Asset Management Assets under management, in CHF billions 160 125 –22 Return on investments in % 5.3 4.7
Net income/loss 4 162 –864 – Earnings per share, in CHF 11.95 –2.61 –
002 Letter to shareholders 034 Financial year 084 Corporate governance and compensation report 132 Financial statements 066 Risk and capital management
While we take no pleasure in reporting these results, we do wish to recognise the enormous effort of our employees to stay focused on delivering solid operational results and taking advantage of business opportunities that present themselves in the current market environment. Their dedication to meeting our clients’ needs should not go unmentioned.
Business performance Our Property & Casualty segment delivered superior underwriting discipline. It achieved an excellent combined ratio of 97.9% for the fourth consecutive year, despite the impact of large natural catastrophes and the lack of material benefit from prior year reserve development. Our underwriting strength was rewarded by major new insurance transactions with clients seeking innovative insurance risk solutions.
Legacy manages specified products that Swiss Re no longer offers. These products comprise Structured CDS, Portfolio CDS, Financial Guarantee Re and former trading activities. The run-off or sale of discontinued businesses has been accelerated and we do not exclude the possibility of future disposal of other businesses.
We took further decisive action to de-risk the asset portfolio during 2008 through a combination of sales and hedging. Consequently, at the end of 2008 the portfolio was composed of substantially more than 55% cash, short-term investments, treasuries or government-backed instruments, and only 1% remained invested in equity securities. New cash flow is invested in short-term investments, government and government-backed securities.
Restore and maintain capital strength In addition to reducing asset risk, we propose to raise capital to re-establish an appropriate buffer given the continuing uncertainties in the financial markets. We want to be a strong counterparty and retain the trust of our clients. The total amount of capital to be raised is likely to be up to CHF 5.0 billion. Subject to your approval, Berkshire Hathaway will invest CHF 3.0 billion in Swiss Re in the form of a convertible instrument. Subject to regulatory approval, the Group has also agreed to enter into an arrangement with Berkshire Hathaway to cover the potential effects of adverse developments, such as inflation, on its Property & Casualty reserves.
Our fundamental business is solid Our business model is sound: we deliver insurance solutions to our clients and invest the premiums that we receive. Our vision has been based on fundamental trends such as primary insurance market consolidation and broader insurance risk transfer needs; changing roles of insurance brokers and intermediaries; and growing integration of capital and insurance markets. Given the substantial dislocations that we have seen in 2008, it makes sense to conduct a thorough review to make sure that we devote our resources to those areas where we can maximise returns.
Appointments On 11 February 2009, Swiss Re’s Board of Directors accepted the resignation of Jacques Aigrain as Chief Executive Officer. The Board thanks Jacques Aigrain for his significant contributions and personal commitment to Swiss Re. Under his leadership, Swiss Re successfully completed several major acquisitions, including the Insurance Solutions operations from General Electric.
On 12 February 2009, the Board announced that Stefan Lippe, former Deputy Chief Executive Officer and Chief Operating Officer, assumes the position of Chief Executive Officer. The Board is confident that Stefan’s proven track record in reinsurance will support our efforts to focus on the core business, while at the same time ensuring operational continuity.
The Board appointed Brian Gray, formerly Head of Property and Specialty Underwriting, as Chief Underwriting Officer. Brian will ensure the continuity of Swiss Re’s underwriting standards and focus on quality and selective underwriting.
Outlook Swiss Re is one of the largest worldwide (re)insurance companies. Our scale and global reach mean that we are well positioned to assist our clients in achieving their ambitious goals in terms of insurance risk-taking or insurance sales growth. Recent transactions demonstrate Swiss Re’s strong reputation and outstanding execution capabilities. This is the basis for the earnings power of the firm going forward.
Demand for reinsurance is growing as clients face capital constraints or pursue opportunities for consolidation. The 2009 January renewals were promising with rates and volume increasing. As the reinsurance premium cycle continues to harden, Swiss Re is well positioned to provide clients with effective solutions.
Peter Forstmoser Jacques Aigrain Stefan Lippe Chairman of Chief Executive Officer Chief Executive Officer the Board of Directors (until 11 February 2009) (as of 12 February 2009)
Our business is to reduce the financial uncertainty associated with risk. We anticipate extreme scenarios, just to be ready if and when they occur. In other words, we enable the risk taking that is essential for progress and prosperity.
52% Americas 15% Other 1% Equity 49% Cash, government bonds&short-term investments 20% Structured products 15% Corporate bonds 8 Swiss Re 2008 Annual Report
Property & Casualty Property & Casualty services encompass traditional reinsurance as well as insurance products for corporate clients. Combining global expertise and local knowledge, we provide clients with financially sound reinsurance support in all lines of business.
Asset Management Asset Management is responsible for the investment of Swiss Re’s asset portfolio. Our approach is focused on asset-liability matching. We also develop solutions for our clients with insurance risks embedded in capital market structures.
How we operate We offer traditional reinsurance for property and casualty and for life and health businesses. We complement these with insurance-based capital market solutions and services for comprehensive risk management.
Swiss Re at a glance 2008 net premiums earned by region 14379 m
2008 net premiums earned by region 11090 m 2008 investment portfolio 160244 m
Clients want solutions Our clients want a solution that will make a difference to their specific business, not just a standardised product or service. Having unique needs, challenges, and goals, they look for solutions that reflect their individual risk and capital management strategy.
Clients want a relationship with us that suits their style Our clients may want a personal, customised approach or prefer a more clear-cut, conventional relationship. Results are what matter – the method is flexible.
Clients want a strong partner Our clients want to be sure that their chosen partner can withstand market dislocations and continue to deliver sustainable solutions in exceptional economic circumstances.
Broker 2008 net premiums earned by product line 31% Life 10% Health 3% Admin Re®
2008 was a difficult year for Swiss Re. Our core business – (re)insurance – delivered excellent results both in Property & Casualty as well as Life & Health. However, this was more than offset by the adverse impact of the worst economic crisis for decades on our financial market activities.
Asset de-risking A changing risk landscape and challenging market conditions called for an adjustment of our business focus in 2008. We reacted to the worst financial market crisis for decades by adopting measures to reduce our investment risk. We hedged our corporate credit exposure and reduced our exposure to equities early in the year. New cash flows were invested in short-term investments, government or government-backed securities. Notwithstanding these efforts, we encountered significant losses on parts of our non-insurance related financial market activities. In response to these developments, we disbanded our Financial Markets division and created two new units, Asset Management and Legacy.
We further enhanced our (re)insurance offering in 2008, notably in the areas of health and longevity – segments in which we have traditionally had only limited involvement. To help satisfy the growing risk transfer needs of our clients, we also provide capital market instruments such as insurance-linked securities (ILS), as well as life and retirement solutions. Our know-how and execution capabilities in these instruments give us a strong competitive advantage. These capital market instruments are firmly embedded in our insurance underwriting.
Next steps Our priorities are centred around our clients. Subject to shareholder approval, we will raise additional capital in order to support our clients with the security they are seeking in a difficult economic environment. We will focus on what we do best, ie writing insurance risk and investing the premiums to match the underlying liabilities. We will focus on deploying capital where it earns the best returns and continue to shift capital from investments to (re)insurance. We will simplify our business model and our organisation to achieve greater effectiveness and efficiency.
We recognise that our clients have increasingly complex (re)insurance needs. Our 145-year track record provides us with the experience and skills to develop innovative products – from natural catastrophe modelling to insurance-linked securities transactions – that help our clients manage their risk exposure.
2008 saw a number of products and tailored solutions introduced for new and existing clients.
Title Insurance and Judicial Review Insurance In response to the growing risk appetite of our clients in Europe and Asia, we adapted for local use two reinsurance offerings previously used in US and UK markets for underlying Title Insurance (TI) and Judicial Review Insurance (JRI) products.
The TI product covers losses arising from disputed real estate titles, while JRI provides cover for costs incurred when third-party action causes a municipality or other local government entity to revoke a building permit or change a zoning plan. This provides a cost-effective alternative to the more expensive financial guarantees that developers must often secure to get a project started. Ideally offered to clients through a quota share agreement, our reinsurance products provide additional capacity to cedents who adapt their TI and JRI products to enter new geographical markets.
Bancassurance In Europe and Latin America we continued to offer our clients support with their bancassurance strategies – selling insurance products to consumers through traditional banks – via partnerships and complex, high-volume deals.
Parametric solutions The past few years have seen increasing demand among clients for parametric solutions to natural catastrophe protection – that is, for policies that link cover to an agreed parameter of event intensity, rather than to individually assessed loss. A number of different teams at Swiss Re are involved in structuring and offering such products. This year, we introduced a parametric earthquake business interruption cover solution for corporate clients in Japan.
In Bolivia, we joined with a local bank and a third-party software administrator to offer life insurance products in a market with low insurance penetration but significant growth potential. All these projects draw on Swiss Re’s expertise in providing unique solutions – from product design to policy wording – that span the divide between financial markets and insurance.
Our offerings are tailored to the needs of the various participants in the agricultural sector, ranging from suppliers, growers and traders to grain processors.
Net Promoter®, NPS and Net Promoter Score are registered trademarks of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld.
Our clients want innovative solutions to support their risk and capital management strategies. Two clients with unique challenges and goals talk about the difference Swiss Re has made to their business and provide insights into how we can further improve our services to better respond to their needs.
Grupo Nacional Provincial (GNP) of Mexico is one of Swiss Re’s most important clients in Latin America: our relationship with GNP dates back to the 1960s. In recent years, the firm has had to cope with several natural catastrophe losses, including Hurricane Wilma in 2005 – which caused the company to re-evaluate its strategy for these risks.
The current global financial crisis is putting pressure on everyone, but we at GNP have been kept aware of Swiss Re’s capital position throughout. We feel comfortable transferring our risk to them. Whenever we had queries about the financial strength of the company and its asset risk profile, we got almost immediate, transparent answers from the Swiss Re team. It’s reassuring and it also demonstrates the strength of our relationship.
Do you recommend Swiss Re to other industry colleagues? Absolutely. Swiss Re’s broad capabilities are difficult to match.
Insurance Australia Group Limited (IAG) has a portfolio of general insurance businesses. It has leading and established brands across its home markets of Australia and New Zealand, a growing presence in Asia, and other specialist underwriting operations.
The company experienced two years of natural perils that exceeded its allowances. Specifically, in 2007/2008, IAG’s businesses incurred AUD 502 million of natural perils claims costs (with AUD 411 million the year before).
Which of Swiss Re’s capabilities made the most difference to you? Innovation. Flexibility. Capacity.
Do you recommend Swiss Re to other industry colleagues? Yes, primarily due to the size, scale and innovation that Swiss Re can provide.
Where could Swiss Re improve its response to your needs? Provide greater clarity over the pricing and quotation process such that the exceptional interaction over the year is not lost at the point of transaction.
Modelling and scenario development combine to create our risk landscape: Swiss Re’s snapshot of the world of risk in which it does business. But we have to be mindful of change. The risk landscape is constantly evolving, at a rate that itself can change suddenly and unpredictably. With our worldwide portfolio of natural, technical, economic and social risks, we must constantly monitor this rate of change, compare different perspectives and seek to understand how risks interlink.
SONAR framework Early warning and risk awareness are the keys to Swiss Re’s profitability because our opportunities and challenges both stem from a changing global risk landscape. SONAR, our framework for managing emerging risks and addressing key industry issues, takes a collaborative approach, drawing on risk experts from across the business to create a holistic picture of the risks we face and to determine how we should manage them.
Emerging risk scenarios Building effective scenarios has become a key part of understanding future risk exposure, especially under the conditions of rapid change or uncertainty. Through definition of parameters and specific events, insurance risks can be assessed in terms of potential future loss patterns and their knock-on effects or connection to other risks. Output takes the form of recommendations and guidance for business actions, from changing contract wording to developing new product opportunities.
Threat scenarios Making the unthinkable thinkable is critical to capturing potential emerging risks. Using threat scenarios, we review risk from many angles to seek out unexpected correlations, sudden increases in loss potential or previously unseen complexity in risk factors. Managing the uncertainty of new situations requires a disciplined approach combined with innovation. It takes what appears to be an unlikely threat and builds scenarios that can test the established assumptions about how the surrounding environment and the threat itself might evolve.
Integrative risk management The impact of hazardous events continues to broaden, so our work on emerging risk management must also be extended. In addition to increased density of people and infrastructure in catastrophe-prone areas, climate change will lead to more severe storms, floods and drought, but it will also reduce agricultural yields.
As an ultimate risk taker, Swiss Re is particularly exposed to the consequences of linked risks. More than ever, an all-hazard approach is needed to implement effective prevention and adaptation strategies. No party can tackle this alone. We see a paradigm shift towards a holistic “ex-ante” or before-the-event approach to disaster risk management.
Such dialogues with leading organisations increase our understanding of global trends and risks. Our task is then to assess how our portfolio of reinsurance risks is positioned and how this may influence our pricing and approach to capacity allocation.
We are also committed to financing a Chair in Risk Management at the Swiss Federal Institute of Technology (ETH) in Zurich. The Risk Chair will act as a focal point in the development, implementation and dissemination of knowledge and tools (eg risk maps) in integrated risk research.
Diversity drives innovation The diversity of our staff continues to be essential to securing a full view of our business and creating a working environment that encourages fresh ideas. We bring together smart, dedicated people from around the world who are all experts in their field. A broad range of cultural backgrounds, different viewpoints and various levels of experience are equally important to us. We currently employ more than 11000 people from more than 80 nations around the world, and have operations in nearly 30 countries.
We gather different points of view to gain a thorough understanding and we build knowledge communities which play a crucial role in our day-to-day work. The Swiss Re Academy also continues its strong legacy of providing industry-leading technical training and learning opportunities to clients and external partners.
Rewarding drive and achievement We value the talent and motivation of our people as one of our core assets. After all, it is the productivity of our staff that moves the company forward, and we honour their achievements with more than just competitive compensation, but also by offering ample opportunities to further develop their skills, build networks and advance their careers.
This is why on-the-job training is an integral part of any development plan – backed by technical grounding, of course. Our staff can expand their capabilities by working as a part of a cross-functional project team, or broaden their horizons and experience other cultures by taking part in a job rotation.
Eliana Ortega Graduates programme participant, New York Born in Ecuador, Eliana graduated from Leonard N. Stern School of Business at New York University in May 2008 with a dual concentration in finance and information systems. She recently joined Swiss Re in New York City to participate in the graduates@swissre programme.
We strive to create sustainable environmental value for our stakeholders. Our risk expertise allows us to form effective responses to major environmental and social challenges. In particular, we offer solutions that help mitigate as well as adapt to climate change; and we are keen to engage in innovative partnerships to extend insurance cover in less developed countries.
Continued to make progress in reducing ̤ our own CO2 emissions and granted subsidies for emissions-cutting investments to a total of 1 231 employees
Achieved further increase in the use of ̤ the Sensitive Business Risks process, a risk management tool specifically developed to assess sustainability, ethical and related concerns in business transactions.
In 2008, we received major recognition for our efforts to act responsibly when we regained the position of sector leader in the Dow Jones Sustainability Indexes (DJSI). The DJSI count among the most important sustainability indexes worldwide and assess companies’ performance in economic, environmental and social terms (www.sustainability-indexes.com).
Corporate sustainability A number of environmental and social issues are endangering or hindering sustainable economic development. We strive to address sustainability challenges that are relevant to our business in three ways: by developing reinsurance solutions for our clients,
employing sustainability-specific risk management tools and tackling the environmental impact of our own operations.
Risk transfer and asset management solutions Climate change and poor insurance cover in emerging countries are two focal points of our sustainability efforts. There is a far-reaching consensus today that climate change increases the frequency and severity of extreme weather events. Innovative solutions are needed both to tackle climate change and to adapt to some of its financial consequences. Lacking risk cover against volatile weather and other kinds of risk presents a particular challenge in emerging countries. Through public-private partnerships and our Climate Adaptation Development Programme, we strive to develop effective responses to this serious development obstacle.
Delivering sustainable value compliance markets, voluntary markets have been established for companies or individuals who want to offset their CO2 emissions.
In asset management, we have over several years built up a sizeable sustainability portfolio of investments in alternative energy, water, resource efficiency, carbon and sustainable forestry/agriculture. In 2008, the portfolio was merged with the existing infrastructure portfolio, in response to the increasing need for low-carbon infrastructure financing (eg in wind and solar power) and the growing relevance of sustainability criteria within traditional infrastructure.
Further activities focused on the microinsurance sector, which aims to provide essential insurance products to people with low incomes in emerging and developing countries. In Pakistan, we support the Aga Khan Foundation and a local insurer in a micro health insurance pilot project designed to protect poor families against medical and hospitalisation expenses. The Group also developed an effective system with several other organisations to offer protection against weather risks to farmers in Malawi.
Reducing the Group’s environmental impact Reducing the environmental impact caused by our business operations is a third key activity in our sustainability efforts. When the Greenhouse Neutral Programme was launched in 2003, it was the first such initiative launched by a large financial services provider. The programme combined a pledge to cut 15% from CO2 emissions per employee by 2013 with the purchase of carbon credits to offset the remaining emissions. We already met this target in 2007, having achieved a 25% reduction in CO2 emissions, mainly through a switch to renewable energy sources at our major business locations. In response, we doubled our original reduction goal to 30%. At the end of 2008, our reduction in emissions slightly exceeded this target figure. Further extending the use of renewable energy, especially in the US, made an important contribution. So did a decrease in emissions from business travel between 2007 and 2008 (–2.5%), which may have been mainly due to difficult market conditions, and may thus not represent a permanent change.
Risk management While we are keen to develop new business solutions addressing sustainability and related challenges, we also take corresponding precautions in our risk management. A key tool is the “Sensitive Business Risks” (SBR) process. Originally introduced in 2002, the SBR process offers employees the possibility to request advice from internal experts on any transaction they think may violate the business principles laid out in the Group Code of Conduct. Most of the screened transactions were found to constitute acceptable risk; the share of negative recommendations in 2008 remained stable at 8%.
2% Ongoing 5% No final recommendation 8% Proceed with conditions 77% Proceed 8% Abstain
Solution building In cooperation with leading charitable organisations, we promote viable solutions to environmental and social challenges related to our business. At present, natural catastrophes, climate change and water are the programme’s target areas. By contributing risk expertise as well as financial aid to projects, we aim to improve humanitarian disaster prevention and to provide instant relief.
Regarding the prevention of humanitarian disasters, we have embarked on a new project in Peru, one of Latin America’s most disaster-prone countries. After the magnitude eight earthquake of summer 2007 killed several hundred people and destroyed more than 100 000 houses in three rural provinces, it became apparent that the rebuilding efforts suffered from the same design errors that had made the original structures vulnerable. Managed in partnership with the SDC (Swiss Agency for Development and Cooperation), the project aims to build up local capacity for earthquake-safe housing construction. It will also provide direct technical assistance for families without access to the government’s reconstruction programme.
In continuing our efforts to address major water issues, we presented our ReSource Award for Sustainable Watershed Management for the sixth time. There were two joint winners, sharing prize money of USD 150 000. In Yunnan Province in China a project was selected for its integrated reservoir watershed model with strong involvement of the local community. And a project in the Solomon Islands was recognised for the way it protects a watershed forest vital to the local community against external logging interests. On the occasion of the International Water Day, we donated CHF 1000 000 to the International Committee of the Red Cross (ICRC) for an infrastructure project in Ethiopia which provides clean water to communities and displaced people in the country’s strife-torn regions.
Community building With our “community building” initiatives, we support local institutions and foster employee-initiated charity projects in the communities where we operate.
The launch of the “Charity of the Year” (COTY) programme in selected locations was a highlight of 2008. Building on existing local commitments, this Group-wide initiative will provide a platform for employees in each location to select charities and raise funds for them. In London, employees raised a substantial amount for the Alzheimer’s Society, holding a charity quiz night and a Christmas raffle. In Zurich, the local Employees Association (“Angestelltenvereinigung ”), which had run the popular Christmas Collection now subsumed under the COTY programme, was presented with a one-time donation of CHF 75 000 on the occasion of its 100-year anniversary. The money was used to support the “Rucksackschule ” (“backpack school”), a Zurich-based organisation that arranges environmental education with simple equipment in the outdoors – hence the term “backpack”.
spent a full day building an environmentally friendly campsite. Further contributions are planned to include youth mentoring activities and support towards the construction of an environmental learning centre. Continuing a tradition stretching back 25 years, the Kansas City location again took part in the annual United Way Campaign, which raises funds for a large number of local charities. A full 96% of all employees made donations, bringing the total, including our matching contribution, to more than USD 220 000.
Net loss of CHF 0.9 billion and earnings ̤ per share of CHF –2.61 due to lower investment performance.
Property & Casualty delivered strong ̤ underwriting performance with combined ratio of 97.9%.
Intense financial market turbulence, a very high natural catastrophe burden and a considerable reduction in the market value of our investment portfolio culminated in a net loss in 2008. We have therefore taken further action to reduce the risk in our investments as well as to restore our capital position to remain a strong counterparty for our clients.
The impact of the global financial crisis made 2008 a difficult year for the insurance industry. Non-life underwriting results remained solid, however, despite high losses from catastrophic events. Life insurance saw robust growth in most markets.
Stock markets continued to decline during the first months of 2008. They fell further in September 2008 as the financial crisis worsened following the bankruptcy of Lehman Brothers investment bank and the US government bailout of American International Group Inc. (AIG). By the end of 2008, the world’s major stock markets had all fallen between 40% and 50% from the end of 2007.
In response to the rapid deterioration of the economic outlook, central banks cut interest rates. Government bond yields dropped sharply as investors shifted funds to more secure investments.
2008 annual GDP growth figures do not fully reflect the real impact of the financial crisis on the global economy. Recession only hit industrialised countries during the third quarter of 2008 and emerging markets are also weakening rapidly.
Underwriting continued to post solid results despite an increasingly competitive market. Results in the largest primary markets were mostly positive, delivering combined ratios below 100%. The main exception was the US, where third-quarter 2008 results suggested an industry-wide combined ratio of around 103%, up from 95% in 2007. The main reasons were:
high property claims, around USD 25 billion, due both to devastating hurricanes Gustav ̤ and Ike, and to several mid-sized catastrophes during the first half of 2008; significant underwriting losses by mortgage and financial guarantee insurers; and ̤ competitive pricing in most lines of business, which reduced underlying underwriting ̤ profitability.
European insurance markets had a relatively benign year with few large natural catastrophes and man-made disasters. Winter storm Emma, the only event in 2008 to exceed the billiondollar mark, cost the industry USD 1.4 billion. Compared to previous years, however, underlying underwriting profitability deteriorated slightly due to lower prices and to a lesser extent to higher claims.
Demand for life insurance has slowed and is expected to continue weakening as the economic impact of the financial crisis deepens. In-force premiums stagnated in 2008, in stark contrast to an outstanding 2007. The products most affected by the crisis are those considered to be “discretionary” as well as unit-linked savings products, which are less popular due to their poor returns and the continuing high volatility in the stock markets. This is especially true in countries where single premium business prevails. While there was a revival in fixed-benefit products, it did not compensate declines in unit-linked sales.
Most major markets have seen a downward trend in sales of traditional protection products. In countries where mortgages are secured with term insurance, such as the UK, Ireland, Spain, and to a lesser degree France, the decline has been substantial. In the US, where business is not mortgage-related, term sales have dropped slightly. Group business is also losing momentum due to weakened job and salary growth.
The financial crisis has eroded life insurers’ shareholder equity, which declined by an average of 20% to 25%, year-on-year, through the third quarter of 2008. Unrealised losses have increased significantly; nevertheless, because life companies often hold securities to maturity or until prices recover, some of these unrealised losses may reverse over time as financial markets stabilise.
Innovative ways of financing retirement Swiss Re’s sigma study “Innovative ways of financing retirement”, published in October 2008, highlights solutions that help individuals and companies manage the risks of retirement. The study addresses outsourcing pension plan risks and transferring existing pension liabilities to (re)insurers. It notes how reinsurance and capital market capabilities help companies and insurers provide these solutions.
Crucial to these and similar solutions is longevity risk, the risk to which a life insurance company could be exposed as a result of higher than expected life expectancy among policyholders, resulting in higher than estimated payout levels. Developing a liquid longevity risk market would enable insurers to create innovative retirement solutions for individuals and institutions. It would also provide a mechanism for pricing the risk and a sizeable new class of investments whose return distribution differs from those of existing major asset classes.
This sigma study can be downloaded electronically or ordered as a print copy in English, German, French, Spanish, Italian, Japanese and Chinese at www.swissre.com.
Insurance market outlook Barring any extraordinary catastrophe losses, underwriting results in the most important non-life primary markets will remain stable in 2009 or even improve in some segments. Premium income is expected to be subdued because of the economic downturn. While some investment-linked lines of business, such as engineering, will suffer significant declines, premium income for most other business is expected to remain stable.
Swiss Re reported an annual net loss of CHF 0.9 billion in 2008, down CHF 5.1 billion from a strong result of CHF 4.2 billion income in the previous year. Earnings per share were CHF –2.61, CHF 14.56 lower than in 2007.
Other revenues were CHF 270 million, a decrease of 10.6% compared to the prior year.
Claims and claim adjustment expenses decreased 17% to CHF 10.0 billion, or 11% at constant foreign exchange rates, despite higher natural catastrophe losses in 2008. The decrease is mainly the result of the Berkshire Hathaway quota share arrangement and strict underwriting.
Return credited to policyholders reflects the investment performance on the underlying assets, which is passed through to contract holders. In 2008, the return credited to policyholders decreased CHF 4.9 billion to CHF 2.8 billion, reflecting realised losses on the unit-linked and with-profit assets during 2008.
Property & Casualty and Life & Health receive a benchmark return based on net reinsurance reserves and risk-free rates. Securitisation-related income and insurance or reinsurance revenues are included in the relevant product line in Property & Casualty or Life & Health. Other activities related to life and health business, such as variable annuity solutions, are included in the results for the Life & Health segment.
Interest expense was CHF 1.5 billion, a decrease of 17.3% from the prior year period. The decrease reflected reduced borrowings as well as lower funding costs related to variable interest debt denominated in USD.
For 2008, we report a tax benefit of CHF 486 million. This represents an effective tax rate of 36%, compared to a tax expense of 19.8% in the prior year. The increase in the tax rate in 2008 was primarily due to the reassessment of tax exposures based on the status of current tax audits, including effectively settled issues.
Shareholders’ equity decreased 36% to CHF 20.5 billion. This was mainly due to credit spread widening resulting in net unrealised losses of CHF 5.5 billion; foreign currency movements of CHF –2.3 billion; share buy-backs of CHF 2.0 billion; and dividends of CHF 1.3 billion paid to shareholders during the year. This decrease was partially offset by the conversion of a mandatory convertible bond in December 2008 improving shareholders’ equity by CHF 1.0 billion.
Corporate Centre expenses –377 –295 –22 Items excluded from the segments: –
Income reconciliation The table above reconciles the income from Swiss Re’s segments and the operations of the company’s Corporate Centre with the Group’s consolidated net income/loss before tax. Net realised gains or losses on certain financial instruments, certain currency exchange gains and losses and other income and expenses – such as indirect taxes, capital taxes and interest charges – have been excluded from the assessment of each segment’s performance.
Net realised investment gains/losses2 –739 –9 482 – Other revenues 302 270 –11
Net income/loss 4 162 –864 – Change in unrealised gains/losses on securities, net 889 –5 493 – Change in foreign currency translation –2 349 –2 300 –2
Deferred acquisition costs and other intangible assets 11 921 10 450 –12
Cash flow from operating activities –3 330 –6 089 83 Cash flow from investing activities –1 302 18 819 – Cash flow from financing activities 2 972 –6 910 – Effect of foreign currency translation –415 –83 –80 Change in cash and cash equivalents –2 075 5 737 – Cash and cash equivalents as of 1 January 13 606 11 531 –15 Cash and cash equivalents as of 31 December 11 531 17 268 50
Business developments Higher claims activity and a difficult market environment in 2008 combined to reduce operating income for the Property & Casualty segment. Our strict underwriting discipline, active cycle management and careful risk selection led to a decline in premiums earned.
Natural catastrophe claims strongly influenced results in the property and specialty lines of business; these events included a snowstorm in China, floods in Queensland, Australia, and hurricanes Gustav and Ike. We continued to hedge our natural catastrophe exposure, which reduced earnings volatility. Using Vega, a new natural catastrophe protection programme, we transferred USD 150 million of catastrophe risk to the capital markets. The notes issued under the programme provide us with protection for low-layer earnings volatility for our peak natural catastrophe perils over multiple events.
Our Property & Casualty underwriters remain dedicated to delivering sustainable returns to shareholders by actively managing the insurance cycle. We seek to achieve this goal by separating selling from underwriting and by emphasising accurate and unbiased cost calculation. We continuously monitor and seek to maintain the profitability of our book of business through integrated pricing tools. We have strengthened our business origination, allowing our client managers to provide clients with a full spectrum of products and services. Our pipeline of product innovations is bearing fruit and has allowed us to enter profitable niche markets.
Business results Operating income decreased 38.6% to CHF 2.7 billion in 2008 from CHF 4.5 billion in 2007. The main drivers for this decline were lower investment returns, higher natural catastrophe losses and a deterioration in credit reinsurance experience.
The impact of natural catastrophe claims, particularly from hurricane Ike, gross of retrocession recovery, was higher in 2008 compared to 2007. Including recovery, claims from natural catastrophes exceeding CHF 20 million amounted to CHF 0.9 billion, or 6.0% of premiums, compared to CHF 0.5 billion or 2.6% of premiums in 2007. As a result of our continued insistence on tight terms and conditions, underlying portfolio profitability remained strong. Claims development from prior years was moderately positive during 2008.
The net investment result fell 15.2% to CHF 2.5 billion, reflecting market conditions and the development of reserves.
Financial Guarantee Reinsurance is now reported in the Legacy segment. 2007 has been restated accordingly.
Property & Casualty results CHF millions 2007 2008 Change in %
Net realised investment gains/losses –283 –145 –49 Other revenues 97 54 –44
Expenses Claims and claim adjustment expenses –12 049 –9 857 –18 Acquisition costs –3 826 –2 730 –29 Other expenses –1 633 –1 562 –4 Total expenses –17 508 –14 149 –19
Claims ratio in %, including unwind of discount 61.9 68.9 Expense ratio in % 28.2 29.0 Combined ratio in %, including unwind of discount 90.1 97.9 Combined ratio in %, excluding unwind of discount 88.8 96.1
Net premiums earned Net premiums earned declined 24.2%, reflecting the quota share arrangement with Berkshire Hathaway and Swiss Re’s continued commitment to strict underwriting discipline. At constant exchange rates, premiums decreased 18.4% in 2008 compared to 2007.
The balance between proportional and non-proportional business was stable in 2008 compared to 2007. The share of non-proportional business in the overall book was 43%.
Combined ratio The combined ratio for traditional business increased to 97.9% in 2008 from 90.1% in 2007, mainly due to higher natural catastrophe claims and deterioration in the credit reinsurance business. The Casualty combined ratio increased slightly, although net prior year claims experience was lower than in 2007.
The discount of Property & Casualty reserves applied following the acquisition of GE Insurance Solutions in 2006 was further amortised in 2008. The amortisation increased the combined ratio by 1.8 percentage points in 2008. The discount, net of capital cost, unwinds over the estimated average duration of the reserves. Excluding this unwind, the combined ratio of traditional business was 96.1%.
The combined ratio increased to 76.6% in 2008 from 68.9% in 2007, reflecting the impact of natural catastrophes and favourable loss experience, although at a lower level than in 2007.
The liability combined ratio was 126.9% in 2008 compared to 123.9% in 2007. The 2008 combined ratio was impacted by large losses especially in the energy and pharmaceutical sectors, which affected prior years.
The accident combined ratio increased to 161.8% in 2008 from 141.1% in 2007. Prior year development on workers’ compensation business continued to impact the combined ratio negatively.
Other expenses –510 –470 –150 –112 –57 –269 –1 568 –65 –1 633 2008 CHF millions
Acquisition costs –623 –609 –265 –136 –484 –488 –2 605 –125 –2 730 Other expenses –463 –471 –117 –103 –87 –187 –1 428 –134 –1 562
The combined ratio for specialty business increased to 94.7% in 2008 from 75.0% in 2007.
The credit reinsurance business was negatively impacted by deteriorating economic conditions, especially in Spain. The combined ratio increased to 119.7% in 2008 from 64.9% in 2007.
The other specialty combined ratio, which includes Marine, Aviation, Engineering, Agriculture and Nuclear business, increased to 83.2% in 2008 from 77.9% in 2007. Partially offset by the positive experience in Aviation, this increase was mainly due to the impact of natural catastrophe claims on Marine business.
Business developments New Life & Health business volumes remained stable in the US and Canada. US cession rates continued to decline, albeit more slowly than in recent years; this was largely due to cedents choosing to take up excess of retention reinsurance and using insurance-linked securities for capital funding. Swiss Re’s market share grew as a result of an increase in requests for mortality knowledge-based services.
We also concluded several new variable annuity reinsurance transactions in the US and Asia. Prices have risen to reflect the increased cost of hedging the financial market risks embedded in these products.
Life & Health operating income fell 47.2% to CHF 697 million in 2008 from CHF 1.3 billion in 2007. Strong performance from traditional mortality and morbidity products was offset by adverse results arising from products that were directly affected by the volatile financial markets.
Premiums earned and fee income Premiums and fees fell 12.6% to CHF 11.9 billion from CHF 13.6 billion in 2007. Excluding currency exchange effects, premiums and fees decreased 2.4%. This decline was primarily attributable to Admin Re® due to the sale of new business operations of Tomorrow to LV= in December 2007, and lower fee income, partially offset by premium from the Barclays Life transaction in 2008.
Traditional life premiums and fees were CHF 7.8 billion, compared to CHF 8.4 billion in 2007. Excluding currency exchange effects, premiums and fees rose 3.5%, reflecting new business written in all regions. Traditional health premiums fell to CHF 2.4 billion from CHF 3.0 billion in 2007, largely due to currency exchange effects, changes in cedents’ reporting dates and commutations. Admin Re® premiums and fees declined to 1.6 billion from CHF 2.3 billion in 2007. Excluding currency exchange effects, premiums and fees fell 19.2%, primarily due to the sale of new business operations of Tomorrow to LV= in December 2007, and lower fee income from unit-linked business as a result of turbulent market conditions.
Our management expense ratio declined to 6.6%, including lower one-off integration costs for Admin Re® transactions, of which we completed 2 in 2008 compared with 7 in 2007. Integration costs depend critically on the timing and stage of completion for each acquisition, but are generally within expectations. In addition, refinements were made to the attribution factors used to allocate expense between business segments, resulting in a slightly lower allocation of total expenses to the Life & Health segment in 2008 compared to 2007.
Lines of business A diversified geographical business mix and continued disciplined pricing contributed to a strong fundamental business result, offset by the impact of a volatile market on products that are directly affected by credit spreads and equity returns.
Traditional life Operating income for traditional life business dropped to CHF 136 million from income of CHF 793 million year on year, primarily due to financial market driven factors. This decline was primarily attributable to unfavourable returns from the new variable annuity business
Life & Health 2008 premiums earned and fee income by region Total CHF 11.9 billion
Net realised investment gains/losses 799 –5 022 – Other revenues 5 –
Operating result, excluding non-participating net realised investment gains/losses 966 926 –4
Net investment income – unit-linked 749 767 2 Net investment income – with-profit business 311 249 –20 Net investment income – non-participating 3 046 2 632 –14 Net realised investment gains/losses – unit-linked 512 –4 052 – Net realised investment gains/losses – with-profit business –67 –741 – Net realised investment gains/losses – non-participating 354 –229 –
Management expense ratio in % 7.9 6.6 Benefit ratio2 in % 87.0 85.5 1 Operating revenues exclude net investment income and net realised investment gains/losses from unit-linked and withprofit business as these are passed through to contract holders and therefore do not have an impact on the operating result. Operating revenues also exclude net realised investment gains/losses from non-participating business.
1 Operating revenues exclude net investment income and net realised investment gains/losses from unit-linked and with-profit business as these are passed through to contract holders and therefore do not have an impact on the operating result. Operating revenues also exclude net realised investment gains/losses from nonparticipating business.
2 The benefit ratio is calculated as claims divided by premiums earned, both of which exclude unit-linked and withprofit business.
Strategic alignment We have completed a review of our Financial Markets unit and defined two strategic mandates: to manage the assets generated through (re)insurance activities and to develop solutions with the Client Markets and Products Underwriting teams for our clients. As a result, we renamed the unit Asset Management to reflect the focus on these two strategic mandates.
As part of this alignment, we decided to identify and allocate non-core activities within Asset Management to the Legacy portfolio, which includes certain activities formerly reported in the Credit & Rates, and Equity & Alternative Investments classifications.
For comparative purposes, the corresponding Asset Management segment values have been broken out and shown separately below from the Legacy segment as of the end of December 2007.
Net realised investment gains/losses –1 045 1 472 427 Fees, commissions and other revenues 125 0 125
Credit & Rates Swiss Re’s Credit & Rates portfolio decreased to CHF 114.7 billion in 2008 from CHF 138.7 billion in 2007 as a result of net sales and maturities in the portfolios, declines in market values and the impact of foreign currency movements. Net investment income, declined 15% to CHF 6.3 billion. The decrease was mainly due to the running yield declining to 4.9% from 5.2% as a result of reducing the risk profile through increased allocation from corporate to government securities and a general decline in interest rates. The net realised gain on credit and rates investments was CHF 807 million in 2008, compared to a net loss of CHF 1.0 billion in 2007. The net realised gain in 2008 related mainly to gains on government bonds, offset by a decrease in the market value of the overall credit portfolio and impairments. Expenses which are included in net investment income decreased CHF 217 million, representing cost reductions in variable expenses.
Net unrealised loss in shareholders’ equity was CHF 2.4 billion at the end of 2008, compared to a net unrealised gain of CHF 1.8 billion at the end of 2007. The decrease was mainly due to credit spread widening and reclassification of assets from trading to available-for-sale.
Equity & Alternative Investments We reduced Swiss Re’s gross exposure to CHF 9.9 billion at the end of 2008 from CHF 21.2 billion at the end of 2007, mainly due to the liquidation of the global equity portfolio as we continued to reduce the Group’s risk exposure to the equity markets.
Strategic alignment We have formed a new unit, Legacy, to manage specified products that Swiss Re no longer offers and which are separately reported. The activities of the Legacy unit were formerly reported in the Financial Markets or Property & Casualty segments.
The Legacy portfolio consists of Structured CDS, Portfolio CDS, Financial Guarantee Re and former trading activities, including credit correlation, collateralised fund obligations, bonds trading, swaps in trust, total return swaps relating to insurance-linked securities, natural gas and other non-core activities.
Legacy segments For comparative purposes, the corresponding Legacy segment values have been broken out and shown separately below from the Asset Management segment as of the end of December 2007.
Structured and Portfolio CDS In 2008, net realised investment losses for Structured CDS increased to CHF 2.0 billion from losses of CHF 1.3 billion in 2007. Net realised investment losses for Portfolio CDS were CHF 563 million in 2008, compared to a gain of CHF 25 million in 2007. These declines were mainly due to the mark-to-market impact on the Structured CDS and credit spread widening affecting the valuation of the Portfolio CDS.
Trading The Legacy trading activities result increased to a CHF 3.3 billion loss in 2008 from a CHF 185 million loss in 2007. This was mainly driven by the Total Return Swap (TRS) portfolios relating to insurance-linked securities activities and a decrease in the market value of positions resulting from illiquidity in the capital markets.
Property & Casualty The January 2009 renewals showed the first signs of a hardening market. We expect this hardening to intensify through the year, due primarily to the crisis in the financial markets. Both increased cost of capital and reduced capacity in the retrocession markets should generate higher reinsurance rates. At the same time, the surplus of many of our clients has been reduced, increasing their need to seek capital relief by buying reinsurance.
Property and specialty renewals show the beginning of an upward price trend for some business segments, most notably for catastrophe cover in the US. We expect this to continue and extend to other products and markets. We are prepared for rapid growth in segments where the market hardens; we also remain fully committed to capturing value through active and disciplined cycle management. We will continue to focus on the areas in which we have a competitive advantage, including writing large individual lines.
Life & Health The slowdown in the global economy is likely to reduce demand for life and health insurance into 2010, since sales of protection products are often linked to those of mortgages or investment products.
In the US, 2008 ended with indicators that declining cession rates are reversing; quote activity increased late in the year as demand for reinsurance grew along with higher capital costs and lower yields. These same forces made it necessary for us to increase our prices. We anticipate continued demand for reinsurance in 2009, with large transactions likely as cedents leverage reinsurance for capital relief until stability returns to the financial markets.
Asia will see continued new business growth, particularly in health and wealth accumulation products. Funding of healthcare costs will continue to be a priority for individuals, creating increased demand among insurers for support in providing sustainable long-term solutions.
Share price performance Capital markets continued in 2008 where they left off in 2007, with downward pressure on most share prices, especially in the financial sector. Swiss Re shares started the year at CHF 80.45; following the publication of strong 2007 results, they climbed to the year’s intraday high of CHF 93.95 on 2 April 2008. Our shares outperformed those of most of our peers as well as the relevant indices during the first six months of 2008.
The second half of the year saw worries about subprime defaults expand into larger concerns about asset valuations and then fear of worldwide recession as the credit crisis cut across all industries. A number of banks and insurance companies sought state support and flagging investor confidence drove down all major stock markets, with financial sector share prices particularly affected. Swiss Re shares suffered significantly increased volatility during this period, reaching an intraday low for the year of CHF 35.38 on 10 October 2008 before recovering to CHF 50.30 at the year’s end. The 37.5% drop in Swiss Re’s share price over the year was in line with the 34.8% fall in the Swiss blue chip index (SMI). Swiss Re outperformed our benchmark, the Dow Jones STOXX 600 Insurance index, which fell 52.6%.
Share trading The average daily trading volume for 2008 was 3.1 million shares on-exchange and 0.1 million shares off-exchange. Trading volume peaked at 16 million shares on 23 January 2008 after the announcement that Berkshire Hathaway had bought a 3% stake in Swiss Re. The week of 15 September 2008 also saw a significant volume of shares change hands as Wall Street had its worst trading day since 11 September 2001, due to the Lehman Brothers bankruptcy filing and the federal support provided to AIG, the largest US insurance company. Daily volumes in the second half of the year were lower than in the first half as investors assumed a wait-and-see position.
Share RUKN VX RUKN RUKN.VX ADR level I1 SWCEY US SWCEY SWCEY.US 1 Swiss Re’s ADR are not listed but traded over-the-counter; one ADR corresponds to one Swiss Re share.
Dividends The Board of Directors will propose a dividend of CHF 0.10 per share for 2008. Swiss Re pays its dividend annually, three working days after the Annual General Meeting; as of that day, the share price is ex-dividend.
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.
Swiss Re share price and trading volume in 2008 Volume in millionsClosing price in CHF
Insurance indices Dow Jones STOXX 600 Insurance 4.68 Bloomberg Europe 500 Insurance 4.86
Earnings per share3, 4 8.00 4.68 13.49 11.95 —2.61 Book value per share3, 4 61.78 73.87 86.21 92.00 60.96
Price per share, year-end 81.10 96.20 103.60 80.45 50.30 Price per share, year high (intraday) 97.05 103.40 108.50 119.40 93.95 Price per share, year low (intraday) 66.35 75.10 79.60 78.70 35.38 Daily trading volume (in CHF millions) 104 126 153 253 214 Market capitalisation3 (in CHF millions) 26 120 30 985 38 792 27 798 18 285 ADR price at year-end (in USD) 71.80 73.25 85.25 71.00 47.80 1 Nominal value of CHF 0.10 per share 2 Dividend divided by year-end share price of corresponding year 3 Based on outstanding shares 4 Figures for 2004 represent the previously applied accounting policy, Swiss GAAP FER; those for 2005 – 2008 are based on US GAAP.
Risk and capital management 68 Risk governance 68 Risk management view of the financial crisis 68 Risk management organisation 70 Swiss Re’s risk landscape 71 Integrated risk modelling 73 Risk assessment 73 Group capital requirement 74 Property and casualty insurance risk 75 Life and health insurance risk 76 Financial market risk 77 Credit risk 78 Operational risk 78 Reputational risk 79 Liquidity risk management 79 Liquidity management actions 79 Liquidity position of Swiss Reinsurance Company Ltd 81 Capital management 81 Capital adequacy 82 Capital management actions 83 Credit ratings
Internal capital adequacy of 207% ̤ remains slightly above our target range, despite significant capital depletion due to unprecedented turbulence in global financial markets.
Completed major step in European ̤ restructuring with the transfer of our Denmark, France, Ireland, Italy, Netherlands, Spain, and UK business into branches of our Luxembourg entities.
The financial crisis has demonstrated the importance of a strong and independent risk management function, as well as the need for an integrated approach to assessing and controlling risks. To this end, we further enhanced our risk management by establishing a more robust governance process, intensifying our risk oversight and strengthening our liquidity management.
The Group Products and Limits Committee determines Swiss Re’s product policy and ̤ standards, grants reinsurance limits, and decides on large or non-standard transactions.
None of the Risk Management departments executes business. They oversee risk-taking activities, and set the risk management guidelines and best practice standards that the business units implement.
Group Internal Audit is an independent, objective assurance function that assesses the adequacy and effectiveness of our internal control systems. It monitors the execution of processes within Swiss Re, including those in risk management.
Swiss Re’s risk landscape Risk management is essential to our strategic planning and is embedded in our management discipline. Our risk landscape comprises core risks as well as operational and other risks that arise as a result of doing business.
Credit risk is the risk of incurring a financial loss due to diminished creditworthiness ̤ (eroding credit ratings and, ultimately, default) among counterparties of Swiss Re or of third parties.
Further risks that arise as a result of doing business include operational, reputational and liquidity risk: Operational risk, defined according to the Basel II recommendations, includes potential ̤ losses or reputational damage arising from inadequate or failed internal processes, people and systems, or from external events. This includes, for example, potential non-compliance with regulation which might result in regulatory penalties.
Our risk model assesses the potential economic loss at a specific confidence level. There is thus a possibility that actual losses may exceed the selected threshold. In addition, the reliability of the model may be limited when future conditions are difficult to predict, for example in an extremely volatile market environment. For this reason, we continuously review and update the model and its parameters to reflect changes in the risk environment as well as current best practice.
Since the onset of the financial crisis, we have implemented various model enhancements to better reflect changes in the market environment. In particular, we have significantly improved the modelling of asset-backed securities by increasing its granularity: the respective risk factors are now more frequently updated to capture increased market volatility. In 2008, we also enhanced our internal model to reflect Swiss Re’s legal entity structure and related Group effects, such as intra-Group transactions and consequential effects from potential distress situations. As part of the Swiss Solvency Test (SST), the new model is in the process of being validated by the Swiss regulator. In addition, the property and casualty risk models were improved by introducing enhanced event-set-based methods for assessing windstorm and aviation risks.
An important aspect of the SST is its recognition of the fundamental economic principle of diversification, taking legal structures and internal contracts into account. We worked closely with the Swiss regulator to extend the Group’s internal model for new SST requirements, including the modelling of intra-group transactions and their impact on capital adequacy. This accelerated our existing efforts, helping us to further enhance our Group-wide capital management.
The table below shows the standalone 99% Tail VaR for Swiss Re’s core risk categories. The Group’s 99% Tail VaR was stable as higher financial market and credit risk was largely offset by lower property and casualty risk. More information on developments within the risk categories is provided later in this chapter.
Stress scenario analyses complement the integrated risk model by providing information on the potential economic impact of certain adverse situations. Some of these stress tests are reported in the following sections.
Simple sum 25.1 24.0 –4 Diversification effect –8.5 –9.1 – Swiss Re Group 16.6 14.9 –10
Property and casualty insurance risk Property and casualty risk arises predominantly from our property and casualty business, as well as from specialty lines, such as engineering, aviation and marine. The Group Property & Casualty Risk Guideline, in conjunction with the Group Risk Management Guideline, establishes the relevant risk governance framework. P & C Risk & Actuarial Management is responsible for independent oversight of property and casualty risk taking.
In 2008, the Group’s property and casualty risk measured by 99% Tail VaR decreased 9% to CHF 7.9 billion. The reduction in risk was mainly driven by the 20% quota share arrangement with Berkshire Hathaway for new property and casualty business, which lowered net exposure and thus decreased capital requirements across all lines. This effect was partly offset by reductions in other protection instruments in order to optimise Swiss Re’s property and casualty hedging portfolio. We also reduced our risk from directors’ and officers’ liability (D & O) and auditors’ professional indemnity insurance through more selective underwriting and a significant reduction in business written. Strict underwriting discipline led to a moderate overall reduction in general liability business, especially in pharmaceutical product liability.
The table above shows the results of our stress scenario analysis: Swiss Re’s expected pre-tax claims for major natural catastrophe events, net of insurance-linked securities, industry loss warranties, retrocession and risk swaps. The scenarios take account of the fact that an event can trigger claims in various lines of business. For example, the European windstorm scenario includes, among others, claims from motor business, while the California earthquake scenario also reflects – but is not limited to – additional claims arising from workers’ compensation and general liability.
The estimated impact for Swiss Re of the largest natural catastrophe loss events has generally decreased since the end of 2007. This mainly reflects the impact of the Berkshire Hathaway quota share arrangement, which is partly offset by the adjustment of other hedging instruments mentioned above, as well as an increase in incoming business written. The rise in California earthquake risk is due to significant business growth in the fourth quarter of 2008.
In 2008, the Group’s life and health risk measured by 99% Tail VaR decreased 12% to CHF 5.2 billion. This was mainly due to lower mortality and morbidity risk following the strengthening of the Swiss franc against the currencies in which our exposures are mainly denominated. In particular, the substantial weakening of the British pound had a significant impact on life and health risk. These currency effects more than offset the impact of introducing longevity risk into the Group risk model.
The table above shows Swiss Re’s expected pre-tax mortality claims for a major lethal pandemic loss event based on our proprietary pandemic model. The scenario assumes that excess mortality will vary with age, but is conservative in that it does not allow for the typically lower mortality experienced among insured populations. The decrease is due to the depreciation of major currencies against the Swiss franc, which more than offset modest overall growth in underlying business volumes.
Estimated economic impact of a single loss event in CHF billions as of 31 December 2007 2008
Financial market risk Swiss Re’s financial market risk originates from two main sources: our investment activities and the financial market sensitivity of the economic value of liabilities. The Group Credit & Financial Market Risk Guideline defines minimum standards for managing financial market risk; these are supplemented by the Group Derivative Guidelines, the Swiss Re Financial Markets Policy and other, business-specific guidelines. Financial Risk Management is responsible for Group-wide monitoring and reporting of financial market risks.
Our Group-wide risk limits are defined by the Group Risk and Capital Committee, based on a proposal by Risk Management. In 2008, we enhanced our limit framework to reflect the changed market environment: all activities involving financial market risk are subject to a first limit set by risk factor and a second limit set by business group. Individual limits are expressed in terms of 10-day VaR, stress testing and sensitivity analysis. Asset Management determines a more detailed set of risk limits for its businesses, including stop-loss triggers.
In 2008, financial market risk measured by 99% Tail VaR increased 3% to CHF 8.0 billion, mainly due to higher credit spread market volatility, which led to a substantial increase in credit spread risk. This was mostly offset by a significant decrease in equity risk, as we reduced our equity positions and increased our hedging in response to the market turmoil.
Estimated economic impact of each single loss event in CHF billions as of 31 December 2007 2008 30% fall in global equity markets –3.8 –2.5 100 basis point parallel increase in global yield curves 0.2 0.1 15% fall in global real estate markets –0.6 –0.6
Operational risk Swiss Re’s operational risk management (ORM) framework provides consistency of approach and a comprehensive overview of potentially serious event scenarios, ensuring that appropriate controls and contingency planning are in place. Our ORM is designed to reduce the Group’s exposures to an acceptable level, taking into account the cost-benefit considerations of risk mitigation, as well as to enhance operational excellence.
We have a long-standing commitment to sustainable business practices, responsible corporate citizenship and good governance. This is reflected in our participation in several international initiatives and conventions. In March 2008, Swiss Re signed the Global Compact, a United Nations initiative for businesses that are committed to human and labour rights, as well as to environmental responsibility and anti-corruption.
As a reinsurance company, our core business generates liquidity largely through premium income. Swiss Re’s exposure to liquidity risk stems mainly from regulatory constraints that limit the flow of funds within the Group as well as from the funding of the Legacy portfolio (described on page 59). To manage this risk, we have a range of liquidity policies and measures in place. In particular, we aim to ensure that: sufficient excess liquidity, mainly in the form of unencumbered liquid assets, is held ̤ centrally to meet Group liquidity requirements resulting from a range of potential stress events; funding is charged at an appropriate market rate through our internal transfer pricing; ̤ diversified sources are used to meet Swiss Re’s residual funding needs; ̤ Swiss Re’s long-term liquidity needs are taken into account as part of our asset-liability ̤ management approach used to control financial market risk (as described on page 76).
Liquidity management actions In response to the extreme market conditions in 2008 and in anticipation of extended market disruption, we enhanced our monitoring of liquidity risk and implemented a range of measures to support Swiss Re’s excess liquidity position.
Liquidity position of Swiss Reinsurance Company Ltd We monitor Swiss Re’s liquidity position based on liquidity stress tests, as well as expected funding gaps over intervals of three months to one year. Our core liquidity policy is to pre-fund the potential funding requirements arising from various stress events. This is achieved by maintaining excess liquidity in the form of unencumbered liquid assets and cash within a central pool of entities, namely the “SRZ liquidity pool”. This 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 excess liquidity, referred to in the following discussion as “spot liquidity”, is intended to allow Swiss Re to meet its funding obligations in a liquidity crisis without having to rely on other asset sales or unsecured external funding – and assuming a reduction in funding from new reinsurance business.
The market value of spot liquidity within the SRZ liquidity pool was CHF 17.3 billion and CHF 9.6 billion as of 31 December 2008 and 2007, respectively. In response to the deterioration in financial market conditions, we substantially increased spot liquidity in September 2008 by earmarking additional assets for liquidity purposes. As of 31 December 2008, we estimate Swiss Re held surplus spot liquidity based on our internal liquidity stress tests.
In addition to spot liquidity, a sizeable portfolio of other unencumbered assets are held within the SRZ liquidity pool. We target holding total unencumbered assets, including spot liquidity, that would provide sufficient funds if pledged or sold to meet the liquidity requirements stemming from an aggregate extreme loss event corresponding to 99% Tail VaR (see page 73). In addition to the cash and collateral requirements resulting from such a loss, we assume a two-notch ratings downgrade within 90 days and a four-notch downgrade within one year. We also assume that funding from assets is subject to conservative haircuts (discounts); that intra-Group funding is not available if it is subject to regulatory approval; that no new unsecured funding is available; and that funding from new reinsurance business is reduced. The estimated total liquidity sources available over a one-year horizon within the SRZ liquidity pool amounted to CHF 25.6 billion and CHF 37.5 billion as of 31 December 2008 and 2007, respectively. This decrease was mainly due to the significant reduction in assets funded by repurchase agreements, which improved net liquidity, as well as the transfer of the European branches from Swiss Reinsurance Company Ltd to Swiss Re Europe S.A. There is a risk that Swiss Re’s liquidity position could be impaired if the Group were unable to access the capital markets over a one-year time horizon following the occurrence of such an extreme loss event.
Our capital management aims to ensure the Group and all its subsidiaries are adequately capitalised at all times. The level of capitalisation and capital structure are determined by regulatory capital requirements (both for the Group and individual legal entities), requirements for our target rating, as well as the management’s view of risks and opportunities arising from our business operations.
Capital adequacy We are actively working towards closing the gaps between regulatory, rating and internal views on capital adequacy. We have had an active dialogue with Standard & Poor’s (S & P), providing feedback on their new Insurance Capital Model, and will continue to participate fully in the development of Solvency II.
Swiss Re’s external capital adequacy Regulatory capital requirements On 1 January 2009, the former Federal Office of Private Insurance (FOPI), the Swiss Federal Banking Commission (SFBC) and the Anti-Money Laundering Control Authority were merged to form the Swiss Financial Market Supervisory Authority, FINMA. FINMA exercises integrated supervision of banks, insurance companies, reinsurers, other financial institutions and intermediaries in Switzerland.
Swiss Re determines the amount of available capital based on Economic Value Management (EVM) economic net worth, adjusted for additional risk-bearing items in line with the SST requirements. Required capital is based on 99% Tail VaR, as discussed on page 73.
The ENW is based on a “closed book” approach which implies that no value is recognised for future expected new business. As a result, no credit is taken for intangible items such as goodwill. For more information on EVM and the economic valuation of insurance contracts, please refer to Swiss Re’s EVM Report, published in May 2008.
Credit ratings Standard & Poor’s (S & P), Moody’s and A.M. Best rate Swiss Re’s financial strength based upon interactive relationships.
As of 18 February 2009 S & P Moody’s A.M. Best
On 5 November 2008, Moody’s affirmed Swiss Re’s financial strength ratings (Aa2) and revised the outlook from stable to negative.
114 Executive management 118 Compensation, shareholdings and loans 125 Shareholders’ participation rights
The charters of the Board committees ̤ have been refined to optimise interaction and efficiency between and among them.
Transparency Transparency is an important component of the governance framework designed to protect the interests of shareholders and create value for all stakeholders. Last year Swiss Re continued to provide Economic Value Management (EVM) reporting to analysts and investors. Unlike other calculation models, EVM includes capital costs and allows a comparison of the Group’s different business operations. This increases the transparency of Swiss Re’s business. In 2008, particular weight was placed on informing stakeholder groups about the repercussions of the financial crisis on Swiss Re.
The information provided in this chapter of the Annual Report follows the structure of the SIX Directive.
Listed Group companies Swiss Reinsurance Company Ltd, the Group’s parent company, is a joint stock company, listed on the SIX Swiss Exchange, domiciled at Mythenquai 50/60 in 8022 Zurich and organised in accordance with Swiss laws. For detailed share information, see the “Share performance” section on pages 62 – 65. For the other listed Group companies, see the Group financial statements, note 18 on “Subsidiaries, equity investees and variable interest entities”, on pages
Client Markets Europe ̤ Americas ̤ Asia ̤ Insurance & Specialty ̤ Global Admin Re® ̤
Global IT ̤ Group Legal ̤ Claims & Liability ̤ Management Global Technical ̤ Accounting & Services Group Logistics ̤
b. Dodge & Cox, 555 California Street, 40th Floor, San Francisco, CA 94104, USA, announced on 31 October 2008 that they held, on behalf of the Dodge & Cox International Stock Fund, through an acquisition, 10 766 995 registered shares of Swiss Re. Dodge & Cox thus has a voting right of 3.05% in Swiss Re which can be exercised autonomously of the beneficial owners.
c. Berkshire Hathaway Inc., 3555 Farnam Street, Omaha, NE 68131, USA, notified Swiss Re on 22 January 2008 that, as of the same day, it held through its subsidiary Columbia Insurance Company, 3024 Harney Street, Omaha, NE 68131, USA, 11 250 000 registered shares or 3.03% of the voting rights of Swiss Re.
d. Franklin Resources, Inc., 500 E. Broward Blvd., Ft. Lauderdale, FL 33394, USA, known as Franklin Templeton Investments, notified Swiss Re on 6 December 2008 that it holds as of 4 December 2008, through an acquisition by a number of its Group companies, in the capacity of investment manager for mutual funds and clients, 10 970 364 registered shares of Swiss Re. Franklin Templeton Investments now holds 3.11% of the voting rights.
Swiss Re does not hold 5% or more of the shares or voting rights of any company which, in turn, also owns 5% or more of Swiss Re’s shares or voting rights.
With regard to the conditional capital for employee participation purposes, shareholders’ subscription rights are excluded. Such shares may be issued at a price below the current market price. The Board of Directors shall specify the precise conditions of issue.
At an Extraordinary General Meeting held on 27 February 2006, shareholders approved the creation of CHF 9 000 000 of authorised capital as well as an increase in conditional capital of CHF 2 000 000, relating to the acquisition of GE Insurance Solutions Corporation and for general corporate purposes.
No additional conditional capital and no authorised capital was created in 2008.
In 2008, the company’s fully paid-in share capital decreased from CHF 37 million to CHF 36 million. This change was due to the cancellation of CHF 1 734 900 of share capital consisting of 17 349 000 shares repurchased via the second trading line, as approved by shareholders at Swiss Re’s 2008 Annual General Meeting, and the creation of 10 460 076
Corporate governance and compensation report 2 Capital structure shares from conditional capital in connection with the conversion of the mandatory convertible bond (MCS) as described below. Total reserves decreased CHF 0.2 billion to CHF 17.0 billion. The profit for the financial year 2008 of CHF 15 million, compared to CHF 1.7 billion in 2007, led to a decrease in disposable profit to CHF 0.1 billion from CHF 1.8 billion. Total shareholders’ equity before allocation of profit decreased to CHF 17.1 billion in 2008 from CHF 19.0 billion in 2007. The company issued 18 205 shares from conditional capital for employee participation purposes, bringing the total of shares issued for employee participation purposes to 974 328, from a total of 7 000 000 shares available. In connection with the conversion of the CHF 1 billion MCS in December 2008 issued by Swiss Re Treasury Luxembourg S.A., the company issued 10 460 076 shares from conditional capital for bonds or instruments with a conversion right, from a total of 26 039 275 shares available. At the Annual General Meeting of 13 March 2009, shareholders will vote on a proposed dividend payment of CHF 33.6 million, compared to CHF 1.3 billion distributed in the previous year.
In January 2008, Swiss Re announced, in connection with its entry into a retrocession agreement with Berkshire Hathaway, that the company intended, in addition to the previously announced share buy-back programme through a second trading line, to acquire its own shares by way of its first trading line for general treasury purposes up to a total value of CHF 1.75 billion. On 4 November 2008 the company announced its intention to suspend both buy-back programmes due to prevailing market conditions.
As of 31 December 2008, the share capital of Swiss Reinsurance Company Ltd, including 11 678 802 shares reserved for corporate purposes, amounted to CHF 36 351 604 or 363 516 036 fully paid-in registered shares (each with a nominal value of CHF 0.10), of which 335 665 775 are entitled to a dividend payment. Other than the shares reserved for corporate purposes, which have no voting power and are not entitled to a dividend payment, there are no additional types of shares with a higher or limited voting power, privileged dividend entitlement or any other preferential rights; nor are there any other securities representing a part of the company’s share capital. Swiss Re’s capital structure ensures equal treatment of all shareholders in accordance with the principle of “one share, one vote”.
According to the SIX Directive, profit-sharing certificates are particular types of non-voting securities that substitute or complement shares. Such certificates do not exist at Swiss Reinsurance Company Ltd.
Independence Swiss Re requires a majority of the Board of Directors to be independent. To be considered independent, a director may not be, and may not have been in the past three years, employed as an executive officer of the Group. In addition, he or she must not have a material relationship with any part of the Group – directly or as a partner, director or shareholder of an organisation that has a material relationship with the Group. Based on Swiss Re’s independence criteria, in 2008 twelve of Swiss Re’s thirteen directors qualified as independent.
Since John R. Coomber was Chief Executive Officer until 31 December 2005, he may not be considered to have been independent in 2008 under the applicable criteria, although he no longer has an executive status.
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 a member of Swiss Re’s executive management and Chief Executive Officer until 31 December 2005. Walter B. Kielholz, former Executive Vice Chairman and non-executive Vice Chairman since 2007, was Swiss Re’s Chief Executive Officer from 1 January 1997 to 31 December 2002. Of the other eleven non-executive directors, none has ever held a management position in the Group.
Skills, experience and expertise The Board aims to attain the requisite balance of skills, knowledge, and tenure for today’s business needs among its members. Potential new candidates are assessed against Board approved selection criteria including integrity, skill, qualifications, experience, communication capabilities and community standing. In addition to their managerial skills and expertise, Swiss Re’s Board members have a sound knowledge of today’s key areas, such as accounting, legislation, insurance/reinsurance, finance and risk, and capital markets, thus providing a solid foundation for decision making. It is ensured that every newly elected Board member receives an adequate general introduction. In the course of the year, the Board and its committees also receive educational sessions from business experts on emerging business trends and risks.
Walter B. Kielholz, a Swiss citizen born in 1951, studied business administration at the University of St. Gallen and graduated in 1976 with a master’s degree in business finance and accounting.
In addition, Walter B. Kielholz is a member of the European Financial Roundtable (EFR), a member of the Board (president in 2006/2007) of the International Monetary Conference and a member of the Institute of International Finance (IIF). Walter B. Kielholz is also Chairman of the Supervisory Board of Avenir Suisse and a member of the Board and the committee of the Swiss Business Federation (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.
Raymund Breu, a Swiss citizen born in 1945, graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a doctorate in mathematics.
Raymund Breu is Chief Financial Officer of the Novartis Group and a member of that company’s Executive Committee, positions he assumed when Novartis was created in December 1996. He joined the group treasury of Sandoz, a predecessor company of Novartis, in 1975. Ten years later, he was appointed Chief Financial Officer of Sandoz Corporation in New York. In 1990, he became Group Treasurer of Sandoz Ltd and, in 1993, Head of Group Finance and a member of the Sandoz Executive Board.
Mathis Cabiallavetta, a Swiss citizen born in 1945, graduated from the University of Montreal with a bachelor’s degree in economics and from the Queen’s University, Kingston, Ontario with a master’s degree in economics.
He was Vice Chairman of MMC from May 1999 to August 2008. 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 since 1971. He became President of the Group Executive Board in 1996 and was elected Chairman of UBS AG in 1998.
Mathis Cabiallavetta was elected to Swiss Re’s Board of Directors at the Annual General Meeting of 18 April 2008, with effect from 1 September 2008, for a three-year term of office.
Raymond K. F. Ch’ien also serves as Chairman of the Boards of Directors of MTR Corporation Limited, Hang Seng Bank Limited and HSBC Private Equity (Asia) Limited. He is also a member of the Board of Directors of Inchcape plc, the Hong Kong and Shanghai Banking Corporation Limited, Convenience Retail Asia Limited and The Wharf (Holdings) Limited. In
Raymond K. F. Ch’ien was elected to Swiss Re’s Board of Directors at the Annual General Meeting of 18 April 2008 for a three-year term of office.
John R. Coomber started his career with the Phoenix Insurance Company. He joined Swiss Re in 1973. Having qualified as an actuary in 1974, he first specialised in the company’s life reinsurance area. He was Swiss Re UK’s appointed actuary from 1983 to 1990. In 1987, he assumed responsibility for the Life division and, in 1993, was made Head of the company’s UK operations. John R. Coomber was appointed as a member of the Executive Board in April 1995, responsible for the Group’s Life & Health division. In June 2000, he became a member of the Executive Committee. He was Swiss Re’s Chief Executive Officer from 1 January 2003 until 31 December 2005, when he retired after 33 years of employment with Swiss Re.
She is also a 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 advisor 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 was elected to Swiss Re’s Board of Directors in June 2000. Her mandate was renewed in 2004 and again in 2008 for a three-year term.
Bénédict G. F. Hentsch was elected to Swiss Re’s Board of Directors in 1993. His mandate was renewed in 1997, 2001 and 2005, each time for a further four-year term. He is also a member of the Board of the ISC Foundation and the MLE Foundation, both at the University of St. Gallen.
Hans Ulrich Maerki, a Swiss citizen born in 1946, graduated with a master’s degree in business administration from the University of Basel in 1972.
Hans Ulrich Maerki joined IBM Switzerland in 1973. After some years in the sales area, he was promoted to a number of managerial positions in IBM’s Paris European Headquarters as well as in IBM Switzerland. From 1993 to 1995, he led IBM’s business in Switzerland as General Manager, before moving to IBM Europe in Paris to build the largest IT services business in the market. In August 2001, he was appointed Chairman of the Board of Directors of IBM Europe, Middle East and Africa (EMEA). From 2003 to 2005 he was also Chief Executive Officer of IBM EMEA. He retired from IBM after 35 years of service in April 2008.
Hans Ulrich Maerki was elected to Swiss Re’s Board of Directors at the Annual General Meeting of 20 April 2007 for a four-year term of office. He is also a member of the Boards of ABB Ltd, Mettler-Toledo International and the Menuhin Festival AG Gstaad. He serves on the Foundation Board of Schulthess-Klinik in Zurich, on the Board of Trustees of the Hermitage Museum in St. Petersburg as well as on the international advisory boards of the Ecole des Hautes Etudes Commerciales (HEC) Paris, the IESE Business School University of Navarra (IESE), the IMD Business School in Lausanne and Bocconi University in Milan.
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, Robert A. Scott 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.
Robert A. Scott joined Swiss Re’s Board of Directors in 2002 for a four-year term. He was reelected for a further four-year term in 2006. Robert A. Scott is also Chairman of the Board of Directors of Yell Group plc and a non-executive Director of the Royal Bank of Scotland Group plc. In addition, he is an adviser to Duke Street Capital and Pension Insurance Corporation Holdings LLP.
Kaspar Villiger joined Swiss Re’s Board of Directors in 2004 for a four-year term. His mandate was renewed in 2008 for a further three-year term. He also serves as non-executive Director on the Boards of Nestlé SA, and the newspaper “Neue Zürcher Zeitung”.
John F. Smith, Jr. retired from the Board of Directors at the Annual General Meeting of 18 April 2008. At the same time, the shareholders re-elected Rajna Gibson Brandon and Kaspar Villiger members of the Board of Directors for a three-year term. Additionally, Mathis Cabiallavetta and Raymond K. F. Ch’ien were elected new members of the Board of Directors.
Election procedure The members of the Board of Directors are elected at a General Meeting of shareholders.
Term The regular term of office of a directorship has been reduced from four to three years, based on the decision taken at the Annual General Meeting of 18 April 2008. It usually begins with the date of election by a General Meeting of shareholders and ends on the third subsequent Annual General Meeting. Members whose term has expired are immediately eligible for reelection. The age limit is 70. Members who reach the age of 70 during a regular term of office shall tender their resignation at the Annual General Meeting following the attainment of that age. The term of office of a committee member is one year, beginning with the Board meeting following the Annual General Meeting and ending with the Board meeting following the subsequent Annual General Meeting.
Nominations for the election at the Annual General Meeting of 13 March 2009 3.2 Other activities and functions 3.3 Cross-involvement 3.4 Elections and term of office 3.5 Organisational structure of the Board of Directors
Committees of the Board of Directors The Board has delegated certain responsibilities, including the preparation and execution of its resolutions, to five committees: Audit Committee, Compensation Committee, Finance and Risk Committee, Governance Committee and Investment Committee. The Investment Committee was established in 2008 and held its first meeting in December 2008.
In fulfilling its responsibilities, the Audit Committee, among other things, reviews major changes to the Group’s accounting principles and practices; ̤ reviews with the external auditor and the Head of Group Internal Audit the adequacy and ̤ efficacy of the financial reporting process as well as the Group’s system of internal controls over financial reporting and quality control procedures; reviews, at least annually, the Group’s policies regarding publication of earnings and the ̤ policies regarding communication of financial information provided to analysts and rating agencies; reviews and discusses with management the quarterly and annual financial accounts of the ̤ parent company and the Group, and approves quarterly accounts and reports of the Group; exercises supervision of compliance-related matters by reviewing management’s reports ̤ on legal, regulatory and compliance risks, including management’s identification of potential fraud risks and implemented anti-fraud controls; approves the appointment of the Head of Group Internal Audit, approves planned audit ̤ services by Group Internal Audit and reviews annually the performance of Group Internal Audit; evaluates external auditors and recommends a firm to the Board of Directors for election at ̤ the General Meeting, reviews annually the independence and the performance of the external auditor as well as its quality control procedures, and approves the compensation for external audit services; periodically meets with Group Internal Audit and the external auditor to discuss their ̤ findings and management’s responses.
Members of the Audit Committee Jakob Baer, Chair Thomas W. Bechtler (as of 18 April 2008) Raymund Breu Rajna Gibson Brandon (until 18 April 2008) Bénédict G. F. Hentsch (as of 18 April 2008) Robert A. Scott John F. Smith, Jr. (until 18 April 2008)
Compensation Committee Responsibilities of the Compensation Committee The Compensation Committee, among other things, ensures the development of a set of Group compensation principles, submits them to the ̤ Board for approval, monitors adherence to the principles and regularly discusses their appropriateness; keeps itself informed of industry and peer compensation practices; ̤ recommends to the Board the remuneration of the members of the Board, the ̤ compensation of the Chief Executive Officer and the total amount available for compensation of the other members of the Executive Board; determines the individual compensation amounts of the members of the Executive Board ̤ (other than the Chief Executive Officer), based on the Board’s determination of the total amount available; determines the total amount for bonus payments and related share deferral plans, on the ̤ basis of achieved performance, and approves long-term incentive plans (subject to the approval of the Board of Directors for new option plans); reviews and approves the Group’s compensation and pension plans; ̤ ensures compliance with any remuneration disclosure requirements; ̤ approves employment contracts with the Chairman, the Vice Chairman, the Chief Executive ̤ Officer and the members of the Executive Committee and the Executive Board.
Independence All members of the Compensation Committee are non-executive and independent.
Finance and Risk Committee Responsibilities of the Finance and Risk Committee The Finance and Risk Committee, among other things,
annually reviews and recommends for approval to the Board of Directors the Group Risk ̤ Policy, including Swiss Re’s risk tolerance targets regarding capital adequacy, risk concentration, and earnings volatility; regularly monitors the usage of limits set out in the Group Risk Policy and decides on ̤ actions to be taken following breaches; discusses with the Chief Risk Officer the top risk issues for the Group and corresponding ̤ risk mitigation actions; reviews the most important risk exposures in all major risk categories – insurance ̤ (including reserve risk), financial market, credit, funding and liquidity, and operational – highlighting significant risk concentrations;
Corporate governance and compensation report 3 Board of Directors reviews new products or strategic expansions of the Group’s areas of business, which ̤ would result in a substantial change to the Group’s risk profile, and provides comments to the Board of Directors from a risk perspective; reviews the assurance activities of the Risk Management function; ̤ reviews critical principles used in internal risk measurement, valuation of assets and ̤ liabilities, capital adequacy assessment, and economic performance measurement, and reviews their implementation; reviews the Group’s funding structure and capital adequacy; ̤ reviews the Group’s treasury strategy, including cash and liquidity management; ̤ discusses external risk mitigation activities (including retrocession, insurance bonds, and ̤ investment hedging) and their impact on counterparty risk; reviews reports on the Group-wide use of derivative instruments. ̤
Members of the Governance Committee Peter Forstmoser, Chair John R. Coomber (as of 18 April 2008) Bénédict G. F. Hentsch (until 18 April 2008) Walter B. Kielholz John F. Smith, Jr. (until 18 April 2008) Kaspar Villiger
Investment Committee Responsibilities of the Investment Committee The Investment Committee, among other things, reviews the quarterly performance of all financial assets of the Group; ̤ reviews the valuation methodology and the risk analysis methodology for each investment ̤ asset class; approves the strategic asset allocation and reviews the tactical asset allocation; ̤ ensures compliance of risk limits with approved limits; ̤ decides on investments for private equity, real estate, hedge funds or third-party fund ̤ manager allocation if in excess of any delegated authority, and reviews the strategic investment portfolio; conducts liquidity reviews relating to investment activities. ̤
The regular Board meetings are normally held in early and late February, April, May or June, early October and December. Each regular Board meeting has a special focus, which is basically related to Swiss Re’s reporting schedule. These areas of focus consist of strategic issues, financial statements, analysis of internal results, the medium-term business plan and corporate governance.
3.5.3 Work methods of the Board of Directors and its committees
Corporate governance and compensation report 3 Board of Directors constituted when at least half the members express their agreement or disagreement with the resolution. Written resolutions of Board committees may be adopted if all committee members express their agreement or disagreement with the resolution.
In the meeting, the agenda items are usually introduced by a presentation, followed by a discussion and, where necessary, a resolution on the item. The presentation is given by an expert from the Executive Committee or Executive Board or by other employees having the requisite specialist knowledge.
Specific subjects can be discussed in a closed session with a reduced number of participants. Depending on the item being discussed, these closed sessions consist solely of Board members (private session) or Board members and the Chief Executive Officer (executive session). Minutes are kept of the discussions and the resolutions of each meeting and are usually approved at the next Board or Board committee meeting.
Corporate governance and compensation report c. Specific work methods of the Audit Committee The Audit Committee normally meets eight times a year. The first two meetings of the year mainly deal with the annual closing. In the subsequent meetings, the committee focuses on topics such as embedded value, the internal control system, or legal, regulatory and compliance issues. The committee receives a status report from Group Internal Audit about four times a year. The meetings at the beginning of May, August and November are mainly dedicated to the discussion and approval of the quarterly results.
Besides the committee members and the company secretary, selected individuals are invited to attend Audit Committee meetings in an advisory capacity. In 2008, the following people exercised an advisory role on the committee: Peter Forstmoser, Chairman of the Board of Directors ̤ Walter B. Kielholz, Vice Chairman ̤ Jacques Aigrain, Chief Executive Officer ̤ George Quinn, Chief Financial Officer ̤ Clare Bousfield, Head of Group Internal Audit ̤
In 2008, there were eight Audit Committee meetings and no extraordinary meetings. No resolutions were taken by written agreement. On average, the meetings lasted three hours. Between four and ten agenda items were discussed per meeting, with an average of seven items. Average attendance was 92.5% at the meetings throughout the year.
The Compensation Committee enlisted the help of Mercer Human Resources Consulting 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.
g. Specific work methods of the Investment Committee The Investment Committee was established in autumn 2008. It held its first and only meeting in December 2008. The meeting, which was attended by all six committee members, lasted 2.5 hours and covered 9 agenda items. Main focus was on strategy, asset management activities, investment performance, valuation methodologies and organisational matters. There were no resolutions by written agreement.
Board of Audit Compensation Finance and Risk Governance Investment Dates Directors Committee Committee Committee Committee Committee
The Board meetings of 19 and 21 September, as well as 13 December and the meeting of the Governance Committee of 2 October were extraordinary.
The Board of Directors, among other things, determines the risk tolerance level of the Group, monitors risk development and approves ̤ the business principles to be applied in reinsurance and asset management; defines the Group’s Guiding Principles, adopts the strategy of the Group and keeps itself ̤ informed of the strategies of the business and corporate functions, as well as of the divisions; approves consolidated medium- and short-term Group business plans based on the ̤ Group’s strategic goals and the business plans of the business and corporate functions; decides on high-level transactions in alternative investments, Admin Re®, debt issuances, ̤ credit facilities or similar instruments, and capital market transactions; reviews periodic core business status reports as well as reports on major business ̤ transactions and events; has overall responsibility for corporate governance matters; ̤ approves the compensation principles of the Group upon recommendation of the ̤ Compensation Committee; reviews the Group’s adherence to legal, regulatory and compliance standards, as well as ̤ the status of significant legal, regulatory or compliance matters, in conjunction with the Audit Committee; determines the structure of the Group, defines its business and corporate functions and ̤ divisions, and decides on structural changes to the Group, as well as the business and corporate functions; appoints and removes members of the Executive Committee and the Executive Board upon ̤ recommendation of the Governance Committee; assesses, on an annual basis, the performance of the Chief Executive Officer as well as the ̤ members of the Executive Committee and the Executive Board; assesses, on an annual basis, the performance of the Board and its committees; ̤ determines the remuneration of the members of the Board, the compensation of the Chief ̤ Executive Officer and the total amount available for compensation of the other members of the Executive Board, upon recommendation of the Compensation Committee; elects the Chairman of the Board, the Vice Chairman and the chairpersons and members of ̤ the Board committees; nominates Board member candidates for election or re-election by the General Meeting ̤ upon recommendation of the Governance Committee; establishes the methods and applicable standards for accounting, budgetary control and ̤ financial planning; reviews and approves annual reports of the parent company and the Group, subject to the ̤ authority of the General Meeting; makes preparations for and convenes General Meetings of shareholders and executes the ̤ resolutions of General Meetings.
3.6 Definition of areas of responsibility of the Board of Directors and the Executive Committee
The Executive Committee has, in addition to its overall responsibility for the operational management of the Group, the following key responsibilities: submits proposals to the Board of Directors relating to all matters within the Board’s ̤ responsibilities, for the Board’s consideration, such as the Group strategy, the business plan, risk tolerances and accounting principles; approves the strategies, structures and business plans of the business and corporate ̤ functions and divisions; establishes principles on financing through capital markets, the financing of Group ̤ companies and the allocation of financial resources within the Group; decides on transactions in alternative investments, Admin Re®, debt issuances and credit ̤ facilities or similar instruments, while submitting proposals on high-limit transactions to the Board of Directors; establishes the performance targets for the Group, the business and corporate functions ̤ and the divisions, monitors performance and takes any necessary action; forms Group committees, delegates to them authorities and responsibilities, and issues ̤ binding Group guidelines; decides on the underwriting authority of the business functions and divisions, and on ̤ individual reinsurance transactions exceeding the underwriting authority limits; exercises oversight responsibilities in respect of the Group‘s internal control evaluation and ̤ certification process; oversees the implementation of Group compliance procedures, monitors remediation of ̤ identified regulatory and compliance deficiencies and ensures that appropriate risk management committees are constituted; assumes responsibility for personnel planning and management development of the ̤ Group, makes recommendations to the Chief Executive Officer on promotions for or removals of Managing Directors, and appoints the Responsible Actuary.
3.7 Information and control instruments of the Board with respect to executive management
Corporate governance and compensation report 3 Board of Directors b. 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 2008, with the exception of two Executive Committee members who were absent from one of the meetings each.
g. Duty to inform about extraordinary events As soon as the Executive Committee hears about significant extraordinary business developments or events, it is obliged to inform the Board of Directors immediately, even if the Board is not in session.
h. Supervision of the Executive Committee by the Vice Chairman of the Board The Vice Chairman supervises the preparation and execution of Board resolutions by the Executive Committee for all operational matters. In addition, he supervises the Executive Committee’s development of Group strategy and oversees management development of the Group’s senior executives.
Corporate governance and compensation report i. Right to obtain information At Board meetings, any member of the Board of Directors can demand information on any aspect of the Group’s business. Any member may, in such meetings, request that books and records be produced for timely inspection. Outside Board meetings, any member can direct a request for production of business records to the Chairman of the Board. In the event the request is denied, the Board decides whether such information shall be produced.
k. Group Internal Audit Group Internal Audit (GIA) is an independent, objective assurance function, performing activities designed to assess the adequacy and effectiveness of the Group‘s internal control systems. GIA helps the Group accomplish its objectives by applying a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
Authority is granted for full, free and unrestricted access to any and all of the Group’s property and personnel relevant to any function under review. All employees are required to assist GIA in fulfilling their duty. GIA has no direct operational responsibility or authority over any of the activities they review.
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 the Group’s Executive Board and 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.
GIA coordinates its activities with other assurance functions in the Group and the external auditor.
Jacques Aigrain Swiss and French 54 Chief Executive Officer Stefan Lippe German 53 Chief Operating Officer Deputy Chief Executive Officer Andreas Beerli Swiss 57 Head of Associated Units and Special Projects David J. Blumer Swiss 40 Head of Asset Management Brian Gray Canadian 46 Chief Underwriting Officer Michel M. Liès Luxembourg 54 Head of Client Markets George Quinn British 42 Chief Financial Officer Raj Singh US 46 Chief Risk Officer
Jacques Aigrain is a member of the Supervisory Board of Deutsche Lufthansa AG, a member of the Board of Directors of Swiss International Air Lines Ltd., Basle, and a member of various advisory committees of a regional or financial nature.
Stefan Lippe, a German citizen born in 1955, graduated in mathematics with business administration from the University of Mannheim. He obtained his doctorate in 1982 while working as a scientific assistant to the chair of insurance business management, being awarded the Kurt Hamann foundation prize for his thesis.
He was appointed deputy member of the Board in 1988 and a full member of the Board in 1991, when he assumed general responsibility for the company’s operations in the Germanspeaking area. In 1993, he became Chairman of the Board of Management of Bavarian Re. Since 2001, he has been Chairman of the Board of Directors of the renamed Swiss Re Germany Holding AG.
Stefan Lippe was appointed a member of Swiss Re’s Executive Board in 1995, as Head of the Bavarian Re Group. In 2001, he was assigned as Head of the Property & Casualty Business Group and appointed a member of the Executive Committee. In September 2008, he took over as Chief Operating Officer and was also appointed Deputy Chief Executive Officer.
Andreas Beerli, a Swiss citizen born in 1951, graduated in law in 1976 and received a doctorate in law from the University of Basle in 1983. He joined Swiss Re in 1979, serving in various marketing functions until 1984. He then worked for Credit Suisse in private banking and for the Baloise Insurance Group, where he served in the company’s foreign operations.
Andreas Beerli served as Head of the Americas division from January 2000 to December 2005 and Chief Operating Officer from January 2006 to August 2008. Until his announced retirement in 2009, he will remain a member of the Executive Committee in charge of Associated Units and Special Projects.
David J. Blumer, a Swiss citizen born in 1968, holds a degree in economics from the University of Zurich.
Before joining Swiss Re, he worked at Credit Suisse from 1993 to 2008 and held a number of positions in Zurich, London and New York. In private banking, he established an 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.
Michel M. Liès became a member of the Executive Board in 1998 and was appointed Head of the Latin America division. In April 2000, he became Head of Europe division of the Property & Casualty Business Group. In September 2005, he assumed the position of Head of Client Markets.
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.
He worked for Citigroup from 1989 to 2001, where he held a number of senior positions, mainly in the area of credit and structured finance. Last he was Managing Director Risk/ Merger & Acquisitions for Citibank Northern Europe and with site responsibility for Citibank Belgium. He joined Allianz SE, where he held the position of Group Chief Risk Officer from 2002 to 2007. He joined Swiss Re as Chief Risk Officer in 2008.
Raj Singh Chief Risk Officer 4.2 Other activities and vested interests 4.3 Management contracts
This section provides an overview of Swiss Re’s governance, compensation philosophy and guiding principles and descriptive elements of the compensation paid to the Board of Directors and Executive Committee, in order to give a comprehensive picture of performance and reward practices in Swiss Re.
Mercer is the external adviser to the Committee. In this role, they provide information on market competitive pay and remuneration trends, as well as timely advice on executive compensation issues. Mercer is engaged directly by the Compensation Committee. Mercer also conducts an annual review of the total compensation of the Executive Committee relative to an identified group of reference companies within the financial services industry to ensure that market competitiveness is maintained.
The Chairman, Vice Chairman, Chief Executive Officer and the Executive Board member responsible for Human Resources are normally invited to attend the meetings of the Compensation Committee, except when their own executive pay matters are being discussed and decided. Each meeting starts and ends with a private session, in which the committee members can raise and discuss questions among themselves. The Committee held four meetings during 2008 after which a summary of decisions was submitted to the full Board of Directors for approval. The Committee has a predetermined agenda to ensure that important reviews take place at the appropriate time throughout the year. Furthermore, the Compensation Committee has established a periodic self-review procedure which ensures that a high level of effectiveness is maintained over time.
Approval process The API pool for the Executive Committee is funded in light of financial performance and qualitative assessment. Financial performance is measured against the following key performance indicators: economic value measures, return on equity, GAAP net income and earnings per share growth.
Total amount for annual CEO Compensation Committee performance incentive payments Total amount for CEO Compensation Committee Long-term Incentive plans Remuneration of the members Compensation Committee Board of Directors of the Board of Directors (incl. Chairman and Vice Chairman) Compensation of the Compensation Committee Board of Directors Chief Executive Officer Individual compensation of the CEO Compensation Committee members of the Executive Board based on Board’s (excl. CEO) determination of the total amount available
Swiss Re takes a holistic view of rewards, including both direct financial compensation, such as base salary, API and equity-related plans, as well as other tangible and intangible benefits, including health coverage, pension and development opportunities.
Focus on performance Swiss Re is performance-oriented, and as such aligns the goals of each employee with the Group’s strategic targets. Our performance management measures each employee’s achievement and behaviour, and ensures that the compensation paid through base salary, annual incentives and other programmes is commensurate with the respective employee’s performance.
To create and maintain this high performance culture, a globally consistent performance management process is in place to ensure that: individual goals with challenging performance benchmarks are aligned to the business ̤ strategy; transparent information is provided on an individual’s contribution to the business success, ̤ using clear qualitative and quantitative performance measurement criteria.
Swiss Re strives to offer exceptional performers total earning opportunities approaching the top tier in the industry. Each compensation element is designed to encourage individual performance, company achievement and shareholder alignment. To that end, annual and long-term incentives are balanced to reflect the performance on Group, business or corporate function and personal level.
Base salary Base salary is a compensation for the function and scope of the job performed. Swiss Re aims to position the total compensation, of which base salary is an element, around the market median for equivalent positions in comparable companies. It reviews pay against market benchmarks on a regular basis to ensure that competitive pay is maintained and undesired fluctuation minimised. Base salary is primarily driven by the markets where the company competes for talent, but factors such as individual expertise are also considered when making any salary-related decision.
Annual Performance Incentive The API is a discretionary, variable component of Swiss Re’s total cash compensation package for employees. The API, together with the base salary, provides an income around the market median for total cash compensation when performance targets are achieved. Where exceptional performance justifies it, the API provides an opportunity for additional income.
Bonus shares From 2008, employees have the opportunity to take some or all of their cash API in the form of Swiss Re shares. This bonus shares programme encourages employee ownership by allowing employees to use API funds to purchase shares of the company at a discount of 10% to the open market. At the end of a one-year blocking period, the employee assumes full ownership of the purchased shares.
Value Alignment Incentive The objective of the VAI is to complement the Swiss Re incentive compensation structure by introducing a time component which supports the business model of the firm and by aligning the API with the long tail factor of the reinsurance business model, which is inherently volatile. Its aim is to promote accurate and commercially sound cash flow projections through all stages of the business acquisition, underwriting and valuation process.
Employees above threshold 75% 25% Executive Board 55% 45% Chief Executive Officer 40% 60%
Our report for 2007 was based on value expectations for the outstanding LTI grants which have since proved unfounded. The line item “Change in fair value of plans vesting over several years” in the compensation tables on the following pages reflects the disappointing performance of the company during 2008 and as a result the LTI granted in 2006 will not yield any value when it vests in March 2009. Similarly, the LTI grants made in 2007 and 2008 will also suffer a significant adverse effect.
The Compensation Committee reviews the LTI on an annual basis to ensure that it remains competitive, and that the measures and performance targets are well aligned with the company’s goals.
Stock grants Swiss Re does not grant employee stock options or restricted stock units (RSUs) on a regular basis, but reserves the right to provide ad hoc grants based on events such as exceptional business cycles, significant acquisitions or the replacement of forfeited equity for new executive hires.
Total CHF 39 345 thousand 21% Base salary and allowances 14% Cash variable pay for performance 11% Value Alignment Incentive 6% Shares 44% Long-term Incentive plan grant 3% Funding of pension benefits
Individual compensation of 14 members of the Board of Directors in 2008
The Chief Executive Officer and all Executive Committee members have standard employment contracts without severance payment agreements. There are no specific “change in control” or retention agreements in place with members of the Executive Committee, other than those provisions applicable to all Swiss Re employees. Executives are covered by the standard defined contribution pension plan of the company. The Swiss legal salary cap on insurable salaries of CHF 795 600 applies and no additional provisions have been made.
Change in fair value of plans vesting over several years 1 557 –16 900 1 Includes 25% uplift on nominal value, which will be paid out at vesting after three years. 2 For 2007 disclosure, the LTI plan granted was presented net of grant which included an adjustment to fair value as at balance sheet date. For 2008 and going forward, the amounts for LTI represent the grant value of the plan for the respective year and the changes in the fair value of the LTI plan as at balance sheet date are reflected in the line “Change in fair value of plans vesting over several years”. 2007 numbers have been revised accordingly.
Base salary and allowances 8 868 8 417 Cash variable pay for performance 10 229 5 625
This section is not applicable to Swiss Re, as Swiss Reinsurance Company Ltd, the parent company of the Group, is domiciled in Switzerland.
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.
The Board of Directors announces the agenda. Shareholders with voting powers whose combined holdings represent shares with a nominal value of at least CHF 100 000 may, 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.
Swiss Re has not taken any defence measures against take-over attempts. The governing bodies are of the opinion that the best protection is a fair valuation of the shares. They believe in the efficiency of a free market rather than relying on defence measures that normally have a long-term negative effect on the share price development.
7.1 Duty to make an offer 7.2 Clauses on change of control
PricewaterhouseCoopers AG (PwC), formerly known as Revisuisse Price Waterhouse AG, were elected as Swiss Re’s auditors at the Annual General Meeting of 25 November 1991 and, since then, have been re-elected annually. At the Annual General Meeting of shareholders on 18 April 2008, based on the proposal of the Audit Committee and recommended by the Board of Directors, PwC were re-elected as Swiss Re’s statutory auditors and auditors of the consolidated financial statements for a term of one year.
Mr David J. A. Law and Ms Dawn M. Kink took up office as lead auditors responsible for the existing auditing mandate as of 1 January 2004 and 1 September 2006, respectively.
The Audit Committee evaluates the external auditor annually and recommends one audit firm to the Board of Directors for election at the following Annual General Meeting of shareholders. The external auditor is accountable to the Audit Committee, the Board of Directors and ultimately to the shareholders.
The Audit Committee meets at least annually with the external auditor to review any significant matters or disagreement between management and the auditor, if and when such disagreements arise. It discusses with the auditor the results of the annual audit, in particular their report on the financial statements, necessary changes to the audit plan, all critical accounting policies, all alternative accounting treatments of financial information that have been discussed with management and other material written communications with management, such as management letters or schedules of unadjusted differences.
Swiss Re maintains a close relationship with the financial community and the broader public by using all available communication channels. Important corporate news is announced on an ad-hoc basis. The Group’s website includes full details of its corporate disclosure.
In 2008, Swiss Re published its first Economic Value Management (EVM) report. EVM is Swiss Re’s framework used for planning, pricing, reserving and managing the business. On 31 March 2008 Swiss Re held an EVM teach-in and disclosed EVM figures for 2006. In the analyst and investor conference call on 6 May 2008 Swiss Re published its EVM results for 2007.
Swiss Re is strongly committed to treating all investors equally. The Group prevents selective disclosure by observing ad-hoc publicity rules and a policy of restrictions for the so-called “close period”, during which quarterly and annual financial results information is finalised. Swiss Re subjects all employees globally to the corresponding trading restrictions in Swiss Re securities. The close period commences on a given date preceding the official publication of the financial information and ends after a “cooling off” period following public release.
The corporate calendar as well as regularly updated information are available on Swiss Re’s website: www.swissre.com/investorrelations
7 January Swiss Re enters into strategic News release partnership with the largest domestic reinsurer in Vietnam 7 January Swiss Re successfully places News release EUR 200 million in a French windstorm securitisation for the benefit of Groupama SA 9 January World Economic Forum event; News release and press conference Global Risk Report 2008 in London 11 January Swiss Re successfully closes News release USD 175 million private XXX transaction with The Savings Bank Life Insurance Company of Massachusetts 22 January Swiss Re successfully places first News release ever bond linked to Central American
29 February Annual Results 2007 News release, press conference and analysts’ meeting in Zurich (including telephone conference and web cast) 2 April Swiss Re to establish full-service third News release party administrator in China – move underlines commitment to Chinese medical insurance industry 2 April Swiss Re appoints David J. Blumer News release as Chief Investment Officer and Member of the Executive Committee 18 April 144th Annual General Meeting Meeting in Zurich and news release 6 May First quarter 2008 and News release and press and analysts’ EVM 2007 results telephone conference in Zurich 26 May Swiss Re recognised as Admitted News release Reinsurer to Brazilian reinsurance
30 June Swiss Re obtains USD 150 million News release of natural catastrophe protection through Vega capital programme 9 Information policy
19 August Walter Bell to join Swiss Re as News release Chairman of Swiss Re America Holding Corporation 8 September “Les Rendez-Vous de Septembre News release, press conference and 2008”, (re)insurance industry event analysts’ meeting in Monte Carlo in Monte Carlo 25 September Swiss Re hosts Investors’ Day in News release, press conference and Zurich: The Group provides update analysts’ meeting in Zurich on its Life & Health business and its investment portfolio 20 October Swiss Re enters into a weather News release derivative contract with the World Bank covering drought in Malawi 31 October Swiss Re completes GBP 762 million News release acquisition of Barclays Life Assurance Company Ltd 4 November Third quarter 2008 results News release, press conference in Zurich and analystsʼ telephone
9 December Swiss Re’s Economic Forum 2008: News release and press conference in The financial crisis and its effects London (including telephone conference) on global insurance
Important dates for 2009 19 February 2008 annual results 13 March 145th Annual General Meeting
Expenses Claims and claim adjustment expenses 9, 17 –12 065 –10 007 Life and health benefits 9, 17 –11 112 –9 065 Return credited to policyholders 17 –2 120 2 822
Income/loss before income tax expense/benefit 5 187 –1 350 Income tax expense/benefit –1 025 486 Net income/loss 4 162 –864
Trading (including 15 000 in 2007 and 33 in 2008 subject to securities lending
Cash and cash equivalents (including 0 in 2007 and 2 477 in 2008
Acquired present value of future profits 6 6 769 6 139
Issue of common shares1 38 992 Cancellation of shares bought back –1 453 Share-based compensation –18 78 Realised gains/losses on treasury shares 52 –49 Balance as of period end 11 208 10 776
Treasury shares Balance as of 1 January –272 –1 540 Purchase of treasury shares –2 574 –2 032 Cancellation of shares bought back 1 453 Sales of treasury shares 1 306 479 Balance as of period end –1 540 –1 640
Change during the period 889 –5 493 Cumulative effect of adoption of SFAS 159 –33 Balance as of period end 3 119 –2 407
Net income/loss 4 162 –864 Dividends on common shares –1 162 –1 331 Cumulative effect of adoption of FIN 48 30 Cumulative effect of adoption of SFAS 158 –31 Cumulative effect of adoption of SFAS 159 –7 Deferred income tax on cross-border business transfer2 –408 Balance as of period end 21 712 19 071 1 This balance represents the premium from the conversion of a mandatory convertible bond that matured in December 2008. 2 The novation of certain treaties from Swiss Re’s Bermuda branches to Swiss Re Zurich resulted in a net deferred tax liability transfer to Swiss Re Zurich. The respective increase in deferred tax liability is due to different jurisdictional tax rates. The transfer of the net deferred tax liability does not impact the Group’s net income or effective tax rate.
Cash flows from operating activities Net income 4 162 –864 Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items 676 871 Net realised investment gains/losses 739 9 482 Change in: Technical provisions, net –6 434 –11 687 Funds held by ceding companies and other reinsurance balances –449 3 191 Other assets and liabilities, net 3 107 –3 407 Income taxes payable/recoverable 672 –1 213 Income from equity-accounted investees, net of dividends received –407 1 031 Trading positions, net –13 331 4 721
Cash flows from investing activities Fixed income securities: Net purchase/sale/maturities of short-term investments 980 4 020
Equity securities: Cash paid/received for acquisitions/disposals and reinsurance transactions, net 1 615 170 Net purchases/sales/maturities of other investments –1 761 –757 Net cash provided/used by investing activities –1 302 18 819
Total net cash provided/used –1 660 5 820 Effect of foreign currency translation –415 –83 Change in cash and cash equivalents –2 075 5 737 Cash and cash equivalents as of 1 January 13 606 11 531 Cash and cash equivalents as of 31 December 11 531 17 268
For 2007 comparatives fixed income securities designated as trading assets have been reclassified from operating cash flows to investing cash flows according to the nature and purpose for which those assets are held as per the amendment to FAS 95 “Statement of Cash Flows”.
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 25 countries.
The Group considers both the credit risk of its counterparties, and own risk of non-performance in the valuation of certain financial instruments. In determining the fair value of the financial instruments, the assessment of the Group’s exposure to the credit risk of our counterparties incorporates consideration of existing collateral and netting arrangements entered into with each counterparty. The measure of the counterparty credit risk is estimated for derivative instruments and other over-the-counter financial assets with incorporation of the observable credit spreads, where available, or credit spread estimates derived based on the benchmarking techniques where market data is not available. The impact of the Group’s own risk of non-performance is analysed in the manner consistent with the aforementioned approach; with consideration of the Group’s observable credit spreads. The value representing such risk is incorporated into the fair value of the financial instruments (primarily derivatives), in a liability position as of the measurement date. The change in this adjustment from period to period is reflected in realised gains and losses in the income statement.
There can also be differences between the market values implied by collateral requested by counterparties and the prices observed in the markets. The Group has provided collateral on all financial instruments, including the structured credit default swap, in excess of the market value estimate of CHF 391 million. For these assets or derivative structures, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function, provides an additional control over the market prices or market input used to determine the fair values of such assets. Whilst management considers that appropriate values have been ascribed to such assets, current market conditions increase the level of uncertainty and judgment over these valuations. Subsequent valuations could differ significantly from the results of the process described above. The Group may become aware of counterparty valuations, either directly through the exchange of information or indirectly, for example, through collateral demands. Any implied differences are considered in the independent price verification process and may result in adjustments to initially indicated valuations.
The Group only transfers investments from the trading into the available-for-sale category under rare circumstances. Transfers are accounted for at fair value at the date of transfer, which becomes the new cost basis. As of 1 October 2008 the Group reclassified fixed income securities from the trading into the available-for-sale category. Refer to Note 2 Investments for more detail.
The cost of fixed income and equity securities are reduced to fair value, with a corresponding charge to realised investment losses if the decline in value, expressed in functional currency terms, is other than temporary. Subsequent recoveries of previously recognised impairments are not recognised.
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 non-derivative monetary financial instruments and translation gains and losses on the hedged net investment are reported as translation gains and losses in shareholders’ equity.
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.
Policyholder account balances relate to universal life-type contracts and investment contracts. Interest crediting rates for policyholder account balances range from 2.5% to 8.5%.
Amounts assessed against policyholders for mortality, administration and surrender are shown as fee income. Amounts credited to policyholders are shown as return 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.
Funds held assets and liabilities include amounts retained by the ceding company or the Group for business written on a funds withheld basis, and amounts arising from the application of the deposit method of accounting to insurance and reinsurance contracts that do not indemnify the ceding company or the Group against loss or liability relating to insurance risk.
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 long-duration contracts, including universal life-type and investment contracts, are reported as assets in the accompanying consolidated balance sheet.
In September 2008, the Financial Accounting Standards Board issued FSP FAS 133-1 and FIN 45-4 “Disclosures about Credit Derivatives and Certain Guarantees – An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP FAS 133-1 and FIN 45-4). This FSP requires disclosures by sellers of credit derivatives and about the current status of the payment/ performance risk of guarantees. The Group adopted FSP FAS 133-1 and FIN 45-4 as of 31 December 2008. Refer to Note 4 for further information.
In December 2008, the Financial Accounting Standards Board issued FSP FAS 140-4 and FIN 46(R)-8 “Disclosures about Transfers of Financial Assets and Interests in VIEs” (FSP FAS 140-4 and FIN 46(R)-8). This FSP requires additional disclosures about a company’s involvement with variable interest entities (VIEs) and its continuing involvement with transferred financial assets. The Group adopted FSP FAS 140-4 and FIN 46(R)-8 as of 31 December 2008. Refer to Notes 2 and 18 for further information.
Investment expenses –612 –732 Interest charged for funds held –534 –382
Realised gains and losses for fixed income, equity securities and other investments (including unit-linked and with-profit business) were as follows: Proceeds from the sales of fixed income securities available-for-sale amounted to CHF 44 356 million and CHF 77 491 million for 2007 and 2008, respectively. Sales of equity securities available-for-sale were CHF 6 668 million and CHF 8 916 million for 2007 and 2008, respectively.
For 2007, foreign exchange gains and losses on investments are included in the respective line items. For 2008, all foreign exchange gains and losses on remeasurement are included in the line item “Foreign exchange gains/losses”.
Fixed income securities available-for-sale: Gross realised gains 621 1 416 Gross realised losses –670 –2 443
Unit-linked realised gains/losses 512 –4 052 With-profit realised gains/losses –67 –741
Debt securities issued by governments and government agencies: US Treasury and other US govern-
Fixed income securities and equity securities classified as trading as of 31 December were as follows: SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” requires that investments are classified into one of three categories: trading, available-for-sale, and held-to-maturity. The criterion for classification is management’s plan for holding or disposing of the investment, rather than the characteristics of the asset. Reclassification between categories is only possible under rare circumstances.
As of 31 December 2007 and 2008, investments with the carrying value of CHF 1 438 million and 1 566 CHF million, respectively, were on deposit with regulatory agencies in accordance with local requirements.
As of 31 December 2007 and 2008, investments (including cash and cash equivalents) with a carrying value of approximately CHF 9 262 million and CHF 8 689 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities.
Mortgage-backed and asset-backed securities 18 161 1 506 Fixed income securities trading 51 793 13 961
Total fixed income securities available-for-sale 105 995 107 810 106 216 103 438
As of 31 December 2007 and 2008, the fair value of the government and corporate bond securities received as collateral, was CHF 13 969 million and CHF 8 272 million, respectively. Of this, the amount that has been sold or repledged as of 31 December 2007 and 2008 was CHF 7 995 million and CHF 2 554 million, respectively, which is used to settle short Government bond positions. The sources of the collateral are typically highly rated banking market counterparties.
The unprecedented market volatility and relative illiquidity in certain asset sectors had an adverse impact on the valuation of certain of the Group’s investments.
An assessment of whether an other-than-temporary decline in the value of equity and fixed income securities available-for-sale has occurred as of the balance sheet date is based on a case-by-case evaluation of the reasons behind the decline in value. This evaluation includes: (a) an assessment of the duration and extent of the decline in value; (b) review of the financial
Collateral accepted which the Group has the right to sell or repledge
Less than 12 months 12 months or more Total As of 31 December 2007 CHF millions Fair value
Less than 12 months 12 months or more Total As of 31 December 2008 CHF millions Fair value
As of 31 December, investments in mortgages and other loans and real estate comprised the following: As of 31 December 2007 and 2008, the Group’s investment in mortgages and other loans included CHF 216 million and CHF 200 million, respectively, of loans due from employees and CHF 415 million and CHF 444 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
The types of instruments valued based on quoted market prices in active markets include most US government and sovereign obligations, active listed equities and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. The Group does not adjust the quoted price for such instruments, even in situations where it holds a large position and a sale could reasonably impact the quoted price.
The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most government agency securities, investment-grade corporate bonds, certain mortgage and asset-backed products, less liquid listed equities, state and municipal and provincial obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.
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.
As of 31 December 2008, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: Assets and liabilities measured at fair value on a recurring basis
Assets Opening balance as of 1 January 2008 8 887 140 9 389 1 498 19 914
Transfers in and/or out of Level 3 5 877 273 106 493 6 749 Impact of foreign exchange movements –733 –92 –179 –26 –1 030
Closing balance as of 31 December 2008 11 521 220 14 917 1 580 28 238
Realised/unrealised gains/losses: Included in net income –376 –7 074 –7 450 Included in other comprehensive
Closing balance as of 31 December 2008 –494 –18 547 0 –19 041
Gains/losses included in net income for the period –5 334 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date –3 605
SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, permits the choice to measure specified financial assets and liabilities at fair value on an instrumentby -instrument basis.
Liabilities for life and health policy benefits As of 1 January 2008, the Group elected the fair value option for existing SOP 03-01 guaranteed minimum death benefit (GMDB) reserves related to certain variable annuity contracts which are classified as universal life-type contracts. The Group has applied the fair value option as the equity risk associated with those contracts is managed on a fair value basis, and it is economically hedged with derivative options in the market.
Liabilities Liabilities for life and health policy benefits –108 –40 –148 1 Prior to the election of the fair value option, the investment was reported in other invested assets.
Fair value changes from fixed income securities trading (CHF –349 million) and equity securities trading (CHF –455 million) are reported in net realised investment gains/losses. Fair value changes from the guaranteed minimum death benefit reserves (CHF –346 million) are shown in life and health benefits.
Changes in fair values for items measured at fair value pursuant to election of the fair value option
Assets Fixed income securities trading 13 961 of which at fair value pursuant to the fair value option 681 Equity securities trading 15 355 of which at fair value pursuant to the fair value option 121 Liabilities Liabilities for life and health policy benefits –39 911 of which at fair value pursuant to the fair value option –494
Equity and index contracts Forwards and futures 670 –672 –2 311 –265 46
The Group offsets derivative assets and liabilities, including certain derivative related collateral contracts in the balance sheet, for which a right of offset under master netting agreements exists.
These derivative financial instruments include cash flow hedges with a fair value of CHF 21 million and CHF 6 million as of 31 December 2007 and 31 December 2008, respectively.
For the year ended 31 December 2007 and 31 December 2008, the Group recorded net unrealised foreign currency remeasurement losses in shareholders’ equity of CHF 668 million and CHF 210 million, respectively. This offsets translation gains and losses on the hedged net investment.
The Group writes/sells credit derivatives, including credit default swaps, credit spread options and credit index products, and total return swaps. The credit derivatives, which protect the counterparty against credit risk, are classified as credit derivatives under FAS 133-1. The total return swaps, for which the Group assumes asset risks mainly of variable interest entities, qualify as guarantees under FIN 45-4. These activities are part of the Group’s overall portfolio and risk management strategies. The events that could require the Group to perform include bankruptcy, default, obligation acceleration or moratorium of the credit derivative’s underlying.
Total credit derivatives written/sold –16 603 112 744 49 819 5 572 168 135 1 The maximum potential payout is based on notional values of the credit derivatives. 2 Including Corporate Portfolio CDS, which consists predominantly of large investment grade and SME corporate loans. 3 Including Structured CDS.
4 The Group enters total return swaps mainly with variable interest entities which issue insurance-linked and credit-linked securities.
The Group has purchased protection to manage the performance/payment risks related with credit derivatives. As of 31 December 2008, the total purchased credit protection was CHF 169 682 million based on notional values. Thereof CHF 90 491 million was related to identical underlyings for which the Group sold credit protection. For tranched indexes and baskets only matching tranches of the respective index were determined as identical. In addition to the purchased credit protection, the Group manages the performance/payment risks through a correlation hedge, which is performed with non-identical offsetting positions.
The Group has acquired approximately 760 000 life insurance and pension policies and annuity contracts, representing approximately GBP 5.9 billion in invested assets. The Barclays Life book comprises unit-linked life and pension policies, non-linked annuity policies and a smaller block of protection business, including term life and permanent health insurance. The acquisition provides further scale and infrastructure for the Group’s Admin Re® business in the United Kingdom.
Present value of future profits (PVFP) 969 Liabilities for policy benefits for Life & Health 73 Tax impact of above adjustments and other tax adjustments –286
Fair values have been attributed to investments mainly according to quoted market prices. If quoted market prices were not available, valuation models were applied.
The present value of future profits (PVFP) has been estimated based on the best estimate of expected future profits. As of the purchase date the PVFP amounted to a value of CHF 969 million with an amortisation period of 50 years. The Life & Health policy benefit reserves have been adjusted based on best estimate assumptions at the time of the acquisition.
Deferred tax has been recognised on the fair value adjustments summarised above. Historic deferred tax assets and liabilities have been adjusted to the expected payable and recoverable amounts which the Group expects to realise.
Present value of future profits and Life & Health policy benefits
Unaudited pro forma results after the Barclays acquisition As of 31 December CHF millions (except share data) 2007 2008
Financial statements / Notes to the Group financial statements 6 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
The amortisation of DAC in 2008 represents CHF 2 676 million and CHF 166 million for the Property & Casualty and Life & Health business segments, respectively.
Retroceded DAC and PVFP may arise on retrocession of reinsurance portfolios, including reinsurance undertaken as part of a securitisation. The associated potential retrocession recoveries are determined by the nature of the retrocession agreements and by the terms of the securitisation.
The percentage of PVFP which is expected to be amortised in each of the next five years
Interest accrued on unamortised PVFP 382 330 Effect of foreign currency translation –257 –458 –718 –1 143 Effect of change in unrealised gains/ losses 7 –95 Balance as of period end 5 152 6 769 4 311 6 139
Short-term debt – financial and operational debt 12 658 6 522
Total subordinated debt as of 31 December 2008 10 571 Total subordinated debt as of 31 December 2007 13 896
1 This debt position resulted from a single transaction and is non-recourse.
Interest expense on long-term debt for the years ended 31 December 2007 and 2008, respectively, was as follows: In January 2008, the Group issued a credit-linked note of USD 2 million, due in 2013, bearing interest of three-month USD Libor plus 50 basis points.
In November 2008, the Group deconsolidated an entity, which provided funding to other Group companies. Prior to the deconsolidation, two existing loans were classified as intercompany transactions and therefore not reported as liabilities to external parties. Subsequent to deconsolidation, the Group shows these positions as Senior notes which mature in 2028, one note with a nominal value of GBP 240 million and the other with a nominal of GBP 100 million, bearing interest of 4.98% and one-month GBP Libor flat, respectively.
Senior financial debt 83 36 Senior operational debt 424 324 Subordinated financial debt 327 330 Subordinated operational debt 163 323
Reinsurance recoverable –7 622 –5 041 Deferred expense on retroactive reinsurance –875 –723
Paid related to: Current year –1767 –1 521 Prior year –12285 –12 131
The Group maintains an active commutation strategy to reduce exposure. When commutation payments are made, the traditional “survival ratio” is artificially reduced by premature payments which should not imply a reduction in reserve adequacy.
Financial statements / Notes to the Group financial statements 9 Reinsurance information
Ceded –136 –136 –117 –117 Total fee income from policyholders 955 955 808 808
Change in unpaid claims and claim adjustment expenses; life and health benefits, gross 4 846 –1 810 3 036 3 813 2 928 6 741 Change in unpaid claims and claim adjustment expenses; life and health benefits, retro –2 859 285 –2 574 –168 –1 196 –1 364 Change in unpaid claims and claim adjustment expenses; life and health benefits, net 1 987 –1 525 462 3 645 1 732 5 377
Financial statements / Notes to the Group financial statements 10 Financial guarantee reinsurance
The Group reinsures monoline insurers against the risk of default on insured financial obligations. The Group’s exposure encompasses public finance and structured finance exposures. In total, the notional exposure as of 31 December 2008 amounted to CHF 15 857 million, whereof 24% is attributable to structured finance. The main driver of the Group’s exposure is the credit risk of the underlying insured obligation.
As of 31 December 2008, total technical provisions for financial guarantee reinsurance amounted to CHF 512 million, which includes unpaid claims and claims adjustment expenses of CHF 149 million and unearned premiums of CHF 363 million.
All of the Group’s companies prepare statutory financial statements based on local laws and regulations. Most jurisdictions require reinsurers to maintain a minimum amount of capital in excess of statutory definition of net assets or maintain certain minimum capital and surplus levels. In addition, some jurisdictions place certain restrictions on amounts that may be loaned or transferred to the parent company. The Group’s ability to pay dividends may be restricted by these requirements.
Financial statements / Notes to the Group financial statements 12 Income taxes
Deferred tax liabilities Present value of future profits –1710 –1586 Income accrued/deferred –500 –147 Bond amortisation –203 –223 Deferred acquisition costs –632 –724 Technical provisions –1113 –840 Unrealised gains on investments –553 –169 Foreign exchange provisions –446 –666 DFI losses –277 –389
FIN 48 liabilities including interest and penalites –1 829 –1 449
The 31 December 2008 balance of gross unrecognised tax benefits presented in the table above is less than the FIN 48 liability reflected in the deferred and other non-current taxes section due to the impact of tax positions which offset loss carryforwards (CHF 227 million) and the removal of interest expense (CHF 268 million). Unrecognised tax benefits which have created certain loss carryforwards are net, whereby the statement of financial position does not reflect a deferred tax asset for the attribute or a liability for the unrecognised tax benefit.
The following table summarises tax years that remain subject to examination in jurisdictions of significance to the Group: FIN 48
Balance as of 1 January 1667 1964 Additions based on tax positions of current year 233 123 Additions for tax positions of prior years 259 33 Reductions for tax positions of prior years –89 –538 Settlements –106 –174 Balance as of 31 December 2008 1964 1408
In June 2008, the Group communicated its intention to change the structure of its Swiss other post-retirement benefits plan. The change is effective as of 1 July 2009 and results in a decrease of the accumulated benefit obligation of CHF 130 million in the current period.
The Group also provides certain healthcare and life insurance benefits for retired employ ees and their dependants. Employees become eligible for these benefits when they become eligible for pension benefits.
Amounts recognised in the balance sheet in 2008 consist of: CHF millions Swiss plan Foreign plans Other benefits Total
Non current assets 93 93 Current liabilities –14 –14 Non current liabilities –151 –373 –311 –835 Net amount recognised –151 –280 –325 –756
Acquisitions/disposals/ additions 10 –29 Effect of foreign currency translation –67 –404 Fair value of plan assets as of 31 December 3 169 2 676 1 970 1 362 Funded status 426 –151 –242 –280 –462 –325
Expected return on assets –141 –152 –101 –118 Amortisation of: Effect of settlement, curtailment and termination 15 –2 –9
Net gain/loss 710 242 –170 782 Prior service cost/credit 63 –153 –90
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are CHF 12 million and CHF 7 million, respectively. The estimated net gain and prior service credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is CHF 10 million and CHF 14 million, respectively.
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was CHF 4 642 million and CHF 4 282 million as of 31 December 2007 and 2008, respectively.
Equity securities include Swiss Re common stock of CHF 11 million (0.2% of total plan assets) and CHF 3 million (0.1% of total plan assets) as of 31 December 2007 and 2008, respectively.
The employer contributions expected to be made in 2009 to the defined benefit pension plans are CHF 190 million and to the post-retirement benefit plan are CHF 14 million.
Swiss plans actual allocation Foreign plans actual allocation Swiss plans Foreign plans
As of 31 December 2008, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees voluntary contributions, are as follows: The Group sponsors a number of defined contribution plans to which employees and the Group make contributions. The accumulated balances are paid as a lump sum at the earlier of retirement, termination, disability or death. The amount expensed in 2007 and in 2008 was CHF 48 million and CHF 48 million, respectively.
The Group changed the measurement date for its employee benefit plans from 30 September to 31 December for its 2008 financial statements in accordance with new generally accepted accounting guidance effective as of 1 January 2008. The corresponding adjustment to the opening balance of retained earnings and accumulated other comprehensive income was CHF 31 million and nil, respectively.
Financial statements / Notes to the Group financial statements 14 Share-based payments
Total compensation cost for share-based compensation plans recognised in net income was CHF 31 million and CHF 41 million in 2007 and 2008, respectively. The related tax benefit was CHF 7 million and CHF 9 million, respectively.
A summary of the activity of the Group’s stock option plans is as follows: No options were granted under this plan from 2007 onwards.
The following table summarises the status of stock options outstanding as of 31 December 2008: The fair value of each option grant was estimated on the date of grant using a binomial option-pricing model, with the following weighted average assumptions used for grants in 2006: dividend yield of 3.8%; expected volatility of 20.0%; risk-free interest rate of 2.4%; expected life of 6.0.
In 2007 and 2008, 980 711 and 1 222 339 options, respectively, were issued to employees and the Group contributed CHF 19 million and CHF 18 million, respectively, to the plan.
The section below follows articles 663bbis and 663c para. 3 of the Swiss Code of Obligations, which require disclosure of the elements of compensation, paid to Swiss Re Group’s Board of Directors and Executive Committee, as well as their shareholdings and loans.
John F. Smith, Jr., Member 97 228 325 Kaspar Villiger, Member 163 162 325 1 Retired from the Board of Directors at the Annual General Meeting of 20 April 2007. 2 Elected to the Board of Directors at the Annual General Meeting of 20 April 2007.
Individual compensation of the remaining members of the Board of Directors granted in 2008 was as follows: Total compensation for members of the Executive Committee was as follows: The fair values of the Value Alignment Incentive (VAI) granted in the current year are based on the nominal amount of the grant and a mark-up of 25% on nominal value. Subsequently, the fair values of VAI’s granted are updated based on actual results for the years covered by the grants. For a description of the VAI plans, see page121 of the corporate governance and compensation report.
Raymond K.F. Ch’ien, Member2 137 91 228 John R. Coomber, Chairman of the Finance and Risk Committee 395 260 655 Rajna Gibson Brandon, Member 195 130 325 Bénédict G.F. Hentsch, Member 195 130 325 Hans Ulrich Maerki, Member 195 130 325 Robert A. Scott, Chairman of the
John F. Smith, Jr., Former member3 48 48 96 Kaspar Villiger, Member 195 130 325 1 Elected to the Board of Directors at the Annual General Meeting of 18 April 2008, with effect as of 1 September 2008. 2 Elected to the Board of Directors at the Annual General Meeting of 18 April 2008. 3 Retired from the Board of Directors at the Annual General Meeting of 18 April 2008.
Members of the Executive Committee are granted Long-term Incentive (LTI) plans. The plans are expected to be settled in cash and the requisite service periods as well the maximum contractual term for each plan is three years. The method to estimate fair value is based on a risk neutral approach that uses the current share price as an estimate of the share price at the end of the vesting period. In order to determine the fair value, the following key performance indicators are also taken into consideration: three-year average return on equity (ROE) and three-year earnings per share compound annual growth rate (EPS CAGR). The fair values of the LTI plans were based on the actual results for those years and the forecast years covered by the plans. For further information on LTI plans, see page 121 of the corporate governance and compensation report.
For US GAAP reporting purposes, the cost of the bonus shares, VAI and LTI awards are accrued over the period during which they are earned. For the current compensation disclosure purposes the value of awards granted is included as compensation in the year of grant and the change in the fair value of both current and prior-year awards are reflected separately from the grant value.
Contractual commitments due to new members represent long-term incentives granted to replace agreements with former employers that were forgone upon joining Swiss Re Group.
As of 1 January 2007, Swiss Re Group converted the pension fund in Switzerland from a defined benefit plan to a defined contribution plan (as defined under Swiss Law), requiring actuarially determined one-off contributions to the plan, which did not give rise to higher pension entitlement. The remuneration for 2007 disclosed above excludes these one-off contributions arising from the conversion. The actuarially determined contribution amounts were approximately CHF 4.8 million in total for the Board of Directors and the Executive Committee. Therefore, certain members of the Board of Directors and the Executive Committee are now in a defined contribution scheme and their pension funding compensation in the remuneration tables above reflects the actual employer contributions. Where defined benefit arrangements persist, the funding is determined on an actuarial basis, which can vary substantially from year to year depending on age and years of service of the benefiting Executive Committee members.
Value alignment incentive (VAI)1 4 875 Long-term Incentive plan grant (LTI) 2 5 000 5 000
Change in fair value of plans vesting over several years –2 500 1 Represents long-term incentives granted by the former employer which were replaced in the form of Swiss Re shares at a value of CHF 86.40 per share.
The numbers of shares held as of 31 December 2007 and 2008 were as follows: In 2004 and 2005, the beneficiaries of the Long-term equity award programme received, as an alternative to stock options, the right to opt for restricted shares. The applicable ratio of stock options to restricted shares was four to one. The restricted shares vest after four years. During the vesting period, there is a risk of forfeiture.
Walter B. Kielholz, Vice Chairman 123 775 155 301 Jakob Baer, Chairman of the Audit Committee 10 336 14 141
Hans Ulrich Maerki, Member 3 819 7 762 Robert A. Scott, Chairman of the Compensation Committee 9 249 11 271 John F. Smith, Jr., Former Member 9 878
Andreas Beerli, Head of Associated Units and Special Projects 30 828 38 178 Brian Gray, Chief Underwriting Officer1 3 207 Michel M. Liès, Head of Client Markets 48 093 51 482 George Quinn, Chief Financial Officer 14 929 17 145 Christian Mumenthaler, Former Chief Risk Officer2 2 419 1 Appointed to the Executive Committee on 1 September 2008. 2 Stepped down from the Executive Committee on 31 December 2007.
Average share price in CHF as of grant date 93.00 82.85 82.85 86.29 Jacques Aigrain,
David J. Blumer, Head of Asset Management 81 000 Brian Gray, Chief Underwriting Officer 750 Michel M. Liès, Head of Client Markets 3 750 3 750 Raj Singh, Chief Risk Officer 4 000 Christian Mumenthaler, Former Chief Risk Officer 1 250 5 000
The following unvested options were held by members of governing bodies as of 31 December 2007 and 2008: Options have a four-year vesting period, during which there is a risk of forfeiture, and an exercise period of six years. The exchange ratio is 1:1, meaning each option entitles the beneficiary to purchase one share at a non-adjustable strike price.
Walter B. Kielholz, Vice Chairman 40 000 20 000 John R. Coomber, Chairman of the Finance and Risk Committee 130 000 70 000
The following vested options were held by members of governing bodies as of 31 December 2007 and 2008: The range of expiry years for vested options held by members of governing bodies as of 31 December 2007 and 2008 was 2008 to 2013 and 2009 to 2014, respectively.
The following loans were granted to members of governing bodies as of 31 December 2007 and 2008: All credit is secured against real estate or pledged shares. The terms and conditions of loans and mortgages are the same as those available to all of Swiss Re Groups employees in the respective locations. Fixed-rate mortgages have a maturity of five years and interest rates that correspond to the five-year Swiss franc swap rate plus a margin of 10 basis points. Adjustable-rate mortgages have no agreed maturity dates. The basic preferential interest rates equal the corresponding interest rates applied by the Zurich Cantonal Bank minus one percentage point. To the extent that fixed or adjustable interest rates are preferential, such values have been factored into the compensation sums given to the governing body members.
Number of options Members of the Board of Directors 2007 2008
Average strike price in CHF as of grant date 111.68 129.72
Mortgages and loans to members of the Board of Directors Walter B. Kielholz, Vice Chairman 2 000 2 000
Total mortgages and loans to members of the Executive Committee 8 585 6 004 Highest mortgages and loans to an individual member of the Executive Committee
Andreas Beerli, Head of Associated Units and Special Projects 3 000 3 000 Total mortgages and loans not at market conditions to former members of the Executive Committee 4184 4 528
Financial statements / Notes to the Group financial statements 16 Commitments and contingent liabilities
The Group enters into a number of contracts in the ordinary course of reinsurance and asset management business which, if the Group’s credit rating and/or defined statutory measures decline to certain levels, would require the Group to post collateral or obtain guarantees. The contracts typically provide alternatives for recapture of the associated business.
On 27 February 2008, a putative securities class action complaint was filed in the United States District Court for the Southern District of New York against Swiss Re Zurich and certain executive officers alleging false and misleading statements in connection with the two credit default swaps in violation of the antifraud provisions of the U.S. securities laws. The original complaint purports to be brought on behalf of U. S. purchasers of our stock between 8 May 2007 and 19 November 2007. On 28 July 2008, the court appointed Plumbers’ Union Local No. 12 Pension Fund as the lead plaintiff for the class action. On 10 September 2008, an amended complaint was filed which, among other things, seeks to expand the class period to 1 March 2007 through 19 November 2007. On 10 November 2008, Swiss Re Zurich filed a motion seeking to dismiss the amended complaint on legal grounds. The lead plaintiff filed its response to the motion on 9 January 2009, and Swiss Re Zurich’s reply brief is due in February 2009. We intend to vigorously defend against the action.
Total operating lease commitments 830 Less minimum non-cancellable sublease rentals –95 Total net future minimum lease commitments 735
Financial statements / Notes to the Group financial statements 17 Information on business segments
The Group provides reinsurance, insurance and capital market solutions for clients that complement our (re)insurance offering throughout the world through its business segments. The business segments are determined by the organisational structure and by the way in which management reviews the operating result of the Group.
The Asset Management business segment includes two separate sub-segments “ Credit & Rates” and “Equity and 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. Third-party asset management is included in Credit & Rates.
Expenses Claims and claim adjustment expenses; life and health benefits –12 049 –11 112 –16 –23 177 Return credited to policyholders –2 120 –2 120
Expenses Claims and claim adjustment expenses; life and health benefits –9 857 –9 065 –150 –19 072 Return credited to policyholders 2 822 2 822
Net realised investment gains/losses –182 –65 1 046 799 Other revenues 5 5
Net investment income – unit-linked 111 638 749 Net investment income – with-profit business 311 311 Net investment income – non-participating 852 457 1 737 3 046 Net realised investment gains/losses – unit-linked –421 933 512 Net realised investment gains/losses – with-profit business –67 –67 Net realised investment gains/losses – non-participating 239 –65 180 354
Expenses Claims and claim adjustment expenses; life and health benefits –6 162 –1 671 –1 232 –9 065
Net investment income – unit-linked 120 647 767 Net investment income – with-profit business 249 249 Net investment income – non-participating 823 412 1 397 2 632 Net realised investment gains/losses – unit-linked –1 026 –3 026 –4 052 Net realised investment gains/losses – with-profit business –741 –741 Net realised investment gains/losses – non-participating –199 –250 220 –229
Benefit ratio2 in % 85.5 1 Operating revenues exclude net investment income and net realised investment gains/losses from unit-linked and with-profit business as these are passed through to contract holders and therefore do not have an impact on the operating result. Operating revenues also exclude net realised investment gains/losses from non-participating business.
Luxembourg Swiss Re Europe S. A. 518 100 f Swiss Re Finance (Luxembourg) S. A. 0 100 f Swiss Re Funds (LUX) I 1 12 171 100 f Swiss Re Management (Luxembourg) S. A. 294 100 f Swiss Re Treasury (Luxembourg) S. A. 155 100 f Swiss Re International SE 196 100 f
Malta Swiss Re Finance (Malta) Ltd 740 100 f Swiss Re Treasury (Malta) Ltd 740 100 f
Financial statements / Notes to the Group financial statements 18 Subsidiaries, equity investees and variable interest entities
Barbados Accra Holdings Corporation 17 100 f Atlantic International Reinsurance Company Ltd 5 100 f European Finance Reinsurance Company Ltd 5 100 f European International Holding Company Ltd 3 282 100 f European International Reinsurance Company Ltd 3 277 100 f Gasper Funding Corporation 18 100 f Stockwood Reinsurance Company, Ltd 1 100 f Underwriters Reinsurance Company (Barbados) Ltd 17 100 f
Bermuda CORE Reinsurance Company Ltd 0 100 f Englewood Ltd 0 100 f Old Fort Insurance Company Ltd 1 100 f Swiss Re Global Markets Ltd 0 100 f SwissRe Capital Management (Bermuda) Ltd 0 100 f SwissRe Finance (Bermuda) Ltd 0 100 f SwissRe Investments (Bermuda) Ltd 0 100 f
China Beijing Prestige Health Consulting Services Company Ltd 6 100 e
Swiss Re Group enters into arrangements with variable interest entities (VIEs) in the normal course of business. The involvement ranges from being a passive investor to designing, structuring, and managing the VIEs. The variable interests held by the Group arise due to a modified coinsurance agreement, certain insurance-linked and credit-linked securitisations, private equity limited partnerships, hedge funds, debt financing and other entities, which meet the definition of a VIE.
When analysing the status of an entity, Swiss Re Group mainly assesses if (1) the equity is sufficient to finance the entity’s activities without additional subordinated financial support, (2) the equity owners have the right to make significant decisions affecting the entity’s operations, and (3) the holders of the voting rights substantively participate in the gains and losses of the entity. When one of these criteria is not met, these entities need to be assessed for consolidation under FIN46(R).
Insurance-linked and credit-linked securitisations The insurance-linked and credit-linked securitisations transfer pre-existing insurance or credit risk to the capital markets through the issuance of insurance-linked or credit-linked securities. In insurance-linked securitisations, the securitisation vehicle initially assumes the insurance risk through insurance contracts. In credit-linked securitisations, the securitisation vehicle initially assumes the credit risk through credit default swaps.
The collateral held predominantly consists of investment grade securities. Swiss Re Group would incur losses when some or all of these securities drop in value or default. The Group’s maximum exposure to loss equals the higher of the carrying amount of the collateral protected or the carrying amount of the insurance-linked or credit-linked securities held.
Others The VIEs in this category were created for various purposes. Generally, the Group is exposed to the asset risk of the VIEs by holding an equity stake in the VIE or by guaranteeing a part or the entire asset value to third-party investors. A significant portion of the exposure of Swiss Re Group is either retroceded or hedged. The assets held by the VIEs consist of investment grade securities, private equity investments, residential real estate and others.
Fixed income securities: Available-for-sale (whereof restricted 8 144) 8 953 Trading 131
Policy loans, mortgages and other loans (whereof restricted 260) 260 Other invested assets (whereof restricted 162) 162 Cash and cash equivalents (whereof restricted 411) 411 Acquired present value of future profits (whereof restricted 84) 84 Accrued investment income (whereof restricted 80) 80 Other assets (whereof restricted 33) 33 Total assets 10 114 Liabilities for life and health policy benefits 1 327 Policyholder account balances 1 718 Deferred and other non-current taxes 162 Accrued expenses and other liabilities 525 Long-term debt 5 155 Net unrealised investment gains/losses, net of deferred taxes –187 Cumulative translation adjustments, net of deferred taxes 1 204 Additional paid in capital 241 Retained earnings –31 Total liabilities and equity 10 114
When the net asset values of the investment vehicles decrease, the carrying amount of the investment is adjusted accordingly and a loss is recognised in the income statement. Consequently, no liabilities are set up for investment vehicles when losses occur.
Other invested assets 2 166 Accrued expenses and other liabilities 752
As of 31 December 2008, the consolidation of the VIEs resulted in a minority interest in the balance sheet of CHF 420 million (2007: CHF 435 million). The minority interest is included in accrued expenses and other liabilities. The net minority interest in income was CHF 37 million and CHF 10 million net of tax for the years ended 31 December 2007 and 2008, respectively. The income statement impacts are generally included in the relevant segment with the underlying movement in income or expenses.
Reconsideration events under FIN 46(R) required the review of the consolidation assessment of certain VIEs. As a result, the Group consolidated and deconsolidated some VIEs. The effect of this on the financial statements is immaterial.
The section below follows article 663b para. 12 of the Swiss Code of Obligations, which requires disclosure of the Group’s performance of a risk assessment.
The Executive Committee is responsible for implementing the risk management framework through two further committees. The Group Risk and Capital Committee has responsibility for allocating capital and capacity, approving investment risk limits, and deciding changes to the internal risk and capital methodology. The Group Products and Limits Committee determines Swiss Re’s product policy and standards, grants reinsurance limits, and decides on large or non-standard transactions.
The global Risk Management function is organised by risk categories, with dedicated departments for property and casualty risk, life and health risk, and credit and financial market risk. Each of these units is entrusted with Group-wide responsibility for identifying, assessing and controlling their allocated risks, including operational risks which arise in their area of control.
The following commentary on the 2008 financial year of the parent company thus complements the review of the financial year of the Swiss Re Group.
The business year was characterised by a number of transactions in connection with the simplification of the Group’s entity structure in the EU and the consolidation of its EU business. During 2008, the Company transferred assets and liabilities from its French, Italian and Spanish branches to the respective branch operations of a reinsurance carrier based in Luxembourg by way of contribution in kind. In addition, the life and health business written by the Company’s German branch was transferred into the German branch of a Luxembourg entity by way of portfolio transfer.
The development of the claims and claim adjustment expenses, life and health benefits and acquisition costs was principally affected by the portfolio transactions described above.
Operating costs allocated to reinsurance operations decreased mainly as a result of the change of the reporting classification of unallocated management expenses. The overall management expenses decreased as well due to lower personnel expenses incurred in the year under report.
The investment result declined to a loss of CHF 0.7 billion.
Both the realised gains and valuation adjustments increased significantly mostly driven by extended volume of the derivative financial instruments in connection with variable annuity business.
As of 31 December 2007, shareholders’ equity amounted to CHF 19.0 billion before allocation of the profit. After the dividend payment of CHF 1 331 million for 2007, the cancellation of shares from the share buy-back programme, the issuance of new shares and the inclusion of the profit for the 2008 financial year, shareholders’ equity decreased to CHF 17.1 billion at the end of 2008.
Reserve for own shares 1 297 1 446 Other legal reserves 650 650
The financial statements are prepared in accordance with Swiss Company Law.
The 2008 financial year comprises the accounting period from 1 January to
Short-term investments contain investments with a remaining maturity at the date of acquisition of one year or less, but greater than three months.
Property for own use is valued at the purchase or construction cost less necessary and legally permissible depreciation.
The provision for taxation contains taxes on the basis of the financial year just ended.
Funds held under reinsurance treaties mainly contain cash deposits withheld from retrocessionaires, which are stated at redemption value.
The tax expense relates to the financial year and includes taxes on income and capital as well as indirect taxes. Value-added taxes are included in the respective expense lines in the income statement.
Notes Swiss Reinsurance Company Ltd Additional information on the financial statements 1. Reinsurance result
Claims and claim adjustment expenses –15 453 1 790 –13 663 –16 169 2 838 –13 331
Other reinsurance income and expenses –7 –36 –43 139 –25 114
Liabilities for life and health policy benefits 12 189 –1 136 11 053 14 504 –954 13 550
Shareholders’ equity as of 1 January 18 409 18 981 Dividend paid for the previous year –1 162 –1 331 Capital increase/decrease including premium 37 –586 Profit for the financial year 1 697 15 Shareholders’ equity on 31 December before allocation of profit 18 981 17 079 Dividend payment –1 387 –341 Shareholders’ equity on 31 December after allocation of profit 17 594 17 045 1 Board of Directors’ proposal to the Annual General Meeting of 13 March 2009, subject to the actual number of shares outstanding and eligible for dividend. The difference between the proposed dividend payment in the previous year and the actual dividend payment in the year under report is described on page 240.
Swiss Reinsurance Company Ltd has issued a number of guarantees to various of its subsidiaries in support of their business activities by securing either their overall capital positions or specific transactions. These guarantees are generally not limited by a nominal amount but rather by the exposure of the underlying business.
As a participant in limited investment partnerships, Swiss Reinsurance Company Ltd commits itself to making available certain amounts of investment funding, callable by the partnerships for periods of up to 10 years. As of 31 December 2008, total commitments remaining uncalled were CHF 2 309 million. These commitments were assumed in the context of the absorption of a subsidiary in 2008.
Total off-balance sheet commitments from operating leases for the next five years and there after are as follows: CHF millions 2007 2008
As of 31 December 2008, the following debentures were outstanding: Instrument
In addition, no authorised capital with shareholders’ subscription rights was outstanding at the end of 2008 (2007: CHF 1 105 337).
a. Swiss Reinsurance Company Ltd, Mythenquai 50/60, 8022 Zurich, Switzerland, held a total of 28 521 789 Swiss Re shares or 7.85% of the share capital. Of these shares, 6 036 987 shares were fully paid-in shares held for general corporate purposes, 11 678 802 shares were paid in only at nominal value and reserved for general corporate purposes, 8 881 000 shares were acquired under the share buy-back programme and subject to cancellation, and 1 925 000 were acquired under the first trading line of the share buy-back programme.
b. Dodge & Cox, 555 California Street, San Francisco, CA, USA, announced on 31 October 2008 that they held, on behalf of the Dodge & Cox International Stock Fund, through an acquisition, 10 766 995 registered Swiss Re shares. Dodge & Cox thus has a voting right of 3.05% in Swiss Reinsurance Company Ltd which can be exercised autonomously of the beneficial owners.
c. Berkshire Hathaway Inc., 3555 Farnam Street, Omaha, NE, USA, notified Swiss Reinsurance Company Ltd on 22 January 2008 that, as of the same day, it held through its subsidiary Columbia Insurance Company, 3024 Harney Street, Omaha, NE, USA, 11 250 000 registered shares or 3.03% of the voting rights of Swiss Reinsurance Company Ltd.
In 2008, management expenses of CHF 173 million (2007: CHF 152 million) were recharged to Group companies and reported net under “Operating costs” and “Investment expenses”.
In 2008, Swiss Reinsurance Company Ltd has revised the basis for the reporting of management expenses that cannot be clearly allocated to the reinsurance or investment business. Such unallocated expenses of CHF 179 million (2007: CHF 168 million) are newly reported under “Other expenses”. In previous years, those expenses were included in the line item “Operating costs” within the reinsurance result. The comparative 2007 figures are adjusted accordingly.
On 1 October 2008, the Company absorbed a subsidiary holding the majority of the Swiss Re Group’s alternative investments. In connection with the merger the Company assumed both assets and liabilities of CHF 4.4 billion. The merger has been executed per 1 October 2008. The Swiss Financial Market Supervisory Authority FINMA has given approval to the transaction and the notification to the register of commerce has been performed subsequently.
Swiss Re Group and Berkshire Hathaway Inc. have agreed in principle, as announced on 5 February 2009, that Berkshire Hathaway Inc. will invest CHF 3.0 billion in Swiss Re Group. The final closing of the investment is subject to shareholder approval.
The investment is expected to be in the form of a subordinated convertible perpetual capital instrument issued by Swiss Reinsurance Company Ltd or one of its subsidiaries with a 12% coupon. At the holder’s option, it will be convertible after three years into Swiss Re shares, at a price of CHF 25 per share (subject to adjustments).
Profit for the financial year 1 697 024 261 15 441 566
2 Board of Directors’ proposal to the Annual General Meeting of 13 March 2009, subject to the actual number of shares outstanding and eligible for dividend.
Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the financial statements in accordance with the requirements of Swiss law and the company’s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
CHF millions 1999¹ 2000¹ 2001¹ 2002¹ 2003¹ 2004¹ 2005 2006² 2007² 2008²
Net realised investment gains/losses 3 588 4 275 2 665 –730 376 1 116 3 474 2 106 –739 –9 482
Amortisation of goodwill –211 –310 –368 –350 –315 –277 Other operating costs and expenses –2 785 –3 074 –3 384 –3 240 –2 942 –2 940 –3 081 –4 616 –5 891 –4 712
Income/loss before income tax expense 3 229 3 655 –104 36 2 336 3 367 2 559 5 856 5 187 –1 350 Income tax expense –783 –689 –61 –127 –634 –892 –255 –1 296 –1 025 486 Net income/loss on ordinary activities 2 446 2 966 –165 –91 1 702 2 475 2 304 4 560 4 162 –864
Forward-looking statements typically are identified by words or phrases such as “anticipate“, “assume“, “believe“, “continue“, “estimate“, “expect“, “foresee“, “intend“, “may increase“ and “may fluctuate“ and similar expressions or by future or conditional verbs such as “will“, “should“, “would“ and “could“. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others: the direct and indirect impact of the continuing deterioration in the financial markets and ̤ the efficacy of efforts to strengthen financial institutions and stabilise the credit markets and the broader financial system; changes in global economic conditions and the effects of the global economic downturn; ̤ the occurrence of other unanticipated market developments or trends; ̤ 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 debt-like 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 Swiss Re’s 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; the possibility that Swiss Re’s hedging arrangements may not be effective; ̤ the lowering or loss of one of the financial strength or other ratings of one or more ̤ companies in the Group; risks associated with implementing Swiss Re’s business strategies; ̤ the cyclicality of the reinsurance industry; ̤ uncertainties in estimating reserves; ̤ the frequency, severity and development of insured claim events; ̤ acts of terrorism and acts of war; ̤
Current market conditions The global financial markets have experienced extreme volatility and disruption for more than 18 months, due in large part to the turmoil affecting the liquidity of the banking system and the market reaction thereto. The impact of the turmoil in the financial markets has been exacerbated by adverse macroeconomic trends affecting an increasing number of the principal economies that have moved toward, or are now in, recession. Volatility and disruption have reached unprecedented levels.
Governments in a number of countries have undertaken initiatives to stabilise the financial markets. It remains to be seen whether these initiatives will be sufficient to positively impact or stabilise the volatility in the financial markets. Failure of these or other initiatives to stabilise and improve the performance of the financial markets could result in continued constraints on the liquidity available to the banking system and financial markets and increased pressure on securities prices of financial institutions. Moreover, government intervention may have a distorting impact on the markets, ranging from changes to the competitive landscape to capital support for ceding companies, thus reducing their need for reinsurance, as well as having a distorting impact on the debt capital markets.
It is unclear whether the severity of the downturn in the global financial markets and/or economic conditions will continue to worsen, or when conditions might improve. It is also unclear what the impact of further deterioration in the financial markets is likely to be on the financial condition of market participants (from a capital, liquidity or other perspective) and on investor confidence. If current levels of market disruption and volatility continue or worsen, at the very least, there can be no assurance that the Group will not be required to record further write-downs and impairments on assets over and above those announced to date, and more broadly, it is difficult to predict what the impact of continued market turbulence will be on the Group from a general business perspective or from a capital or liquidity perspective.
These risks can have a significant effect on investment returns, which in turn affects both results of operations and financial condition. The Group is focused on asset-liability management for its investment portfolio, but pursuing even this strategy has its risks, including possible mismatch, that in turn can lead to reinvestment risk. As interest rates have dropped significantly in line with reductions in central bank rates, which trend is exacerbated by the effects of unprecedented government intervention and the corresponding need for governments to raise debt to finance rescue efforts, the Group may be unable to successfully match, or come close to, historical parameters.
The Group seeks to manage the risks inherent in its investment portfolio by repositioning the portfolio from time to time, as needed, and to reduce risk and fluctuations through the use of hedges and other risk management tools. The Group has moved to reduce risk to the portfolio by repositioning the components of the portfolio and, as a result, profitability will potentially be impacted, and unless offset by underwriting returns, will be reduced.
Credit risk Like other financial institutions, the Group has been adversely impacted by the deterioration in the credit markets, and further market fluctuations and volatility could have a material adverse effect on the Group’s business, financial condition and results of operations. For 2008, the Group reported a net loss of CHF 0.9 billion, which was due principally to mark-to-market losses recognised in income and CHF 2.9 billion of impairments on the investment portfolio. Total mark-to-market losses were approximately CHF 3.2 billion excluding unit-linked investments and with-profit business, which included approximately CHF 2.5 billion attributable to two related structured CDS contracts written by the Group’s former Credit Solutions business. Shareholders’ equity in 2008 decreased to CHF 20.5 billion. This was mainly due to credit spread widening resulting in net unrealised losses of CHF 5.5 billion, foreign exchange movements of CHF –2.3 billion, share buy-back of CHF 2.0 billion and dividend of CHF 1.3 billion paid to shareholders during the year.
The unprecedented and severe ratings downgrades that the Group and others have experienced over the past 18 months, and the absence of a liquid market for credit-related and other securities, have resulted in a significant and material reduction in the value of the underlying assets. With respect to the credit default swaps, the Group remains exposed to continued fluctuations in the market value of the underlying securities and could be required to report further mark-to-market losses. Changes in the market value of the underlying securities and other factors impacting their price could give rise to market value losses. If the credit markets continue to deteriorate, the Group could face further losses in other areas of its portfolio, including other structured instruments.
More generally, the continued deterioration of the credit markets and related developments have had, and can be expected to have (at least in the near term), an adverse impact on the ability of market participants, including the Group and its counterparties, to value credit default swaps and other credit-related instruments. In the absence of a liquid market, various methodologies may be available to value securities positions. Valuation is a complex process
General information / Note on risk factors involving quantitative modelling and management judgment, which is also impacted by external factors including default rates, rating agency action, financial strength of counterparties and prices of observable comparable market transactions. In addition, to the extent institutions sell assets as part of national rescue efforts, such sales may establish new valuation benchmarks.
Liquidity risks The Group’s business requires, and its clients expect, that it has sufficient capital and sufficient liquidity to meet its reinsurance obligations, and that that would continue to be the case following the occurrence of any event or series of events, including extreme catastrophes, that would trigger insurance or reinsurance coverage obligations. The Group’s uses of funds include obligations arising in its reinsurance business (including claims and other payments as well as insurance provision repayments due to portfolio transfers, securitisations and commutations), which may include large and unpredictable claims (including catastrophe claims), funding of capital requirements and operating costs, payment of principal and interest on outstanding indebtedness and funding of acquisitions. The Group also enters into contracts or trading arrangements that could give rise to significant short-term funding obligations and, in connection with the Group’s trading operations, it could be subject to unexpected calls to deliver collateral or unwind trading positions at a net cost to it. The Group also has unfunded capital commitments in its private equity and hedge fund investments, which could result in funding obligations at a time when it is subject to liquidity constraints.
The Group may not be able to secure new sources of liquidity or funding, should projected or actual liquidity fall below levels it requires. In addition, the Group’s ability to meet liquidity needs may be further constrained by regulatory requirements that require regulated entities to maintain regulatory capital or that restrict intra-group transactions, the timing of dividend payments from subsidiaries or the fact that certain assets may be encumbered or otherwise non-tradeable. Finally, any adverse ratings action could trigger a need for further liquidity (for example, by triggering termination provisions or collateral delivery requirements in contracts to which we are a party) at a time when the Group’s ability to obtain liquidity from external sources is limited by such ratings action.