––– Weekly price of Swiss Re share (logarithmic right-hand scale) Source: Datastream *as of 28 March 2002: Closing share price: CHF 154.75, stock market capitalisation: CHF 48 030 million
For detailed information on financial statements and notes, please see Annual Report 2001 – Financial Statements.
Any review of the year 2001 must start with the tragedy of 11 September, with its terrible cost in human lives and suffering. Our sympathy will always be with the victims and their families. We were fortunate and are deeply thankful that no employee of the Swiss Re Group was seriously affected.
Another defining moment in 2001 was the successful achievement of Swiss Re’s largest ever capital market transaction. The ability to call on capital markets only weeks after 11 September, in a bearish investment environment, highlights the Group’s sound fundamental performance, strong balance sheet and favourable business outlook.
The year-end renewals confirmed our belief in an accelerated turnaround in the profitability of Swiss Re’s property and casualty and financial services business. There was a marked improvement in prices and conditions as well as a continued “flight to quality” into 2002. We expect to deliver on the planned results from the new organisation. We further anticipate that business processes will improve and cost ratios decline. The business group structure shall drive product innovation and extend cross-selling of risk and capital management solutions.
On behalf of the Board of Directors and the Executive Board, we would like to thank our employees, whose initiative, flexibility and commitment have helped bring our company through a challenging period in excellent shape. We would also like to thank our clients and shareholders, whose continued support has allowed the Group to adapt rapidly and effectively to a changing risk landscape. We know it is this support that makes Swiss Re strong – and we are profoundly grateful for it.
Swiss Re’s core competencies are defined by three essential business disciplines: Risk transfer The objective is to identify, evaluate, underwrite and diversify risk in order to minimise the total capital cost of carrying such risk.
Risk finance Risk financing employs a wide array of products from finite reinsurance to equity, leveraging Swiss Re’s knowledge and understanding of worldwide risk markets to finance risk retention.
Group strategy Swiss Re’s goal is to be the premier provider of risk and capital management solutions and to add economic value for the company’s clients and shareholders while maintaining the highest credit ratings. Swiss Re seeks to optimise its diversification geographically by line of business and operates a truly global business. Acquisitions have enhanced Swiss Re’s leadership in its core European and North American life and health and property and casualty markets, as well as in the emerging markets of Latin America. Swiss Re seeks to achieve its goals while steering its ecological and societal impacts to enable future generations to meet their needs.
The Group operates through product and marketing teams, which work together to serve the company’s clients efficiently on a global basis. Its business structure ensures that Swiss Re can work closely with clients in each local market, while also diversifying risks and sharing expertise throughout the Group.
Swiss Re’s guiding principles The guiding principles foster the implementation of the core competencies and ensure the long-term success of the company.
Excellence based on knowledge: our products and services are the result of long-established and proven expertise, extensive research and focused innovation. We foster an exceptional working and learning environment that is reflected in a strong team-based culture.
Partnership with clients: we consult with clients as partners for the long term to develop the most effective tailormade solutions, leveraging our expertise and profound know-how to help them attain their individual goals.
Swiss Re’s business strategy focuses on five key initiatives: ■ Property & Casualty to outperform the market through active management of the underwriting cycle and costs; ■ Life & Health to maintain number one market position, margins and growth; ■ Financial Services to be the premier provider of risk and capital management solutions to its clients; ■ Diversify Swiss Re’s worldwide risk portfolio; ■ Leverage Swiss Re’s capabilities in human, brand, capital and risk management.
Americas Asia Europe Life & Health Asset Investment Credit Risk Management Banking Solutions Solutions
Have you ever seen a Mother Christmas? I haven’t. My grandfather always used to surprise us as Father Christmas when I was a child and ever since then I have always wished I could be in his shoes one day. If I can help people in difficult situations have an enjoyable Christmas, my wish takes on a greater meaning for me.
“Think of others first, and try to leave the world a little better than how you found it,” my parents always said. In today’s world I think sharing enjoyable Christmas memories is one of the most important ways of contributing towards a better world.
Bénédict G. F. Hentsch 1993–2005 Born 1948, Swiss citizen. Mr Hentsch joined Swiss Re’s Board of Directors in November 1993. He was a partner of Darier Hentsch & Cie, Geneva, from 1985 until October 2001 when he resigned to fully dedicate himself to his mandate of Vice President of the Board of the Swissair Group. He is also a founding member of the Board of Directors of the newspaper Le Temps.
George L. Farr 1996–2004 Born 1941, US citizen. Mr Farr has been Managing Partner of Muirhead Holdings, LLC, Greenwich, Connecticut, US, since 1998. He joined Swiss Re’s Board of Directors in November 1996. At that time he was Vice Chairman of American Express Company, New York. Mr Farr is also Chairman of the Board of Directors of Covanta Energy, New York, and a member of the Board of Directors of Misys plc, London.
Walter B. Kielholz 1998–2002 Managing Director Born 1951, Swiss citizen. Mr Kielholz has been Swiss Re’s Chief Executive Officer since 1 January 1997. He joined Swiss Re’s Board of Directors in June 1998, when he was also appointed Managing Director. He became a member of Swiss Re’s Executive Board in January 1993. Mr Kielholz also serves as a member of the boards of directors of Credit Suisse Group, Zurich; “Winterthur” Swiss Insurance Company, Winterthur; Euler, Paris; Partner Re and Allied World Assurance Company Ltd, Pembroke, Bermuda. In addition, Mr Kielholz is President of the International Association for the Study of Insurance Economics “The Geneva Association ”, Geneva, and the Foundation “Avenir Suisse”.
Jorge Paulo Lemann 1999–2003 Born 1939, Brazilian and Swiss citizen. Mr Lemann is a controlling shareholder of AmBev, a brewery; Loja Americanas, a discount store chain, and GP Investimentos, a buy-out and restructuring firm with interests in Brazilian railways, supermarkets, amusement parks and telecommunications in São Paulo, Brazil. Mr Lemann joined Swiss Re’s Board of Directors in June 1999. He also serves on the Board of Directors of The Gillette Company, Boston, on the international advisory boards of DaimlerChrysler Corp, Auburn Hills, Michigan, and Credit Suisse Group, Zurich, and as Chairman of the Latin American Advisory Committee of the New York Stock Exchange.
In 1991, he was called to the Executive Board of Credit Suisse. In 1997, he became a member of the Executive Board of both Credit Suisse Group and Credit Suisse First Boston, where he was in charge of global trading. In 1998, he was appointed CEO of Credit Suisse Private Banking, in which capacity he continued to serve on the Executive Board of Credit Suisse Group. He retired at the end of 2001. Mr Grübel is also a non-executive director of Sauber Holding, Vaduz.
Bob Scott 2002–2006 Proposed member Born 1942, Australian citizen. Mr Scott retired in May 2001 as Group Chief Executive of CGNU plc, having previously been Group CEO of CGU plc and General Accident plc from 1996. Mr Scott held executive positions in the group in Australia and New Zealand before transferring to the United Kingdom in 1990. Mr Scott is also a non-executive Director of the Royal Bank of Scotland Group plc and Jardine Lloyd Thompson Group plc.
Secretary of the Board of Directors Thomas Hodler Born 1947, Swiss citizen. Mr Hodler has been the Company Secretary since November 1997. He is a member of Swiss Re’s senior management.
Board of Directors Committees (from 31 May 2001– 6 May 2002)
Finance and Risk Committee Lukas Mühlemann, Chair Rajna Gibson Ernesto Jutzi Walter B. Kielholz
The Board proposes to the Annual General Meeting of 6 May 2002 that Mr Oswald J. Grübel and Mr Bob Scott be newly elected to the Board of Directors each for a four-year term of office.
Business groups Stefan Lippe* John R. Coomber* Jacques Aigrain* Property & Casualty Life & Health Financial Services
Divisions/Units Andreas Beerli Jacques E. Dubois Martin Albers** Americas Deputy Head of Risk Solutions
Life & Health (in charge from Business Group 1 July 2002)
Michel M. Liès Chris C. Stroup** Giuseppe Benelli* Europe Swiss Re Life & Health Chief Investment Officer/
Asset Management * Members of the Executive Board Committee ** Members of the Executive Board since 1 January 2002
Swiss Re Annual Report 200114 22–24 January Conference on Managing the Global Ageing Transition Swiss Re’s Centre for Global Dialogue hosted the well attended conference on “Managing the Global Ageing Transition” in conjunction with the Washington based Center for Strategic and International Studies.
5 March Online catastrophe excess of loss windstorm capacity for Japan Swiss Re launched the first online reinsurance product for the Japanese market: Catastrophe Excess of Loss Windstorm Japan on the ELRiX (Electronic Risk Exchange ) platform.
18 May Jacques Aigrain becomes head of Financial Services Business Group Swiss Re’s Board of Directors appointed Jacques Aigrain as head of Financial Services Business Group, with effect from mid-June 2001. He has also been appointed as a member of Swiss Re’s Executive Board and Executive Board Committee.
30 July Swiss Re to acquire Lincoln Re Swiss Re and Lincoln National Corporation announced that Swiss Re will acquire Lincoln’s reinsurance operation, Lincoln Re, headquartered in Fort Wayne, Indiana, for USD 2 billion, strengthening its position as the leader in the world’s largest life and health reinsurance market. The transaction closed on 7 December.
21 August Sustainability and capital markets event Swiss Re hosted an event at its Centre for Global Dialogue in Rüschlikon focusing on sustainability and capital markets – roles, benefits and conflicts, in partnership with The Sustainability Forum in Zurich.
11 September Statement made on 12 September on tragic event in the United States Swiss Re was deeply moved by the tragic events in the United States. The first concern was for the victims and their families affected by this tragedy. Swiss Re suffered a financial loss at least in the range of the largest loss ever recorded in its 138-year history.
30 October Non-life underwriting results must improve significantly (sigma 05/01) The major finding of this edition of sigma is the need for improved underwriting results. After a prolonged soft market and with investment prospects diminished, premium rates and underwriting results need to improve significantly to achieve widespread profitability.
19 December New horizons in insurance and banking (sigma 07/01) This edition of sigma described how insurers, banks and other financial intermediaries are changing in response to a variety of influences to cross industry and national boundaries.
Since 11 September a new and unprecedented level of terrorist threat has been presented to society at large and, in particular, to the insurance and reinsurance industry. Prior to 11 September, Swiss Re Group Risk Management evaluated the assumed maximum loss potentials arising from terrorist acts to be of a controllable size and comparable to property losses resulting from fire or explosion. This assessment was based on many years of experience of national political terrorism. The extraordinary nature and magnitude of the 11 September attack revealed the full extent and scope of the international terrorist threat and has made it necessary for Group Risk Management to substantially reassess terrorism risk.
The loss of the World Trade Center (WTC) and other property in lower Manhattan shook prevailing assumptions about risk cover for man-made disasters in several ways.
Firstly, the coordinated attack redefined “normal circumstances”. Prevailing risk engineering analysis reports on the potential damage caused by a skyscraper fire predicted that 10 storeys would be damaged before the fire was extinguished, amounting to around 10% of property value. The deliberate crashing of two airliners, laden with fuel, into the WTC, causing the entire structure to collapse, certainly cannot be qualified as “normal circumstances”.
Thirdly, there is the scale of consequential business interruption. Tenants in the WTC and surrounding buildings lost access to their office space. This resulted in additional costs including: loss of turnover, property rental costs, new equipment purchase costs, loss of productive time and cost of reconstructing files. Some firms
Cultural diversity is a key element in a globalised world. Companies that have a widely varied cultural make-up are increasingly operating according to this principle of a globalised world. Motivated by a desire to work in a culturally diverse atmosphere in Zurich, I quickly got to know the company better. It is tremendously exciting when a Russian underwriter and a Spanish client advisor get together in Rüschlikon and come up with a solution for simplifying a Group-wide process! I did not expect to come across such a diverse range of views from so many different nationalities in Switzerland. It was precisely this global approach, variety and cultural diversity which confirmed my decision to work for Swiss Re as a wise choice.
in earlier periods and from higher-yielding corporate bonds and asset-backed fixed income securities. Equities as a percentage of invested assets declined to 19% of the total portfolio, due in part to the increasing importance of the Group’s life and health business and to its view on equity markets. Net investment income also increased as a result of increases in income from the Group’s equity accounted investments.
Net realised gains were CHF 2.7 billion, reduced by 37.7% from the record high of CHF 4.3 billion in 2000. This is due to the poor investment environment and the fact that 2000’s major gains, expected and realised through shifts in asset allocation from equity to fixed income, were not repeated in 2001. A further contributory factor was the previously mentioned weak private equity markets. This reduction was partially offset by continued outperformance in key asset classes, combined with gains from the sale of part of Swiss Re’s stake in NCM and a further gain from another large individual transaction. Furthermore, Swiss accounting rules changed in 2001, limiting the recognition of unrealised losses on equities in income to impairments that are considered other than temporary. This, combined with the already weak market position at the end of 2000, led to a lower loss from unrealised losses recognised in income.
Other revenue increased by 15.2% to CHF 455 million. This is principally due to increases in asset management fees following the acquisition of Conning.
The Group’s reserve ratio at the end of 2001 was 340%, an increase of five points over 2000. This is adjusted for the sale of NCM. The increase is due to the impact of the losses from 11 September and the sale of NCM, which had a significantly lower reserve ratio. This was partially compensated by the growth in net premiums earned. The Group maintained its reserve strength in 2001, but this is likely to decline in 2002 as rates and the premium volume increase.
Amortisation of goodwill increased from CHF 310 million to CHF 368 million. The main reason for the increase was the inclusion of a full year of amortisation of goodwill arising on the acquisition of Underwriters Re, which took place in May 2000, as well as the amortisation of goodwill arising from the acquisition of Conning in 2001.
Overall Group expenses increased by 10.1% to CHF 3.4 billion. The main contributors to this increase are the acquisitions made in 2000 and 2001, the launch of a new advertising campaign, other activities to support the Swiss Re brand and the first full year of operation of the Group’s Centre for Global Dialogue in Rüschlikon. Overall Group expenses declined as a percentage of operating revenues (revenues excluding capital gains) in 2001, as the company continued to make progress on its objective to achieve strategic cost leadership.
Restructuring costs decreased from CHF 110 million to CHF 29 million. The Group accrued CHF 75 million in respect of lease termination and redundancy costs in the Financial Services Business Group.
The reduction reflects lower total anticipated costs of the property and casualty restructuring. A further CHF 28 million from the provisions established in 2000 was released into the Property & Casualty Business Group results against costs incurred in restructuring in 2001. This relates to the integration of operations in Munich and Zurich and the relocation of activities from Zurich to New York, Mexico and Hong Kong.
The Group recorded a net loss of CHF 165 million, compared to a net income of CHF 2 966 million in 2000. Losses per share were CHF 0.57, compared to earnings per share of CHF 10.39 in 2000. Shareholders’ equity decreased from CHF 22.8 billion to CHF 22.6 billion. This reflects CHF 3.5 billion in unrealised losses on securities due to continuing weakness in world stock markets in 2001, the net loss for the year, the CHF 117 million capital reduction in August 2001, the dividend of CHF 713 million paid to shareholders in June 2001, and the cumulative effect of a change in accounting policy relating to derivatives. These negative effects more than offset the CHF 4 billion increase in equity due to the rights offering and global share issue in November 2001. Return on equity decreased from 11.9% to –0.7%.
Financial Services 431 –932 –316 Total business group operating income 4 042 1031 –74 Corporate Centre expenses –321 –450 40 Items excluded from the business groups: Net realised gains/losses 625 131 –79 Amortisation of goodwill –310 –368 19 Other income/expenses –381 –448 18 Net income / loss before tax 3 655 –104 –103
Income reconciliation The following table reconciles the income from Swiss Re’s business groups and the operations of its Corporate Centre with the Group consolidated net income before tax.
Ever since the US economy peaked in 2000, growth has continued to deteriorate in all the major economies. Discussions on the length and depth of the economic slowdown were inconclusive and led to increasing volatility in the financial markets. Initial action by central banks eased the apprehension but did little to mitigate the uncertainty. After the 11 September terrorist attack, fears of an extended period of economic weakness began to prevail.
Global stock markets mirrored this development. The downtrend that had started in the first half of 2000 continued with few interruptions until September 2001. The recovery through the year-end to pre11 September levels was a correction of the very strong reaction to the 11 September event but was not supported by a turnaround of the global economy. As in prior years, the major equity markets showed a largely synchronised picture, the exceptions being mainly among stocks on the smaller exchanges.
In many respects, the bond markets showed the reverse side of the same coin. In an environment of economic slowdown and in widespread absence of inflation fears, the US Federal Reserve continued its policy of cutting interest rates, spearheading a further decline of money and capital market rates. This continued on a global basis and led to yield levels that could well prove to have been the bottom of the cycle. This resulted in a solid performance by the bond markets. The disruptions after 11 September, as well as the deteriorating economic fundamentals, led to a widening of interest spreads for corporate bonds. In addition, first thoughts of slackening budget discipline crept up and gave a slight lift to long-term interest rates. This counterbalanced to some extent the lowering of short-term interest rates induced by the central banks.
Swiss Re’s investment result was mainly driven by strong current income. This originated to a large extent from the growth of the fixed income investment portfolio – both in absolute terms and relative to total investments – largely linked to the growth of Swiss Re’s life & health business in the US. The impact of lower interest rates on current earnings was mitigated by the income from higher-yielding investments of earlier periods and from yields achieved on high quality corporate bonds and asset-backed fixed income securities. The substantial gains from the partial disposal of the participation in the telecom operator diAx also affected current income due to the “at equity” accounting of the holding company. This was partly offset by Swiss Re’s stake in the loss of Partner Re, also accounted for “at equity”.
At CHF –0.7 billion, write-downs on investments were only moderately above 2000 levels, despite the unfavourable movements of the equity markets. A change in Swiss accounting rules limits value adjustments through income on securities to impairments that are considered other than temporary. Until 2000, all market movements below the acquisition cost had been part of the investment result. On a basis comparable to the prior year, unrealised losses would have been CHF 0.9 billion higher. The return on investment would have been 7.1%.
Investments grew by 11% to CHF 99 billion. When including other interest-bearing assets, such as cash deposits with insurance companies, the growth rate was slightly over 16%, to CHF 118 billion. This increase followed the general growth in life business and the acquisition of Lincoln Re. The share of bonds increased to 74%, from 69% at the end of 2000; equities now represent 19% of the portfolio, down from 26%.
Revenues Premiums earned Net investment income Net realised investment gains Other revenues Total revenues
Earnings / loss per share – Basic – Diluted * Adjusted by 20-for-1 share split
Liabilities Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Unearned premiums Funds held under reinsurance treaties Reinsurance balances payable Other liabilities Long-term debt Total liabilities
Balance as of 1 January Net income / loss Change in net unrealised investment gains / losses, net of tax Change in foreign currency translation adjustments Dividends Capital repayment Stock repurchase Equity offering Change in accounting policy
In June 2001, Swiss Re successfully renewed its European Medium Term Note (EMTN) programme, increasing its size from USD 1 billion to USD 2 billion. The programme serves as a single platform for raising funds from various investor categories. At the end of the year, Swiss Re’s outstanding debt under the EMTN programme had an aggregate face value of USD 722.9 million, and USD 945.3 million at the end of March 2002.
In November 2001, Swiss Re increased the US Commercial Paper Programme of its subsidiary, Swiss Re Financial Products Corporation, from USD 1 billion to USD 1.5 billion.
On 30 July 2001, Swiss Re announced the acquisition of Lincoln Re for USD 2 billion; it also announced its intent to raise equity to finance the acquisition. The 11 September terrorist attack had a significant negative impact on the financial markets but, after a marked immediate deterioration, Swiss Re’s share price recovered.
The combined offering structure was: ■ a 1:10 rights offering at market of up to 28 522 370 registered shares to existing shareholders, subject to sales restrictions in certain jurisdictions; ■ a global equity offering for shares not taken up in the rights offer, including an offering in the US under Rule 144A; ■ an offering of subordinated convertible bonds, concurrent with the global equity offering.
In the rights offering, 11706 189 shares (41% of the total offer) were taken up by existing shareholders. This figure laid the groundwork for the subsequent successful global equity and subordinated convertible bond placement. The conditions for the securities were determined on 14 November: for the equity issues, shares were priced at CHF 165.75, the closing price on this day. The bonds have a maturity of 20 years and a fixed coupon of 3.25% during the first 10 years, which will be reset to a floating 6-month LIBOR plus 180 basis points for the last 10 years. Up to and including 21 November 2011, the bonds can be converted into Swiss Re shares at a price of CHF 207.19 per share and a fixed USD exchange rate of 1.6641. The bonds have been issued by Swiss Re America Holding Corporation and are unconditionally and irrevocably guaranteed on a subordinated level by Swiss Reinsurance Company.
Reinsurance market Despite the withdrawal of several international groups from the reinsurance market (and the sizeable reduction by others of their involvement), competition remained keen. New market entrants and additional capital generated by established reinsurers partly offset the drop in capacity. Nevertheless, recovery is well on its way; the reinsurance market is benefiting from rising rates and tightening terms and conditions in the primary market. In addition, reinsurance prices, having increased significantly during the first eight months of the year, rose even further after 11 September. Overall, prices, terms and conditions improved more for reinsurers than for primary insurers. No industry-wide solution has yet emerged for covering gross acts of terrorism; nevertheless, additional premium is generally being collected for this exposure when coverage is granted.
Development and implementation of Property & Casualty Business Group strategy In 2001, Swiss Re’s Property & Casualty Business Group saw several changes. The Bavarian Re brand name was folded into Swiss Re, and all of the business group’s offices now operate under the Swiss Re brand. In the future, this business group will write property, casualty, marine and engineering reinsurance business – while aviation, credit and surety business, as well as Swiss Re’s corporate clients, will be served by the Financial Services Business Group.
The business group has three market divisions, with responsibility for the Americas, Asia and Europe. In the first quarter of 2002, the Asian head office completed its move to Hong Kong. As shown by the declining cost ratio, duplications are being eliminated, processes streamlined and client management responsibility more clearly identified. Being one business group also allows Property & Casualty to make best use of its global IT, underwriting and claims-management expertise and systems.
2001 saw the creation of a Chief Underwriting Office within the business group, as well as the appointment of a Chief Financial Officer. These two developments will further improve the strategic co-ordination of capital and capacity management over the course of the underwriting cycle. The Chief Underwriting Office is responsible for ensuring one global approach to underwriting through a common set of risk assessment models, pricing tools and training programmes. One example is Swiss Re’s Group-wide approach to the strategy, modelling and pricing of its top natural catastrophe exposures.
Underwriting measures There are several areas that warrant active monitoring. The terrorist attack in the US has led Swiss Re to re-examine methods for managing such exposures. Swiss Re significantly adapted its underwriting approach, particularly for large commercial risks in potentially exposed areas. As the market further develops – and as possible government-led solutions emerge – Swiss Re will alter its policy accordingly. Another area of potential concern was addressed in 2001 by introducing a single Groupwide approach to industrial liability. To increase transparency and allow better risk management and pricing in the future, these risks must now be underwritten either on a facultative basis or as special acceptances under obligatory treaties. Contingent business interruption coverage also requires scrutiny: over the past few years, this coverage has slipped into property reinsurance without specific risk assessment and premium. The Chief Underwriting Office has issued underwriting guidelines that will address this concern. Unlimited motor liability and a number of other similar topics will be addressed and managed in the course of 2002.
Expenses Claims and claim adjustment expenses –10 143 –13 055 29
Although claims from natural catastrophes remained at a relatively low level in 2001, large property losses arising from man-made events as well as liability and surety losses were exceptionally high, particularly in the second half of the year. These factors, together with a reduction in regulated discount rates affecting reserves mostly in the UK, led to an increase in the combined ratio in the second half of the year and dampened the improvements from pricing and improved reinsurance terms evident in the first half of the year. A positive development was a decline in administrative expenses. The expense ratio improved from above 9% in 1999 to 5% in 2001, due to the continuing emphasis on expense control and operational efficiency.
Operating income Operating income declined from CHF 2 164 million in 2000 to CHF 281 million in 2001. The higher realised gains in 2000 were offset by the large addition to equalisation reserves in that year, while the reduction in operating income in 2001 is due entirely to the 11 September event.
Combined ratio The combined ratio increased from 117% to 124% in 2001. The ratio for 2000 included the effect of a transfer to equalisation reserves of CHF 691 million, made possible by the relatively light incidence of large losses. Before this transfer, the ratio was 111%, a figure that benefited from the positive effect of commutations of asbestos and environmental exposures agreed in 2000. In 2001 (excluding the event of 11 September) the combined ratio was 110% after taking into account a release of equalisation reserves of CHF 378 million to compensate for the more severe incidence of other large losses.
There was substantial growth of 20% in premiums earned as a result of rate increases, larger shares on renewed business and new acceptances on quality offers.
In addition Underwriters Re – now included for a full year (eight months in 2000) – added 2% to the growth. Non-proportional business recorded the greatest improvement; proportional business was still subdued because of continued primary rate inadequacy. The most dramatic price increases in 2001 were in the natural catastrophe segment, where first estimates indicate that rates increased by 25% on a global average. The French market in particular recorded price increases of up to 100% following the storms Lothar and Martin at the end of 1999. In the man-made area, too, Swiss Re’s underwriters were successful in obtaining substantial rate increases in many markets.
Worldwide natural catastrophe losses totalled USD 9 billion in 2001, compared to USD 7.6 billion in 2000. The two largest claims occurred in the US: a storm system in April (insured loss: USD 1.9 billion ) and tropical storm Allison in June (insured loss: USD 2.5 billion). Also, a storm system with hail and heavy rain hit Germany and Austria in August 2001, causing insured losses of more than CHF 840 million. All other natural catastrophes (earthquakes in Seattle, India and El Salvador; typhoon Nari in Japan and others) resulted in insured losses of less than CHF 840 million each. Such events are considered moderate and Swiss Re’s share in these events was in line with its market share and therefore within the range of expectations.
Excluding this event, the combined ratio would have been 109%. In addition to 11 September, four large man-made property losses (claims not arising from natural causes) were recorded in 2001, representing losses for the business group of almost CHF 100 million. In 2000, the combined ratio of 129% was high, as it included a contribution of approximately CHF 568 million to equalisation reserves. Excluding this contribution, the 2000 ratio would have been 114%. While 2001, excluding the effects of 11 September, has seen an improvement of five percentage points, this is still an unsatisfactory result for property business, which should improve further with the rate improvement action taken
Premium growth of 21% originated entirely from US workers’ compensation business. Underwriters Re contributed almost 6% to this growth. New business was written at significantly improved terms, while underperforming business was cancelled or switched to non-proportional covers, permitting greater transparency and exposure-related pricing. The accident line of business combined ratio improved by 20 percentage points (29 percentage points excluding 11 September). The greatest impact arose from regulatory changes in the US, increasing the scope for discounting of workers’ compensation reserves. This is a one-time benefit that will not be repeated in 2002. Swiss Re will continue to focus on better pricing and tighter terms and conditions for this line of business.
Marine: premiums earned increased by 31% to CHF 787 million overall, the largest increase being in Europe (34%). The main drivers of this additional premium volume were general rate increases and acquisition of new business. The marine underwriting result showed a 4% deterioration to a 97% combined ratio, following a particularly profitable result in 2000. The sinking of the Petrobras offshore platform was the main reason for this reduced performance.
Aviation: premiums earned showed healthy growth of more than 30%. Underwriters Re added 21% to this growth. Aviation results were negatively affected by 11 September.
Credit: income shrunk by some 5%. The credit line experienced a considerably higher combined ratio than last year, influenced by unusual loss severity, the largest of which was the Enron bankruptcy. Both aviation and credit will be managed by the Financial Services Business Group from 2002.
Outlook The accelerating upswing in the property and casualty cycle, with improved prices, terms and conditions, has led to a fundamentally positive environment. Great strides have been made in both the primary and the reinsurance markets towards a return to profitability; but this effort must be sustained. The soft market of the last several years, coupled with the capital drain generated by 11 September, the lacklustre performance of financial markets and a general decline in interest rates, all bode well for a continued firming in both insurance and reinsurance markets. The reduced appetite of cedents for high hazard risks (such as pharmaceutical product liability), coupled with the prudent use of capacity by reinsurers, will sustain the drive towards premiums commensurate with exposure.
1 Third Assessment Report, Summary for Policymakers, Intergovernmental Panel on Climate Change (www.ipcc.ch)
Primary insurance market Life insurance has seen significant expansion over the last 20 years, exceeding economic growth in the industrialised countries by five percentage points and in developing nations by nine percentage points on an annualised basis. In the US and UK markets, industry consolidation has continued, as companies seek capital and cost efficiencies from increased scale.
Elsewhere in Asia, primary market trends generally are positive, reflecting a high level of personal responsibility for welfare provision and a cultural bias towards savings. Asian markets have seen a growing awareness of the benefits of capital management, a growth in new life products, new distribution channels and a rising demand for living benefit products. In addition, the ageing population in many developed countries is expected to increase the demand for health products such as long-term care, disability and critical illness coverage.
The life and health reinsurance market is providing increased capacity as well as coverage for new products. Reinsurers like Swiss Re are using their underwriting and pricing capabilities to handle the primary market’s increased risk management requirements.
Swiss Re continues to develop its global leadership in the traditional life reinsurance markets, which offer attractive growth, profitability and risk management potential. In emerging markets, particularly in Asia, the business group is building a strong franchise to capitalise on opportunities.
In the US, Swiss Re’s Admin Re portfolio benefited from two major transactions in 2001: Aurora National Life Assurance Co (Aurora) and Southwestern Life Holdings, Inc (Southwestern). These transactions involved total invested capital of CHF 750 million and added CHF 8.5 billion to the Group’s assets. Aurora’s result is included from 1 January 2001, Southwestern’s from 1 July 2001.
true “business to business” interaction and the major external focus will be electronic data interchange with clients and business partners. Timely access to high quality data is imperative and supports Swiss Re’s ability to actively monitor and manage its exposures and the performance of its reinsurance portfolio. Swiss Re expects these developments to begin delivering benefits in 2003.
The acquisition will increase the size of Swiss Re’s US traditional life reinsurance business by approximately 50% and reinforce the Group’s leading position in the US, the world’s largest life reinsurance market. Lincoln Re had USD 1.7 billion of revenues in 2001 and approximately USD 4 billion of total assets as of 31 December 2001. It will reinforce Swiss Re’s standing, in the US and globally, both by increasing its client base (there is little overlap between the largest clients of the two companies) and by enhancing its life reinsurance expertise. The results for 2001 include the operating income for Lincoln Re from the purchase date, 7 December 2001.
Since concluding the acquisition, Swiss Re has announced the sale of Lincoln Re’s Employers Stop Loss business segment (CHF 420 million premiums earned in 2001) as this product line does not fit with the business group’s strategy. This sale is expected to close by 30 June 2002.
Life & Health Business Group results CHF millions 2000 2001 Change in %
This gain was offset by increases in the incurred but not reported reserves and claim provisions for group disability and critical illness in the UK arising from updated cedant data and late notified claims.
Exploring the unknown widens your horizons and creates a dialogue between people. This is why I had a special wish to share the message of my art collection with my colleagues. However, I also wanted to share something else – the history of the artists. One of them, Rudolf Müller, was only fifteen when he left home. He set out to conquer an economically and politically precarious world. His courage, his view of the world and the way he approached risk are all impressive for someone so young.
So I was particularly happy to be able to discuss the artists themselves as well as artistic aspects during the exhibition at Swiss Re.
Swiss Re formed the Financial Services Business Group in 2001 to efficiently deliver a comprehensive range of capital management products to Swiss Re’s core clients. The business group’s new management also concentrated on efficiency: a mid-year review of operations produced organisational changes and cost-management measures. These are expected to have a positive impact on 2002 results while creating a flatter, more nimble organisation.
Other details are reported here as they apply to the business group’s four segments: Asset Management, Investment Banking, Credit Solutions and Risk Solutions.
Market uncertainty in the wake of 11 September created several attractive investment opportunities. Capital Partners reviewed a range of appealing possibilities and allocated some funds. For example, it committed capital to the start-up of Allied World Assurance Co Ltd, a Bermudabased insurer and reinsurer that was established to profit from additional capacity demand.
The Asset Management segment reported an operating result for 2001 of CHF 12 million on revenues of CHF 399 million.
The Financial Products unit offers capital markets structuring, trading and distribution, extending Swiss Re’s risk and capital management services to areas that converge with its core insurance business. Financial Products is entering the second year of a three-year plan to build a platform to execute and support capital markets transactions. 2001 saw the laying of a secure foundation for the business; by year-end, Financial Products had commenced operational activities and will establish critical mass in 2002.
In keeping with the business group’s convergence strategy, FPK assumed primary responsibility for marketing of non-traditional products to insurance companies and banks. This enables Swiss Re to offer risk-transfer products side-by-side with FPK’s mergers and acquisitions and equityoriented solutions. This powerful combination of insurance and investment banking expertise will further strengthen Swiss Re’s offering of innovative capital management solutions to its core client base.
The Credit Solutions segment reported operating results for 2001 of CHF 107 million on revenues of CHF 990 million. The downturn of the credit cycle continued as anticipated. Swiss Re focused on the quality of its credit book rather than the volume, which is being streamlined in light of continuing weak market conditions. This will lead to reduced overall credit exposure. Credit Solutions launched an automated online credit tool that allows clients to tailor single-name credit protection based on their particular corporate needs.
Swiss Re’s casualty business has been experiencing similar positive trends. Although pricing for all casualty lines was gaining momentum before 11 September, the event accelerated the process. Overall capacity, on the other hand, has not been greatly reduced; however, insurers are generally deploying capacity more cautiously and at higher attachment points.
Pricing for airline coverage, which is a significant part of the business group’s portfolio, also firmed dramatically as a result of several factors, including 11 September, which accelerated premium increases that were already evident. General aviation pricing also improved.
Financial Services Business Group driving convergence A Swiss Re convergence solution – combining both capital and insurance markets – enabled a global financial services company to manage a basket of complex and volatile insurance and financial risks more effectively and cost-efficiently.
Throughout the year, the Financial Services Business Group continued to drive the convergence topic through the use of groundbreaking risk and capital management solutions. Clients benefit from answers that combine Swiss Re’s profound understanding of risk together with superior advisory and structuring capabilities as well as the transfer of risk to Swiss Re’s sound balance sheet.
Looking to the future, the business group will continue to bring value to clients through the opportunities offered by the convergence marketplace.
e-business initiatives In 2001, Swiss Re launched RISKPORT, an interactive Internet site that provides an overview and comparison of how alternative strategic financial decisions can impact property and casualty insurance companies. RISKPORT makes Swiss Re one of the leading providers of ALM/Dynamic Financial Analysis consulting services to the global insurance community.
The Finance Division supports the Group’s global leadership by maintaining a unified capital base for the Group’s activities, co-operating with the Risk & Knowledge Division to assess and balance the Group’s overall risks and returns. The risk landscape is becoming ever more complex; this makes it all the more important for Swiss Re to manage its risk portfolio centrally, making the best use of available capital.
11 September and the Corporate Centre A moment of crisis, when the global risk landscape changes dramatically, is one of those times when the Corporate Centre proves its value. 11 September was an unprecedented stress test for Swiss Re’s central information, risk management and strategic control systems. The insurance industry, as well as society, had suddenly to learn to take account of the unthinkable.
Throughout the unfolding tragedy, Swiss Re’s Executive Board, management and employees were kept up-to-date with key information and the Group’s relevant internal and external stakeholders were also kept informed. Communication with the public was managed through a single communications hub, established before the attack and used extensively by all three business groups. Throughout the crisis, Swiss Re continued to operate and present itself as a single world brand – the leading manager of capital and risk. As an opinion leader and global industry influence, Swiss Re helped shape the market’s response to this exceptional challenge.
Swiss Re’s Centre for Global Dialogue in Rüschlikon completed a successful first year of operation. The Centre played host to 250 events, which brought more than ten thousand people to Rüschlikon.
Swiss Re’s Centre for Global Dialogue in Rüschlikon is a forum for discussion of developments in economics, business, science, technology, society and culture. Applied Research, Business Solutions and Corporate Development are the three pillars on which Swiss Re’s Centre for Global Dialogue was founded; together, they offer a unique value proposition to the entire Swiss Re Group.
Applied Research focuses primarily on the identification of emerging risks and their potential effects on society and business. The Centre’s first high-profile event was the international conference on Managing the Global Ageing Transition. The conference examined the economic, political, and social implications of the ageing population and the challenge this presents for future generations in the developed world. Of particular interest for Swiss Re was the dramatic impact foreseen for the financial services industry if the crisis is not addressed. The conference closed with an agreement on policy objectives, the Rüschlikon Declaration, which was submitted at the follow-up Conference on Ageing held in August 2001 in Tokyo.
While the Centre is regarded as a longterm investment for Swiss Re, the Greenhouse Gas (GHG) event, held in autumn 2001, highlights the Centre’s potential for offering events which unify the company’s specialised knowledge with market and product innovation, resulting in genuine Business Solutions. Swiss Re, together with the World Business Council for Sustainable Development and the World Wildlife Fund, welcomed leaders from the utility, energy and transportation sectors to discuss the market drivers and business solutions in a carbon-constrained future.
The objectives of this first ever businessfocused GHG conference were to assist companies in their understanding of the exposures and challenges in coping with GHG emission reduction requirements, and to determine the financial sector’s role in this new market. The specialist unit for GHG risk solutions within Swiss Re sees this as the first of a series of ongoing multi-stakeholder dialogues for sharing and developing sustainable cooperative efforts.
Corporate Development means shaping corporate strategy, communicating shared values and developing the talents of employees. With a decentralised organisation, the Centre provides a place to physically meet, exchange ideas and share knowledge across geographic and cultural boundaries. Based in Rüschlikon, the corporate learning team designs, develops and delivers people management and leadership programmes to foster common principles within Swiss Re’s leadership culture. The newly established project management programmes are designed to encourage greater consistency and harmony in the way the Group works.
On 26 February, Swiss Re held an Investors ’ Day in Rüschlikon. The presentations were broadcast live on the Internet and could be followed by telephone conference. The media were also informed through a press release. The information focused on the 2001/2002 renewals in property and casualty business and the revised loss estimate for 11 September. Swiss Re informed the audience that the Group is confident of returning to the earnings growth path achieved in prior years and will recommend an unchanged dividend of CHF 2.50 per share.
In property and casualty, the 2001/2002 renewal season confirmed the trends with insurance and reinsurance prices and conditions firming in major markets. This development was stronger where catastrophe covers played an important role as well as in the large industrial risks markets.
On 4 March, Swiss Re reached an agreement to sell Lincoln Re’s medical excessloss and group life insurance books to SAFECO of Seattle, WA. Pending regulatory approval, the transfer is expected to close in June 2002.
Swiss Re has reinforced its strong position in each of the financial services business segments. The consolidation of the Financial Services Business Group with its four focused business units will support Swiss Re’s aim of developing and selling convergence solutions, combining both capital and insurance products. By bringing its abilities in corporate risk underwriting to the bottom line, using market conditions to create opportunities for structured and other capital and risk management solutions, Swiss Re is confident that it will transform “growth stage” financial services business into profitable contributors of comprehensive solutions.
Swiss Re’s positive outlook for 2002 is based on a strong upswing in property and casualty; continued growth in life and health, bolstered by the integration of Lincoln Re; and expanded business capabilities in financial services.
Board of Directors The Board of Directors is ultimately responsible for the policies and management of the corporation. The Board establishes the strategic, accounting, organisational and financing policies to be followed. The Board further appoints the executive officers and the authorised signatories, and supervises the management of the corporation. Moreover, the Board is entrusted with preparing shareholders’ meetings and carrying out shareholders’ resolutions.
Compensation and The Committee shall Appointments Committee – in respect of compensation ensure the development of a compensation philosophy; review and approve the Group’s compensation plans; recommend to the Board the amount and composition of remuneration of the members of the Board; determine the amount and composition of remuneration of the Chairman, the CEO and the members of the Executive Board; approve the amount available for performance-based compensation; review decisions regarding benefit and pension systems; – in respect of personnel matters make proposals to the Board that ensure an adequate size and a well-balanced composition of the Board; ensure the development of guidelines for selecting candidates for election to the Board; evaluate Board member candidates in accordance with these criteria and make recommendations to the Board; evaluate on an annual basis the performance of the Chief Executive Officer; evaluate proposals made to the Board for the appointment and removal of members of the Executive Board; approve employment contracts with the CEO and the members of the Executive Board; review executive succession and emergency plans.
General provisions for all committees The committees shall conduct or authorise investigations into any matters within the committees’ scope of responsibilities, thereby taking into consideration both relevant peer group practices as well as general best practices. They shall be empowered to retain independent counsel, accountants or other experts if deemed necessary and for benchmarking best practice. The committees shall comply with all regulatory provisions or supervisory regulations and consider compliance with best practice recommendations.
The risks under consideration are underwriting risk, financial market risk, credit risk and operational risk. Swiss Re’s risk landscape is updated and quantified whenever larger changes occur, such as movements in the market value of securities, acquisition of companies, or very large transactions. Once a year, a comprehensive risk report is compiled and discussed by the Executive Board and the Finance and Risk Committee.
The role of Group Internal Audit Within Swiss Re Group, Group Internal Audit provides the Chairman, Board of Directors and Executive Board of Swiss Re with an independent, objective assurance and consulting activity designed to assess the adequacy and effectiveness of the Group’s system of internal control, adding value through improving the Group’s operations.
The role of the external auditor in the Swiss Re Group corporate governance process The external auditor is accountable to the Audit Committee, the Board of Directors and ultimately to the shareholders. PricewaterhouseCoopers has been exercising this function since 1991 (originally as Revisuisse Price Waterhouse).
The maximum amount of risk that can be accepted in insurance. One factor in determining capacity is government regulations that define minimum solvency requirements. Capacity also refers to the amount of insurance coverage 1) to a particular policyholder or 2) in the marketplace in general.
Payment incurred under the terms of a (re)insurance contract for a loss event.
Claims incurred and claim adjustment expenses: All claim payments plus the adjustment in the outstanding claims provision of a business year and claim adjustment expenses.
An arrangement by which a number of insurers and/or reinsurers share a risk.
Disability insurance: Insurance against the incapacity to exercise a profession as a result of sickness or other infirmity.
Fire insurance: Insurance against fire, lightning or explosion, it can also embrace insurance against windstorm, earthquake, flood, and other natural hazards or political risks.
Marine insurance: Insurance against damage or loss of ships and cargoes: also includes offshore drilling platforms.
Premiums written: Refer to premiums for all policies sold during a specific accounting period.
Proportional reinsurance: Form of reinsurance in which the premiums and claims of the insurer are shared proportionally by the insurer and reinsurer.
Quota-share reinsurance: Form of proportional reinsurance in which a defined percentage of all risks held by the insurer in a specific line is reinsured.
Treaty reinsurance: Participation of the reinsurer in certain sections of the insurer’s business as agreed by treaty, as opposed to single risks.
Income statement Revenues Premiums earned Net investment income Net realised investment gains Other revenues Total revenues Expenses Claims and claim adjustment expenses Life and health benefits Acquisition costs Amortisation of goodwill Other operating costs and expenses Total expenses Income / loss before income tax expense Income tax expense Net income / loss on ordinary activities Extraordinary income Extraordinary charges Net income / loss
– – 450 – – – – – 450 – –
Readers are cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to publicly revise or update any forwardlooking statements, whether as a result of new information, future events or otherwise.
The Annual Report 2001 summary is available in: English, French, German, Italian, Portuguese and Spanish.
The Business Report appears separately. See Annual Report 2001 – Business Report.
Investments Fixed income securities: Available for sale, at amortised cost (fair value: 2000: 51 019; 2001: 60 711) Trading, at fair value (amortised cost: 2000: 648; 2001: 1 113)
Cash and cash equivalents Accrued investment income Premiums receivable Reinsurance recoverable on paid and unpaid claims Funds held by ceding companies Prepaid reinsurance premiums Deferred acquisition costs Acquired present value of future profits Goodwill Income taxes recoverable Other assets Total assets
Liabilities Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Unearned premiums Funds held under reinsurance treaties Reinsurance balances payable Income taxes payable Deferred income taxes Short-term debt Accrued expenses and other liabilities Long-term debt Total liabilities
Total accumulated other comprehensive income Retained earnings Reserve for own shares Total shareholders’ equity Total liabilities and shareholders’ equity * Adjusted by 20-for-1 share split
Common paid-in gains / losses, adjust- Retained for own CHF millions stock capital net of tax ments earnings shares Total
Balance as of 31 December 1999 Net income Unrealised losses on securities, net (note 2) Foreign currency translation adjustments Dividends Change in own shares (note 9)
Balance as of 31 December 2000 Net loss Unrealised losses on securities, net (note 2) Foreign currency translation adjustments Dividends Change in own shares (note 9) Capital repayment Equity offering Change in accounting policy (note 1)
Net income / loss Other comprehensive income: Change in foreign currency translation adjustments Change in unrealised gains / losses, net of tax
Cash flows provided / used by investing activities Fixed income securities: Proceeds from sale of investments Purchase of investments Net purchase / sale of short-term investments
Cash paid for acquisitions and reinsurance transactions, net Other investments, net Net cash provided / used by investing activities
The Swiss Re Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company (the parent company, referred to as ‘‘Swiss Re Zurich’’) and its subsidiaries (collectively, the ‘‘Swiss Re Group’’ or the ‘‘Group’’). The Group provides reinsurance, alternative risk transfer products and services to insurance companies, clients and others world-wide. Reinsurance and other related products and services are delivered to clients through a network of more than 70 offices in over 30 countries as well as through reinsurance brokers.
Companies in which Swiss Re Zurich, directly or indirectly, holds a voting majority or otherwise controls, are consolidated in the Group accounts. Companies in which Swiss Re Zurich maintains a direct or indirect holding of between 20% and 50% and has a significant influence, but not a controlling interest, are accounted for using the equity method and are included in other invested assets. The Swiss Re Group’s share of net profit or loss in investees accounted for under the equity method is included in net investment income. Equity and net income of these companies are adjusted as necessary to be in line with the Group accounting policies. The results of consolidated subsidiaries and investees accounted for using the equity method are included in the financial statements for the period commencing from the date of acquisition.
The Group’s investments in fixed income securities are classified as Available for sale (‘‘AFS’’) or Trading. Fixed income securities AFS are reported at amortised cost. Trading fixed income securities are carried at fair value with unrealised gains and losses being included in the income statement.
Equity investments AFS are carried at fair value, based on quoted market prices, with the difference between original cost and fair value included in shareholders’ equity. The cost of equity securities is reduced to fair value with a corresponding charge to realised loss on investments for declines in value that are other than temporary.
Acquisition costs, which vary with, and are primarily related to, the production of new business, are deferred to the extent they are deemed recoverable from future gross profits. Deferred acquisition costs consist principally of commissions. Deferred acquisition costs associated with property and casualty reinsurance business are amortised in proportion to property and casualty premiums earned. Future investment income is considered in determining the recoverability of deferred acquisition costs on property and casualty business.
Deferred acquisition costs associated with life and health reinsurance business are amortised over the premium paying period. For investment-type contracts, deferred acquisition costs are amortised in relation to the present value of estimated gross profits and are adjusted to reflect the estimated effect of realising unrealised investment gains and losses with an offset to unrealised investment gains and losses included in shareholders ’ equity.
External direct costs of materials and services incurred to develop or obtain internal use software, payroll and payroll-related costs for employees who are directly associated with software development and interest cost incurred while developing internal use software are capitalised and amortised on a straight-line basis over a period of 3 years through the income statement.
Unpaid property and casualty claims provisions may only be discounted if the payment pattern and ultimate cost are fixed and reasonably determinable.
Liabilities for life and health policy benefits reinsurance business are generally calculated using the net level premium method, based on assumptions as to investment yields, mortality, withdrawals and policyholder dividends. Assumptions are set at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. The assumptions are based on projections from past experience, making allowance for possible adverse deviation. Interest assumptions for life and health reinsurance
Reinsurance ceded benefits liabilities range from 2.5% to 12%. Assumed mortality rates are generally based on experience multiples applied to actuarial select and ultimate tables commonly used in the industry. Withdrawal assumptions for individual life reinsurance contracts issued by the Group range from 1% to 20% and are based on historical experience.
Basic earnings per common share is determined by dividing income / loss available to common shareholders by the weighted average number of common shares entitled to dividends during the year. Diluted earnings per common share reflects the effect on earnings and average common shares outstanding associated with dilutive securities.
As of 1 January 2001 the Group recognises all of its derivative instruments on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is used to hedge the fair value of assets or liabilities, changes in the fair value of the derivative are reflected in earnings, together with changes in the fair value of the related hedged item. If the derivative is used to hedge the variability in expected future cash flow related to a particular risk, changes in the derivative’s fair value are reported in other comprehensive income until the hedged item is recognised in earnings. The ineffective portion of the hedge is recognised in earnings.
The impact of the change in the balance sheet at 1 January 2001 is CHF 162 million and is recognised in shareholders’ equity. The amount has increased by CHF 67 million in comparison to the transition amount recognised at 30 June 2001 because the Group has re-evaluated the treatment of certain financial instruments in the Group’s portfolio.
Gross Gross As of 31 December 2001 Amortised unrealised unrealised Estimated CHF millions cost or cost gains losses fair value
As of 31 December 2001 CHF millions USD EUR GBP CHF CAD Other Total
As of 31 December 2000 and 2001, investments with a carrying value of approximately CHF 4 161 million and CHF 5 475 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities.
Cash and cash equivalents include short-term deposits with a carrying value of CHF 1 424 million and CHF 3 544 million as of 31 December 2000 and 2001, respectively.
The Group’s investment in mortgages and other loans included CHF 1 483 million and CHF 1 587 million of mortgage participations associated with linked investment contracts as of 31 December 2000 and 2001, respectively. Contract holders bear all investment risk related to mortgage participations. Fair value for other loans is considered to be equal to carrying value.
Dividends received from investees accounted for using the equity method were CHF 40 million and CHF 175 million in 2000 and 2001, respectively.
Realised gains and losses for fixed income, equity securities and other investments were as follows: CHF millions 2000 2001
The amounts reported under “Credit derivatives” are mainly (80%) portfolio credit default swap structures underwritten by the business unit “Credit Solutions” of the Financial Services Business Group. In such structures, under which the Group primarily sells credit protection, the protection buyer in most cases retains a first loss position (or deductible).
The Group is typically exposed only once the aggregate credit losses in the portfolio (net of any recovery amount) exceed this retained first loss position. Each portfolio credit default swap can be tranched into layers of increasing credit quality, from “equity” (i.e. first loss position) to “Super-Senior” (i.e. with better than “AAA” quality). The Group has over 90% of its notional exposure assigned to the “Super-Senior” category.
The remaining 20% of the reported total notional amount refers to credit default swaps on the trading book of the business unit “Investment Banking”. This figure is reported as the sum of outstanding positions, therefore inflating the notional values of all hedged positions. A considerable amount of credit default swaps in the trading book are hedged with offsetting positions. However, the business unit does maintain open long and short positions in credit default swaps and related instruments as part of its trading function.
The figures reported for notional amounts in 2000 have been restated to include three contracts entered into at the end of 2000 which had previously been omitted as the carrying values at 31 December 2000 were zero. This has no impact on net income or net equity of the Group.
On 22 August 2001, the Group announced a transaction to combine NCM with Gerling Credit to form a new company, Gerling NCM Credit and Finance. In the first stage of the transaction in 2001, the Group received a combination of cash and a 44% interest in the new company in exchange for the Group’s holding of 90% in NCM. The Group realised a CHF 184 million gain on this transaction in 2001.
On 7 December 2001, the Group completed the acquisition of the reinsurance operations of Lincoln National Corporation (Lincoln) for CHF 3.4 billion.
In accordance with the purchase agreement with Lincoln, the Group prepared closing financial statements for the business acquired from Lincoln and delivered them to Lincoln on 7 March 2002. Although the Group has not received a response from Lincoln to the closing financial statements, Lincoln indicated in its Form 10-K that Lincoln disputes certain aspects of the statements prepared by the Group, which total approximately USD 500 million. The purchase agreement contains procedures and timetables for resolution of any disputes that Lincoln may assert, including a 45 day period from 7 March 2002 for the parties to attempt to resolve the disputes followed
On 6 January 2001, the Group sold its holding in the insurance broker International Risk Management Group and on 1 January 2001 the Group sold its holding in Harrington Holdings and the company’s insurance subsidiary.
In conjunction with the acquisitions, CHF 874 million and CHF 268 million of goodwill was recorded in 2000 and 2001, respectively. During the years ended 31 December 2000 and 2001, goodwill of CHF 310 million and CHF 368 million, respectively, was amortised.
As of 31 December 2000 and 2001, the balance of accumulated goodwill amortisation was CHF 664 million and CHF 945 million, respectively.
In prior years, the Group has differentiated between the deferred acquisition costs (DAC) that arose on life portfolio acquisitions effected as reinsurance agreements and the present value of future profits (PVFP) arising when a life portfolio is acquired through the acquisitions of legal entities. In essence, the DAC and PVFP assets are the same, and the Group has altered the presentation to show all as PVFP. The Group has also amended the disclosure of deferred acquisition costs to exclude acquisition costs considered nondeferrable. This has the effect of reducing the disclosed amounts for acquisition costs deferred and acquisition costs amortised. The 2000 figures are restated accordingly. Neither of these changes have any impact on net income or net equity.
The Group enters into long and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group also issues operational debt to provide working capital for financing specific assets as part of its business activities. The Group defines long-term debt as debt having a maturity of greater than one year. The Group’s long-term debt as of 31 December 2001 was: Senior debt Book Issued Nominal Interest value in
Subordinated debt Book Issued Cur- Nominal Interest ...to first value in
Total subordinated debt 2001 3 785 Total subordinated debt 2000 1 941 1 Assumed in the acquisition of Underwriters Re Group 2 Assumed in the acquisition of Life Re Corporation
Senior and long-term operational debt 105 90 Subordinated debt 90 92
The majority of interest payments on debentures are payable annually with the principal due at maturity. Interest on bank and other loans is generally due semi-annually with principal due upon maturity.
In June 1999, the Group also issued EUR 250 million of subordinated Perpetual Auction Reset Capital Solvency bonds, with a coupon of six-month EURIBOR plus 55 basis points for the first seven years. After seven years, and every five years thereafter, an auction will be conducted to determine the re-offer yield.
During 2001, the Group issued two private placements in Switzerland. The first private placement was issued in June in the amount of CHF 200 million and is due between 2003 and 2008 with an initial coupon of 3.42% with a step-up in 2003. In September, an additional private placement of CHF 100 million was issued maturing in 2006 with a coupon of 3.25%.
A reconciliation of the beginning and ending reserve balances for asbestos, environmental and other long latent liability claims and claim adjustment expenses for the periods presented is as follows: CHF millions 2000 2001
The reassessment of reserves has demonstrated that reserves established in prior years continue to be sufficient. The Group also maintains an active commutation strategy to reduce exposure, although the number and amount of commutations was lower in 2001 compared to 2000. When commutation payments are made, the traditional “survival ratio” is artificially reduced by premature payments which does not necessarily imply a reduction in reserve adequacy.
The effects of debt conversion have not been included in the 2000 and 2001 earnings / losses per share, as the effect of converting to 1 543 720* and 9 236 800 shares, respectively, were anti-dilutive. In addition, 585 886 employee options have not been included in the 2001 earnings / losses per share, as they were anti-dilutive.
Share data 10.39 –0.57 10.37 –0.57 * Adjusted by 20-for-1 share split
Own shares held as of 1 January at cost Purchases Sales Realised gains Own shares held as of 31 December at cost Own shares held as of 31 December at market value * Adjusted by 20-for-1 share split
Deferred tax assets Technical provisions Unrealised losses on investments Benefit on loss carryforwards Discounting reserve Other
As of 31 December 2001, the Group had CHF 3 222 million of foreign net operating tax loss carryforwards, expiring as follows: CHF 37 million in 2002, CHF 35 million in 2003, CHF 12 million in 2005 and CHF 3 138 million after 2007. The Group also had capital loss carryforwards of CHF 25 million expiring as follows: CHF 4 million in 2004, CHF 18 million in 2005, CHF 2 million in 2006 and CHF 1 million after 2007.
Income taxes paid in 2001 were CHF 339 million, and in 2000 CHF 627 million.
Notes to the Group financial statements 11. Compensation and remuneration of directors and executive officers
The Group paid an aggregate of CHF 31.8 million in 2000 and CHF 42.8 million in 2001 to the members of the Executive Board and to the members of the Board of Directors (27 people in total) for services in all capacities. Non-executive members of the Board of Directors receive 1 000 shares of restricted stock in remuneration for their services annually. Executive members of the Board of Directors and the Executive Board received CHF 18.5 million in 2000 and CHF 22.6 million in 2001 of their remuneration in the form of bonuses taken in restricted shares. Bonuses paid in 2001 relate to the performance of the Group in 2000. In addition, the Group contributed or accrued CHF 2.4 million in 2000 and CHF 7.6 million in 2001 for pension, retirement or similar benefits for the Executive Board. In addition, CHF 26.1 million was paid to a member of the Executive Board pursuant to the terms of an acquisition agreement which provided for compensation should certain performance targets be met. The final payments under this agreement will be made in 2002.
Fair value of plan assets as of 1 January Actual return on plan assets Company contribution Benefits paid Acquisitions / disposals Curtailment / settlement Foreign currency translation adjustments Fair value of plan assets as of 31 December
Reconciliation of balance sheet Funded status Unrecognised losses / gains Unrecognised prior service cost Unrecognised transition obligation / asset Net amount recognised
Discount rate in % Expected return on plan assets in % Rate of compensation increase in % Medical trend – initial rate in % Medical trend – ultimate rate in %
Effect on total of service and interest cost components 16 –12 Effect on post-retirement benefit obligation 83 –65
As of 31 December 2000 and 2001, the Group had the following stock-based compensation plans, which are described below.
A summary of the activity of the Group’s fixed stock option plan is as follows: Weighted Weighted average average exercise 2000* exercise 2001 price in CHF Shares price in CHF Shares
Weighted average fair value of options granted during the year 28 43 * Adjusted by 20-for-1 share split
The fair value of each option grant is estimated on the date of the grant using a binomial option-pricing model with the following weighted average assumptions used for grants in 2000 and 2001, respectively: dividend yield of 2.5% and 2.0%; expected volatility of 22% and 23.1%; risk-free interest rate of 3.8% and 3.4%; expected life of 5.5 years and 5.75 years.
From annual option plans 1995 – 2001, an aggregate of 1 138 101 options to purchase the same number of shares were held by members of the Executive Board, as of 31 December 2001. Options vest after four years.
The Group does not recognise compensation expense for these options. If compensation expense for the options had been recognised, the Group’s net income and earnings per share would approximate the pro forma amounts in the following table: CHF millions 2000* 2001
In 2001, Swiss Re introduced a new employee participation plan consisting of a savings scheme lasting two or three years. Employees combine regular savings with the purchase of either actual or tracking options. Swiss Re matches the savings of the employee with an employer contribution.
In 2001, 452 660 options were issued to employees, and the company contributed CHF 6 million to the plan.
Notes to the Group financial statements 13. Stock compensation plans (continued)
The Group had five guarantees as of 31 December 2000 and 2001, which primarily indemnify the purchasers of former Group entities for possible run-off losses or claims for pending litigation. The Group enters into guarantees with regulators, purchasers of former Group entities and others in the ordinary course of business.
In the normal course of business operations, the Group is involved in various claims, lawsuits and regulatory matters. In the opinion of management, the disposition of these or any other legal matters, except for matters relating to the 11 September 2001 described below, will not have a material adverse effect on the Group’s business, consolidated financial position or results of operations.
The Group underwrote a significant share of the excess coverage for the USD 3.5 billion in first party insurance obtained by the lessees of building 1, 2, 4, and 5 of the World Trade Center.
The insured contends that the destruction of the World Trade Center constitutes more than one occurrence under the coverage that the Group agreed to provide to the lessees. A trial is currently scheduled for September 2002. If judgement is granted in favour of the insured, then this could have a material impact on the Group’s results of operations or statement of financial position.
The Group acts as manager for certain pooled funds that operate similarly to mutual funds. As of 31 December 2000 and 2001, net third party assets under management at market value were CHF 6 801 million and CHF 60 040 million, respectively.
The Group provides reinsurance and financial services throughout the world. Swiss Re Group has three business groups, which are determined by the organisational structure. These are Property & Casualty Business Group (former Non-Life Business Group); Life & Health Business Group, which includes life, health and disability reinsurance; Financial Services Business Group, which includes asset management, investment banking, credit and risk solutions. The Corporate Centre provides direction and Group-wide support to the business groups.
The main expenses excluded from the measurement of segments are goodwill amortisation, interest expenses and indirect taxes.
Net investment income and realised gains are allocated to business groups based on the net investment income and realised gains of the legal entities that are operated by these business groups. Where one entity is utilised by two or more business groups, the investment income and realised gains are allocated to these business groups using technical reserves and other information as a key for the allocation.
Expenses Claims and claim adjustment expenses; life and health benefits Acquisition costs Amortisation of goodwill Other operating costs and expenses Total expenses
Claims paid, net Claims and claim adjustment expenses; life and health benefits, gross Claims and claim adjustment expenses; life and health benefits, retro
Premiums written, net Change unearned premiums, gross Change unearned premiums, retro
Claims and claim adjustment ex- penses; life and health benefits, net
Change equalisation reserves Claims and claim adjustment expenses; life and health benefits
Unpaid claims and claim adjustment expenses, liabilities for life and health policy benefits and unearned premiums are reported gross in the Group’s balance sheet. Gross and retroceded amounts for these items were as follows: 2000 Property & Life & Financial CHF millions Casualty Health Services Total
Unpaid claims and claim adjustment expenses Unpaid claims and claim adjustment expenses Equalisation reserves
Property & 2000 Casualty CHF millions Property Liability Motor Accident Other lines Business Group
Property & 2001 Casualty CHF millions Property Liability Motor Accident Other lines Business Group
Revenues Premiums earned Net investment income Net realised investment gains Total revenues
Management expense ratio in % Return on operating revenues in %
Operating income / loss 1 The total per business unit differs from the total segment result per individual line item due to reclassifications. The main reclassifications are to present net the results of an investment broker which was sold in 2001 and to reallocate certain fee income from investment income to other revenues and investment expenses from investment income to other operating costs and expenses. The reclassifications do not affect operating income.
Operating income / loss 2 The total per business unit differs from the total segment result per individual line item due to reclassifications. The main reclassifications are to reallocate fee income from investment income to other revenues and investment expenses from investment income to other operating costs and expenses. The reclassifications do not affect operating income.
United States United Kingdom Germany Netherlands Switzerland Italy France Canada Other Total h) Gross premiums written by line of business
Property Liability Motor Credit/surety Accident Marine Engineering Aviation / other lines Total non-life Total life / health Total gross premiums written
Luxembourg Swiss Re Treasury & Management (Luxembourg) S.A. 100 f Swiss Re Treasury (Luxembourg) S.A. 100 f
Bermuda Englewood Ltd. 100 f Life Re International, Ltd. 100 f Lincoln National Reinsurance Company Ltd. 100 f Partner Reinsurance Company1 27.59 e Swiss Re Capital Management (Bermuda) Ltd. 100 f Swiss Re Finance (Bermuda) Ltd. 100 f Swiss Re Investments (Bermuda) Ltd. 100 f
United States Allied Life Financial Corporation 100 f Assure America, Inc. 100 f Conning Group 100 f Facility Insurance Holding Corporation 100 f Life Re Capital Trust I 100 f Life Re Capital Trust II 100 f Life Reassurance Corporation of America 100 f Lincoln National Health & Casualty Insurance Company 100 f Lincoln National Reassurance Company 100 f LSL Financial Corporation 100 f Midland Life Insurance Company 100 f NAS Management Inc. 100 f North American Capacity Insurance Company 100 f North American Elite Insurance Company 100 f North American Specialty Insurance Company 100 f Old Fort Insurance Company Ltd. 100 f Reassure America Life Insurance Company 100 f1 Voting share 28.7%
Southwestern Life Insurance Company 100 f Swiss Re America Holding Corporation 100 f Swiss Re Atrium Corporation 100 f Swiss Re Capital Markets Corporation 100 f Swiss Re Capital Partner (US) Inc. 100 f Swiss Re Financial Products Corporation 100 f Swiss Re Investors America 100 f Swiss Re Life & Health America Inc. 100 f Swiss Re Management Corporation 100 f Swiss Re New Markets Corporation 100 f Swiss Reinsurance America Corporation 100 f Underwriters Re 100 f Washington International Insurance Company 100 f
Company of Australia Limited 100 f Swiss Re Investors Australia Pty Ltd. 100 f
Notes to the Group financial statements 17. Subsidiaries and equity investees (continued)
The Property & Casualty Business Group has re-estimated the ultimate cost of restructuring and the provision has been reduced by CHF 46 million. This reduction has been excluded from the Group’s segment results, as was the creation of the provision in 2000.
As a result of the Group’s acquisition of the reinsurance operations of Lincoln National Corporation, the Group has established a restructuring provision of CHF 70 million. The provision was established as part of the purchase transaction which does not result in a charge to net income.
Following the creation of the Financial Services Business Group, a further restructuring provision of CHF 75 million has been established in respect of redundancy costs and lease abandonment.
Swiss Reinsurance Company, Zurich, performs a dual role within Swiss Re Group as both a reinsurance and a holding company. The assessment of the market position, profitability and financial strength of our world-wide organisation must focus primarily on the consolidated financial statements.
The following commentary on the 2001 financial year of the parent company therefore complements the review of the financial year of the Swiss Re Group and is intentionally kept short.
Investments Land and buildings Investments in subsidiaries and affiliated companies Loans to subsidiaries and affiliated companies Shares Fixed income securities and registered debt instruments Mortgages and loans Time deposits Deposits with ceding companies Total investments
Other assets and accruals Cash at bank and in hand Intangible assets Fixed and other assets Accrued interest and rent Other accruals Total other assets and accruals
The income statement and the balance sheet are presented in a format which follows Swiss GAAP FER. The financial statements and the notes are prepared in accordance with the regulations of the Swiss Company Law.
The 2001 financial year comprises the accounting period from 1 January to 31 December 2001. However, due to local convention, reinsurance business from Japan included in the accounts is for the period from 1 April 2001 to 31 March 2002.
The following assets are stated at cost, less necessary and legally permissible depreciation: – Land and buildings (purchase or construction cost) – Investments in subsidiaries and affiliated companies – Shares – Fixed income securities and registered debt instruments – Derivative financial instruments (without hedging intent) These assets are not subject to revaluation. Discounted securities are valued at their amortised cost. Derivative financial instruments used for hedging purposes are valued on the basis of the underlying business. The valuation rules prescribed by the Swiss insurance supervisory authority are observed.
The following items are stated at nominal value in the balance sheet, after deduction of known credit risks if applicable: – Loans to subsidiaries and affiliated companies – Mortgages and loans – Time deposits – Deposits with ceding companies – Debtors – Cash at bank and in hand
Valuation differences from foreign exchange transactions versus the actually realised transaction rates are recognised in the income statement.
Technical account Premiums written Change in the provisions for unearned premiums 1. Premiums earned
Investment management charges Valuation adjustments on investments Realised losses on sale of investments 7. Investment charges
CHF millions 2000 2001 9. Other liabilities and accruals Creditors arising out of reinsurance operations Amounts owed to banks Debentures Loans Other creditors Accruals
Dividend paid for the previous year Capital repayment Capital increase including premium Share buyback / capital reduction Extraordinary allocation Profit for the financial year
Shareholders’ equity on 31 December before allocation of profit Dividend payment
These off balance commitments primarily pertain to office and apartment space rented by the company. The amounts are shown for the non-cancellable treaty period only.
To secure the technical provisions as per 31 December 2001, securities in the amount of CHF 2 579 million were deposited in favour of ceding companies (2000: CHF 1 987 million).
The insurance value of tangible assets, comprising the real estate portfolio and other tangible assets, amounted on 31 December 2001 to CHF 2 644 million (2000: CHF 2 605 million).
Details on the Swiss Re Group’s subsidiaries are to be found on pages 48 to 50.
This item contains provisions for taxation which after the release of a no longer necessary foreign tax provision amount to CHF 94 million (2000: CHF 221 million) and other provisions totalling CHF 3 872 million (2000: CHF 3 896 million). Other provisions notably include a provision deriving from the restructuring of participations and a provision for currency fluctuations.
Swiss Reinsurance Company, Zurich, employed a staff of 2 831 on the balance sheet date (2000: 2 841). Personnel expenses for the 2001 financial year amounted to CHF 775 million (2000: CHF 687 million).
As statutory auditors, we have audited the accounting records and the financial statements (income statement, balance sheet and notes / pages 55 to 63) of Swiss Reinsurance Company for the year ended 31 December 2001.
Concentration of risks which may be affected by the same loss event or concentration of shares in the same risk or same event through reinsurance treaties.
Sum of claims paid, change in the provision for unpaid claims and claim adjustment expenses, in relation to earned premiums.
Engineering insurance: Insurance of construction and erection of objects during the construction or erection period and the insurance of machinery in operating plants.
Surety insurance: Sureties and guarantees issued to third parties for the fulfilment of contractual liabilities.
Balance sheet Investments Other assets Total assets Unpaid claims and claim adjustment expenses Liabilities for life and health policy benefits Unearned premiums Other liabilities Long-term debt Total liabilities
Stock exchange listing Swiss Re shares are listed on the main board of the SWX Swiss Exchange and traded on the virt-x under the symbol “RUKN”. In addition, on 1 February 1996, an American Depositary Receipts Program (ADR level I, over-the-counter) was launched together with Morgan Guaranty Trust Company of New York. One ADR corresponds to one Swiss Re share.
Dividend paid per share CHF Net income per share (EPS)1 CHF Equity per share1 CHF
Price per share – year-end CHF – year high CHF – year low CHF Average daily trading volume CHF millions Stock market capitalisation3 CHF millions The figures 1998–2000 have been adjusted by the 20-for-one share split in 2001 1 Per share entitled to dividend 3 Based on shares entitled to dividend 2 All data as of 28 March 2002 4 Subject to approval by the General Meeting