in financial markets and cost containment initiatives. In 2010, however, profitability stabilised at a level well below the pre-crisis level.
Life reinsurance: Strong demand for longevity and large transactions The reinsurance industry is benefiting from strong demand for capital relief solutions. Net premiums (for traditional and non-traditional business) for the top ten reinsurers grew 9% year on year in USD terms (+6% in constant currency terms) in the first nine months of 2010.
Large transactions of various forms – acquisitions of closed blocks of in-force life and health insurance business, longevity and mortality swaps, and structured life reinsurance solutions – played an important role in recapitalising the life insurance industry. There is still strong demand for these transactions. In 2010, the number of publicly disclosed block transactions involving asset transfer, such as acquisitions of closed blocks of business, bulk purchase annuities and large quota share in-force deals, between insurers and reinsurers ran at about the same level as in 2009.
Outlook for life primary insurance and reinsurance From 2011 onwards, premium income in the primary sector is expected to return to its long-term trend path. New business growth will be positive in the next few years, driven by an expected recovery of US sales. Therefore, the business case for primary life insurance remains strong. Unit-linked products with guarantees will gain ground in line with improving equity markets. However, it will be necessary to redesign and reprice these products to better reflect the costs of the embedded risks. Once the economy is back on track, protection products and disability will also pick up again.
Overall, the outlook for non-traditional life reinsurance remains positive for 2011 and 2012 due to the continuing recapitalisation needs of direct companies, mergers and acquisitions and the demand for longevity solutions. Potential demand for longevity reinsurance, particularly from pension funds, is vast, but requires the development of capital market solutions to achieve that potential.
Excluding the impact of USD 1.4 billion from the convertible perpetual capital instrument (CPCI) issued to Berkshire Hathaway, net income in 2010 was USD 2.3 billion. On the same basis, earnings per share were CHF 6.93 (USD 6.62).
In 2010, shareholders’ equity was stable at USD 25.3 billion, compared to 31 December 2009, despite the impact of the early termination of the CPCI of USD 2.7 billion. This was more than offset by unrealised gains on investments and net earnings for the year.
Basic book value per share was CHF 68.99 or USD 74.02 at the end of December 2010, compared to CHF 67.72 or USD 66.18 at the end of 2009. Book value per share is based on shareholders’ equity and excludes the impact of the CPCI and non-controlling interests.
23% Property 17% Casualty 13% Specialty 2% P&C non-traditional 30% Life 11% Health 4% Admin Re®
Corporate Centre expenses –217 –257 18 Items excluded from the segments: Net investment income 291 116 –60 Net realised investment gains/losses –361 277 – Foreign exchange gains/losses –1 229 –552 –55
Return credited to policyholders reflects the investment performance on the underlying assets, mainly backing unit-linked and unitised with-profit policies, which is passed through to contract holders.
In 2010, policyholders benefited from total investment returns of USD 3.4 billion, mainly driven by the further recovery of equity markets, compared to USD 4.6 billion in the prior year.
The decrease in administrative expenses includes savings of CHF 59 million achieved in 2010 through the Group’s cost efficiency programme initiated in April 2009.
For 2010, the Group reported a tax expense of USD 541 million. This represents a tax rate of 20.2% compared to an effective tax rate of 24.2% in the prior year. The tax charge generally reflects the tax at the statutory tax rate offset by the reduction in the valuation allowance on unrealised losses.
Changes in shareholders’ equity Total equity, including non-controlling interests, was USD 26.9 billion. Non-controlling interests reflect interests attributable to non-controlling owners of Swiss Re’s subsidiaries. They relate to a modified coinsurance treaty and the management company of certain private equity funds acquired in the first quarter of 2010, which resulted in the consolidation of all the investees’ assets and liabilities even though the Group does not own the majority of the equity. Swiss Re presents non-controlling interests as separate components of net income and total equity. Minority interests were classified as liabilities under the previous guidance. As of 31 December 2010, non-controlling interests totalled USD 1.6 billion.
Total shareholders’ equity as of 1 January 19 220 25 344 32 Net income after non-controlling interests 699 1 980 183 Issuance of convertible perpetual capital instrument 2 670 – Reclassification of convertible perpetual capital instrument –2 670 – Change in unrealised gains/losses on securities, net 1 269 2 035 60 Change in other-than-temporary impairment, net of tax –397 228 – Change in foreign currency translation 1 149 –182 – Dividends –30 –319 963 Convertible perpetual capital instrument (net income) –203 –1 117 450 Purchase/sale of treasury shares and shares issued under employee plans 410 52 –87 Other changes in equity 557 –9 – Total shareholders’ equity as of 31 December 25 344 25 342 0 Non-controlling interests 1 564 – Total equity as of 31 December 25 344 26 906 6
Convertible perpetual capital instrument 1 –203 –1 117 – Net income attributable to common shareholders 496 863 74 1 Please refer to Note 9 Earnings per share of the Group financial statements for details on the impact of the CPCI on earnings.
Summary of cash flow statement USD millions 2009 2010 Change in %
Policy loans, mortgages and other loans 5 606 5 630 –
Liabilities and equity Unpaid claims and claim adjustment expenses 68 412 64 690 –5 Liabilities for life and health policy benefits 39 944 39 551 –1
Income taxes payable 608 708 16 Deferred and other non-current taxes 928 1 716 85
We started to see expansions of coverage in certain circumstances, both through removal of exclusions and explicit granting of additional coverage. This trend could have adverse consequences as such changes in coverage can potentially generate unexpected claims.
Strategy and priorities Cycle management remains one of Swiss Re’s top priorities: We continuously shift capacity to those segments where we expect the most attractive returns on our capital. This led us, for example, to reduce our exposure in Credit & Surety and Casualty, allocating the released capital to other, more profitable markets and segments.
Casualty premium volume declined and the remaining portfolio shows acceptable margins. This will put us in a better position, avoiding prior-year issues, when the market improves.
Swiss Re writes treaty and facultative reinsurance, with treaty business comprising 85% of the 2010 gross premium written, compared to 86% in 2009. Treaty reinsurance covers entire portfolios, while facultative reinsurance is case-by-case risk transfer. Both treaty and facultative reinsurance can be on a proportional or non-proportional basis. In proportional reinsurance, the reinsurer assumes an agreed percentage of the premium and liabilities arising from each policy an insurer writes. Non-proportional coverage (or excess of loss as the most common form) reimburses the insured for losses incurred above a fixed limit.
The major events experienced in 2010 were the earthquakes in Chile and New Zealand, the winter storm Xynthia over Western Europe, hailstorms in Melbourne and Perth, floods in Queensland, and the Deepwater Horizon oil spill.
Net premiums earned Net premiums earned decreased 15% to USD 10.9 billion in 2010, compared to USD 12.8 billion in 2009, largely driven by Swiss Re’s decisions taken during the January 2010 renewal season and less premium earnings from prior years.
Lines of business Property The property combined ratio increased to 86.6% in 2010, compared to 70.1% in 2009, driven by the higher than expected natural catastrophe losses.
Casualty The casualty combined ratio for 2010 was 114.6%, which is 7.8 percentage points higher than the 2009 ratio of 106.8%. The 2010 combined ratio was impacted by large losses and unfavourable change in net premium updates in prior years.
The liability combined ratio in 2010 was 120.4%, compared to 111.4% in 2009. The increase was mainly driven by loss experience, including Deepwater Horizon.
The motor combined ratio increased to 106.6% in 2010 from 98.2% in 2009, largely due to unfavourable net premium updates and losses in prior years.
The accident combined ratio increased modestly to 114.2% in 2010 from 113.6% in 2009.
The other specialty combined ratio decreased to 85.5% in 2010 from 87.7% in 2009, mainly due to better current year experience in 2010, including the benefits from the improved technical margin.
P&C gross premiums earned in 2010 by type of business 52% Direct 48% Broker
Financial year / Property & Casualty 42% Property 30% Casualty 24% Specialty 4% Non-traditional
Property & Casualty results USD millions 2009 2010 Change in %
Expenses Claims and claim adjustment expenses –7 970 –7 200 –10 Acquisition costs –2 203 –1 859 –16 Other expenses –1 396 –1 184 –15 Total expenses –11 569 –10 243 –11
We expect that our cycle management and portfolio steering expertise will continue to make us successful in this market. Our ability to deliver client-specific solutions means that we can create value for our clients whatever the stage of the cycle, while disciplined underwriting lets us create economic profit for our shareholders.
Property & Casualty results by line of business 2009 USD millions
Expenses Claims and claim adjustment expenses –2 318 –1 554 –1 155 –378 –705 –1 285 –7 395 –575 –7 970 Acquisition costs –741 –359 –224 –121 –311 –374 –2 130 –73 –2 203 Other expenses –371 –425 –103 –94 –69 –212 –1 274 –122 –1 396
Strategy and priorities In the US, Swiss Re continues to focus on business – such as yearly renewable term reinsurance – that plays to our core strengths in mortality coverage. We still provide some capacity for traditional ‘XXX’ term coinsurance business (traditional US life business subject to ‘Regulation XXX’), but we are increasingly looking to address our clients’ ‘XXX’ reserve funding needs through alternative structures.
In Europe, we are helping clients to manage their capital positions under current Solvency I regulations, while working with them to analyse the impact of Solvency II and create efficient reinsurance structures for the new regime.
Even in industrialised countries, a large part of the population remains underinsured against life and health risks, as shown in research undertaken by Swiss Re and published in our European Insurance Report 2010. The report concludes that, in the 12 countries it studied, there is a mortality protection gap of EUR 10 trillion, equivalent to a potential annual premium volume of EUR 25 billion. Swiss Re aims to help its clients close this gap by providing accessible, affordable and sustainable life and health protection products in their markets.
Longevity risk protection for life insurance companies and corporate clients continues to be a strategic priority for Swiss Re. The reinsurance industry has, so far, coped with the demand for such protection, but the sheer scale of global exposure to longevity risk in pension schemes and insurance companies – estimated at more than USD 20 trillion – means that additional capacity will have to be secured through the capital markets.
Financial year / Life & Health 61% Life 22% Health 17% Admin Re®
Life & Health results USD millions 2009 2010 Change in %
Net realised investment gains/losses 3 121 2 331 –25 Other revenues
Expenses Claims and claim adjustment expenses; life and health benefits –8 639 –8 236 –5 Return credited to policyholders –4 597 –3 371 –27 Acquisition costs –2 292 –1 826 –20 Other expenses –781 –817 5 Total expenses –16 309 –14 250 –13
Management expense ratio in % 5.9 6.8 Benefit ratio2 in % 83.8 88.7 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. Operating revenues also exclude net realised investment gains/losses from non-participating business.
Segment information The Life & Health business segment comprises three lines of business, Traditional Life, Traditional Health and Admin Re®. The Traditional Life and Traditional Health lines of business include reinsurance contracts for individual and group life, disability income, critical illness and annuity products. Admin Re® comprises closed blocks of in-force life and health insurance business, acquired through either purchase of legal entities or via reinsurance contracts. Individual life and unit-linked products dominate the Admin Re® segment, although the acquired businesses include disability income, long-term care and annuity products.
Traditional life premiums and fees were USD 5.9 billion, compared to USD 7.1 billion in 2009. The decrease is due to the US life retrocession noted above. Excluding this and the effect of foreign exchange movements, premiums and fees increased 7.1%, reflecting new business written in all regions.
Admin Re® premiums and fees were USD 1.6 billion in both 2010 and 2009. Favourable equity market performance drove an increase in fee income, although this was partially offset by lower premiums.
The geographical distribution of premiums and fees earned remained stable during 2010.
Outlook In the short term, sales of life insurance in developed markets will continue to depend on the pace and strength of the economic recovery. Nevertheless, the insurance industry can benefit from a substantial current protection gap by providing consumers with easily accessible and affordable products through efficient distribution. Government reductions in welfare benefits will also boost demand for private sector alternatives.
In emerging markets, we see rising demand for life and health products from a growing and increasingly affluent middle class, along with opportunities in micro-insurance schemes for the poorer parts of the population.
In Europe, we expect to see significant interest from life insurers in reinsurance as a way to meet the enhanced capital requirements expected to be mandated under Solvency II. Swiss Re can provide a full spectrum of solutions, ranging from traditional reinsurance through highly structured transactions to the disposal of entire blocks of business with Admin Re®.
We expect continued strong interest for longevity risk transfer from life insurers and pension funds, particularly in the UK, continental Europe and Canada. The challenge of longevity in these markets will be an increasingly powerful incentive to develop innovative risk transfer solutions.
Benefit and expense ratios The Life & Health benefit ratio increased 4.9 percentage points to 88.7%. Excluding the prior year benefit derived from the rescission of a disability contract together with the impact of certain commutations, the benefit ratio increased 3.0 percentage points. Traditional mortality experience was better than expected, although less favourable than the results recorded in the prior year.
Lines of business A diversified geographical business mix and a continued disciplined pricing approach provided for a stable business result.
America, and gains from the variable annuity and pre-2000 guaranteed minimum death benefit business as Swiss Re’s own credit spreads narrowed. The hedging for expected variable annuity cash flows performed within expected parameters. These results were partially offset by lapse experience on certain US term life insurance products as they reached the end of the fixed premium paying period, resulting in lower operating income. The 2009 result was primarily attributable to the variable annuity business as the company’s estimate on future cash flows changed, driven by lapse experience.
Traditional health Operating income from the traditional health business declined USD 421 million to USD 363 million. Morbidity experience was within expectations in 2010, while cedent reporting timing differences were positive in the reporting year. The 2009 operating income included the one-time gain from an arbitration award related to the rescinded disability income reinsurance agreement as well as gains from the commutation of certain personal accident treaties.
Life & Health results by line of business 2009 USD millions Life traditional
Asset Management Market environment 2010 marked another volatile year in financial markets, with sovereign debt being the main focus of concern – particularly the heavily burdened government balance sheets of peripheral Europe. Coordinated support programmes and promised fiscal reforms helped somewhat to reduce the tensions prevalent in the first half of the year, but a lack of clarity about how debt would be serviced beyond the scope of EU- and IMF-designed programmes prompted renewed market worries toward the end of 2010.
Strategy and priorities Following 2009, a year of significant change, Asset Management utilised 2010 to cement the foundations established by previous initiatives. The programmes to reduce risk in the portfolio continued. De-risking efforts focused on commercial mortgage-backed securities and subordinated bank debt: USD 5.4 billion of securitised products were sold in 2010 (excluding agency securities); and corporate credit hedges were lifted.
Asset Management also selectively extended external mandates to leading asset managers to manage specific corporate credit and equity portfolios. External mandates, including the initial credit and securitised mandates awarded in 2009, now comprise USD 31 billion in assets, placed with a total of 15 external managers. The overall performance of external managers in 2010 was very positive, with aggregate returns exceeding their corresponding benchmarks.
Besides making progress in the de-risking initiatives, Asset Management implemented its more cautious top-down driven investment plan. Navigating the financial markets in 2010 with a low investment risk profile proved to be the right strategy, given the bumpy road for risky asset classes through most of the year. With the view at the start of 2010 that the global economy, in particular in developed economies, was likely to face sub-trend growth for a longer period, the investment risk was increased in higher rated corporate credit. This was achieved by lifting hedges and increasing cash exposure. For 2010, the performance on a total return basis, and in particular in risk-adjusted terms, proved once again to be very favourable for corporate credit.
Navigating the financial markets in 2010 with a low investment risk profile proved to be the right strategy.
61% Cash and cash equivalents, government bonds and short-term investments 14% Corporate bonds 10% Securitised products 1% Equities 14% Other
Investment portfolio as of 31 December 2010 Total USD 143.7 billion 45% USD
Investment result Asset Management’s primary mandate is to manage the assets that Swiss Re generates through its reinsurance and insurance business using a clear, robust asset-liability management framework. During the year, there was a continued reduction of securitised products, a reduction of hedges on the corporate credit portfolio, and a deployment of cash to additional corporate credit and newly created equity mandates.
For 2010, the return on investments was 3.5%, compared to 1.8% for the prior year, and operating income increased to USD 4.5 billion from USD 3.6 billion in 2009. This was driven mainly by realised gains, lower impairments and lower hedging costs, which more than offset the impact of lower net investment income from lower yields. Mark-to-market gains increased shareholders’ equity by USD 3.7 billion, primarily as a result of an increase in mark to market on securitised products and the impact of lower interest rates, leading to a total return of 6.5% in 2010.
Net investment income for Asset Management was USD 3.6 billion for 2010, compared to USD 4.3 billion for 2009. This is mainly due to the lower yields on purchases during the year as well as a reduction of fixed income positions from net sales.
Asset Management’s investment portfolio decreased to USD 143.7 billion in 2010, excluding unit-linked and with-profit business, compared to USD 149.1 billion at the end of 2009.
Equities and alternative investments Equities increased by USD 0.9 billion mainly as a result of new equity mandates. Operating income for equity and alternative investments was USD 0.4 billion in 2010, compared to an operating loss of USD 0.1 billion in 2009. This improvement was mainly due to higher valuations of private equity investments and real estate.
The challenges to recovery are most prominent in the eurozone, where sovereign debt risks (mainly in the peripheral countries) still weigh on investor sentiment, while future fiscal austerity measures are likely to depress GDP growth. In contrast, most emerging economies are performing well and will continue to do so, though potential inflationary pressures need to be watched carefully.
We therefore expect interest rates generally to move higher. We continue to favour credit risk in this environment, but also see opportunities in the equity markets, such as investments with high dividend yields.
In summary, we are cautiously optimistic about financial markets in 2011 from a top-down investment point of view. We believe that emerging economies will continue to grow more strongly than developed economies. Among the potential risks, we will be vigilant about the impact of changes in the regulatory environment, pressures toward protectionist measures, developments on the sovereign risk front and, of course, shifts in monetary policy.
Total operating income/loss 3 707 –83 3 624 Return on investments in %1 1.8%
Share performance Swiss Re shares Swiss Re had a market capitalisation of CHF 18.6 billion on 31 December 2010, with 370.7 million shares outstanding. Swiss Re shares are listed on the main board of the SIX Swiss Exchange (SIX) and are traded under the ticker symbol RUKN. The shares are also traded over the counter in the form of an American Depositary Receipt (ADR) level I programme (OTC symbol SWCEY).
Throughout 2010, Swiss Re’s share price was closely correlated with both the STOXX Europe 600 Insurance index (SXIP) and the broader index of Swiss blue chips (SMI). Swiss Re’s share price increased 0.8% during the year, slightly behind the STOXX Europe 600 Insurance index, which increased 2.0%, and ahead of the SMI, which decreased 1.7% during 2010.
Share trading The average daily trading volume for 2010 was 1.8 million shares on-exchange and 0.1 million shares off-exchange. The on-exchange average daily trading volume was almost 40% down on the average trading volume for 2009. Trading volume peaked at 6 million shares on 19 February 2010 after Swiss Re announced its results for the 2009 financial year. Repeating the pattern of 2009, daily volumes were lower in the second half of 2010 compared to the first half of the year.
Dividends The Board of Directors will propose a dividend of CHF 2.75 per share for 2010, in the form of a withholding tax exempt repayment of legal reserves from capital contributions. Swiss Re pays its dividend annually. Shares are ex-dividend two working days after the Annual General Meeting (AGM, 19 April 2011), with payment made five working days after the AGM (26 April 2011).
Share custody Swiss Re offers its shareholders the opportunity to deposit shares in their own names with the Share Register in Zurich. Share custody is free of charge. Shareholders can download the application form from Swiss Re’s website at: www.swissre.com/investors/share_register
Insurance indices STOXX Europe 600 Insurance 4.84 Bloomberg Europe 500 Insurance 5.38 FTSEurofirst 300 Insurance 5.44 Dow Jones Insurance Titans 30 2.53
Swiss Re share price and trading volume in 2010 Volume in millionsClosing price in CHF
Key share statistics 2006–2010 of which Treasury shares and shares reserved for corporate purposes 16 184 149 23 720 789 27 850 261 27 994 167 28 083 630
Our risk management function is embedded across Swiss Re’s business, as a key stakeholder throughout the cycle: from strategic planning, via capital allocation and target setting, through to large transaction approval, portfolio monitoring and performance measurement. Its goal is to ensure controlled risk-taking and efficient, risk-adjusted capital allocation. Based on our internal Group risk model, Swiss Re’s overall exposure decreased 3% in 2010, driven by reductions in all risk categories.
Proposed changes in regulatory and solvency regimes in the EU, the US and elsewhere have re-emphasised the value of risk management and our well-established expertise in risk modelling. Swiss Re’s integrated model, which has been developed over more than 15 years, provides a sound basis for our risk assessment under the economic-based Swiss Solvency Test. We are actively involved in dialogue with the industry and legislators to support the establishment of robust and efficient regulatory structures. We also continue to lead the discussion on sustainable insurance and reinsurance solutions for emerging risks, and were named once more “insurance supersector leader” in the Dow Jones Sustainability Index.
Capital management In 2010, Swiss Re further strengthened its capital position. This enabled us to bring forward the repayment date of the convertible perpetual capital instrument (CPCI) issued to Berkshire Hathaway in 2009. In addition, in the fourth quarter of 2010, Standard & Poor’s and A.M. Best affirmed our financial strength rating and revised the rating outlook to positive from stable.
̤ We continue to apply a wide range of instruments and expertise to proactively ensure maximum flexibility when deploying capital. For example, in January 2010, we closed a US individual life retrocession transaction with Berkshire Hathaway.
Swiss Re’s external capital adequacy After repayment of the CPCI and a dividend of CHF 2.75 per share, Swiss Re still holds excess capital under all relevant capital adequacy requirements such as Standard & Poor’s AA level, Group Solvency I and the Swiss Solvency Test (SST).
Regulated subsidiaries are subject to local regulatory requirements. Our EU subsidiaries Swiss Re Europe S.A., Swiss Re International SE and Windsor Life Assurance Company Ltd will be required to comply with Solvency II. Similar to the SST, Solvency II is based on economic principles for the measurement of assets and liabilities, and sets out requirements for governance, risk management, and supervision, as well as for disclosure and transparency. We continue to follow the developments of Solvency II and are implementing the requirements, which are broadly in line with our internal model and the SST for our European entities.
We continuously strive to simplify our legal entity structure and to optimise local capital levels. We will continue these efforts so as to further enhance our efficiency, and respond to regulatory developments and client needs.
A.M. Best, Moody’s and Standard & Poor’s rate Swiss Re’s financial strength based upon interactive relationships. The insurance financial strength ratings are shown in the table above.
On 15 December 2010, A.M. Best Co. revised the outlook to positive from stable and affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a+” of Swiss Reinsurance Company Ltd and its subsidiaries.
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 in the range of at least 175–200%.
Available capital is based on our economic net worth – as determined by our EVM methodology adjusted for additional riskbearing items. The EVM model is Swiss Re’s integrated economic measurement and steering framework used for planning, pricing and managing its business. Required capital is calculated by our internal risk model, based on 99% Tail VaR (see page 44). As of 31 December 2010, available capital is estimated to be USD 36.4 billion and required capital is estimated to be USD 15.0 billion, resulting in an internal capital adequacy ratio of 243%.
Swiss Re’s financial strength ratings As of 11 February 2011 Financial strength rating Outlook Last rating action
̤ Swiss Re’s long-term liquidity needs are taken into account as part of our asset-liability management approach to controlling financial market risk.
For cost efficiency reasons, we also closed our Commercial Paper programme and did not renew the corresponding credit back-up facilities.
Liquidity position of Swiss Reinsurance Company Ltd We monitor Swiss Re’s liquidity position using liquidity stress tests, as well as expected funding gaps over three-month and one-year intervals. Identifying potential funding requirements under stressed conditions lets us take appropriate management actions to ensure that the Group can withstand such events and meet payment obligations. Our core liquidity policy is to maintain sufficient liquidity, in the form of unencumbered liquid assets and cash within a central pool of entities, to meet potential funding requirements arising from various stress events. The pool comprises the Group’s parent company – Swiss Reinsurance Company Ltd – as well as subsidiaries whose funds are freely transferable to the parent company. This liquidity, referred to as “spot liquidity”, is intended to allow Swiss Re to meet its funding obligations in a liquidity crisis, assuming a drop in funding from new reinsurance business, without having to rely on other asset sales or unsecured external funding.
We manage Swiss Re’s liquidity risk using an established stress testing framework.
Swiss Re’s liquidity stress tests are reviewed regularly and their main assumptions are approved by the Group Risk and Capital Committee.
The estimated total liquidity sources in the pool available within one year after haircuts amounted to USD 29.1 billion as of 31 December 2010, compared to USD 28.2 billion on the same date in 2009. Based on the above extreme loss internal liquidity stress test, we estimate Swiss Re held surplus liquidity on 31 December 2010.
Controlled risk-taking requires a strong and independent risk management organisation and comprehensive risk management processes to identify, assess and control the Group’s risk exposures. We base our risk management on four guiding principles, which we strive to apply consistently across all risk categories throughout the Group: ̤ Controlled risk-taking: Financial strength and sustainable value creation are central to Swiss Re’s value proposition. We therefore operate within a clearly defined risk policy and risk control framework.
Risk management organisation The Board of Directors is ultimately responsible for the Group’s governance principles and policies, including approval for our overall risk tolerance. The Board mainly deals with risk management through two committees: ̤ The Finance and Risk Committee is responsible for reviewing the Group Risk Policy and capacity limits, as well as monitoring risk tolerance and reviewing top risk issues and exposures.
Risk Management is embedded across our business cycle to enable controlled risk-taking and efficient, risk-adjusted allocation of capital.
Risk Management function Identification, assessment, control and reporting of insurance, financial market, credit, operational, liquidity and other risks
̤ The Group Asset-Liability Committee oversees the management of Swiss Re’s balance sheet, in particular its liquidity, capital and funding positions and related policies.
Liquidity risk, capital adequacy, and emerging risks are managed at Group level. Certain other risk management activities are also performed globally, across all risk categories. These include risk governance at Group level, risk modelling, risk reporting and the steering of our regulatory activities.
Risk tolerance and limit framework Our risk tolerance is an expression of the extent to which the Board of Directors has authorised the Group to assume risk. It represents the maximum amount of risk that Swiss Re is willing to accept within the constraints imposed by its capital resources, its strategy, its risk appetite, and the regulatory and rating agency environment within which it operates.
Swiss Re uses 99% Tail VaR (see box on page 44) to measure the Group’s capital requirement, as well as for defining risk tolerance, limits and liquidity stress tests. According to the Group’s internal risk model, Swiss Re’s overall risk exposure based on 99% Tail VaR decreased to USD 15.0 billion in 2010, down 3% from USD 15.5 billion in 2009. Alternative risk measures are 99% and 99.5% VaR based on which our risk decreased 5% to USD 11.3 billion and 4% to USD 13.1 billion, respectively.
The table below shows 99% Tail VaR for each of Swiss Re’s core risk categories on a stand-alone basis: ̤ Property and casualty risk decreased 5%
̤ Credit risk decreased 35% to USD 1.8 billion due to de-risking in the credit and surety underwriting book, partly offset by the corporate bond hedge reduction.
In 2010, we de-risked our credit and surety book, and lowered our exposure across all risk categories.
Simple sum 25.0 23.4 –6 Diversification effect –9.5 –8.4 Swiss Re Group 15.5 15.0 –3 1 Credit comprises credit default and credit migration risk.
Setting and monitoring reserving levels is a key component of Swiss Re’s insurance risk and actuarial management function, including the communication of trends back to the risk-taking functions to ensure appropriate pricing. 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 As reported on page 41, lower reserving and inflation risk was the main driver for the change in overall property and casualty risk in 2010. The table below shows Swiss Re’s exposure to a set of major natural catastrophe scenarios net of retrocession and securitisation. The risk measures take into account the fact that such a scenario will trigger claims in several 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.
The main changes in 2010 were driven by active management of our Californian earthquake portfolio – which led to an exposure reduction over the year. In addition, the weakening of the euro against the US dollar reduced European windstorm risk, while Japanese earthquake risk increased due to the hardening of the yen.
One instrument for reducing the risk exposure of Swiss Re’s life and health book is retrocession, in particular the quota share provided by Berkshire Hathaway for a closed book of US individual life business. In addition, we use insurance-linked securities as a means to reduce peak exposures. The
Vita bonds, for example, are issued to provide protection against extreme mortality events and the first Kortis bond providing protection against longevity trend risk was also issued in 2010.
Financial Risk Management defines risks using a regularly updated classification of risk factors. The unit is also responsible for monitoring aggregations of financial market risk in accordance with our risk management standards; the results are stored in a single system, which is also used for risk modelling and risk reporting.
Market scenarios Pre-tax impact on economic capital in USD billions, as of 31 December 2009 2010 Change in %
Swiss Re’s risk model provides a meaningful assessment of the risks to which the company is exposed and is an important tool for managing its business. The model is used for determining capital requirements for internal purposes as well as for regulatory reporting under the Swiss Solvency Test (SST). The model output also forms the basis for Swiss Re’s capital cost allocation keys in its economic value management (EVM) framework, which are used for pricing, the evaluation of profitability and consequently compensation decisions.
The model generates a probability distribution for the Group’s annual economic profit and loss, specifying the likelihood that the outcome will fall within a given range. From this distribution, a base capital requirement is derived that captures the potential for severe, but rare, aggregate losses over a one-year time horizon.
Swiss Re’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, eg 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. Market developments have confirmed that risk models must be supported by a clear understanding of those risks – and complemented by robust internal controls.
We distinguish between three types of credit exposure: the risk of issuer default from instruments in which Swiss Re invests or trades, such as corporate bonds; counterparty exposure in a direct contractual relationship, such as retrocession or over-the-counter (OTC) derivatives; and risk assumed by Swiss Re through reinsurance contracts, such as Trade Credit and Surety reinsurance business. Credit risk is viewed separately from credit spread risk, which is included under financial market risk.
Operational risk Operational risk, defined according to the Basel II causal categories, includes potential losses or reputational damage arising from inadequate or failed internal processes, people or systems, or from external events. Exposure to external events only takes account of the potential consequences for Swiss Re’s own operations or infrastructure.
Operational risks are mitigated by appropriate controls on key processes that reduce the potential impact or likelihood of a risk event. Swiss Re aims to limit the Group’s exposure to operational losses through cost-effective mitigation and control strategies.
To take account of country risks other than from credit default, Swiss Re’s Political and Sustainability Risk Management unit prepares specific country ratings in addition to the sovereign ratings used by the Group. These ratings are considered in the decision-making process. The ratings cover political, economic and security-related country risks, thus allowing for a more comprehensive assessment of country risks relevant in different ways for individual lines of business.
Credit stress test Pre-tax impact on economic capital in USD billions, as of 31 December 2009 2010 Change in %
The responsibility for managing strategic risk lies with the Group’s Board of Directors. It is addressed by examining multi-year scenarios and considering the related risks. Implementation and monitoring of the chosen strategy is assessed year by year in terms of the annual business plan. The operational risks of implementing the strategy are reviewed through an integrated assurance framework comprising business management, risk management and independent internal audits.
In the US, various reform initiatives are under way, including the Dodd-Frank Wall Street Reform Act, which in addition to its main banking focus also contains provisions on systemically relevant institutions and establishes a federal insurance regulator. On an international level, the G20 have agreed to give supervisors the power to identify systemic risks across the financial system and to subject firms that are deemed “systemically important” to higher capital requirements, stricter resolution regimes and more extensive reporting. The Financial Stability Board (FSB) is now widening its focus on systemically relevant companies from banks to other financial institutions, including the insurance industry.
While convergence and rationalisation of supervisory and prudential regimes are desirable goals, political pressure on governments and supervisors to implement these reforms quickly may lead to unforeseen distortions of the market and overly conservative regulatory requirements. These developments and uncertainty regarding future supervisory requirements have heightened the level of regulatory risk for the insurance industry, including Swiss Re.
We are actively involved in dialogue with the industry and legislators to support the establishment of robust and efficient regulatory structures. In addition, we are monitoring ongoing developments to assess the potential impact of these reforms on Swiss Re and identify related business opportunities.
Reputational risk Swiss Re’s continued business success depends on maintaining our reputation with clients, investors, employees and other stakeholders. Environmental, social and ethical reputation risks may arise from individual business transactions, and our reputation could also be damaged by operational failures.
Titel, titel 48 Swiss Re 2010 Financial Report 48 Swiss Re 2010 Financial Report
50 Overview 52 Group structure and shareholders 54 Capital structure 57 Board of Directors 72 Executive management 77 Shareholders’ participation rights 78 Changes of control and defence measures 79 Auditors 81 Information policy
Overview Swiss Reinsurance Company Ltd, the parent company of the Swiss Re Group, is listed in the main segment of the SIX Swiss Exchange. Its corporate governance is therefore assessed under the Swiss Code of Best Practice for Corporate Governance (Swiss Code), issued by economiesuisse in 2002, and its 2007 appendix concerning recommendations on the process for setting compensation. Swiss Re fully adheres to the principles set out in the Swiss Code and is also compliant with the Directive on Information relating to Corporate Governance (including its annex), issued by the SIX Swiss Exchange in 2002 and amended in 2009 (SIX Directive). Moreover, Swiss Re conforms to the provisions on corporate governance, risk management and internal control systems, issued by the Swiss Financial Market Supervisory Authority (FINMA) with effect from 1 January 2009. Finally, Swiss Re’s corporate governance complies with the applicable local rules and regulations of all the jurisdictions in which it conducts business.
The information provided in this chapter follows, in principle, the structure of the SIX Directive. Information on compensation, shareholdings and loans, as required by the Directive, is provided in the Compensation chapter on pages 84 –107.
Key developments in 2010 and 2011 ̤ The shareholders elected Malcolm D. Knight, Carlos E. Represas and Jean-Pierre Roth new members of the Group Board of Directors.
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.
Shareholder Number of shares % of voting rights and share capital Date of notification 1 No further notification was made in the subsequent year(s). 2 8 883 676 registered shares and 2 367 440 American Depositary Receipts (ADRs). 3 Franklin Resources, Inc. reported on 14 December 2010 that it held, through a number of group companies, 15 925 239 shares, corresponding to 4.30% of the voting rights. The notification of 20 December 2010 was made due to a group internal transfer of shares.
Shares held by Swiss Re 28 635 251 7.7 1 Excluding shares held by Swiss Re
The following table provides an overview of the issued, conditional and authorised capital of Swiss Reinsurance Company Ltd. Please also refer to the sections “Conditional and authorised capital in particular” below and “Changes in capital” on page 55.
Conditional and authorised capital in particular Conditional capital As of 31 December 2010, the conditional capital of Swiss Reinsurance Company Ltd consisted of the following categories: Conditional capital for bonds or similar instruments Conditional capital of CHF 839 479.20 was available to settle conversion rights and warrants for bonds or similar instruments issued by the company or Group companies. Shareholders’ subscription rights are excluded. Shareholders’ pre-emption rights may be restricted or excluded by decision of the Board of Directors in order to finance or refinance the acquisition of companies, parts of companies or holdings, or new investments planned by the company, or in order to issue convertible bonds and warrants on the international capital markets. If pre-emption rights are excluded, then (1) the bonds are to be placed at market conditions, (2) the exercise period is not to exceed ten years from the date of issue for warrants and twenty years for conversion rights and (3) the conversion or exercise price for the new shares is to be set at least in line with the market conditions prevailing at the date on which the bonds are issued.
Conditional capital for employee participation Conditional capital of CHF 1 695 280.70 was available to settle warrants or subscription rights granted to employees, including members of the Board of Directors, of Swiss Reinsurance Company Ltd or Group companies. The new registered shares may be issued at a price below the current market price and shareholders’ subscription rights are excluded.
Conditional capital for bonds or similar instruments 839 479.20 8 394 792 839 479.20 8 394 792 in favour of Berkshire Hathaway Inc. 16 000 000.00 160 000 000 16 000 000.00 160 000 000
Changes in capital Changes in 2010 On 7 April 2010, the Annual General Meeting approved the increase of conditional capital for employee participation by CHF 1 093 084.50 to a total of CHF 1 695 579.20 to ensure that sufficient shares for existing and future share-based compensation plans are available.
In 2010, the company issued 2 985 shares from conditional capital for employee participation purposes.
Limitations on transferability and nominee registrations Free transferability Shares of Swiss Reinsurance Company Ltd 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 Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA).
Admissibility of nominee registrations Trustees or nominees who act as fiduciaries of shareholders are entered without further inquiry in the share register of Swiss Reinsurance Company Ltd as shareholders with voting rights up to a maximum of 2% of the outstanding share capital available at the time. Additional shares held by such nominees that exceed the limit of 2% of the outstanding share capital are entered in the share register with voting rights only if such nominees disclose the names, addresses and shareholdings of the beneficial owners of the holdings amounting to or exceeding 0.5% of the outstanding share capital. In addition, such nominees must comply with the disclosure requirements of the SESTA.
Convertible bonds and options Convertible bonds As of 31 December 2010, the following convertible bond is outstanding: Holders may convert the bond, due in 2021 and issued in denominations of USD 10 000 principal amount and integral multiples thereof, into registered shares of Swiss Reinsurance Company Ltd at any time prior to the close of business on 21 November 2011, at a conversion price of CHF 207.19 per share and a fixed exchange rate of USD 1 = CHF 1.6641. The exercise of this convertible bond will not affect Swiss Re’s capital, as Swiss Reinsurance Company Ltd purchased a call option to hedge the underlying shares. If bond holders convert the bond, Swiss Re will exercise the hedge option to obtain the necessary shares. A full conversion of the USD 1 150 000 000 convertible bond would theoretically result in a delivery of around 9.2 million shares under the call option Swiss Re purchased.
Convertible perpetual capital instrument In 2009, Swiss Re issued in favour of Berkshire Hathaway Inc. and certain of its subsidiaries a convertible perpetual capital instrument in an aggregate face amount of CHF 3 000 000 000. With effect from 3 November 2010, the instrument was terminated and repaid on 10 January 2011.
For details on stock options granted to Swiss Re employees, see Note 12 to the Group financial statements on pages 168 –170.
Tenor Instrument Currency Nominal (millions) Terms of conversion 2001– 2021 Convertible bond USD 1 150 See below
Information about managerial positions and significant business connections of non-executive directors All members of the Board of Directors are non-executive. John R. Coomber was Chief Executive Officer until 31 December 2005. Walter B. Kielholz, Chairman of the Board of Directors since 1 May 2009, was Swiss Re’s Chief Executive Officer from 1 January 1997 to 31 December 2002. Of the other ten directors, none has ever held a management position in the Group.
No director has any significant business connection with Swiss Re or any of its Group companies.
Mathis Cabiallavetta Swiss 65 Vice Chairman of the Board 2008 2011 Chairman of the IC Member of the CGC and CC
He is a member of the European Financial Services Roundtable, a member of the International Monetary Conference, and a member of the Board of the Institute of International Finance. Walter B. Kielholz is also a member and former Chairman of the Board of Trustees of Avenir Suisse. From 2003 to 2009, he was a member of the Board and the Committee of economiesuisse. In 2005, he was elected to the Insurance Hall of Fame, which honours individuals who have exercised substantial influence on the insurance industry for the benefit of society. Furthermore, Walter B. Kielholz is Chairman of the Zurich Art Society.
Mathis Cabiallavetta was Vice Chairman of the Board of Directors of Marsh & McLennan Companies (MMC) from November 2001 to November 2004. Prior to joining MMC in 1999, Mathis Cabiallavetta was Chairman of the Board of Directors of UBS AG, having held several senior positions in the company from 1971. He became President of the Group Executive Board in 1996 and was elected Chairman of UBS AG in 1998.
Jakob Baer Non-executive and independent director Jakob Baer, a Swiss citizen born in 1944, was elected to Swiss Re’s Board of Directors in May 2005.
He began his career in the legal department of the Federal Finance Administration. In 1975, he joined Fides Trust Company. Following the successful planning and execution of a management buyout of Fides’ advisory business, he became a member of the Management Board of KPMG Switzerland in 1992. He was appointed Chief Executive Officer of KPMG Switzerland in 1994 and a member of KPMG’s European and international Management Boards. He retired from KPMG in September 2004, having reached the statutory retirement age.
John R. Coomber Non-executive and independent director John R. Coomber, a British citizen born in 1949, was elected to Swiss Re’s Board of Directors in February 2006.
Rajna Gibson Brandon is a deputy director of the National Centre of Competence in Research (NCCR) “Financial Valuation and Risk Management” research network, Director of Research of the Swiss Finance Institute (SFI) and an adviser to scientific councils of various educational institutions. She was a member of the Swiss Federal Banking Commission until the end of 2004.
Rajna Gibson Brandon studied business and economics at the University of Geneva, graduating with a BA in 1982 and a PhD in economics and social sciences in 1987.
Malcolm D. Knight Non-executive and independent director Malcolm D. Knight, a Canadian citizen born in 1944, was elected to Swiss Re’s Board of Directors in April 2010.
Malcolm D. Knight has been a Vice Chairman of Deutsche Bank since 2008. Concurrently he is Visiting Professor in Finance at the London School of Economics and Political Science. In addition, he is a trustee of the Per Jacobsson Foundation, Chairman of the Board of Patrons of the European Association for Banking and Financial History, and a trustee of the International Valuation Standards Council.
Hans Ulrich Maerki Non-executive and independent director Hans Ulrich Maerki, a Swiss citizen born in 1946, was elected to Swiss Re’s Board of Directors in 2007.
He is a member of the Boards of ABB Ltd, Mettler-Toledo International and the Menuhin Festival Gstaad AG. 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.
Carlos E. Represas Non-executive and independent director Carlos E. Represas, a Mexican citizen born in 1945, was elected to Swiss Re’s Board of Directors in April 2010.
Carlos E. Represas was Chairman of the Board of Nestlé Group Mexico from 1983 to 2010. 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. Furthermore, he is Chairman of the Board of Trustees of the National Institute of Genomic Medicine, Mexico, President of the Mexico Chapter of the Latin American Chamber of Commerce in Switzerland, and a member of the Latin America Business Council (CEAL).
Carlos E. Represas studied Economics at the National University of Mexico and Industrial Economics at the National Polytechnic Institute, Mexico. He completed further studies in the areas of finance, marketing and management in the US and in Switzerland.
Jean-Pierre Roth was Chairman of the Governing Board of the Swiss National Bank (SNB) from January 2001 until December 2009. He joined the SNB in 1979, where he held various senior positions before he was appointed a member of the Governing Board in 1996. From 2001 he was a member and from 2006 Chairman of the Board of Directors of the Bank for International Settlements, until his retirement from this position in 2009. Jean-Pierre Roth also served as Swiss Governor of the International Monetary Fund from 2001 to 2009 and as a Swiss representative on the Financial Stability Board from 2007 to 2009.
Jean-Pierre Roth studied economics at the University of Geneva and graduated from the Graduate Institute of International Studies (Institut Universitaire de Hautes Etudes Internationales) with a PhD in political sciences in 1975.
Robert A. Scott is a retired Group Chief Executive of CGNU plc, now Aviva. In the 1990s, he was Group Chief Executive of General Accident and, following the merger with Commercial Union in 1998, was appointed Group Chief Executive of CGU plc. Following the merger in 2000 with Norwich Union, he became Group Chief Executive of CGNU plc, retiring in May 2001. Robert A. Scott was also Chairman of the Association of British Insurers from 2000 to 2001, and a Board member in the previous four years.
Other activities and functions Please refer to the information provided in each director’s biography on pages 58 –63.
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.
First election and remaining term of each director Please refer to the table provided on page 57.
Organisational structure of the Board of Directors The organisation of the Board of Directors is set forth in the Corporate Bylaws, which define the responsibilities of the Board of Directors, its committees and executive management, as well as the reporting procedures. The Corporate Bylaws are reviewed periodically by both the Chairman’s and Governance Committee and the full Board with regard to expediency as well as compliance with domestic and applicable international laws, regulations and best practice standards.
Committees of the Board of Directors: responsibilities and members Chairman’s and Governance Committee Responsibilities The Chairman’s and Governance Committee’s primary function is to act as counsellor to the Chairman with regard to emerging business issues and Board-related organisational matters, address 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 at 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.
Audit Committee Responsibilities The Audit Committee assists the Board in fulfilling its oversight responsibilities as they relate to the integrity of the Group’s financial statements and exercises supervision of legal, regulatory and compliance-related matters. It reviews the annual reports of the parent company and the Group and approves quarterly reports. The committee also reviews the Group’s accounting principles and practices, the adequacy of the financial reporting process and the efficacy of the system of internal controls. Furthermore, it evaluates the external auditor, approves the audit plans of Group Internal Audit and the external auditor, and discusses their findings with them.
Members Jakob Baer, Chair Raymund Breu Raymond K. F. Ch’ien John R. Coomber
Independence and other qualifications All members of the Audit Committee are non-executive and independent. In addition to the independence criteria applicable to Board members, members of the Audit Committee may not accept any consulting, advisory, or other compensatory fee from the company. All members must have a thorough understanding of finance. At least one member must have the attributes qualifying him/her as an Audit Committee Financial Expert. Furthermore, the Corporate Bylaws require that Audit Committee members should not serve simultaneously on audit committees of more than two other listed companies. Members shall pre-advise the Chairman prior to accepting any further invitation to serve on the audit committee of
Corporate governance / Board of Directors another listed company. No member of the Audit Committee held more than two additional audit committee mandates in 2010.
Finance and Risk Committee Responsibilities The Finance and Risk Committee annually reviews the Group Risk Policy and recommends it for approval to the Board of Directors, reviews risk and capacity limits approved by the executive management as well as their usage, and reviews the risk control framework. It reviews the most important risk exposures in all major risk categories as well as new products or strategic expansions of the Group’s areas of business. In terms of risk and economic performance measurement, it reviews critical principles used in internal risk measurement, valuation of assets and liabilities, capital adequacy assessment and economic performance management. It also reviews the capital adequacy and the treasury strategy of the Group.
Work methods of the Board of Directors and its committees 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. 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.
Board of Directors The Board of Directors held twelve regular and two extraordinary meetings in 2010. The meetings lasted 4.5 hours on average. The average attendance rate was 95.8% throughout
Compensation Committee The Compensation Committee held six regular meetings in 2010. The meetings lasted on average 2.5 hours. Attendance was 90.3% during the reporting year. Besides the committee members and the secretary, the Chief Executive Officer, the Chief Operating 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 the law firm Niederer Kraft & Frey (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 all committee meetings in 2010, representatives of NKF in five meetings.
Investment Committee The Investment Committee held eight regular meetings in 2010. On average, the meetings lasted 2.5 hours. Attendance was 89.2% during the reporting year. Besides the committee members and the Company Secretary, the Chief Executive Officer, the Chief Investment Officer, the Chief Financial Officer, the Chief Risk Officer and the Head Financial Markets Risk Management were invited to attend Investment Committee meetings in an advisory capacity.
Definition of areas of responsibility of the Board of Directors and the Executive Committee The Board of Directors exercises the ultimate authority of the Group. It has delegated the responsibility for managing the Group’s operations to the Executive Committee (see section “Executive management” as of page 72).
Involvement of executive management in meetings of the Board of Directors As a matter of principle, all members of the Executive Committee are invited to all meetings of the Board of Directors. The entire Executive Committee was present at all regular Board meetings in 2010, with the exception of one Executive Committee member who was absent from one of the meetings.
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 under “Work methods of the Board of Directors” and its committees, on pages 67 – 68.
Periodic reporting by executive management The Executive Report is a standard agenda item at Board meetings, comprising a comprehensive report on business development, including major business transactions, claims, corporate development issues and key projects. In addition, specific written reports focusing on issues such as risk exposure and risk management activities of the Group, economic results, investment operations, compliance, legal aspects, and economic outlook are provided to the members of the Board of Directors on a regular basis.
GIA applies a risk-based approach to auditing the Group’s control systems, performing its own risk assessment and making use of risk assessments performed by the risk management and other assurance functions in the Group after reviewing the quality of the assurance work performed. The GIA Audit Plan is determined annually and updated on a quarterly basis. The results of the audits are reported to executive management and the Audit Committee. Formal quarterly updates are provided to the Audit Committee on the findings, resources and skills within GIA and on the changes in tools and methodologies GIA uses. In addition, GIA reviews the Assurance Report, which provides a summary of the assurance activities of Operational Risk Management, Business Risk Review, Compliance and GIA.
GIA coordinates its activities with other risk controlling functions of the Group and the external auditor.
Executive management Members of the Executive Committee The Executive Committee consisted of the following members as of 31 December 2010: Stefan Lippe Chief Executive Officer 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, and was awarded the Kurt Hamann foundation prize for his thesis.
He was appointed deputy member of the Board of Management in 1988 and a full member in 1991, when he assumed general responsibility for the company’s operations in the German-speaking area. In 1993, he became Chairman of the Board of Management of Bavarian Re.
Stefan Lippe became a member of Swiss Re’s Executive Board in 1995, as Head of the Bavarian Re Group. In 2001, he assumed the role of Head of the Property & Casualty Business Group and was appointed a member of the Executive Committee. Beginning in 2005, he led Swiss Re’s Property & Casualty and Life & Health Underwriting activities, and in September 2008, he took over as Chief Operating Officer and was also made Deputy Chief Executive Officer. In February 2009, he was appointed Chief Executive Officer.
Before joining Swiss Re, he worked at Credit Suisse from 1993 to 2008 in a number of positions in Zurich, London and New York. In private banking, he established an industryleading 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.
David Blumer was appointed Swiss Re’s Head of Asset Management/Chief Investment Officer and member of the Executive Committee with effect from 1 May 2008. On 1 October 2010, he also assumed responsibility for the Admin Re® business.
He started his career in 1984 with ABN AMRO in Amsterdam and held a series of credit and relationship management positions in New York, Houston, Chicago and Amsterdam, before being appointed Executive Vice President and Regional Head of Risk Management for Latin America in 1999, based in São Paulo, Brazil.
Agostino Galvagni CEO Corporate Solutions Agostino Galvagni, an Italian citizen born in 1960, graduated in business management from the Università Commerciale Luigi Bocconi in Milan and then joined Bavarian Re (former Swiss Re subsidiary), Munich, as a trainee in 1985.
Brian Gray Chief Underwriting Officer Brian Gray, a Canadian citizen born in 1962, holds a degree in economics from Wilfrid Laurier University and an MBA from the University of Toronto.
He joined Swiss Re in 1985 and worked in a variety of underwriting and marketing roles in Toronto. In 1994, he moved to Zurich where he held positions in the former Asia-Pacific/ Africa division, as well as corporate integrated risk management functions. In 1997, he returned to Canada where he assumed responsibility for Underwriting, Claims and Special Lines activities. He was appointed President and Chief Executive Officer of Swiss Re Canada in March 2001.
Michel M. Liès Chief Marketing Officer Michel M. Liès, a citizen of Luxembourg born in 1954, holds a degree in mathematics from the Swiss Federal Institute of Technology (ETH) in Zurich.
In 1978, Michel M. Liès joined the Life department of Swiss Re in Zurich and was mainly active in the Latin American market. From 1983 to 1993, he was responsible for France and the Iberian Peninsula and coordinated Swiss Re’s life strategy across the European Community.
In 1994, he transferred to the non-life sector of the Southern Europe/Latin America department, where he was initially responsible for the Spanish market. He was appointed Head of the Southern Europe/Latin America department at the beginning of 1997.
Raj Singh Chief Risk Officer Raj Singh, a US citizen born in 1962, holds a Bachelor of Science degree from the Winona State University, Minnesota, and an MBA from the Thunderbird American School for International Management, Arizona.
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 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.
Thomas Wellauer Chief Operating Officer Thomas Wellauer, a Swiss citizen born in 1955, holds a PhD in Systems Engineering from the Swiss Federal Institute of Technology (ETH), as well as an MBA from the University of Zurich.
He started his career with McKinsey & Company, specialising in the financial services and pharmaceutical industry sectors, and became a Partner in 1991 and Senior Partner in 1996. In 1997, he was named CEO of the Winterthur Insurance Group, which was later acquired by Credit Suisse. At Credit Suisse he was a member of the Group Executive Board, initially responsible for the group’s insurance business before becoming CEO of the Financial Services division in 2000.
From 2003 to 2006, Thomas Wellauer headed the global turnaround project at Clariant. Subsequently, he joined Novartis as Head of Corporate Affairs and became member of the Executive Committee of Novartis in 2007.
From April 2009 until end of September 2010, he was a member of the Supervisory Board of Munich Re.
Changes in the course of 2010 Thomas Wellauer joined Swiss Re as Chief Operating Officer and member of the Executive Committee on 1 October 2010, succeeding Agostino Galvagni who assumed the newly created position of CEO Corporate Solutions at the same time.
Changes in 2011 Christian Mumenthaler, previously Head of the Life & Health division, was appointed Chief Marketing Officer Reinsurance and member of the Executive Committee with effect from 1 January 2011. He succeeded Michel M. Liès, who became Chairman Global Partnerships, a position outside the Executive Committee which was established to foster relationships in the areas of the public sector, governments and non-government organisations, as well as Swiss Re’s growth strategy in emerging markets.
Shareholders’ participation rights Voting right restrictions and representation Voting right restrictions, statutory group clauses, exception rules There are no voting right restrictions, no statutory group clauses and thus no rules on making exceptions.
Statutory rules on participating in the General Meeting of shareholders In line with the legal provisions, any shareholder with voting rights may have his/her shares represented at any General Meeting by another person authorised in writing or by corporate bodies, independent proxies or proxies for deposited shares. Such representatives need not be shareholders.
Statutory quorums 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.
Convocation of the General Meeting of shareholders The statutory rules on the convocation of the General Meeting of shareholders correspond with the legal provisions. Accordingly, the General Meeting of shareholders is summoned by the Board of Directors at least 20 days before the date of the meeting by notice published in the Swiss Official Gazette of Commerce.
Extraordinary General Meetings may be called by resolution of the General Meeting or the Board of Directors, or by shareholders with voting power, provided they represent at least 10% of the share capital.
Agenda The Board of Directors announces the agenda. Shareholders with voting power whose combined holdings represent shares with a nominal value of at least CHF 100 000 may, no later than 45 days before the date of the meeting, demand that matters be included in the agenda. Such demands must be in writing and must specify the items and the proposals to be submitted.
Changes of control and defence measures Duty to make an offer Swiss Re has not taken any defence measures against takeover attempts. The Board of Directors is of the opinion that the best protection is a fair valuation of the shares. It believes in the efficiency of a free market, rather than relying on defence measures that normally have a long-term negative effect on the share price development.
Clauses on change of control 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.
David J. A. Law and Dawn M. Kink became lead auditors responsible for the existing auditing mandate as of 1 January 2004 and 1 September 2006, respectively. David J. A. Law will rotate upon completion of the 2010 audit. Alex Finn will take over the lead auditor role in 2011.
Audit-related fees comprise, among other things, review of the Economic Value Management report, certain accounting advice, information system reviews, and reviews of internal controls.
Other fees include permitted advisory work related to a range of projects, but are primarily related to accounting advice.
Cooperation and flow of information between the auditor and the Audit Committee The Audit Committee liaises closely with the auditor. The lead auditors participate as advisers in all meetings of the Audit Committee. For more information about the meetings of the Audit Committee, see page 68.
Audit fees The audit fees and the fees paid to the external auditor in respect of non-audit services are annually reviewed by the Audit Committee.
Special Auditor At the Annual General Meeting of shareholders of 7 April 2010, OBT AG was elected for the first time as a Special Auditor for a term of three years. The election was based on a new provision of the Articles of Association. The Special Auditor performs certain audits required by Swiss law in cases of capital increases. Current standards of best practice concerning the independence of auditors require that these audits be conducted by an audit firm other than the principal auditors. OBT AG did not perform any Swiss Re-related auditing activity in the reporting year.
Swiss Re maintains a close relationship with the financial community and the broader public by using all available communication channels. Comprehensive information about the Group is provided on Swiss Re’s website. Important corporate news is announced on an ad hoc basis and made available on the Group’s website. Swiss Re’s ad hoc disclosures and other corporate news can be subscribed to electronically via Swiss Re’s news service on the website at www.swissre.com/subscription. For Swiss Re’s contact details, see Business contact details on page 222.
Date Event 17 February 2010 annual results 24 March Publication of 2010 Annual Report 25 March Investors’ Day 15 April 147th Annual General Meeting 5 May First quarter 2011 results 4 August Second quarter 2011 results 3 November Third quarter 2011 results 9 December Investors’ Day
Compensation / Introduction 86 Report from the Compensation Committee 88 Activity review 91 Compensation framework 96 Decisions by the Compensation Committee
Report from the Compensation Committee Compensation practices in the financial services sector have been at the centre of public attention over the past few years and have been the object of increased scrutiny by regulators at all levels. At Swiss Re, we continue to take these concerns very seriously and the Compensation Committee conducts comprehensive reviews of the Groupʼs global compensation approach, focusing on alignment of employee and shareholder interests and avoiding incentives for undue risk taking, while ensuring that Swiss Re remains an attractive employer for highly skilled professionals.
Consistent with the regulatorsʼ guidance on evaluating “economic profit which takes into account the cost of capital” (risk-adjusted metric), the Board of Directors has been using economic value management (EVM) as the Groupʼs key metric for assessing annual business performance and for determining the subsequent payout of deferred compensation after a three-year measurement period. The EVM model is Swiss Reʼs integrated economic measurement and steering framework used for planning, pricing and managing its business. This ensures that rewards are linked to the true risk-adjusted economic profit contributions rather than GAAP accounting results, which would not take the cost of capital sufficiently into account. In addition, other quantitative and qualitative evaluation factors – such as underwriting discipline and compliance with risk limits – are also taken into consideration.
The Long-term Incentive is a further element of variable compensation, which serves as a forward-looking incentive at the top executive level. This plan truly aligns compensation paid to executives with shareholder returns using the performance metrics of return on equity and earnings per share over a three-year period.
Swiss Re subscribes to the principles of EVM for steering its worldwide business. In line with the economic value management concept, the Compensation Committee focuses on the economic profit of the entire company as well as of the individual lines of business when assessing financial performance. The Compensation Committee remains convinced that our incentive structure which is driven by the companyʼs value creation is fully in line with the long-term interests of our shareholders. The full EVM report covering the financial business year 2010 is available at: www.swissre.com/investors, released on 24 March 2011.
Activity review Summary 2010 ̤ Swiss Re generated an EVM income before capital costs of USD 3181 million during 2010. Capital costs released were USD 1854 million and the EVM profit after capital costs was USD 1327 million. In light of the sustained earnings power demonstrated by Swiss Re in 2010, the Compensation Committee approved an aggregate amount of CHF 410 million for annual variable compensation for the Group. An amount of approximately CHF 65 million thereof remains deferred for three years and continues to be measured against sustained business performance.
̤ From 7 April 2010, Carlos E. Represas joined the Board of Directors and became a member of the Compensation Committee.
̤ In May 2010, the first payment under the Value Alignment Incentive plan became due. This deferred compensation plan was introduced in 2006 and is designed to align variable compensation with the longer-term sustained performance of the business over time.
̤ At its June 2010 meeting, the Compensation Committee approved the revised compensation policy, which further improves the delineation of authorities and responsibilities between the Board of Directors and executive management.
̤ Throughout 2010, the Compensation Committee continued to monitor regulatory developments and adjusted the Groupʼs compensation practices in line with current regulatory requirements.
̤ In 2010, Swiss Re reintroduced Minimum Stock Ownership guidelines for the Group Management Board.
The Compensation Committee held six meetings during the reporting year. The tasks and priorities were captured in a rolling agenda, which reflects the standing items within the Compensation Committeeʼs remit. In addition to such standing items, the Compensation Committee discussed matters relating to compensation policy, labour market trends as well as regulatory directives.
June ̤ Compensation policy; ̤ Compensation approach for control functions; ̤ Analysis of Executive Committee membersʼ compensation in 2009 relative to peers; ̤ Update on regulatory developments.
December ̤ Group Management Board membersʼ compensation benchmarking; ̤ Long-term Incentive evaluation process; ̤ Initial performance assessment of the company and top management during 2010.
The first meeting of the Committee in January 2010 covered the pay-for-performance assessment for 2009. The Compensation Committee then turned its attention to targets for 2010 at its meeting in February. The targets consist of a set of financial and qualitative metrics. Financial objectives are based on the financial plan, and the companyʼs ability to generate economic value (as expressed in economic value management) is the main financial performance measure. Furthermore the performance targets for the Long-term Incentive 2010 to 2012 were agreed. This Long-term Incentive is subject to stretched targets, which were set at 10% above the respective three-year plan.
Swiss Reʼs compensation policy was refined over several months in close co-operation with management. Although the core structure of the compensation elements remained unchanged, the updated policy provides significantly improved clarity about the specific levels of delegated authority, segregation of authority and oversight in matters of compensation. This will facilitate a compensation culture that remains aligned with labour market developments as well as evolving best practices and regulatory expectations. The Compensation Committee intends to review the appropriateness of the compensation policy on an annual basis.
The approach contributes to the success of the business by: ̤ supporting a culture of high performance with a clear focus on risk-adjusted financial results; ̤ ensuring a clear link between business results, individual contribution, compliance and reward; ̤ supporting Swiss Reʼs commitment to key talent; ̤ aligning the interests of employees with those of Swiss Reʼs shareholders; and ̤ fostering compliance and supporting sensible risk taking.
A range of incentive programmes have been designed to reflect the long-term dynamics of the business. Both the Value Alignment Incentive plan and the Long-term Incentive plan aim to reward sustained corporate success as opposed to short-term results. The use of share-based arrangements ensures a direct link between shareholder and employee interests. A significant portion of senior managementʼs compensation is tied to the organisationʼs long-term performance.
The Compensation Committee retains external advisers to support its work. The human resources consulting firm Mercer takes this role on specific compensation issues, providing information about remuneration trends and timely advice on executive compensation issues. Niederer Kraft & Frey provide legal advice, mainly about specific aspects of compliance. While Mercer and Niederer Kraft & Frey are engaged directly by the Compensation Committee, both firms occasionally provide other services to the firm. The Compensation Committee may also, from time to time, appoint other external advisers.
Total amount for annual CEO Compensation Board of Directors performance incentive Committee payments Total amount for Long-term CEO Compensation Board of Directors Incentive plans Committee Remuneration of the Compensation Board of Directors members of the Board of Committee Directors (incl. Chairman and Vice Chairman) Compensation of the Chairman Compensation Board of Directors Chief Executive Officer Committee Individual compensation CEO Compensation of the members of the Committee Executive Committee (excl. CEO)
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 risk-aligned performance of the Group, the business function, and the individual.
Swiss Re aims for total compensation that is competitive with that for equivalent positions in comparable companies in each of its markets.
The following illustration shows a summary of the compensation elements, which are explained in the section below: Base salary and benefits Base salary represents the regular payments made to an employee as compensation for carrying out their role.
The API for each yearʼs performance is paid in March, after the publication of the Groupʼs annual results for that year.
Value Alignment Incentive The Value Alignment Incentive (VAI), the deferred compensation component, was introduced in 2006 and brought a time component into variable compensation. This supports the business model of the Group by aligning a substantial portion of the variable compensation with sustained long-term results. The aim is to ensure that the ultimate value of the deferred variable compensation through VAI, though awarded for short-term performance, is significantly affected by the longer-term performance of the line of business and/or the entire Group.
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 companyʼs goals and shareholdersʼ interests.
Sum of severance payments 5 5 Sum of sign-on payments – 0
Cash API 20091 n. a –202 –20 1 Plans were granted in prior years. 2 Reversal of overaccrual in prior year.
The variable compensation awarded to all members of the Executive Committee totalled CHF 19.8 million for 2010, compared to CHF 23.4 million in 2009. As explained in the previous section, a material part of variable compensation is deferred for three years through VAI; the remainder of variable compensation can be taken either in cash or in incentive shares. The following table covers payments to eight members, including the CEO, compared to nine members in 2009. This also takes changes in the composition of the Executive Committee into account.
The 2010 values shown in the table above reflect the compensation paid to seven members for the full year, and one member who joined in the last quarter. The 2009 values reflect the compensation paid to six members for the full year, two members who left during the first half of the year, and one member who joined in the second quarter of the year.
In addition to these values which relate to the performance year 2010, a release of deferred compensation from the VAI 2006 (awarded in 2007) took place in spring 2010. The payout under this release of deferred compensation exceeded the value reported in the Compensation Report 2006 by CHF 2.2 million. However, the LTI awarded in 2007 expired in March 2010 without generating any value.
Base salary and allowances 8 822 8 499 Cash variable pay for performance 11 525 6 906
Compensation due to two members leaving in 2009 1 378 Funding of pension benefits 2 582 1 215 1 Includes mark-up on nominal value, which will be paid out at vesting after three years. In 2010 the mark-up was reduced from 25% to 15%.
Long-term Incentive Performance metric ROE and EPS Measurement period 3 years Settlement type Shares For each Long-term Incentive (LTI) plan year, final payment, if any, occurs at the end of the respective three-year performance measurement period. The plan includes a payout factor which can vary between 0 and 2, driven by average return on equity (ROE) and earnings per share (EPS) over the vesting period. The final payment in respect of each plan year will depend on whether performance targets, expressed by average ROE and EPS, have been achieved over the plan period and the share price at conclusion. The LTI plan is denominated in Swiss Re shares.
In 2010 the Group revised the valuation methodology of the payout factor to a stochastic model which considers the likelihood of achieving the performance targets. Basis inputs for the model continue to be the Groupʼs plan targets, however, the model considers the probability of meeting such targets. The likelihood is measured by reference to external analystsʼ expectations. Group plan targets and analystsʼ expectations are equally weighted in the model. This valuation approach has been applied to all unvested plans as of 31 December 2010. Furthermore, the model will discount the share price at grant to reflect dividend foregone during the vesting period.
The LTI grants from 2006 and 2007 expired in March 2009 and March 2010 and resulted in nil value, as LTI plan performance targets had not been achieved. Similarly, the 2008 LTI plan will not result in a payment when it expires in March 2011, based on the performance triggers in place for this plan year. This historic LTI performance reflects the direct alignment of the award with shareholder interests and company performance.
The higher the total variable annual compensation, the greater the portion of variable compensation that remains at risk through deferral in the VAI. For most employees, 50% of the variable annual compensation in excess of USD 100 000 is deferred, although the deferred amount is capped at 40% of the total variable compensation. For members of the Group Management Board 40% of total variable annual compensation is deferred, for members of the Executive Committee the deferral rate is 45% and for the CEO 50%.
The first award of VAI was made in 2007 and related to the performance year 2006. The deferral period of this first award ended in March 2010 and most of the underlying lines of business yielded a positive payout. The average payout was 124% of the initially deferred amounts for members of the Executive Committee across the Group. This was due to the fact that prior-year reserving quality had proven to be positive over the deferral period.
The LTI represents the expected value of the LTI award made in March 2011. This LTI may lead to a payment in March 2014, subject to the Companyʼs reported financial performance from 2011 to 2013. Up to 2009, the LTI disclosure reflected the award made during the reporting year. From this year, the disclosure is accelerated to reflect the LTI decision taken at the same time as the API and the VAI.
Base salary and allowances 1 720 1 783 Cash variable pay for performance 2 500 0
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: Stefan Lippe, Chief Executive Officer 432 550 David J. Blumer, Chief Investment Officer 241 550 Agostino Galvagni, CEO Corporate Solutions 113 300 Brian Gray, Chief Underwriting Officer 223 700 Michel M. Liès, Chief Marketing Officer 231 150 George Quinn, Chief Financial Officer 184 950 Raj Singh, Chief Risk Officer 92 500
Variable-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 floating 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 2010 a total of CHF 1.15 million was paid to former members of the Executive Committee. This figure relates to three individuals and covers commitments of the company which arose following the retirement of the respective executives.
The fees for the members of the Board of Directors reflect differing levels of responsibility and time commitment. The individual levels of pay therefore differ considerably. Certain committees, such as the Audit Committee and the Investment Committee, meet more frequently and require more preparation time than other committees. Chairpersons of the committees devote even more time to their task. This can be as much as 50% of their working time over the year. Overall, their contribution is extensive.
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, the fees for the Board of Directors are determined in advance at the start of the financial year. The fee level is reviewed annually to ensure that it remains appropriate.
Aggregate compensation for the members of the Board of Directors The aggregate compensation for members of the Board of Directors was: CHF thousands 2009 2010
Fees and allowances in cash 4 922 6 781 Fees in blocked shares 1 880 1 592
The Chairman and the Vice Chairman receive half of their respective overall fees in the form of a three-year performance share plan, which is measured against total shareholder return (TSR). For 2010, these performance shares were granted at a reference price of CHF 53.60 (2009: CHF 36.00), the market price at the time the Board approved the award.
Board fees are set at the beginning of each year and as such are not directly correlated with the annual performance of the company.
Walter B. Kielholz has been Chairman since May 2009. In recognition of the difficulties faced by the company in the financial year 2008, he elected to reduce his 2009 fee by 50% of the compensation for 2008, when his compensation as Vice Chairman amounted to CHF 2.5 million, before the waiver of fees.
Compensation for the remaining members of the Board of Directors The remaining members of the Board of Directors receive a mandatory 40% of their fee in Swiss Re shares, with a four-year blocking period.
Walter B. Kielholz, Chairman 149 619 Mathis Cabiallavetta, Vice Chairman 1 961 Jakob Baer, Chairman of the Audit Committee 29 001 Raymund Breu, Member 29 013 Raymond K.F. Chʼien, Member 7 943 John R. Coomber, Chairman of the Finance and Risk Committee 129 526 Rajna Gibson Brandon, Member 19 433 Malcolm D. Knight, Member 1 502 Hans Ulrich Maerki, Member 19 215 Carlos E. Represas, Member 3 502 Jean-Pierre Roth, Member 1 129 Robert A. Scott, Chairman of the Compensation Committee 20 395
Loans to members of the Board of Directors The mortgage is secured against real estate and its terms and conditions are the same as those available to all of Swiss Re employees in Switzerland. It carries a fixed rate and has a maturity of five years. The interest rate corresponds to the five-year Swiss franc swap rate plus a margin of 10 basis points at the time of fixing.
Financial statements 111 Group financial statements 111 Income statement 112 Balance sheet 114 Statement of shareholders’
Net realised investment gains/losses (total impairments for the years ended 31 December were 3 450 in 2009 and 683 in 2010, of which 1 784 and 423, respectively, were recognised in earnings) 2, 15 875 2 783
Income attributable to non-controlling interests –154 Net income after attribution of non-controlling interests 699 1 980
Acquired present value of future profits 5 6 054 4 565
Liabilities Unpaid claims and claim adjustment expenses 7 68 412 64 690 Liabilities for life and health policy benefits 3, 8 39 944 39 551
Additional paid-in capital 10 472 10 530 Treasury shares, net of tax –1 477 –1 483
Total liabilities and equity 232 748 228 403 1 The Group changed its reporting currency from CHF to USD. Please refer to Note 1. 2 The CPCI was reclassified from equity to short-term debt upon termination in the fourth quarter of 2010. Please refer to Note 9 Earnings per share for details on the accounting for the CPCI.
Convertible perpetual capital instrument Balance as of 1 January 0 2 670
Common shares Balance as of 1 January 34 35 Issue of common shares 1 Balance as of period end 35 35
5 The Group adopted a new accounting pronouncement, ASU No. 2009-17 (FAS167), an update to Topic 810 – Consolidation, as of 1 January 2010, which resulted in the full consolidation of certain VIEs. This resulted in a transition impact to retained earnings of USD 60 million and to net unrealised gains/losses of USD –35 million, and other balance sheet items. Please refer to Note 16 for more details.
Total comprehensive income before attribution of non-controlling interests 2 561 3 029
Comprehensive income attributable to non-controlling interests –154 Total comprehensive income attributable to common shareholders 2 561 2 875 1 The Group changed its reporting currency from CHF to USD. Please refer to Note 1. 2 After interest on convertible perpetual capital instrument.
Nature of operations The Swiss Re Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company Ltd (the parent company, referred to as “Swiss Re Zurich”) and its subsidiaries (collectively, the “Swiss Re Group” or the “Group”). The Group provides reinsurance and other related products and services to insurance companies, direct clients and others worldwide through reinsurance brokers and a network of offices in over 20 countries.
From 1 January 2010, Swiss Re changed its presentation currency from Swiss francs (CHF) to US dollars (USD). US dollar is the currency in which a significant part of the reinsurance business of the Group is written and assets are invested. Comparative periods have been retranslated at the closing rates for balance sheet items and at average rates for income statement items.
Following the acquisition of certain private equity funds in the first quarter of 2010, the Group presents interests attributable to non-controlling owners of its subsidiaries in its statement of equity as a separate component. The income attributable to the non-controlling interests is presented as a deduction from net income on the face of the income statement.
Principles of consolidation The Group’s financial statements include the consolidated financial statements of Swiss Re Zurich and its subsidiaries. Voting entities which Swiss Re Zurich directly or indirectly controls through holding a majority of the voting rights are consolidated in the Group’s accounts. Variable interest entities (VIEs) are consolidated when the Group is the primary beneficiary. The Group is the primary beneficiary when it has power over the activities that impact the VIE’s economic performance and at the same time has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. 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.
Investments The Group’s investments in fixed income and equity securities are classified as available-for-sale (AFS) or trading. Fixed income securities AFS and equity securities AFS are carried at fair value, based on quoted market prices, with the difference between original cost and fair value being recognised in shareholders’ equity. Trading fixed income and equity securities are carried at fair value with unrealised gains and losses being recognised in earnings.
The Group also designates non-derivative monetary financial instruments as a hedge of the foreign currency exposure of its net investment in certain foreign operations. From the inception of the hedging relationship, remeasurement gains and losses on the designated nonderivative monetary financial instruments and translation gains and losses on the hedged net investment are reported as translation gains and losses in shareholdersʼ equity.
Deferred acquisition costs Acquisition costs, which vary with, and are primarily related to, the production of new insurance and reinsurance business, are deferred to the extent they are deemed recoverable from future gross profits. Deferred acquisition costs consist principally of commissions. Deferred acquisition costs for short-duration contracts are amortised in proportion to premiums earned. Future investment income is considered in determining the recoverability of deferred acquisition costs for short-duration contracts. Deferred acquisition costs for long-duration contracts are amortised over the life of underlying contracts. Deferred acquisition costs for universal-life and similar products are amortised based on the present value of estimated gross profits. Estimated gross profits are updated quarterly.
Admin Re® blocks of business can be acquired in different legal forms, either through an acquisition of an entityʼs 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.
Unpaid claims and claim adjustment expenses Liabilities for unpaid claims and claim adjustment expenses for property and casualty reinsurance contracts are accrued when insured events occur and are based on the estimated ultimate cost of settling the claims, using reports and individual case estimates received from ceding companies. A provision is also included for claims incurred but not reported, which is developed on the basis of past experience adjusted for current trends and other factors that modify past experience. The establishment of the appropriate level of reserves is an inherently uncertain process involving estimates and judgments made by management, and therefore there can be no assurance that ultimate claims and claim adjustment expenses will not exceed the loss reserves currently established. These estimates are regularly reviewed, and adjustments for differences between estimates and actual payments for claims and for changes in estimates are reflected in income in the period in which the estimates are changed or payments are made.
Universal life-type contracts are long-duration insurance contracts, providing either death or annuity benefits, with terms that are not fixed and guaranteed.
Amounts assessed against policyholders for mortality, administration and surrender are shown as fee income. Amounts credited to policyholders are shown as interest credited to policyholders. Investment income and realised investment gains and losses allocable to policyholders are included in net investment income and net realised investment gains/losses.
Reinsurance ceded The Group uses retrocession arrangements to increase its aggregate underwriting capacity, to diversify its risk and to reduce the risk of catastrophic loss on reinsurance assumed. The ceding of risks to retrocessionaires does not relieve the Group of its obligations to its ceding companies. The Group regularly evaluates the financial condition of its retrocessionaires and monitors the concentration of credit risk to minimise its exposure to financial loss from retrocessionaires’ insolvency. Premiums and losses ceded under retrocession contracts are reported as reductions of premiums earned and claims and claim adjustment expenses. Amounts recoverable for ceded short- and longduration contracts, including universal life-type and investment contracts, are reported as assets in the accompanying consolidated balance sheet.
Share-based payment transactions The Group has a long-term incentive plan, a fixed option plan, a restricted share plan, and an employee participation plan. These plans are described in more detail in Note 12. The Group accounts for share-based payment transactions with employees using the fair value method. Under the fair value method, the fair value of the awards is recognised in earnings over the vesting period.
Financial Review 2010 Swiss Re published its unaudited Financial Review for the year 2010 on 17 February 2011. In the Financial Report, the Group has revised the disclosure on unpaid claims and claims adjustment expenses. The split between claims incurred for the current year and the prior year has been updated accordingly. The change had no impact on the net income or shareholders’ equity.
Recent accounting guidance In June 2009, the Financial Accounting Standards Board (“FASB”) issued “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (VIEs)” (ASU No. 2009-17), an update to Topic 810 – Consolidation. This ASU requires companies to assess VIEs under a new method for consolidation. The Group adopted this new standard as of 1 January 2010. Please refer to Note 16 for further information.
In February 2010, the FASB issued “Amendments to Certain Recognition and Disclosure Requirements”(ASU No. 2010-9), an update to Topic 855 – Subsequent Events. As the Swiss Re Group is not a SEC filer, only the clarification on the reissuance disclosure provisions related to subsequent events applies to the Group. The Group adopted this standard as of the first quarter of 2010. It did not have an impact on the Group’s financial statements.
Proceeds from sales of fixed income securities available-for-sale amounted to USD 176 286 million and USD 118 947 million for 2009 and 2010, respectively. Sales of equity securities available-for-sale were USD 559 million and USD 105 million for 2009 and 2010, respectively.
Investments trading 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: Maturity of fixed income securities available-for-sale 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 2009 and 2010, USD 18 181 million and USD 13 107 million, respectively, of fixed income securities available-for-sale were callable.
Assets pledged As of 31 December 2009 and 2010, investments with the carrying value of USD 1 706 million and USD 1 769 million, respectively, were on deposit with regulatory agencies in accordance with local requirements.
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 17 622 933 129 17 751 933 States of the United States and political subdivisions of the states 26 1 16 3 42 4
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 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.
Corporate debt securities mainly include US and European investment-grade positions, which are priced on the basis of quotes provided by third-party pricing vendors and first utilise valuation inputs from actively traded securities, such as bid prices, bid spreads to Treasury securities, Treasury curves, and same or comparable issuer curves and spreads. Issuer spreads are determined from actual quotes and traded prices and incorporate considerations of credit/default, sector composition, and liquidity and call features. Where market data is not available, valuations are developed based on the modelling techniques that utilise observable inputs and option adjusted spreads and incorporate considerations of the security’s seniority, maturity and the issuer’s corporate structure.
The category Other ABS primarily includes debt securitised by credit card, student loan and auto loan receivables. Pricing inputs for these securities also focus on capturing, where relevant, collateral quality and performance, payment patterns, and delinquencies.
The Group holds both exchange-traded and over-the-counter (OTC) interest rate, foreign exchange, credit, and equity derivative contracts for hedging and trading purposes. The fair values of exchange-traded derivatives measured using observable exchange prices are classified in level 1. Long-dated contracts may require adjustments to the exchange-traded prices which would trigger reclassification to level 2 in the fair value hierarchy. OTC derivatives are generally valued by the Group based on the internal models, which are consistent with industry standards and practices, and use both observable (dealer, broker or market consensus prices, spot and forward rates, interest rate and credit curves and volatility indices) and unobservable inputs (adjustments for liquidity, inputs derived from the observable data based on the Group’s judgments and assumptions).
The Group’s OTC interest rate derivatives primarily include interest rate swaps, futures, options, caps and floors, and are valued based on the cash flow discounting models, which generally utilise as inputs observable market yield curves and volatility assumptions.
The Group’s OTC credit derivatives include index and single-name credit default swaps, as well as more complex structured credit derivatives. Plain vanilla credit derivatives, such as index and single-name credit default swaps, are valued by the Group based on the models consistent with the industry valuation standards for these credit contracts, and primarily utilising observable inputs published by market data sources, such as credit spreads and recovery rates. These valuation techniques warrant classification of plain vanilla OTC derivatives as level 2 financial instruments in the fair value hierarchy.
Total assets at fair value 42 654 79 496 11 027 –8 961 124 216
Liabilities for life and health policy benefits –293 –293 Accrued expenses and other liabilities –594 –1 333 –1 927 Total liabilities at fair value –1 052 –8 891 –5 331 6 879 –8 395 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.
Debt securities issued by US government and government agencies 16 043 3 041 19 084 Debt securities issued by non-US governments and government agencies 34 438 34 438
Interest rate contracts –402 –3 579 –825 –4 806 Foreign exchange contracts –41 –1 103 –72 –1 216 Derivative equity contracts –123 –531 –56 –710 Credit contracts –317 –1 007 –1 324 Other contracts –11 –119 –2 572 –2 702
Realised/unrealised gains/losses: Included in other comprehensive income –15 293 181 16 –3 189 –25 39 675
Liabilities Balance as of 1 January 2009 –464 –16 833 –17 297
Closing balance as of 31 December 2009 –293 –5 038 –5 331
Debt securities issued by non-US governments and government agencies Corporate debt securities
Closing balance as of 31 December 2010 0 1 748 7 3 123 203 839 162 0 1 214 202 1 411 5 912
Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) were as follows: Other assets measured at net asset value Other assets measured at net asset value as of 31 December 2009 and 2010, respectively, were as follows: The hedge fund investments employ a variety of strategies including global macro, relative value, and event-driven strategies across various asset classes including long/short equity and credit investments.
Fixed income securities trading 142 –23 Equity securities trading 379 –17 GMDB reserves 171 22 Total 692 –18
Fair values and notional amounts of derivative financial instruments As of 31 December 2009 and 2010, the fair values and notional amounts of the derivatives outstanding were as follows: As of 31 December 2009 USD millions
Non-hedging activities The Group primarily uses derivative financial instruments for risk management and trading strategies. Gains and losses of derivative financial instruments not designated as hedging instruments are recorded in net realised investment gains/losses in the income statement. For the years ended 31 December 2009 and 2010, the gains and losses of derivative financial instruments not designated as hedging instruments were as follows: Hedging activities The Group designates certain derivative financial instruments as hedging instruments. The designation of derivative financial instruments is primarily used for overall portfolio and risk management strategies. As of 31 December 2009 and 2010, the following hedging relationships were outstanding: Fair value hedges The Group enters into interest rate and foreign exchange swaps to reduce the exposure to interest rate and foreign exchange volatility for certain of its issued debt positions. These derivative instruments are designated as hedging instruments in qualifying fair value hedges. Gains and losses on derivative financial instruments designated as fair value hedging instruments are recorded in net realised investment gains/losses in the income statement. For the years ended 31 December 2009 and 2010, the gains and losses attributable to the hedged risks were as follows: Hedges of the net investment in foreign operations The Group designates non-derivative monetary financial instruments as hedging the foreign currency exposure of its net investment in certain foreign operations.
Credit risk-related contingent features Certain derivative instruments held by the Group contain provisions that require its debt to maintain an investment-grade credit rating. If the Groupʼs credit rating were downgraded or no longer rated, the counterparties could request immediate payment, guarantee or an ongoing full overnight collateralisation on derivative instruments in net liability positions.
The following tables show the fair values and the maximum potential payout of the credit derivatives written/sold as of 31 December 2009 and 2010, categorised by the type of credit derivative and credit spreads, which were based on external market data. The fair values represent the gross carrying values, excluding the effects of netting under ISDA master agreements and cash collateral netting. The maximum potential payout is based on the notional values of the derivatives and represents the gross undiscounted future payments the Group would be required to make, assuming the default of all credit derivativesʼ underlyings.
Total credit derivatives written/sold –435 11 877 12 225 747 24 849
The decrease in PVFP in the current year is primarily due to the impact of the US individual life retrocession agreement announced in the first quarter of 2010.
The percentage of PVFP which is expected to be amortised in each of the next five years is 8%, 7%, 8%, 7% and 7%.
2009 DAC PVFP USD millions Non-Life Life & Health Total Total
Opening balance as of 1 January 2009 1 086 2 964 4 050 5 768 Cumulative effect of adoption of FSP SFAS 115-2 5 Cumulative effect of adoption of SFAS 163 –23 –23
As of 1 January 2010, the Group adopted ASU No.2009-17 relating to consolidation of variable interest entities. For more information on the transition impact on debt, please refer to Note 16.
The Group’s debt as of 31 December 2009 and 2010 was as follows: The Group uses debt for general corporate purposes and to fund discrete pools of operational leverage and financial intermediation assets. Operational leverage and financial intermediation are subject to asset and liability matching resulting in little to no risk that the assets will be insufficient to service and settle the liabilities. Debt used for operational leverage and financial intermediation is treated as operational debt and excluded by the rating agencies from financial leverage calculations. Certain debt positions are limited recourse, meaning the debtors’ claims are limited to assets underlying the financing. As of 31 December 2009 and 2010, debt related to operational leverage and financial intermediation amounted to USD 20.4 billion (thereof USD 6.0 billion limited recourse) and USD 17.2 billion (thereof USD 7.5 billion limited recourse), respectively.
Maturity of long-term debt As of 31 December 2009 and 2010, long-term debt as reported above had the following maturities: USD millions 2009 2010
Various Payment undertaking agreements various USD 1 025 various 1 248 Various Insurance-linked placements2 various USD 366 various 373 Various Insurance-linked placements2 various EUR 227 various 311 Total senior debt as of 31 December 2010 9 566 Total senior debt as of 31 December 2009 8 492 1 Assumed in the acquisition of Insurance Solutions.
2 These instruments were consolidated as of 1 January 2010 under ASU No.2009-17 relating to the consolidation of variable interest entities. For more information, refer to Note 16.
Additional funding resources As additional resources to meet funding requirements, the Group has committed repurchase facilities in place with various banks.
152 Swiss Re 2010 Financial Report 7 Unpaid claims and claim adjustment expenses
Foreign exchange 1 802 –562 Effect of acquisitions, disposals, new retroactive reinsurance and other items –2 077 158
Deferred expense on retroactive reinsurance 455 401 1 The Group has updated the allocation of claims incurred between current and prior year for 2010 compared to the information published in the financial review on 17 February 2011. Please refer to the section “Financial Review” in Note 1 “Organisation and summary of significant accounting policies” on page 124 for further information.
Asbestos and environmental claims exposure The Group’s obligation for claims payments and claims settlement charges also includes obligations for long-latent injury claims arising out of policies written prior to 1985, in particular in the area of US asbestos and environmental liability.
At the end of 2010, the Group carried net reserves for US asbestos, environmental and other long-latent health hazards equal to USD 2 226 million. During 2010, the Group incurred net losses of USD 1 million and paid net against these liabilities USD 27 million.
Claims and claim adjustment expenses; life and health benefits –8 336 –8 639 –16 975 –7 254 –8 236 –15 490
Sales inducements are offered to contract holders of certain universal life and annuity products. The amounts deferred equal the sum of persistency bonuses credited to the account value plus the non-interest related increase in the persistency bonus liability. These costs are amortised in constant proportion to estimated gross profits over the life of the contract, using the credited interest rates as the discount rate. The unamortised balance of sales inducements as of 1 January 2009 and 2010 was USD 901 million and USD 1 035 million, respectively. In the course of 2009 and 2010, USD 272 million and USD 234 million, respectively, of sales inducements were deferred and USD 245 million and USD 219 million, respectively, were amortised. The unamortised balance of sales inducements as of 31 December 2009 and 2010 was USD 1 035 million and USD 1 019 million, respectively.
USD millions Non-Life Life & Health Total Non-Life Life & Health Total
Liabilities Unpaid claims and claim adjustment expenses 57 015 11 397 68 412 53 345 11 345 64 690 Life and health policy benefits 39 944 39 944 39 551 39 551
Financial statements / Notes to the Group financial statements 9 Earnings per share
Dividends are declared in Swiss francs. For the years ended 31 December 2009 and 2010, the Group ś dividends per share were CHF 0.10 and CHF 1.00, respectively.
Income tax at the Swiss statutory tax rate of 21.0% 191 562 Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates –110 39 Impact of foreign exchange movements –17 65 Disallowed expenses 10 2 Tax exempt income/dividends received deduction –45 –47 Change in valuation allowance 67 68 Basis differences in subsidiaries 37 0 Change in statutory tax rates 19 14 Change in liability for unrecognised tax benefits including interest and penalties 115 –50 Life tax adjustments –6 14 Other, net –40 –126
As of 31 December 2010, the Group had USD 13 013 million net operating tax loss carryforwards, expiring as follows: USD 42 million in 2011, USD 9 million in 2012, USD 0 million in 2013, USD 7 605 million in 2014 and beyond and USD 5 357 million never expire. The Group also had capital loss carryforwards of USD 485 million, expiring as follows: USD 0 million in 2011, USD 0 million in 2012, USD 177 million in 2013, USD 202 million in 2014 and beyond and USD 106 million never expire. Net operating tax losses of USD 438 million were utilised or expired during the period ended 31 December 2010.
Gross deferred tax asset 8 270 7 406 Valuation allowance –1 603 –1 602
Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such benefit for the period ending 31 December 2010 was USD 21 million (USD 23 million for the period ending 31 December 2009). As of 31 December 2009 and 31 December 2010, USD 237 million and USD 216 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2010 is included within the deferred and other non-current taxes section reflected above and in the balance sheet.
During the year, certain tax positions and audits in Switzerland, the United Kingdom and the United States were effectively settled.
Additions based on tax positions of current year –21 69 Additions for tax positions of prior years 99 –126 Reductions for tax positions of prior years –262 46 Settlements –1 –147 Balance as of 31 December 1 138 980
Benefit obligation as of 1 January 2 656 1 543 305 4 504
Amendments –1 –1 Actuarial gains/losses –20 253 –13 220 Benefits paid –201 –64 –13 –278
Amounts recognised in the balance sheet, as of 31 December 2009 and 2010, respectively, were as follows: 2009 USD millions Swiss plan Foreign plans Other benefits Total
Non-current assets 96 96 Current liabilities –1 –15 –16 Non-current liabilities –98 –219 –315 –632 Net amount recognised –98 –124 –330 –552
Amendments –7 –7 Actuarial gains/losses 157 –18 12 151 Benefits paid –149 –61 –13 –223 Employee contribution 20 20 Acquisitions/disposals/additions 1 –3 –2 Effect of curtailment and termination benefits 3 –4 –1 Effect of foreign currency translation 317 –44 17 290 Benefit obligation as of 31 December 3 202 1 902 330 5 434
Benefits paid –149 –61 –14 –224 Employee contribution 20 20 Acquisitions/disposals/additions 3 –1 2 Effect of foreign currency translation 306 –38 268 Fair value of plan assets as of 31 December 3 104 1 778 0 4 882 Funded status –98 –124 –330 –552
Amounts recognised in accumulated other comprehensive income, gross of tax, in 2009 and 2010, respectively, were as follows: Components of net periodic benefit cost The components of pension and post-retirement cost for the years ended 31 December 2009 and 2010, respectively, were as follows: 2009 USD millions Swiss plan Foreign plans Other benefits Total
Net gain/loss 526 312 –165 673 Prior service cost/credit 50 –126 –76
Expected return on assets –137 –101 –238 Amortisation of: Net gain/loss 9 7 –12 4 Prior service cost 7 –13 –6 Effect of settlement, curtailment and termination 8 –1 –11 –4 Net periodic benefit cost 64 37 –14 87
Expected return on assets –126 –106 –232 Amortisation of: Net gain/loss 10 16 –11 15 Prior service cost 6 –11 –5 Effect of settlement, curtailment and termination 3 –1 –1 1 Net periodic benefit cost 59 22 –4 77
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was USD 4 481 million and USD 5 035 million as of 31 December 2009 and 2010, respectively.
Pension plans with an accumulated benefit obligation in excess of plan assets were as follows: USD millions 2009 2010
Net gain/loss 155 –61 11 105 Prior service cost/credit –7 –7 Amortisation of: Net gain/loss –10 –19 11 –18 Prior service cost –6 11 5 Exchange rate gain/loss recognised during the year –8 –8 Total recognised in other comprehensive income, gross of tax 139 –88 26 77 Total recognised in net periodic benefit cost and other comprehensive income, gross of tax 198 –66 22 154
Assumed medical trend rates at year end Medical trend – initial rate 6.9% 6.5% Medical trend – ultimate rate 4.8% 4.7% Year that the rate reaches the ultimate trend rate 2015 2015
Effect on total of service and interest cost components 1 –1 Effect on post-retirement benefit obligation 30 –25
Equity securities: Equity securities held for proprietary investment purposes 783 592 1 375
Residential mortgage-backed securities 113 113 Commercial mortgage-backed securities 7 7 Other asset-backed securities 15 15
Total assets at fair value 1 129 2 903 652 4 684
As of 31 December 2010, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: Defined contribution pension plans 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 2009 and in 2010 was USD 39 million and USD 39 million, respectively.
Purchases, issuances and settlements 0 Transfers in and/or out of Level 3 19 14 33 Impact of foreign exchange movements 14 1 15 Closing balance as of 31 December 465 95 560
Purchases, issuances and settlements 0 Transfers in and/or out of Level 3 5 12 17 Impact of foreign exchange movements 53 –2 51 Closing balance as of 31 December 539 113 652
As of 31 December 2009 and 2010, the Group had the share-based compensation plans described below.
Total compensation cost for share-based compensation plans recognised in net income was USD 104 million and USD 129 million in 2009 and 2010, respectively. The related tax benefit was USD 28 million and USD 34 million, respectively.
Long-term Incentive plan The Group annually grants a Long-term Incentive plan (LTI) to selected employees with a three-year vesting period. The requisite service period as well as the maximum contractual term for each plan is three years and the final payment, if any, occurs at the end of this performance measurement period. The plan includes a payout factor which is derived from Return on Equity (ROE) and Earnings per Share (EPS) targets over the vesting period. The payout ratio can vary between 0 and 2 and the final payment for each plan will depend on whether the performance targets have been achieved over the plan period. Each of the plan grants that were outstanding during 2010 are described below.
Number of shares Weighted average grant date fair value in CHF
Swiss Re 2010 Financial Report 171 13 Compensation, participations and loans of members of governing bodies
172 Swiss Re 2010 Financial Report 14 Commitments and contingent liabilities
Federal securities class action lawsuit In 2009, Plumbers’ Union Local No. 12 Pension Fund, a Swiss Re shareholder, filed a federal securities law class action against Swiss Re, Swiss Re’s former Chief Executive Officer and Swiss Re’s Chief Financial Officer arising out of Swiss Re’s announcement in November 2007 that it would report a USD 1 billion mark-to-market loss on two credit default swaps. By order dated 1 October 2010, all claims against Swiss Re and the individual defendants in that action were dismissed with prejudice. Plaintiff’s deadline to file an appeal has lapsed.
Swiss Re 2010 Financial Report 173 15 Information on business segments
The Group presents four operating business segments: Property & Casualty, Life & Health, Asset Management and Legacy. Items not allocated to these four business segments are included in the “Group items” column.
The Asset Management business segment includes two separate sub-segments Credit & Rates and Equity & Alternative Investments resulting from the aggregation of Asset Management Risk Stripes. The Asset Management business segment includes proprietary returns on the Group’s invested fixed income securities, equity securities and alternative investments.
The Legacy business segment encompasses non-core activities, which have been in run-off since November 2007 and are managed separately from the Asset Management division. Legacy includes Financial Guarantee Re business, and assets in the Group’s former trading book, including credit correlation, collateralised fund obligations and other non-core activities.
Certain investment results, including investment income and realised gains on unit-linked business, with-profit business and reinsurance derivatives, are excluded from the performance of the Asset Management business segment and directly allocated to the Property & Casualty and Life & Health business segments.
The allocation of investment result to Property & Casualty and Life & Health is determined based on US GAAP re/insurance liabilities. The allocation methodology applies a risk-free return to the nominal net reserves at the end of the prior quarter. The risk-free interest rate applied to the reserves is determined by currency and duration of the underlying Property & Casualty and Life & Health reserves. The Allocation column eliminates the calculated investment result allocated to either the Property & Casualty or the Life & Health business segments.
The accounting policies of the business segments are in line with those described in the summary of significant accounting policies. Please refer to Note 1.
174 Swiss Re 2010 Financial Report a) Business segment results For the years ended 31 December 2009 USD millions Property & Casualty Life & Health Asset Management Legacy Group items Allocation Total
Swiss Re 2010 Financial Report 175 b) Property & Casualty business segment – by line of business For the years ended 31 December 2009 USD millions
176 Swiss Re 2010 Financial Report c) Life & Health business segment – by line of business For the years ended 31 December
Expenses Claims and claim adjustment expenses; life and health benefits –5 297 –1 185 –2 157 –8 639 Return credited to policyholders –496 –4 101 –4 597 Acquisition costs –1 581 –421 –290 –2 292 Other expenses –348 –139 –294 –781
Benefit ratio2 in % 83.8 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. Operating revenues also exclude net realised investment gains/losses from non-participating business.
Expenses Claims and claim adjustment expenses; life and health benefits –4 492 –1 543 –2 201 –8 236 Return credited to policyholders –69 –3 302 –3 371 Acquisition costs –1 244 –355 –227 –1 826 Other expenses –377 –149 –291 –817
178 Swiss Re 2010 Financial Report d) Asset Management For the years ended 31 December 2009 USD millions Credit & Rates
180 Swiss Re 2010 Financial Report 16 Subsidiaries, equity investees and variable interest entities
Denmark Swiss Re Denmark H ApS, Copenhagen 0 0 100 f Swiss Re Denmark Services A/S, Copenhagen 0 0 100 f
Germany ASS Assekuranz, Service-und Sachverständigengesellschaft mbH, Sundern 0 0 49 e EXTREMUS Versicherungs-Aktiengesellschaft, Cologne 67 63 15 e Paarl Grundbesitzverwaltung GmbH & Co. KG Objekt Köln Sterrenhofweg, Munich 0 0 22 e ROLAND Partner Beteiligungsverwaltung GmbH, Cologne 0 0 20 e Swiss Re Germany AG, Unterföhring bei München 60 56 100 f
Hungary Swiss Re Treasury (Hungary) Group Financing Limited Liability Company, Budapest 0 0 100 f
Luxembourg Securitas de Milo S.a.r.l., Luxembourg 0 0 100 e Swiss Re Europe Holdings S.A., Luxembourg 141 131 100 f Swiss Re Europe S.A., Luxembourg 470 438 100 f Swiss Re Finance (Luxembourg) S.A., Luxembourg 1 1 100 f Swiss Re Funds (Lux) I, Senningerberg1 12 427 11 583 100 f Swiss Re International SE, Luxembourg 240 224 100 f
United Kingdom Admin Re UK Limited, Shropshire 114 107 100 f Banian Investments UK Limited, London 0 0 100 f Barclays Life Assurance Company Limited, London 47 44 100 f Calico Leasing (GB), London 0 0 100 f Cyrenaic Investments (UK) Limited, London 0 0 100 f European Credit and Guarantee Insurance PCC Limited, St. Peter Port 8 8 100 f NM Insurance Holdings Limited, Shropshire 206 192 100 f NM Life Group Limited, Shropshire 234 218 100 f NM Life Limited, Shropshire 149 139 100 f NM Pensions Limited, Shropshire 235 219 100 f Reassure Life Limited, London 23 22 100 f Reassure UK Life Assurance Company Limited, London 43 40 100 f SR Delta Investments (UK) Limited, London 6 5 100 f SRNY Limited, London 52 49 100 f Swiss Re BHI Limited, London 0 0 100 e Swiss Re Capital Markets Limited, London 60 56 100 f Swiss Re Financial Services Limited, London 0 0 100 f Swiss Re Frankona LM Limited, London 11 10 100 e Swiss Re GB Plc, London 1 001 933 100 f Swiss Re Services Limited, London 3 3 100 f Swiss Re Specialised Investments Holdings (UK) Limited, London 2 1 100 f Swiss Re Specialty Insurance (UK) Limited, London 28 26 100 f The Mercantile & General Reinsurance Company Limited, Glasgow 0 0 100 f The Palatine Insurance Company Limited, London 12 11 100 f Windsor Life Assurance Company Limited, Shropshire 412 384 100 f
Barbados European Finance Reinsurance Company Ltd., Bridgetown 3 089 2 879 100 f European International Holding Company Ltd., Bridgetown 0 0 100 f European International Reinsurance Company Ltd., Bridgetown 1 1 100 f Gasper Funding Corporation, Bridgetown 17 16 100 f Milvus I Reassurance Limited, Bridgetown 0 0 100 f
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 holders 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, the entity is considered a VIE and needs to be assessed for consolidation under the VIE section of the Consolidation Topic. This section was amended by ASU No. 2009-17 “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” which is applicable to Swiss Re as of 1 January 2010.
According to the amendment, the party that has a controlling financial interest is called the primary beneficiary and consolidates the VIE. An enterprise is deemed to have a controlling financial interest if it has both of the following: ̤ the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and ̤ the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
The Group assesses for all its variable interests in VIEs whether it has a controlling financial interest in these entities and, thus, is the primary beneficiary. For this, the Group identifies the activities that most significantly impact the entity’s performance and determines whether the Group has the power to direct those activities. In conducting the analysis, the Group considers the purpose, the design, and the risks that the entity was designed to create and pass through to its variable interest holders. In a second step, the Group assesses if it has the obligation to absorb losses or if it has the right to receive benefits from the VIE that could potentially be significant to the entity. If both criteria are met, the Group has a controlling financial interest in the VIE and consolidates the entity.
Modified coinsurance agreement The Group assumes insurance risk via a modified coinsurance agreement from a direct insurer, which qualifies as a VIE. The Group assumes the majority of the mortality and investment risk in the VIE. In addition, the Group has the power over the investment management and policyholder administration. As these are the activities that most significantly impact the entity’s economic performance, the Group qualifies as the primary beneficiary and consolidates the entity. The Group will incur losses if mortality risk or the investment returns of the entity develop unfavourably.
Certain debt financing vehicles are consolidated as the Group has power over the investment management, considered to be the activity that most significantly impacts the entity’s economic performance. In addition, the Group absorbs the variability of the investment return so that both criteria for a controlling financial interest are met.
As of 31 December 2010, the total assets of the debt financing vehicles in which the Group holds variable interests but is not the primary beneficiary were USD 5 021 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 8 202 million.
As of 1 January 2010, additional entities are included in the VIE disclosures due to the implementation of ASU No. 2009-17. Due to the required prospective application of the Update, the comparatives in this note were not restated.
Policy loans, mortgages and other loans (whereof restricted: 2010: 203) 217 596 Short-term investments (whereof restricted: 2010: 1 329) 1 329 Other invested assets (whereof restricted: 2010: 195) 104 2 045 Cash and cash equivalents (whereof restricted: 2009: 136; 2010: 966) 302 968 Accrued investment income (whereof restricted: 2009: 42; 2010: 82) 73 82 Premiums and other receivables (whereof restricted: 2010: 10) 15 10 Reinsurance recoverable on unpaid claims and policy benefits (whereof restricted: 2010: 11) 10 11 Funds held by ceding companies (whereof restricted: 2010: 6) 6 Income taxes recoverable (whereof restricted: 2010: 19) 19 Acquired present value of future profits (whereof restricted: 2010: 36) 74 36 Other assets (whereof restricted: 2009: 27; 2010: 63) 27 63
As of 31 December 2010, the consolidation of the VIEs resulted in non-controlling interests in the balance sheet of USD 402 million (31 December 2009: USD 394 million). The net non-controlling interests in income were USD 2 million and USD 6 million net of tax for 2009 and 2010, respectively.
Funds held under reinsurance treaties 1 614 Short-term debt 406 Accrued expenses and other liabilities 425 885
For the years ended 31 December, restructuring provision developed as follows: 2009 USD millions Property & Casualty Life & Health Asset Management Total
The Board of Directors is ultimately responsible for the Group’s governance principles and policies, including approval for the Group’s overall risk tolerance. The Board mainly deals with risk management through two committees: ̤ The Finance and Risk Committee is responsible for reviewing the Group Risk Policy and capacity limits, as well as monitoring risk tolerance and reviewing top risk issues and exposures. ̤ The Audit Committee is responsible for overseeing internal controls and compliance procedures.
Senior managers of business and corporate units are responsible for managing operational risks in their area of activity, based on a centrally coordinated methodology. The self-assessments are reviewed and challenged by operational risk specialists in each of the dedicated risk management units. Risk management experts also review the Group’s underwriting decision processes.
The Group’s Internal Audit department carries out independent, objective assessments of the adequacy and effectiveness of internal control systems. It evaluates the execution of processes within Swiss Re, including those within Risk Management.
The Group provisionally estimates claims costs of USD 1.2 billion, net of retrocession and before tax, from the earthquake and the tsunami in Japan, on 11 March 2011. These estimates are subject to a high degree of uncertainty due to the complexity of loss assessment, and may be subject to change as new 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 111 – 191), for the year ended 31 December 2010.
Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
Opinion In our opinion, the consolidated financial statements for the year ended 31 December 2010 present fairly, in all material respects, the financial position, the results of operations and the cash flows in accordance with accounting principles generally accepted in the United States of America (US GAAP) and comply with Swiss law.
Income/loss before income tax expense –61 26 1 732 2 700 2 057 4 670 4 313 –1 074 920 2 675 Income tax expense –36 –81 –470 –715 –205 –1 033 –853 411 –221 –541 Net income/loss before attribution of non-controlling interests –97 –55 1 262 1 985 1 852 3 637 3 460 –663 699 2 134
Income/loss attributable to non-controlling interests –154 Net income after attribution of non-controlling interests –97 –55 1 262 1 985 1 852 3 637 3 460 –663 699 1 980
Other liabilities 14 576 23 744 31 700 43 409 61 953 80 802 95 172 73 366 73 336 72 524 Long-term debt 4 243 4 095 3 887 4 657 4 440 11 337 18 898 17 018 19 184 18 427
2 Trading revenues are included in net investment income; long-term debt also includes debt positions from former Financial Markets. 3 The Group changed its reporting currency from CHF to USD in 2010. Periods prior into 2010 have been translated into USD for informational purposes only based on the Group’s average exchange rates for the income statements and year-end rates for the balance sheets.
Reinsurance and holding company Swiss Reinsurance Company Ltd, domiciled in Zurich, Switzerland, performs a dual role within the Swiss Re Group as both a reinsurance company and a holding company. The assessment of the market position, profitability and financial strength of Swiss Re’s worldwide organisation must focus primarily on the consolidated financial statements.
Property and casualty business continued to perform well despite the continuing soft pricing cycle and higher natural catastrophe losses, but benefiting from favourable claims experience. Compared to the previous year, life and health business was driven by less favourable mortality experience and minor non-recurring impacts.
An agreement was signed effective 3 November 2010 to terminate the convertible perpetual capital instrument (CPCI) with a face value of CHF 3.0 billion issued in 2009 to National Indemnity Company, a subsidiary of Berkshire Hathaway Inc. All termination related expenses including interest due after this date until the balance sheet date were recognised as a charge to the 2010 financial year. The premium on termination of CHF 0.6 billion is classified under “Other expenses”. The redemption value of CHF 3.7 billion is reported under “Debentures” with a repayment date on 10 January 2011.
Reinsurance result The total reinsurance operating income resulted in a gain of CHF 1.3 billion, compared to a gain of CHF 2.5 billion in 2009.
Claims and claim adjustment expenses decreased 18% to CHF 7.8 billion.
Investment result The investment result improved by CHF 0.7 billion to a profit of CHF 0.3 billion for the year under report.
Other income and expenses Other net expenses increased by CHF 0.2 billion to CHF 1.0 billion in 2010. The increase mainly consists of the termination expenses of the CPCI issued to National Indemnity Company, which were largely offset by income from the reduction of the provision for currency fluctuation.
Assets Compared to 2009, total assets decreased 3% to CHF 95.2 billion. Without the effect of foreign exchange movements, total assets amounted to CHF 101.5 billion.
The increase in fixed income securities is mainly due to reinvestments of short-term investments into longer term bonds. The ratio between short-terms and bonds varies as the duration of the fixed income portfolio is adjusted to match a particular duration target.
Liabilities In comparison with 2009, total liabilities decreased 4% to CHF 76.4 billion. Without the effect of foreign exchange movements, total liabilities amounted to CHF 83.3 billion.
Shareholders’ equity As of 31 December 2009, shareholders’ equity amounted to CHF 18.7 billion before allocation of the disposable profit. After the dividend payment of CHF 343 million for 2009, the issuance of new shares from the conditional capital in connection with employee participation programmes and the inclusion of the profit for the 2010 financial year, shareholders’ equity increased to CHF 18.8 billion at the end of 2010.
Investment expenses –2 918 –2 151 Allocated investment return –1 054 –858 Investment result –379 318
Other income and expenses Other interest income 74 67 Other interest expenses –775 –792 Other income 171 655 Other expenses –301 –924 Result from other income and expenses –831 –994
Income before tax expense 1 327 629 Tax expense –257 –249
Non-current assets Investments Investment real estate 1 091 1 130 Investments in subsidiaries and affiliated companies 16 560 21 389 Loans to subsidiaries and affiliated companies 15 396 4 227 Mortgages and other loans 722 705
Non-technical provisions Provision for taxation 161 128 Provision for currency fluctuation 1 555 1 465 Other provisions 444 513 Total non-technical provisions 2 160 2 106
Shareholders’ equity 5 Share capital 37 37 Other legal reserves 650 650 Reserve for own shares 1 446 1 449 Legal reserves from capital contributions – 9 762
Retained earnings brought forward 43 50 Profit for the financial year 1 070 380
Time period The 2010 financial year comprises the accounting period from 1 January to 31 December 2010.
All exchange rate differences arising from the revaluation of the opening balance sheet, the adjustments from application of year-end or average rates and foreign exchange transactions are booked to the provision for currency fluctuation.
Other tangible assets are carried at cost, less individually scheduled straight-line depreciation over their useful lives. Items of minor value are not capitalised.
Deferred acquisition cost Deferred acquisition costs consist principally of commissions and are related to the production of new reinsurance business. Deferred acquisition costs for short duration contracts are amortised in proportion to premiums earned. Deferred acquisition costs for long duration contracts are amortised over the life of the underlying contracts.
Other current assets Other current assets are carried at nominal value after deduction of known credit risks if applicable.
Liabilities assumed and consideration provided in connection with portfolio transactions are established through the respective income statement line items. The initial recognition of assumed outstanding claims is recorded as change in unpaid claims, with the consideration being recognised as negative claims paid. The assumption of the provision for unearned premiums is established through the change in unearned premiums, with the respective consideration accounted for as premiums written. The liability for life and health policy benefits is established as a charge against life and health benefits, with the initial premium consideration recorded as premiums written.
Funds held under reinsurance treaties Funds held under reinsurance treaties mainly contain cash deposits withheld from retrocessionaires, which are stated at redemption value.
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.
Other liabilities Other liabilities include payables in connection with repurchase agreements and securities lending transactions, which are held at redemption value.
Management expenses The overall management expenses are allocated to the reinsurance business, the investment business and to other expenses on an imputed basis.
Claims paid and claim adjustment expenses –18 165 –1 921 –20 086 –7 568 –152 –7 720
Other reinsurance income and expenses 132 –37 95 248 –81 167 Result from cash deposits 738 –119 619 863 –618 245