Proposal for allocation of profit 46 Report of the statutory auditors 47
Subsidiaries and affiliated companies 48 Glossary of technical terms 51 Swiss Re registered shares 55 Financial years 1993–1998 56
An investment of CHF 100 000 in the total Swiss market at the end of 1989 would have increased in value to
(basis: Swiss Performance Index with reinvestment of income ). The total performance amounts to 315.5% or 16.5% per year.
Closing share price on 4 May 1999: CHF 3 380 Stockmarket capitalisation CHF 48 360 million
Performance of Swiss Re registered shares and the Swiss Performance Index from 31 December 1989 to 4 May 1999
Dividend per share in CHF 48* 44 9.1 * Subject to approval by the General Meeting
Swiss Re is once again pleased to report a strong increase in ordinary Group profit to CHF 2504 million – an improvement of 18% for the 1998 financial year.
We wish to thank all our employees, whose significant contributions will continue to support our company during these particularly challenging times.We also thank our many clients around the world for the confidence they show in us every day.
Auditors PricewaterhouseCoopers Ltd 1 Member of the Audit Committee 2 Member of the Compensation and
Gross premiums written rose by 4% during 1998. Life business contributed strongly to this growth. Non-life premium volume increased slightly because acquisitions offset the effect of the soft underwriting environment and a negative currency adjustment.The first-time inclusion of Swiss Re Italia and Nederlandsche Credietverzekering Maatschappij (NCM) contributed 7% to overall growth. The impact of currency fluctuations amounted to a decrease of approximately 3%. One significant cause of the change in premiums is the long-term trend from proportional to non-proportional business. In addition, premium trends reflect the discontinuation of the US medical business, as previously announced.
Non-life technical provisions grew to CHF 41 billion from CHF 39 billion in 1997. These provisions include CHF 2.8 billion approved by local regulatory authorities for future claims fluctuations and for large and catastrophic losses. The contribution to these provisions was largely offset by releases for catastrophic losses, resulting in a net contribution of CHF 8 million (1997: CHF 398 million).This reduction is attributable to the higher incidence of catastrophe claims in the year under review.These technical provisions also include business from NCM and Reaseguros Alianza S.A. (Alianza) and the accident and health business from Life Re Corporation (Life Re) for the first time.
The life business posted a good technical result of CHF 365 million due to generally favourable trends in the market. Profits on the existing book of business were partly offset by the financing strain for new business. Improvements in mortality experience, although satisfactory, were less favourable than in the previous year.
Investments at balance-sheet values rose from CHF 70 billion to CHF 78 billion. Most of this increase can be attributed to the companies newly acquired in 1998.The return on investment adjusted for changes in consolidation rose from 7.4% to 8.5%.
The reduction of shareholders’ capital by CHF1.6 billion through the share repurchase programme and dividend payment as well as the offsetting of significant goodwill on acquisitions were the main causes of a decline in the published shareholders’ capital.This outweighed the significant positive effects from unrealised gains on shares and retained profit for the financial year.Total shareholders’ equity at year-end amounted to CHF 13.0 billion, down from CHF 14.2 billion. Valuing investments at market values, capital funds were CHF 17.7 billion, representing a decrease of CHF 0.4 billion compared with the previous year.
Against a background of substantially larger profit and decreasing equity, the return on equity (ROE) of 13.6% for 1998 lies below the previous year’s figure of 14.0% but is within Swiss Re’s target of 1000 basis points over the risk-free rate.This reflects the adjustments made in calculating the figure: the goodwill offset is added back to the equity figure and the profit is reduced by an imputed goodwill write-off. Thus, the profit was adjusted by CHF –170 million and equity by CHF 5158 million.Taking account of these adjustments, the development of the ROE mainly reflects the substantial retained earnings and the significant increase in unrealised gains on shares over the 4 Swiss Re Group
Swiss Re’s workforce increased during 1998 by 15% to 8770; this was largely due to acquisitions.Thirty-one percent of staff were employed in Switzerland and 69% in Swiss Re’s more than 70 offices around the world.
The following points reflect the continued implementation of Swiss Re’s strategy as well as the impact on the consolidated accounts: In 1998, the profit and loss account of Swiss Re Italia was for the first time fully consolidated into the results of the Group; in the previous year, only a 49% share of this company’s profits had been consolidated in the profit and loss account (using the equity method).The full consolidation of Swiss Re Italia resulted in growth in net premiums of CHF 750 million and has provided a significant boost to the importance of Italian business in the Group: gross premiums from this source rose from 3% to 6.5% of total business.
On 30 June 1998, Swiss Re completed its acquisition of NCM.The purchase price valued 100% of NCM at NLG 761 million. At year-end 1998, Swiss Re held a 90% share in the company. NCM was fully consolidated as of the acquisition date, and thus its half-year’s profit and loss account is included in the Group accounts.The acquisition of NCM had an impact on premium growth of CHF 288 million.
The company’s capital structure has been further refined through the issue of hybrid capital, which combines elements of debt and equity. This move, along with Swiss Re’s first share repurchase programme of CHF1 billion concluded in May 1998, underlines Swiss Re’s intent to make efficient use of capital. Share buy-back transactions and dividend payments are ways of returning capital to shareholders. Using both of these instruments allows Swiss Re to manage efficiently the capital base of the company. The Board of Directors has authorised the company to purchase an additional CHF 1 billion in shares, subject to market conditions.
In March 1999, Swiss Re completed its acquisition of Fox-Pitt, Kelton Group, an integrated investment bank specialising in the financial services industry. Fox-Pitt, Kelton’s research and investment banking skills will add important strength to the insurance and financial solutions Swiss Re offers to clients.
Through its subsidiary Life Re, Swiss Re also announced four administrative reinsurance transactions, representing a capital commitment of approximately USD 500 million, significantly surpassing our initial expectations. This represents tangible evidence that more and larger administrative reinsurance transactions would occur under Swiss Re’s ownership.
In April 1999, Swiss Re sold its 20% stake in Credit Suisse Financial Products to the Credit Suisse Group. Under the terms of the transaction, the holding in Credit Suisse Group has been increased, but still remains below 5%.This transaction improves Swiss Re’s financial position in terms of asset liquidity and flexibility. In addition, it is consistent with organisational changes at Credit Suisse First Boston.
A further deterioration in rates was evident in all lines of business in 1998. This has several causes: a boom in capital markets, consolidation, deregulation, surplus capacity and the good overall results which insurers and reinsurers have experienced in recent years.The knock-on effect of these “good” years has been the extension of market standards to coverage offered with minimal pricing increases.
Provisions for long latent injury claims, arising mainly from US asbestos and environmental liability business, amounted to USD 2374 million.This was down 4.9% from the previous year due to claim payments which increased in 1998.The so-called survival ratio, which compares the provisions with the average payments over the last three years and indicates how many years the provisions would last assuming identical payments in future years, decreased from 26.6 years to 22.8 years. Swiss Re expects the survival ratio to continue to decline over time as claims are settled, but to remain substantially above that of its competitors.
In the insurance industry, strict underwriting procedures or exclusion endorsements are generally being used to address Year 2000 exposure. However, some exposure to loss still remains on account of specific claims circumstances, varying policy and reinsurance contract wordings, as well as the uncertainty of judicial interpretation.
According to some experts, any impact should not exceed the order of magnitude that might reasonably be expected in the event of other loss scenarios.
Following the integration of Unione Italiana di Riassicurazione (Uniorias) in 1997, Swiss Re was generally successful in securing the Italian non-life portfolios of the company where this seemed desirable.
The fall in non-life premium volume was a consequence of increased pressure on premium levels, the continued switch from proportional to nonproportional reinsurance, which was already evident in the 1997 results, and a cut-back in a few major proportional placements. These declines could not be fully compensated by the acquisition of Uniorias.
With the exception of the hail losses in the Netherlands and Italy, and the impact of hurricanes Mitch and Georges on European clients’ property accounts, Europe has been spared any significant natural disasters in 1998. The non-proportional property book has therefore posted another very satisfactory result.
The frequency of large fire losses remained below the long-term average, in spite of a few major events in the UK, Scandinavia and the Netherlands. This positive trend was partially offset by a higher level of small and mediumsized claims under proportional treaties.
Special lines business made a smaller contribution to the overall underwriting result than usual, despite the absence of any exceptional losses, due mainly to greater competition on price.
On the whole, the underwriting results in Europe for 1998 were not satisfactory; remedial measures will be introduced in the coming renewal season.
Division Europe made fundamental changes to its managerial and organisational structure in 1998, in order to maximise the effectiveness of its approach to clients. In the future, the division will place strong emphasis on proximity to its clients. As part of its newly defined strategy of decentralisation, the division has decided to strengthen its local organisational units by expanding its Paris, Madrid and Tel Aviv offices. Subsidiaries in Italy and the UK have also put in place processes to redefine their market approach.
In Australia and New Zealand, premium levels continued to suffer from extreme pricing pressure in all classes of commercial and industrial insurance, with a number of new reinsurers being authorised to transact business during 1998. Difficult market conditions notwithstanding, Swiss Re in Australia produced a good result, and posted premium growth of almost 8%.
The capital bases of all financial institutions in Southeast Asia (including local insurance companies) have been seriously undermined, which has led to greater consolidation activity in recent months.
In future, the impact of the Asian financial crisis on insurers’ capital should mean that markets will increasingly require reinsurers’ capital strength and support. In the Middle East, surplus oil production and stagnating demand have resulted in the lowest oil prices in 25 years. Correspondingly high budget deficits in Arab countries are negatively affecting the outlook for economic growth. Swiss Re will seek an improvement in results for this region by focusing on professional underwriting, making better portfolio selection and offering enhanced services to its Asian clients. Regionalisation is a key factor in further strengthening Swiss Re’s position in Asia.
CHF billions 2.6 billion in 1997 to approximately USD 10.1 billion in 1998.The main contributor was Hurricane Georges, which caused USD 2.9 billion in losses. Numerous spring storms in Minnesota produced losses of approximately USD 1.3 billion.The ice storm in Quebec in January 1998 was the largest single loss event in Canadian history resulting in a CAD 1.4 billion loss. Exposure to loss continues to rise in many hurricane-prone areas due to the rapid population growth and consequent growth in insured values in the Atlantic and Gulf coasts. Despite the catastrophe losses in the US and Canada, the impact on renewals was modest and mainly confined to those catastrophe agreements that were directly affected by events.
1998 saw a significant increase in requests for multi-year cover in the US and Canada. Most clients were concerned about the continuity of coverage around year-end as they want to ensure that the same reinsurers provide the expiring cover at the end of 1999 and the new cover for the beginning of 2000 should any Year 2000 coverage issues arise. Many clients were also seeking to lock in rates at attractive terms and conditions.
The general trend towards increasing retentions continues. Against the background of an increasingly competitive industry, major US and Canadian reinsurers are seeking to gain competitive advantage by offering specialised capital and risk services. Reinsurers are acting as strategic advisers to their clients providing assistance in such areas as information technology, financial restructuring, mergers, acquisitions and capital buy-backs. In North America, Swiss Re continued to shift the mix of business in line with its strategy towards more casualty and excess business and less property and proportional business.
In Latin America, financial market volatility stemming from the crises in Asia and Russia and concerns over Brazil’s economic policy spread throughout the region. Pressure from higher interest rates and lower commodity prices remain a significant burden to the economies of Latin America despite the continued improvement of the economic fundamentals.
an active interest in this transaction, which could prove pivotal to Swiss Re’s options for competing in Brazil in the future.
In South Africa, major market consolidation continued during 1998, including several significant acquisitions and mergers.The trend is expected to continue in 1999.
Corporate clients in the region are steadily increasing their level of selfinsurance and captives have been gaining market share at the expense of traditional carriers. Underwriting issues relating to the Year 2000 have generally been dealt with in southern Africa by applying exclusions.
Thanks to the application of stringent technical underwriting strategies, Swiss Re has delivered a strong operating result in southern Africa, moreover, the region has been spared any major natural catastrophes since 1987.
Demand for integrated risk products for insurance companies is beginning to grow. Covers which blend substantial funded elements with high excess risk transfer to finance what are essentially uninsurable risks are now becoming fairly standard.
Industrial casualty business remained unaffected by any major losses in 1998, which allowed good results to be reported in this area.
The number of insolvencies, however, which has a major impact on results in this business, decreased slightly in developed markets, generating a generally favourable business performance. Despite the challenging environment, Swiss Re was able to consolidate its leading global position, matching the profitability levels of previous years.
Swiss Re New Markets was only moderately exposed in the Swissair crash off the coast of Nova Scotia in September 1998 and the China Airlines crash inTaipei in February 1998. Nevertheless, the impact of these two events on business meant an overall negative result in this sector.
Non-traditional business The acceptance of finite risk techniques in managing remote but solvencythreatening risk situations continued to grow in the year under review. Insurers were the major source of demand for high excess catastrophe layers for second or third event covers and whole account stop loss protection with high attachment points. Corporate clients, as well as insurers, also made use of finite reinsurance covers to manage new risk situations, such as Year 2000 and operational risks.
Gross margins on funded reinsurance contracts remained narrow as a number of the largest providers essentially competed for the same business.
The market for weather derivatives (covering large average temperature deviations) continued to grow in 1998, as an increasing number of energy companies boosted demand.
Their approach has made branding an increasingly crucial factor for distribution.
Insurers are increasingly turning to reinsurance as a tool to minimise earnings fluctuations and/or capital arbitrage.The key drivers of demand are the need for efficient capital management and in some regions changes to solvency standards.
Growth in the life business was encouraging in the year under review, with particularly strong underlying growth in the UK and the US.The firsttime inclusion of Swiss Re Italia, following the completion of its acquisition in 1997, provided a further boost to growth in the portfolio. On the other hand, the gain in strength of the Swiss franc against several other currencies somewhat restricted this growth. Developments in mortality were satisfactory, with particularly good experience in the US, the UK and Canada.
Additional information on the Group accounts Gross premiums by country 25 Premiums by line 25 Net technical account by line 26 Technical provisions 27 Technical provisions by line 27 Technical provisions by currency 27 Investments 28 Investment result 28 Investments by currency 29 Capital funds 30
The use of derivative instruments forms part of the risk management strategy, the main purpose being to hedge market risks. Derivative instruments used as hedging instruments are valued in the same way as the underlying transactions they hedge, gains and losses are included in the profit and loss account when gains and losses on the underlying transactions are recognised in income. Derivative instruments which are not effected for hedging purposes are valued at market values, the resulting gain or loss is recognised in the profit and loss account.
Share capital and the share premium account are disclosed separately. The retained earnings brought forward show the cumulative retained earnings on the balancesheet date. The revaluation reserve is the difference between cost and market value of land and buildings and shares, after provision for deferred taxes. The reserve for own shares corresponds to the cost value of shares in Swiss Re, Zurich, held by Group companies.
All items in the balance sheet and the profit and loss account denominated in foreign currencies are translated at the currency exchange rates applicable on the balancesheet date. The currency translation adjustment from the recalculation of the opening balance sheet is netted against retained earnings.
Previous year 1 refer to glossary for definition 2 not including Swiss Re Italia 3 not including Life Re and Alianza
CHF millions CHF EUR GBP USD CAD Other Total 29 Swiss Re Group
Return on equity 1 refer to glossary for definition 2 before offset of goodwill from acquisitions made since 1 January 1996
Deferred acquisition costs in the amount of CHF 433 million (1997: CHF 444 million) are offset against the unearned premium reserve and in the amount of CHF 644 million (1997: CHF 546 million) against provisions for life, health and disability reinsurance. Changes in deferred acquisition costs are treated in the profit and loss account as part of changes in the provisions for unearned premiums and for life, health and disability reinsurance respectively.
These items contain charges and income of the service companies, currency differences and other charges and income not attributable to the technical account or investments. Also included are restructuring expenses of CHF 54 million for the existing North American Group companies arising in connection with the acquisition of Life Re Corporation. In addition, the provision of CHF 50 million set up in the previous year for internal costs arising from the Year 2000 issue was further strengthened by CHF10 million to CHF 60 million.
Affiliated companies valued at Swiss Re’s share of their equity 1 450 1 586
Investments in unconsolidated subsidiaries and affiliated companies as stated in the balance sheet 2 791 3 404
The amount in the respective balance-sheet positions related to affiliated companies is as follows: CHF millions 1998 1997
The shares stated at market value in the balance sheet cost CHF12 298 million (1997: CHF12 424 million).
The following own shares of Swiss Re, Zurich, are held by the Swiss Re Group: Number of registered CHF
Own shares held on 31 December 1998 at cost 808 092 1 127
The portfolio includes shares serving as a guarantee for obligations arising from the convertible bonds issued by SwissRe Finance (Bermuda) Ltd and the call warrants issued in 1997. Following approval by the General Meeting on 26 June 1998, capital was reduced by the 312 350 shares bought back as part of the repurchase programme.
Other prepayments and accrued income contain a surplus of CHF 316 million accumulated in previous years from paid-in employer’s contributions for the obligations towards employee pension funds existing on 31 December.
Change in technical provisions in accordance with the profit and loss account 2 489 2 269
The provisions for claims outstanding include provisions of CHF 2818 million (1997: CHF 2615 million) prescribed by local regulatory authorities for future claim fluctuations and for large and catastrophic losses. In 1998, a net amount of CHF 8 million was added to provisions after revaluation at current exchange rates (1997: 398 million).
Provisions for long latent injury claims outstanding on 31 December 1998 reflect the carefully estimated future trend of claims payments and claims settlement charges. Due to the inherent uncertainties and assumptions on which these estimates are based, however, we cannot exclude the need to make further additions to these provisions in the future.
Debentures as at 31.12. of the report year were as follows: in CHF millions Interest rate Due date Currency 1998 1997
There are liabilities covered by valuable security in the sum of CHF 46 million (1997: CHF195 million).
All obligations entered into under derivative instruments are secured by underlying assets.
Our audit was conducted in accordance with auditing standards promulgated by the profession and with the International Standards on Auditing issued by the International Federation of Accountants (IFAC), which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.We have examined on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements.We have also assessed the accounting principles used, significant estimates made and the overall consolidated financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.
Swiss Re, Zurich, performs a dual role within the Swiss Re Group as both a reinsurance and a holding company. Around 35% of the total gross premium income of the Swiss Re Group is attributable to business acquired directly by Swiss Re, Zurich. An assessment of market position, profitability and financial strength must focus primarily on the consolidated financial statements.
The following commentary on the 1998 financial year of the parent company therefore complements the review of the financial year of the Swiss Re Group and is intentionally kept short.
After-tax profit for the financial year amounted to CHF 1282 million, following CHF 802 million in 1997.
This rise in profit is attributable to the non-technical result, which more than doubled from CHF 649 million in 1997 to CHF 1352 million in 1998. The technical result amounted to CHF 140 million, representing a decline over the previous year (CHF 341 million).
Capital funds at year-end 1997 amounted to CHF 5745 million before profit allocation. Following the dividend distribution of CHF 629 million as well as the inclusion of shares repurchased to a total value of CHF 1000 million and the 1998 profit, capital funds equalled CHF 5398 million at year-end 1998.
Investment result 3. Allocated investment return 4. Interest charges 5. Other income 6. Other charges
III Total result 1. Technical result 2. Non-technical result 3. Profit before tax 4. Tax
The accounts of the parent company are prepared in accordance with the regulations of Swiss Company Law. Swiss Re’s profit and loss account and balance sheet are presented in line with European Union directive-based accounting and reporting recommendations for insurance companies.
The 1998 financial year comprises the accounting period from 1 January to 31 December 1998. However, due to local convention, reinsurance business from Japan included in the accounts is for the period from 1 April 1998 to 31 March 1999.
The allocated investment return includes the actual investment income which can be directly attributed to the reinsurance business. In addition, it contains the investment return generated on the investments covering the technical provisions.The interest rate reflects the currency-weighted 5-year average yield on 5-year government bonds.
Deposits retained from ceded reinsurance business as well as other liabilities are stated at redemption value.
All items in the balance sheet and the profit and loss account denominated in foreign currencies were uniformly translated into Swiss francs at the currency exchange rates applicable on the balance-sheet date. Differences arising from the recalculation of the opening balance sheet are booked via a corresponding provision and have no impact on the profit and loss account.
Own shares held by the Swiss Re Group are stated on page 33.
Based on the information at our disposal, Credit Suisse Group owned 1251313 registered shares of Swiss Reinsurance Company on 4 May 1999, representing 8.49% of the total share capital.
The independent actuary, Paul Embrechts, Oberrohrdorf, has confirmed in his report that the balance-sheet provisions for the life reinsurance business stated at year-end 1998 have been calculated in accordance with European Union guidelines.
The General Meeting to be held in Zurich on 25 June 1999 has at its disposal the following balance-sheet profit (cf. profit and loss account and balance sheet, pages 39 to 41): in CHF 1998 1997
If the proposal of the Board of Directors is accepted, a dividend of CHF 48 per share will be paid.
Bavarian Reinsurance d 100 f DEM 140.0 572.5 Company Limited 2
Schweizer Rück Risk Management m 100 – – – – und Produktentwicklung für Versicherungen GmbH
Württembergische AG Versicherungs- j 31.92 e DEM 79.7 826.1 Beteiligungsgesellschaft1, 2
Areas: d Reinsurance m Reinsurance advisers j Insurance s Banking m Services j Holding
Swiss Re Capital Markets Limited m 100 f GBP 0 0.1
e a o f b u si n e ss fi li a ti o n i n
European Finance Reinsurance d 100 f USD 0.7 6.2 Company Ltd.
SwissRe Finance (Bermuda) Ltd. m 100 f USD 146.3 1 058.9
European Reinsurance Corporation d 100 f USD 12.9 29.8 of America
Swiss Re America j 100 f USD 17.5 1 724.1 Holding Corporation1
Swiss Re Capital Markets Corporation m 100 f USD 0.1 5.3 49 Swiss Re Group
o f b u si n e ss ia ti o n i n
Swiss Re Life & Health America Inc d 100 f USD – 52.5 448.0
Suiza Re México, S.A. de C.V. m 100 – – – –
Swiss Re Investors Asia Ltd. m 100 – – – –
SR Risk Management Services Limited m 49 – – – –
Swiss Re Life & Health d 100 f AUD 37.0 277.0 Australia Limited
The Mercantile and General d 100 f AUD 13.0 48.5 Reinsurance Company of Australia Limited
Swiss Re Life and Health d 100 f ZAR 5.7 263.5 Southern Africa Limited 50 Swiss Re Group
Concentration of risks which may be affected by the same claim event or concentration of shares in the same risk or same event through reinsurance treaties.
Sum of the claims ratio and the expense ratio. This ratio enables the assessment of business performance in non-life reinsurance before inclusion of allocated investment return.
Marine insurance: Insurance against damage or loss of ships and cargoes: also includes off-shore drilling platforms and oil rigs.
Professional and directors’ and officers’ liability: Insurance of liabilities arising from the performance of professional or official company duties.
Treaty reinsurance: Participation of the reinsurer in certain sections of the insurer’s business as agreed by treaty.
Adjusted stock exchange prices per registered share 3 high low year-end 4
Swiss Re Finance (Bermuda) Ltd., a wholly owned subsidiary of Swiss Re, Zurich, placed a convertible bond issue on 29 June 1995. The convertible bonds, in the nominal amount of USD 500 million and maturing in five years (on 30 June 2000), can be converted into a total of 490 330 registered shares of Swiss Re, Zurich. In order to secure conversion rights, no new securities were issued.
Shareholders’ capital and reserves stated in the balance sheet Shareholders’ capital and reserves at market value, after taxes
The publication Swiss Re 1999: The art of taking risks and the Environmental Report are available on our Website www.swissre.com