As a leading global reinsurer, Swiss Re enables its clients to take on risks that are essential to development and progress. The pictures and stories in this year’s Annual Report illustrate the benefits of reinsurance and the services and solutions developed by Swiss Re as an enabler of risk taking: Product development in China 31
Return on equity 1 Net income divided by average of shareholders’ equity (1996 estimated)
News 2005 Net income of CHF 1.5 billion impacted by record natural catastrophe claims Continued excellent investment performance with return on investments of 5.7% Property & Casualty operating income decreased to CHF 1.0 billion, reflecting an extraordinary year for natural catastrophes Life & Health operating income grew by 26% to CHF 1.6 billion, reflecting higher realised gains and continuing good mortality experience Financial Services operating income grew 15% to CHF 366 million, driven by excellent performance in credit business Shareholders’ equity increased 20% to CHF 22.9 billion, demonstrating Group’s ability to remain financially very strong even after an extraordinary claim event Substantial dividend increase of 56% from CHF 1.60 to CHF 2.50 per share
The direct and reinsurance markets maintained attractive pricing levels throughout the year. The aftermath of Hurricane Katrina triggered a significant rise in natural catastrophe prices and reversed downward pressure in other lines of business. Swiss Re remains focused on profitability through strict underwriting and risk selection. This had the effect of reducing premiums in our non-life traditional treaty and facultative business by 5% in 2005. We are willing to accept reductions in volume where economic returns do not match our pricing and contract standards.
State-of-the-art governance and comprehensive transparency are essential values to Swiss Re. We continuously review our risk management practices and, in 2005, strengthened them with an updated Assurance Framework. The framework clearly defines risk-assurance activities in our new organisation and helps us respond swiftly to changes in Swiss Re’s risk landscape, particularly in the context of increased compliance requirements.
One recent major milestone was the announcement of the acquisition of GE Insurance Solutions (GEIS) on 18 November 2005. GEIS is the world’s fifth largest rein surer with a strong client franchise, providing Swiss Re with a complementary product range. The acquisition further diversifies our portfolio, provides benefits of enlarged earnings, and adds new talent to our global workforce. The combined entity will be the largest and most diversified reinsurer in the world, offering clients superior financial security. We are making good progress towards completing the transaction and securing the necessary regulatory approvals. We expect to close the acquisition by mid-2006 and have prepared an integration plan identifying key operational and strategic imperatives.
Shareholders expressed their full support for the GEIS transaction at an Extraordinary General Meeting (EGM) on 27 February 2006, approving the creation of authorised capital and the increase of conditional capital to finance the acquisition. Since the transaction makes GE a significant shareholder in Swiss Re, shareholders also elected Dennis D. Dammerman, GE’s former Vice Chairman of the Board, to our Board of Directors.
Swiss Re’s success depends on the skills and commitment of its employees. The recent organisational realignment and the planned integration of GEIS have demanded especially focused efforts; we sincerely appreciate our colleagues’ ongoing contributions. The new structure puts our clients at the heart of our organisation. We thank them for their trust and confidence and our shareholders for their continued support.
Client Markets Europe Americas Property & Casualty Americas Life & Health &
As a leading global reinsurer, Swiss Re provides reinsurance products and financial services for managing capital and risk.
Swiss Re’s structure In September 2005, Swiss Re completed a management reorganisation to align the Group’s structure more closely with its strategic focus on profitable growth, the efficient use of capital and bringing the Group closer to its clients. The reorganisation created three business functions: Client Markets, Products and Financial Services; while the corporate support functions were globalised to manage common resources.
Worldwide, the increasing concentration of economic activities and people living and working in areas exposed to natural catastrophes has resulted in increased financial risk and complexity. These factors are leading to a growing demand for property and casualty insurance products. Similarly, the concerns of an ageing population are driving demand for life and health insurance products, particularly pension products.
Jacques Aigrain, Swiss Re’s new Chief Executive Officer, gives his views about the opportunities in today’s insurance and reinsurance markets, and how Swiss Re will turn these into sustainable growth in profits.
Swiss Re is at the forefront of this long-term transformation process, whereby risk management and investment banking capabilities are combined. We can claim to have driven and accelerated the development of the insurance bond market for both property and life exposures for almost a decade. Swiss Re is the most active trader and market maker in the emerging financial market for these bonds and is actively participating in the development of the derivative, or non cash, form of these markets.
Strategy can only be implemented successfully if it is rooted in a strong performance culture that encourages and rewards personal accountability. Swiss Re’s financial targets of 13% ROE and 10% EPS growth over the cycle remain unchanged at this time. Our performance will also be based on our ability to make greater use of financial market solutions, deliver superior investment results and maintain an unequivocal focus on quality underwriting. Our new structure better facilitates accountability for these goals. Internally, we also use non-financial targets to manage Swiss Re’s pool of talent – our most precious resource – and to improve operational excellence in how we deliver products and services to our clients.
The GE Insurance Solutions acquisition is due to close mid-year. What benefits do you see for the combined group? Strong companies build on their strengths. The acquisition of GE Insurance Solutions, still subject to regulatory approval, extends Swiss Re’s strategy of exposure diversification and geographical reach. It will give us access to a wider client base, new product lines and an additional pool of talent. The combined enterprise will enjoy a strong franchise and the benefits of scale, in the form of complementary lines of business and regional presence. The transaction is also financially highly attractive and should deliver material synergies.
We will continue our efforts to make Swiss Re more nimble and responsive to our clients. The successful integration of GE Insurance Solutions, after the closing of the transaction, will bring material benefits to our stakeholders: the cost of capital for insurance will decrease through better risk diversification while return on that capital will increase by application to more profitable opportunities. We will work hard to sustain our leadership position, continue investing in innovation and, ultimately, create opportunities for the insurance industry.
Swiss Re’s value proposition to its clients is strongly driven by the development and application of the Group’s knowledge and expertise.
Developing expertise and experts Swiss Re attracts, develops and retains highly skilled and motivated professionals to deliver competitive services in line with its business strategy. The Group’s expertise is embodied in its workforce drawn from a broad spectrum of disciplines – including actuarial studies, engineering, finance, law and natural sciences. The Group has established comprehensive management and leadership development programmes. The Swiss Re Academy systematically assesses and develops employee competencies according to business needs and individual potential.
External collaboration While Swiss Re is highly committed to developing expertise internally, the Group also establishes close working relationships on specific topics with leading educational institutions, such as the Center for Health and the Global Environment at Harvard Medical School on the Climate Change Futures project (see page 58), the Swiss Federal Institute of Technology (ETH) under the framework of the National Centre of Competence in Research on Climate (NCCR Climate), Beijing Normal University on a China atlas of natural catastrophes and Fudan University of Shanghai on a series of mortality studies in China. These ties enable Swiss Re to leverage external resources and gather fresh perspectives on issues impacting the insurance industry.
The analysis shows that investors favour investing in larger companies, which may be better positioned to secure long-term profitability and achieve essential economies of scale. It also shows that investors assign higher value to companies that can simultaneously achieve profitability and growth – but are unwilling to pay for growth at the expense of profitability.
Climate change  Experts increasingly believe that climate change may have a severe impact on society and the global economy
 Climate change has become an important element in many companies’ long-term risk management strategies
 Swiss Re factors climate change risks into its risk selection, pricing and capacity deployment and pursues innovative solutions, such as risk securitisation and weather derivatives
 Swiss Re is committed to strategies that facilitate greenhouse gas emissions reduction and monitors its own environmental performance to minimise its carbon footprint
 ILS is an effective risk management tool to increase capacity and transfer peak risks, as well as volume insurance risks, to the capital markets
 Swiss Re has been a pioneer in developing the ILS market, having underwritten some USD 5.8 billion of risks for itself and third parties
 Swiss Re fosters risk dialogue to prevent a polarised debate on the development of the technology
 Swiss Re offers clients tailor-made solutions for their catastrophe perils risk portfolio
 The new regulation is likely to have a significant impact on the industry by redefining capital requirements
 Swiss Re supports the introduction of Solvency II: riskbased solvency regimes will improve risk management practices, as well as encourage economic valuation and the use of internal models
 Swiss Re continues to work with regulators and clients to help implement appropriate capital models and promote the recognition in solvency requirements of the benefits created by reinsurance through the global and sectoral diversification of risk
Terrorism  Terrorism risk is privately insurable to the extent that the risk can be assessed, controlled and adequately priced
 Long-term market solutions require a risk partnership between insureds, insurers, capital markets and governments. The challenge is to find the most efficient way to achieve such public/private partnerships
 Swiss Re supports existing market solutions and encourages the development of new, efficient and fairly-priced products that meet society’s need for terrorism cover
Apart from the exceptionally high natural catastrophe losses, underwriting profitability developed favourably for the year. Most of the primary insurance markets are expected to report positive combined ratios – below 100% in many markets, as they were in 2004. Even the combined ratio for the US primary market is anticipated to be about 102%, compared with 98% the year before, despite unprecedented hurricane losses.
Life insurance industry: continued strong fundamentals Global life insurance business continues to show healthy growth. Initial evidence suggests that average growth in 2005 is somewhat higher than the 3% real premium growth achieved in 2004. Sales of unit-linked business and variable annuity products in Europe benefited from strong equity markets performance in 2005.
Life reinsurance premium growth is likely to be in line with primary market growth. However, growth was lower than in 2004, particularly in the US and UK, which account for around 70% of global life reinsurance volume. Cession rates have stabilised in these markets, as a result of increased reinsurance prices. Competition in the market for the management of closed blocks of business, both in the US and UK, increased somewhat, as new players entered the market.
14 February Successful 2005 renewals Swiss Re reported successful January renewals.
27 April 2004 embedded value Swiss Re reported embedded value of its life and health business of CHF 17.1 billion. The increased embedded value earnings of CHF 2.0 billion represent a return on embedded value of 13%. The value added by new business more than doubled to CHF 666 million, driven by increased investment in Admin ReSM and the excellent new business margins achieved in 2004.
9 May Annual General Meeting The 141st Swiss Re Annual General Meeting approved the dividend of CHF 1.60 per share. Jakob Baer was elected to the Board of Directors. Jorge Paulo Lemann stepped down from the Board. The terms of Thomas W. Bechtler and Bénédict G.F. Hentsch were extended for a further four years.
25 August Interim results 2005 Swiss Re reported a net income of CHF 1.4 billion in the first half of 2005. Annualised return on equity was 13%, in line with the target over the cycle. Shareholders’ equity grew 15% to CHF 22 billion.
2006 to date 23 January First credit reinsurance securitisation Swiss Re successfully completed its first credit reinsurance securitisation. The EUR 252 million issue benefits Swiss Re by transferring credit insurance risk to the capital markets, thereby increasing Swiss Re’s capital efficiency.
10 February Swiss Re to sell Fox-Pitt, Kelton Swiss Re reached an agreement to sell its wholly-owned subsidiary Fox-Pitt, Kelton (FPK) to a new company formed by J.C. Flowers & Co. LLC and FPK management. Swiss Re will retain an interest in the new company through convertible preferred shares.
14 February 2006 renewals Swiss Re achieved 7% improvement in economic profit and premiums grow to CHF 9.3 billion in successful January renewals.
Premiums in the Life & Health business increased by 3% to CHF 10.5 billion, mainly due to the full-year inclusion of two Admin ReSM transactions completed during 2004. The increase was partly offset by the Queensgate securitisation, which increased retrocession premiums, otherwise the increase would have been 5%.
The Swiss franc remained relatively stable against the US dollar, the Euro and the British pound compared to 2004 average rates. As a result, the currency exchange effect on income and expense comparisons is immaterial in contrast to previous years.
The total investment result rose to CHF 6.6 billion in 2005, an increase of 11% compared to 2004.
Other revenues were CHF 286 million, an increase of 18% on 2004.
Trading revenues decreased to CHF 343 million from CHF 438 million during the same period last year. The decrease is mainly due to Swiss Re’s reduced market risk exposure to structured and traded credit products.
Acquisition costs declined by 6% to CHF 5.9 billion in 2005 from CHF 6.3 billion in 2004. The reduction reflects lower premiums in the Property & Casualty business. The decrease in the Property & Casualty business was partly offset by the Life & Health business, due to full-year
Other operating costs and expenses were CHF 3.1 billion in 2005, an increase of 6% over 2004. Other operating costs and expenses for the Life & Health business increased due to the growth in Admin ReSM business. Corporate Centre costs increased due to Group project activities and the globalisation of some functions previously carried out in the business functions.
Income reconciliation The following table reconciles the income from Swiss Re’s segments and the operations of its Corporate Centre with the Group consolidated net income before tax.
Return on investments achieved an excellent 5.7%, thanks to continuing active portfolio management and positive market conditions.
CHF 6.6 billion. Net investment income increased by 10% to CHF 5.4 billion, as Swiss Re continued to earn attractive yields on its large fixed income portfolio.
Net realised gains rose by 12% to CHF 1.2 billion; Swiss Re’s active investment approach contributed significantly to this growth by managing duration and credit exposure in the fixed income portfolio, and by moving equity holdings systematically from overvalued stocks, sectors or regions to more undervalued ones. Capital gains in other asset classes included the private equity fund of funds and the real estate portfolio.
¹ Return on investments is calculated using average foreign exchange rates. Based on investments measured at year-end foreign exchange rates, the return would be 5.8% in 2004 and 5.4% in 2005.
Overall credit quality in Swiss Re’s portfolio remained high, with investment grade ratings for 93% of the corporate bonds in the fixed income portfolio. Swiss Re nevertheless took a proactive approach to managing credit exposures in specific sectors. Towards the end of the first quarter, when credit spreads remained exceptionally tight, the Group sold USD 1 billion of mostly BBB-rated corporate bonds in North America, largely from the life and health portfolios. Most of the proceeds went into higher-rated fixed income investments, including AAA-rated structured investments, mortgages, commercial /mortgage-backed securities and Federal Agency securities.
Equities Swiss Re enjoyed strong returns from publicly traded equities in 2005. Stock markets posted excellent gains, with Europe and Asia, in particular, outpacing the US. As an active, diversified investor, Swiss Re reduced its equity exposure to CHF 5.3 billion shortly before the end of 2004, in anticipation of a short-term market correction. The Group maintained a cautious stance early in 2005, but began rebuilding its exposure late in the second quarter. At year end, the equity portfolio amounted to CHF 8.4 billion.
Although Swiss Re continued to favour European and Asian equity markets, especially Japan, the Group also increased its US exposure, especially in energy and technology stocks.
Changes in shareholders’ equity CHF millions 2004 2005 Change in %
Cash and cash equivalents as of 1 January 12 251 9 504 –22
Cash and cash equivalents as of 31 December 9 504 8 126 –14
Operating income of CHF 1.0 billion despite an extraordinary year for natural catastrophes. Selective underwriting and a continued focus on profitability led to a reduction of 5% in premiums earned for traditional business.
Claims for natural catastrophes were the highest ever recorded, while Hurricane Katrina became the largest single insured loss in history. Almost 90% of the total claims from natural catastrophes were caused by storms and floods, from both the Atlantic hurricanes and the heavy August rains that caused widespread flooding in Switzerland, Germany and Austria. The combination of the 2005 claims and heightened demand for coverage has led to a significant increase in natural catastrophe pricing for the exposures most at risk, including US property exposures and marine offshore energy programmes. The corporate sector also saw stronger rates, terms and conditions, arresting previous market softening, especially in North America.
Some pharmaceutical companies and financial institutions were unwilling to purchase cover at 2005 rates and conditions, and thus decided not to purchase insurance in certain segments.
Swiss Re’s underwriting steering values, which compare current prices with the Group’s required risk-adjusted profit margins, continue to support Swiss Re’s disciplined underwriting approach and to shape the portfolio for sustainable profitability. This approach actually led to a decrease in renewed business in January 2006 for certain casualty lines as continued pressure on rates meant some casualty business was marginal at best.
In the first half of 2005, prior years incurred adverse development of CHF 255 million. In the second half of 2005, prior years developed favourably with a small release of CHF 31 million. Overall, prior years generated a modest loss of CHF 224 million, representing less than 0.5% of 2004 Property & Casualty reserves and 1.5% of the 2005 premiums earned for traditional business. For years
Total CHF 16.4 billion 12% Risk Solutions 43% Europe 11% Asia 34% Americas tional contracts were not renewed, primarily because clients’ balance sheets had strengthened and there was a general slowdown in demand for these covers.
Lines of business Swiss Re continues to proactively manage its mix of business, directing capital to those lines that generate superior returns.
Rates for man-made risks saw less upward pressure because of generally strong prices, especially in Europe and Asia; some markets saw slight downward pressure through the year’s end. Contractual terms and conditions for property business remained strong.
Pricing of the Swiss Re motor book remained stable and terms and conditions in general were unchanged. The 9% reduction in premium volume stemmed from lower demand at Swiss Re’s price level, which mainly affected the proportional motor business in Italy, Germany and the UK, and an increase in client retentions. In some countries, such as France, where there was an upward trend in bodily injury claims, Swiss Re increased its rates in order to maintain price adequacy. As a result of firm underwriting action, the quality of the motor book has improved.
Premium volume fell by 7%, mostly due to a reduction in engineering premiums in Europe because of a non-recurring premium adjustment in 2004 related to prior- year business.
The combined ratio was strongly impacted by hurricane claims, which amounted to CHF 762 million, net of equalisation reserves release, or 46 percentage points on the combined ratio. Excluding the exceptional natural catastrophe claims, recent treaty years developed in line with expectations.
The combined ratio is not a suitable measure for some non-traditional treaties as the source of profits typically arises from a combination of investment performance and underwriting performance. Overall, there was a significant reduction in premiums due to the non-renewal of two large quota share agreements. Profitability nevertheless increased following a large favourable commutation and beneficial development on one major contract.
Although China’s real GDP has grown by an impressive annual average of 9% over the last ten years, insurance penetration is still very low. Life and property and casualty combined totalled a mere 2.7% of GDP in 2005, with property and casualty business accounting for less than 1%.
Following WTO accession, China began to phase out compulsory cession requirements, allowing insurers to place reinsurance business based on commercial and risk considerations. This was a key milestone in the market’s development. Since 2003, three international reinsurers, including Swiss Re, have opened branches in the country.
Swiss Re actively shares knowledge with its Chinese clients to help foster sound market growth. For example, liability products are rapidly becoming essential as economic development creates awareness of consumer and legal rights and generates more litigation. Globalisation is reinforcing this trend: exporters are seeking cover for product liability while Chinese enterprises – particularly those seeking overseas listing – are keen to acquire directors’ and officers’ covers.
China’s economic growth is leading to the emergence of a significant middle class as evidenced by the rapid increase in vehicle registrations and the resulting need for key transportation infrastructure.
Motor liability is a particularly interesting area in the Chinese liability sector, partly due to the Chinese government’s introduction of compulsory third-party liability cover in 2005. Vehicle registrations rocketed from a mere 5.5 million in 1990 to 26.9 million at the end of 2004. Competition is keen among both foreign and domestic players in the primary market, but statutory cover limits are so low that they are unable to meet the insurance needs of the more affluent coastal regions. The situation is therefore ripe for a global reinsurance leader with product expertise to step in and provide support to local insurers.
Continued strong economic growth in China necessitates new insurance solutions. Swiss Re supports local in surers with its product expertise in motor and liability insurance, thereby enabling them to address varying regional un derwriting requirements.
The custom-designed product, based on existing global solutions, was first offered in the southern city of Guangzhou and is targeted at about 10% of the client’s portfolio of 30 000 vehicles. Nation-wide rollout will take place in 2006. This type of product highlights Swiss Re’s ability to adapt proven, product-based global models in response to fundamental changes in China’s risk landscape.
Return on operating revenues rose to 9.6%, on the back of positive claims developments, exceeding its 9% target.
Key business topics Swiss Re’s mortality experience continued to develop positively, due both to underlying demographic trends and to higher underwriting and risk management standards in the primary business. Swiss Re regularly reviews treaty pricing to ensure that it reflects the latest mortality and economic assumptions.
The growth of the primary market was largely from investment rather than protection products: the so-called “protection gap” remains a significant issue in both established and new markets. Swiss Re’s traditional life and health business grew only modestly in 2005. The Group’s repricing initiative, undertaken in 2004, particularly restrained new business growth in the US. Swiss Re’s business in Asia grew by more than 15%; several key strategic initiatives will build on this achievement in 2006, including new product development in the areas of health and living benefits and capital management.
Through its Vita Capital programme, Swiss Re draws on capital markets to mitigate the impact of an extreme mortality event, including a global pandemic. The Group closed its second Vita life catastrophe bond in 2005, bringing Swiss Re’s total cover, provided through issuing notes as collateral against a significant loss event to USD 762 million.
Business results The operating result rose by 9% over the previous year to CHF 1.3 billion.
The traditional life operating result increased by 16% to CHF 740 million, reflecting the release of the unused portion of the tsunami provision established at the end of 2004 and the continuing positive mortality experience around the world. The traditional health result increased by CHF 14 million, to CHF 212 million; the Admin ReSM operating result remained stable at CHF 381 million.
The 9.6% return on operating revenues exceeded both the target of 9% and the prior year return of 9.1%. The return for traditional life business improved from 8.2% in 2004 to 9.3% in 2005, following the release of the unused portion of the tsunami provision. The return for tradi-
The Admin ReSM return declined from 11% in 2004 to 10.2% in 2005, due to the accelerated amortisation of the present value of future profits at CHF 27 million. Excluding this adjustment, which was more than offset by realised gains on the Admin ReSM portfolio of CHF 140 million, the return on Admin ReSM would have been 10.9%.
Premiums earned Premiums increased by 3%, to CHF 10.5 billion. The Queensgate securitisation effectively reduced premiums by CHF 181 million; excluding the impact of this transaction, underlying premium growth was 5%. Traditional life premiums increased by 3%, reflecting the low levels of growth in the US life reinsurance markets, which were however offset by stronger growth in Asia. Traditional health premiums remained flat at CHF 1.6 billion, with growth in new group income protection business offsetting the run-off of discontinued lines. Admin ReSM premiums, after adjustment for the Queensgate transaction, increased by 17% to CHF 2.1 billion, reflecting the full-year impact of the 2004 acquisitions of LAHC and the individual life business of CNA.
The return on operating revenues in 2005 of 10.2% was impacted by the accelerated amortisation of the present value of future profits, following realised gains in the Admin ReSM portfolio.
On the liability side, as in traditional reinsurance, SMM fully transfers risk from the insurer to the reinsurer, who is liable for any higher-than-expected claims experienced by the insurer. This reduces the insurer ’s required solvency margin, thereby unlocking tied-up capital. SMM therefore represents a twin value enabler for insurance companies.
Reinsurance eases the capital requirements of primary life insurers, enabling them to offer competitively priced cover to individuals and corporations.
“With SMM, we can place a value on a life insurer’s anticipated margins, allowing it to sell all, or part, of these future cash flows. In exchange, the life insurer receives capital management benefits on both sides of its balance sheet.”
Swiss Re’s “sale of mortality margins” (SMM) structure offers life insurers an efficient and flexible capital management solution
As the world’s leading life reinsurer, Swiss Re has gained extensive knowledge of mortality experience; SMM uses this capability to create value for insurers in a way that suits clients’ individual capital management needs. Jos Cobben, head of Swiss Re’s Life Products team in Continental Europe, explains: “SMM is an excellent component in the toolkit we offer to our clients. Swiss Re recently arranged an SMM structure for a key client. Thanks to our knowledge and expertise, we can accurately value an insurer’s mortality margins and realise that value in a way that suits the client’s individual capital management needs.”
Flexibility is a key strength of Swiss Re’s SMM. The asset provided to the insurer can be in cash, or booked as a receivable on its balance sheet. The duration of the arrangement can be tailored – either to reflect the natural run-off of the insured portfolio or for a pre-determined period.
Demands on capital can challenge life insurers’ growth capacity. By helping unlock future profits, Swiss Re offers its life insurance clients capital solutions that enable them to seize new business opportunities.
Hedge funds continued to attract capital and increased their activity in insurance markets as significant investors in insurance -linked securities. Additionally, they participated directly in insurance and reinsurance markets. Investors remained confident in the insurance-linked securities sector, which retained its liquidity in a higher-than-average catastrophe year.
Financial services solutions Financial Services provides the Group with greater flexibility in managing its balance sheet and reducing earnings volatility, while increasing the transparency and liquidity of insurance risks for both investors and clients.
The creation of the Insurance Risk Transformation unit has increased the focus on the acceleration of Swiss Re’s balance sheet through securitisation. In 2005, the Group executed four insurance-linked securitisations: two capital management transactions in the life area and two risk management transactions.
Capital Management and Advisory (CMA) remains at the forefront of the market for intermediating insurance risk, complemented by controlled growth of its trading and structuring capabilities in other asset classes. CMA originates, structures, places and trades interest rate, equity, credit, insurance and weather risks.
Proprietary Asset Management aims to provide Swiss Re with superior risk-adjusted returns on its investment portfolios. Swiss Re provides asset management services for insurance clients under the Conning Asset Management brand in the US, Canada, Bermuda, UK and Europe; it will open a Conning office in Asia during 2006. Third-party assets under management increased to USD 61.3 billion as at 1 January 2006 – a compound annual growth rate of 24% since Swiss Re acquired Conning in 2001.
Business results Operating income rose 15% to CHF 366 million, driven by the excellent performance of Credit Solutions and further improvements in the profitability of Swiss Re’s third-party asset management business. Total revenues declined 3% to CHF 1.7 billion, due to lower revenues in the Capital Management and Advisory business, which offset increases in other Financial Services businesses. Premiums earned increased only slightly, due both to stringent underwriting standards in Credit Solutions and increased retention by some clients. Trading revenues and fee income declined, reflecting a challenging environment for Capital Management and Advisory’s corporate finance and equities units, as well as Swiss Re’s reduced market risk exposure to structured and traded credit products. This decline was in contrast to a strong increase in fees for third- party asset management. Mark-to-market gains on portfolio credit swaps boosted earnings, although to a lesser extent than in 2004.
The combined ratio of 81.1% is lower than in the previous year, due both to a continued favourable market environment in Credit Solutions’ traditional trade credit and surety reinsurance business and to a favourable claims settlement agreement reached earlier in the year. The margin on fee business declined primarily due to the challenging conditions in corporate finance and equities units.
¹ Risk Solutions business, which represents Swiss Re’s activities with large corporate clients, was formerly part of Financial Services and is now incorporated into Property & Casualty for both years presented.
The combination, within Financial Services, of Credit Solutions’ expertise in trade credit reinsurance with the ability to securitise insurance risk, was the foundation for the successful completion of the first indemnity-based credit reinsurance securitisation, which closed on 13 January 2006. The EUR 252 million issue benefits Swiss Re by transferring credit insurance risk to the capital markets.
In this transaction, Swiss Re transfers risk through a retrocession agreement to Crystal Credit Ltd, which in turn issues principal at-risk variable notes. The underlying risk is linked to Swiss Re’s incurred claims on its credit reinsurance business for the underwriting years 2006, 2007 and 2008. The indemnity-based trigger allows Swiss Re to achieve capital relief at minimal basis risk. In turn, the security provides investors with the benefit of an actively managed credit insurance book over three years. For Swiss Re, the transaction increases the stability of the credit reinsurance market for its credit insurance clients.
example, or a global risk of influenza pandemic – into a bond or other security and sell it to investors. The investors who buy the securities understand that they will receive a particular return on their investment – unless the specified event occurs. If it does, they may lose some or all of the capital they have invested.
“Insurance-linked risk securitisation will soon be a core competence for reinsurers. Swiss Re is making sure it leads the market.”
Swiss Re is the world’s largest life reinsurer. Committing capital to underwrite such risks demands an excellent understanding of potential mortality scenarios that could adversely affect the balance sheet.
Swiss Re expects to capture the full potential of the market through a continuing focus on profitability and product innovation.
Client focus and product developments Increased client focus was one of the main drivers for the organisational realignment completed during 2005 and is already bearing fruit with clients reacting positively to Swiss Re’s combined marketing activities for its Property & Casualty and Life & Health businesses.
Overall, Swiss Re expects to maintain a preferred position in an attractive market and to secure terms and conditions that outperform the market average. Swiss Re will maintain its strong global market position, continued focus on economic profit, and strict pricing discipline. Provided that large claims are within expected levels, Swiss Re anticipates its combined ratio, from 2006 January renewals, to be below 95%.
On the life and health side, the primary markets show increasing policyholder demand for a wide range of living and survival benefits. Swiss Re is developing new products with clients within appropriate risk sharing and risk management structures. New products being reviewed include a wider range of health products, longevity solutions and alternative solutions in the US to address regulatory reserving requirements and associated collateral needs for guaranteed term assurance products. The Group also continues to work with clients to respond to their capital management needs, including alternative structured reinsurance solutions and Admin ReSM. The anticipated consolidation of the life insurance market is expected to provide a number of opportunities for further Admin ReSM transactions.
Swiss Re uses risk and capital management to ensure controlled risk taking and adequate capitalisation, and to maintain the financial flexibility to profit from attractive business opportunities.
Swiss Re’s risk governance aims to efficiently support these principles. In August 2005, the Board of Directors approved the Assurance Framework, which ensures that, in the new organisation, a risk owner, risk taker and risk controller are assigned
to each risk. This framework will also ensure that Swiss Re’s risk governance remains at the forefront of the industry.
Risk management organisation The Board of Directors is ultimately responsible for Swiss Re Group’s risk management principles and policies, as well as for approving Swiss Re’s overall risk tolerance. The Board committees that deal with risk management issues include the Finance and Risk Committee and the Audit Committee.
Within the Executive Committee, the Chief Financial Officer (CFO) is responsible for the business planning process and defining asset management benchmarks. Responsibility for implementing the risk governance framework across the Group lies with the Chief Risk Officer (CRO). The CRO leads the global risk manage-
Core risks Operational risks Other risks ment function, which was adapted following the reorganisation implemented in September 2005 (see Figure 1).
None of these departments actually executes business; they set risk management guidelines and standards based on best practice that the business units implement and provide oversight of risk-taking activities.
In addition to the committees at Executive Board level, the Group Risk Management Committee is the platform through which the CRO coordinates risk management activities Group-wide.
Swiss Re’s risk landscape At Swiss Re, risk management considerations are essential to strategic planning and they are embedded in the company’s management discipline. In addition to strategic risks, Swiss Re distinguishes three types of risks: core risks, operational risks and other risks (see Figure 2).
markets, such as equity market prices, interest rates, credit spreads, foreign exchange rates or real estate prices. Credit risk is the risk of incurring a financial loss due to diminished creditworthiness (ie ratings migration and ultimately counterparty default) among counterparties of Swiss Re and/or third parties.
Operational risk, defined according to the Basel II risk areas, includes potential losses from inadequate or failed internal processes, people, systems, external events, or non-compliance with regulation resulting in regulatory penalties or an inability to operate properly. Management of operational risk is designed purely to mitigate risk down to an acceptable level, as there is no financial return for carrying operational risk.
Other risks comprise: Funding and liquidity risk is the risk that Swiss Re is unable to meet its short-
term financial obligations or raise funds in the markets to finance its commitments at a reasonable cost.
Funding and liquidity risk may result from larger than expected cash outflows or smaller than expected cash inflows and a restricted ability to raise short-term funds. In addition, sudden liquidity requirements may arise if covenants are triggered under specific adverse circumstances, requiring the collateralisation of debt obliga-
Swiss Re’s model is based on two important principles. Firstly, it uses an assetliability management (ALM) approach (see page 23), measuring the net impact of risk on the economic value of both assets and liabilities. Secondly, it adopts an integrated risk perspective, taking into account that a single risk factor can impact different sub-portfolios and different risk factors can exhibit dependencies.
The model generates a probability distribution for the Group’s annual economic profit and loss, specifying the likelihood that profit or loss will fall within any given range. From this distribution a base capital requirement is derived that captures the potential for severe, but rare, aggregate losses over a one-year time horizon. The base capital requirement is then compared with available capital to determine the adequacy of Swiss Re’s capitalisation (see Capital management, page 55).
The Solvency II project was initiated to modernise the existing EU solvency system. Solvency II will be based on a three-pillar structure inspired by the Basel II Capital Requirements Directive: quantitative requirements (Pillar 1), supervisory activities (Pillar 2) and supervisory reporting and public disclosure (Pillar 3). In the interests of policyholders, two solvency control levels will be established: a minimum capital requirement, reflecting a level of capital below which prompt and severe sanctions would be triggered, and a higher solvency capital requirement level below which the actions would be broadly at the supervisor’s discretion.
Stress scenario analyses complement the integrated risk model by providing information on the economic implications of certain adverse situations. Some of these analyses appear in the following sections.
Risk management per core risk category Risk appetite and risk tolerance at Group level are defined by a set of limits approved by the Executive Committee and the Board of Directors. The allocation of capacity to lower levels is carried out by the relevant Group bodies.
Estimated economic impact of each single loss event in CHF billions as of 31 December 2005
Mortality (300 000 excess deaths in the US evenly spread across the population) –2.1
These procedures and limits define the underwriting process and are laid down in the Group Underwriting Guidelines, which are approved by the Group Product and Limits Committee.
Property & Casualty Risk Management is responsible for Group-wide reporting and monitoring of property and casualty risks. The various underwriting systems across the Group permit timely reporting on risks assumed and regular monitoring of capacity usage. The Global Products function plays a major role in actively managing property and casualty risks by proposing the annual renewal strategy and closely monitoring renewal business. Where appropriate, Swiss Re also uses insurance-linked securities, retrocession and risk swaps as a means of balancing its portfolio.
2005 was clearly dominated by the North Atlantic tropical cyclone season. Hurricane Katrina was the most expensive catastrophe ever for the global insurance and reinsurance industry with an estimated market loss of USD 45 billion. The unusually large amount of flood and storm surge losses came as a negative surprise for the entire industry. Swiss Re has taken immediate action and implemented a whole array of measures, the most prominent one being a fully probabilistic US flood rating model for the 2006 renewals, the first of its kind.
Swiss Re has a significant exposure to mortality risk due to its life and health business and recognises that influenza is a material risk because an influenza pandemic has the potential to impact all markets across the world. Therefore all relevant developments are closely monitored.
The increase in the Atlantic hurricane scenario from CHF 2.0 billion in 2004 to CHF 3.3 billion in 2005 is mainly due to the enhanced inclusion of offshore exposures in the model, combined with an expansion of business driven by the favourable conditions in 2005 July renewals in the US for this business. The California Earthquake scenario decreased from CHF 2.3 billion to CHF 1.5 billion, mainly due to business cancelled in renewals where conditions were not attractive.
Life and health risk is assumed through written mortality and morbidity covers and acquired run-off business (Admin ReSM business). Local business units can accept business within agreed limits which include per life retention limits for individual business, maximum market exposures for life and health catastrophe business and occupational scheme aggregation limits. Any business that falls outside the specified limits must be approved by the head of Life & Health Products.
The CMA business sector monitors its VaR at a 99th percentile level using a 10-day time horizon. This means that, assuming a static portfolio over 10 days, there is a 1% chance that losses will exceed VaR.
Financial market risk management Financial market risk arises from three main sources: Swiss Re’s Proprietary Asset Management unit (PAM), the interest rate sensitivity of the present value of liabilities and the capital markets trading activities of the Capital Management and Advisory business sector (CMA). The overall risk limits framework is defined by the Group Capital & Capacity Allocation Committee (GCAC), which sets the risk limits for individual investment asset classes for the PAM portfolio. This framework includes a combination of VaR limits, stress loss limits and exposure limits for specific asset classes.
CMA and PAM then translate this limits framework for their own activities, generally incorporating a much more granular set of risk limits into their business. For instance, CMA uses a 10-day 99% VaR to limit and monitor its financial market risk on a daily basis (see page 52 for more details). Minimum standards for the management of financial market risk are specified in the Market Risk Guidelines. These are supplemented by Derivative Guidelines, Investment Guidelines and business- specific guidelines.
Financial market risk is identified using a risk inventory of the various risk factors that each business unit is exposed to. Each business area is responsible for measuring the financial market risk arising from its own activities; the results are captured in the Market Risk Aggregation & Reporting System (MARS) which is also used for risk modelling and risk reporting at Group level. The asset-liability management report summarises financial market risks at Group level. Risk reporting in PAM is done on a weekly basis, while a combination of daily and weekly risk reporting is done in CMA. These reports are the primary tools used to track exposures and monitor usage of limits.
Limits are monitored independently by the Credit & Financial Market Risk Management department. The limits are reported to the head of the business unit who is also ultimately responsible for risk steering. The business unit heads seek to optimise their respective portfolios within their limits, including the use of cash and derivative instruments.
Estimated economic impact of each single scenario in CHF billions as of 31 December 2005
liabilities underwritten directly by the business units. Swiss Re distinguishes three kinds of exposure: the risk of issuer default from instruments in which Swiss Re invests or trades, eg corporate bonds; counterparty exposure in a direct contractual relationship, eg retrocession or Over-theCounter (OTC) derivatives; and portfolio exposure from risk transferred to Swiss Re with no direct contractual relationship, eg trade credit and surety reinsurance business. All contribute to an overall credit risk portfolio governed by Group Credit Risk Guidelines that are approved by the Group Capital and Capacity Allocation Committee (GCAC).
The reporting process is supported by the Group Credit Risk Exposure Reporting, Management and Information Tool (GERMIT) that contains all relevant information including counterparty details, ratings, credit risk exposures, credit limits and watch lists. It is accessible by all key credit practitioners in the Group, thus providing essential transparency to allow for the successful implementation of active exposure management strategies for specific counterparties, industry sectors and geographic regions.
The figures in Table 5 report the estimated pre-tax impact of credit scenarios on available economic capital. For instance, the default scenario shows estimated additional (unexpected) losses due to adverse default rate changes. The modelled scenarios are based on a credit environment development similar to 2001, which was the worst credit experience in the past ten years. This period also reflects changes in credit markets due to the increased use of credit derivatives.
Operational risk is monitored and controlled by dedicated operational risk management units embedded within the organisation. At Group level the Group Operational Risk Management department is responsible for setting the relevant operational risk management guidelines and standards, and independent assur-
 Available capital  Required capital at 99% VaR  Capital adequacy ratio
ance on policy and process compliance and risk controlling adequacy is given by Group Internal Audit.
Capital management Capital management, like risk management, is one of Swiss Re’s key tasks and is based on the following guiding principles: ensure the Group is adequately capitalised at all times and able to maintain financial strength after a large loss event; meet the capital requirements of Swiss Re’s legal entities; actively manage the capital adequacy of the Group and its legal entities, taking into account internal economic and accounting views and rating agency and regulatory solvency models.
Internal capital adequacy Swiss Re determines the amount of economic capital it has available to cover adverse events as follows: first, it adjusts published shareholders’ equity for unrealised gains and losses on the investment portfolio and for economic values on liabilities, to the extent that they are not on the published balance sheet. It then deducts goodwill, and adds capital items that meet the underlying principles of loss absorbency and permanence, such as hybrid capital and equalisation reserves. The tax impact on the valuation adjustments is shown separately. These figures are shown in Table 6.
quacy ratio (CAR) of 329% at 30 June 2005, compared to 278% on 30 June 2004. This CAR improvement is mainly due to an increase in available capital from CHF 28.4 billion to CHF 32.6 billion. This increase is a result of positive earnings, a strengthening of foreign currencies, higher unrealised gains and the issuance of the mandatory convertible security. In the same period, the amount of underlying capital required fell from CHF 10.2 billion to CHF 9.9 billion. As a consequence of this development, Swiss Re’s capital position measured by internal capital adequacy has further improved compared to 2004.
Financial strength is a central component of Swiss Re’s client franchise and therefore of the Group’s value proposition. Swiss Re targets a capital level well in excess of 100% of the required capital based on the 99% VaR. This reflects Swiss Re’s goal to remain financially strong, even after a large loss event. In addition, the Group has to allow for external constraints from rating agencies and regulators.
Swiss Re’s funded business strategy Swiss Re continues to expand its funded business strategy, diversifying its business while offering value-added solutions for clients. Funded business creates assets and liabilities – usually capital market instruments – that generate additional revenues.
These transactions appear on the balance sheet as “Financial services assets” and “Financial services liabilities” (see page 4–5 of the Financial Statements) and are taken into account in Swiss Re’s risk management process.
¹ As of 1 March 2006 ² Following the announcement of the GE Insurance Solutions acquisition, S&P placed Swiss Re on CreditWatch negative, Moody’s on review for possible downgrade and A. M. Best under review with negative implications. These developments are typical when large acquisitions are announced and reflect rating agencies’ views with regard to execution risk.
Regulatory developments The new Swiss Insurance law will be effective as of 1 January 2006 and will cover Swiss Re’s legal entities domiciled in Switzerland as well as the entire Group. Swiss Re has already been subject to, and complied with, the 2005 Federal Office of Private Insurance (FOPI) provisions for group supervision based on a decree signed by Swiss Re and FOPI at the end of 2004.
Besides monitoring and managing Swiss Re’s risk landscape to achieve an optimal, risk/ return profile, the focus of risk management activities in 2006 will be on several important areas: monitoring the integration of GE Insurance Solutions into Swiss Re’s risk management processes; continuing to play a leading role in industry discussions on emerging risks; and continuing to lead the dialogue with regulators on ongoing developments, such as the Solvency II project at the European level and the Swiss Solvency Test at the Swiss level.
The intense hurricane season of 2005 put the spotlight on climate-related risks. As part of its commitment to sustainability, Swiss Re has continued its wide-ranging efforts to tackle the challenges of climate change.
Unsustainable behaviour endangers ecological and social balance and therefore generates risk. Promoting sustainability, on the other hand, creates new opportunities. Through risk management, innovative product development and awareness building, Swiss Re helps clients to develop mitigation and adaptation strategies for managing climate-related risks. The Group’s “Sharing Solutions” citizenship programme directly supports these goals and Swiss Re’s wider social objectives.
More information on the Group’s sustainability and corporate citizenship activities is available on the Swiss Re website at www.swissre.com.
Change from 2003 2005 base year kg/employee Share in % kg/employee Share in % 2003 in %
Raising awareness In 2005, The Great Warming, a three-part television documentary sponsored by Swiss Re, was released in two cinema versions for the North American and European markets, and received nationwide screening in the US and sales to major television networks in Europe and Asia. Swiss Re also sponsored the photo exhibition NorthSouthEastWest, produced by the Climate Group and the British Council. This exhibition links ten climate issues with twelve locations and features contributions from leading political figures. By the end of 2005, it had been displayed in more than sixty cities worldwide.
Asset management For several years, Swiss Re has managed a portfolio of investments in sustainabilityrelated sub-sectors, including alternative energy and water. The portfolio’s total market value rose substantially in 2005 thanks to strong share price performance as well as new investments. There are clear signs that the sustainable investment market is becoming increasingly developed. Swiss Re wants to use its sustainability expertise to benefit from new opportunities in asset management and has fully incorporated the sustainability portfolio into its Alternative Investments unit.
Corporate citizenship initiatives Alongside its major support for climate change related initiatives, Swiss Re’s sponsorship programme for 2005 included: ReSource Award for Sustainable Watershed Management: conferred for the third successive year, this award honours innovative ways to protect
A three-year research project conducted by the Center for Health and the Global Environment at Harvard Medical School and sponsored by Swiss Re and the United Nations Development Programme (UNDP) produced its final report in November 2005. “Climate Change Futures: Health, Ecological and Economic Dimensions” offers a comprehensive survey of the complex and interlinked effects of climate change on human health and ecosystems, as well as their economic consequences. Based on an analysis of trends and case studies, it presents scenarios for probable near-term financial implications. The report confirms that the insurance industry has a vital role in managing the consequences of climate change.
Financial solutions for weather risks Climate change is a fact: one of its effects is an increase in the volatility and unpredictability of weather events, for example maximum and minimum temperatures, the number of hot or cold days and precipitation levels. Human activity contributes to climate change, but it can also help mitigate its effects on weather events. The insurance industry, through its expertise in risk management, plays an important role in developing solutions to tackle the weatherrelated uncertainties.
The weather has never been predictable. 2005 – with its freezing March in Europe, record-breaking hot summer in the United States, and intense Atlantic hurricane season – shows how extreme its fluctuations can be. Variable weather affects supply and demand in almost every industry: evidently in such sectors as energy or agriculture; more subtly, but still significantly, in others, for example retail, clothing or entertainment. The US Department of Commerce estimates that, of America’s USD 11 trillion economy, USD 3 trillion is directly affected by weather. For many industries, it is the greatest risk to earnings: a risk that cannot be prevented, avoided or isolated.
As the weather becomes more volatile, society will require more powerful methods to manage its inherent risks. Swiss Re has, among other climate-related initiatives, been developing weather risk transfer products both in derivative and insurance form – instruments for transferring weather risks from affected companies to the capital and insurance markets. Companies with a clear understanding of how weather affects their business can buy these instruments to protect themselves against unusually warm, cold, wet or dry weather.
Rice farming in Asia is highly dependent on adequate monsoon rainfall, making weather risk management extremely important. Weather insurance provides an effective method for stabilising the livelihoods of farmers and their communities.
Knowledge is vital to using a weather derivative well: companies must make a rigorous analysis of how the weather affects their business. A farm, for instance, would need accurate data about the impact of variation in rainfall on the volume of grain it harvests. An energy company might study the correlation between summer temperatures and energy sales levels. Understanding the size of risk a company faces from the weather allows it to structure a derivative to transfer some of that risk to the financial markets.
In exchange for a premium, the typical weather derivative pays a specified sum when a certain weather measure, such as rainfall or temperature at a given weather station, exceeds an agreed level for an agreed time. This cash sum – paid when, for instance, there is drought during a farm’s growing season – offers partial compensation for the weather’s unpredictable behaviour. The size of the weather derivatives market has grown sharply, from nearly nothing in 1997 to USD 40 billion notional market value in 2005, as companies have become more aware of the risk that weather poses to their businesses and the weather itself has become more changeable. More than 5 000 contracts were traded in 2005 between 40 market participants, mainly in the US, Europe and Japan, with some strong interest coming from India and South America.
For the reinsurance industry, weather risk provides an extension to portfolios and a source of diversification. Reinsurers are able to offer expertise in managing and packaging large risks, as well as the capital to underwrite derivative issues, thus helping to mitigate the financial impact of the variability in the world’s climate.
For the farming industry, among others, weather variability poses the greatest risk to earnings. To help manage this inherent challenge, Swiss Re, together with local partners, has created products to help clients offset such risks.
As a matter of principle, Swiss Re fully endorses the values of state-of-the-art corporate governance and related transparency.
There is a growing connection between corporate governance and corporate sustainability. A company’s sustainability practice, and its reputational value, is increasingly being perceived as an important driver of continued business success. Swiss Re has firmly integrated sustainability practice into its corporate framework, thus creating economic value by improving its environmental and social performance beyond mere compliance with laws and regulations.
Risk identification and assessment is vital to Swiss Re’s aim of building awareness of risks and creating appropriate risk management solutions. Swiss Re’s Assurance Framework, redesigned in 2005, ensures that risk-assurance activities are implemented, aligned and reported for all significant corporate risks, ensuring that the Group will conduct and further improve its risk management model into the future.
Listed Group companies Swiss Reinsurance Company, the Group’s parent company, is a joint stock company, listed on SWX Swiss Exchange, domiciled at Mythenquai 50/60 in 8022 Zurich, and organised in accordance with the laws of Switzerland. Please see page 98–100 (“Swiss Re shares”) for details on share information. For the other listed Group companies please refer to the Financial Statements, note 16 on “Subsidiaries, equity investees and variable interest entities”, page 50–54.
Non-listed Group companies Please refer to the Financial Statements, note 16 on “Subsidiaries, equity investees and variable interest entities”, page 50–54.
a. Franklin Resources, Inc., Ft. Lauderdale, Florida, known as Franklin Templeton Investments, announced that on 5 July 2004 it held, as investment manager for mutual funds and clients and through a number of its group companies, aggregate voting rights of 5.06% which may be exercised autonomously of the beneficial owners.
As these shares have mostly not been registered under Franklin Resources or Capital Group Companies or any of their respective group companies, Swiss Re is unable to track, on its own, changes in these shareholders’ aggregate holdings.
On 18 November 2005, Swiss Re and General Electric Company, 3135 Easton Turnpike, Fairfield, Connecticut 06828, US, signed a transaction agreement regarding the acquisition of GE Insurance Solutions, Kansas City, Missouri, US. The acquisition is expected to be completed in the first half of 2006. The consideration to General Electric Company will consist of cash, mandatory convertible securities, notes and Swiss Re shares. As a result, General Electric Company is expected to hold in excess of 10% of Swiss Re’s voting rights.
There are no cross-shareholdings to report as Swiss Re does not hold 5% or more of the shares or voting rights of any company which, in turn, also owns 5% or more of Swiss Re’s shares or voting rights.
The Annual General Meeting 2004 approved an increase of conditional capital from CHF 900 000 to CHF 2 000 000, representing a maximum of 20 million registered shares, payable in full, each with a nominal value of CHF 0.10, for the exercise of conversion rights and warrants granted in connection with bonds or similar instruments issued by the Group.
At an Extraordinary General Meeting (EGM), held on 27 February 2006, shareholders approved the creation of authorised capital as well as an increase of conditional capital, thereby enabling management to execute the transaction agreement relating to the acquisition of GE Insurance Solutions Corporation and for general corporate purposes. An overview of the effects of the EGM resolutions on Swiss Re’s capital is shown in the following tables: The number of shares that will actually be issued depends on the ultimate purchase price of GE Insurance Solutions and prevailing market conditions.
To be issued to General Electric (GE) To be issued to capital markets
In 2005, the company’s share capital remained at CHF 32 million. Total reserves increased by CHF 952 million to CHF 11.7 billion. The lower profit for the financial year 2005 of CHF 1.1 billion (compared to CHF 1.4 billion in 2004) led to a decrease of disposable profit from CHF 1.5 billion to CHF 1.1 billion. Total shareholders’ equity before allocation of profit increased from CHF 12.2 billion to CHF 12.8 billion. At the Annual General Meeting shareholders will vote on a dividend payment of CHF 776 million, compared to CHF 497 million in the previous year.
Total conditional capital to underlie convertible bonds 20 000 000 2.0 20 000 000 2.0 40 000 000 4.0
Admissibility of nominee registrations Trustees or nominees who act as fiduciaries of shareholders are entered without further inquiry in Swiss Reinsurance Company’s share register as shareholders with voting rights up to a maximum of 2% of the outstanding share capital available at the time. Additional shares held by such nominees, which exceed the limit of 2% of the outstanding share capital, are entered in the share register with voting rights only if such nominees disclose the names, addresses and shareholdings of the beneficial owners of the holdings amount ing to or exceeding 0.5% of the outstanding share capital. In addition, such nominees must comply with the disclosure requirements of the Stock Exchange Act.
Convertible bonds As stated in note 6 on “Debt” on page 24-28 of the Financial Statements, the following convertible bonds are outstanding: Maturity Instrument Issued in Currency Nominal (m) Exchange terms 2007 Mandatory Convertible Bond 2004 EUR 672 ii)
George L. Farr US 64 Member, Chair Compensation 1996 2008 and Appointments Committee
Rajna Gibson Brandon Swiss 43 Member, Chair Finance 2000 2008 and Risk Committee
Members of the Board of Directors elected on 27 February 2006 Name Nationality Age Function Initial election Current term ends
No director has any significant business connections with Swiss Re or any of its Group companies, except for Dennis Dammerman who joined the Board as nominee of General Electric Company.
Mr Forstmoser was elected to the Board in 1990. His mandate was renewed in 1994 and 1998, each time for a further four years. The Board of Directors elected him Chairman on 30 June 2000. After the expiration of the Board membership in 2002, Mr Forstmoser was re-elected for a further four years. He will stand for re-election at the Annual General Meeting on 21 April 2006.
3.1 Members of the Board of Directors as of 31 December 2005 3.1 Members of the Board of Directors as of 31 December 2005
Mr Kielholz’s career began at the General Reinsurance Corporation, Zurich. After working in the United States, the United Kingdom and Italy, he assumed responsibility for the company’s European marketing activities. In 1986 he moved to Credit Suisse, Zurich, where he was responsible for client relations with large insurance groups in the multinational services department.
Mr Baer was elected to Swiss Re’s Board of Directors in May 2005. He began his career in the legal department of the Federal Finance Administration. In 1975 he joined Fides Trust Company. Following the successful planning and execution of a management buyout of Fides’ advisory business, he became a member of the management board of KPMG Switzerland in 1992. In 1994, he was appointed CEO of KPMG Switzerland and a member of KPMG’s European and international management boards. He retired from KPMG in September 2004, having reached the statutory retirement age. Mr Baer then joined Adecco S.A. as a non-executive director. In addition he is a member of the board of directors of Allreal Holding AG, Baar, Emmentalische Mobiliar Versicherungs-Gesellschaft, Konolfingen, and IFBC – Integrated Financial Business Consulting AG, Zurich.
Mr Bechtler joined Swiss Re’s Board of Directors in November 1993. His mandate was renewed in 1997, 2001 and 2005, each time for a further four years. Mr Bechtler has been managing director of Hesta AG as well as Hesta Tex AG, Zug, since 1972. In
this capacity he is chairman of the boards of Zellweger Luwa AG, Uster, and Schiesser Group AG, Küsnacht.
Mr Bechtler also serves on the boards of directors of Credit Suisse Group, Zurich, Bucher Industries, Niederweningen, Sika AG, Baar, and Conzzeta Holding, Zurich. From 1987 to 1999 he served as chairman of “Swisscontact”, a large Swiss development foundation, and from 1987 to 2002 as chairman of the Zurich Art Society.
Mr Breu was elected to Swiss Re’s Board of Directors in 2003 for a four year term of office. He is Chief Financial Officer of the Novartis Group and member of the executive committee of Novartis, positions he assumed when Novartis was created in December 1996. He joined the group treasury of Sandoz, a predecessor company of Novartis, in 1975. Ten years later, he was appointed CFO of Sandoz Corporation in New York. In 1990, he became group treasurer of Sandoz Ltd, and, in 1993, head of group finance and member of the Sandoz executive board.
Mr Coomber was elected to Swiss Re’s Board of Directors at the Extraordinary General Meeting of 27 February 2006 for a term ending at the AGM of 2009. He started his career with the Phoenix Insurance Company. He joined Swiss Re in 1973. Having qualified as an actuary in 1974, he first specialised in the company’s life reinsurance. He was Swiss Re (UK)’s appointed actuary from 1983 to 1990. In 1987 he assumed responsibility for the life division, and, in 1993, was made head of the company’s UK operations. Mr Coomber was appointed Member of the Executive Board in April 1995, responsible for the Group’s Life & Health Division. In June 2000, he became a member of the Executive Committee. He was Swiss Re’s Chief Executive Officer from 1 January 2003 through 31 December 2005 when he retired after 33 years of employment. Mr Coomber also serves as a member of the supervisory board of Euler Hermes.
Mr Dammerman was elected to Swiss Re’s Board of Directors at the Extraordinary General Meeting of 27 February 2006 for a term ending at the AGM of 2009. He began his professional career after graduation when he joined General Electric in the Financial Management Program at GE Appliances. In 1984, he became senior vice presidentfinance of General Electric Company. He was elected to the company’s board of directors in December 1994 and was subsequently appointed vice chairman of the board. He remained an executive officer of GE, and a member of the corporate executive office. He also served as chairman of GE Capital Services. At the end of 2005 he retired from
Mr Farr joined Swiss Re’s Board of Directors in November 1996. His mandate was renewed in 2000 and 2004, each time for a further four year period. Mr Farr has been managing partner of Muirhead Holdings LLC, Greenwich, CT, since 1998. Prior to that he was vice chairman of American Express Company, New York, from 1995 until his retirement in 1998. Before 1995, Mr Farr was a director of McKinsey & Co, New York.
Mr Scott, a British and Australian citizen born in 1942, was educated at Scots College, Wellington, New Zealand. He has been a Senior Associate of the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) since 1965 and was made a Commander of the British Empire (CBE) in 2002.
Rajna Gibson Brandon Non-executive and independent director Rajna Gibson Brandon Non-executive and independent director
Robert A. Scott Non-executive and independent director Robert A. Scott Non-executive and independent director
appointed group chief executive of CGU plc. Following the merger in 2000 with Norwich Union, Mr Scott became group chief executive of CGNU plc, retiring in May 2001. Mr Scott was also chairman of the Association of British Insurers in 2000–2001, and a board member in the previous four years.
Mr Scott is chairman of the board of directors of Yell Group plc, and a non-executive director of the Royal Bank of Scotland Group plc, Jardine Lloyd Thompson Group plc, and Focus (DIY) Limited. In addition, he is an advisor to Duke Street Capital and a member of the international advisory board of Sapiens International Corporation.
Changes since 1 January 2006 At the Extraordinary General Meeting of 27 February 2006, Mr John R. Coomber and Mr Dennis D. Dammerman were elected new members of the Board of Directors.
Nomination for the election to be held at the Annual General Meeting of 21 April 2006 The Board of Directors has decided to nominate the following candidates for re-election to the Board, all with four year terms of office: Peter Forstmoser, Walter B. Kielholz and Robert A. Scott.
Jakob Baer, Director, is also a director and chairman of the audit committees of Adecco SA and Allreal Holding AG.
The organisational structure is laid down in the Corporate Bylaws, which also define the responsibilities of the Board of Directors, its committees, the executive management as well as the reporting procedures. The Corporate Bylaws are, therefore, a key regulation in respect of corporate governance. Given their significance, the Corporate Bylaws are reviewed annually by both the Governance and Shareholder Relations Committee and the Board for compliance with domestic and applicable international laws, regulations and best practice standards.
Executive Vice Chairman The Executive Vice Chairman liaises between the Board and executive management in matters not reserved to the Chairman; he may attend the meetings of the Executive Committee and the Executive Board and receives the relevant documentation and minutes. Other responsibilities include supervising management’s preparation and execution of Board resolutions in operational matters, monitoring the Group’s strategic direction and overseeing management development for the Group’s senior executives.
Audit Committee Members Jakob Baer, Chair (from 9 May 2005, previously Thomas Bechtler) Raymund Breu Rajna Gibson Brandon Robert A. Scott John F. Smith, Jr.
Tasks and responsibilities In compensation matters, this Committee oversees the development of a set of compensation principles, submits them to the Board for approval, monitors adherence to such principles and regularly discusses their appropriateness; it keeps itself informed of industry and peer compensation practice; it recommends to the Board the remuneration of the members of the Board other than the Chairman and the Executive Vice Chairman; it determines the compensation of the Chairman, the Executive Vice Chairman, the CEO and the members of the Executive Board on the basis of their performance; it determines the
total amount for bonus payments and related deferral plans; it reviews and approves the Group’s compensation and pension plans; and it ensures compliance with any remuneration disclosure requirements.
Tasks and responsibilities This Committee oversees risk management, approves the fundamental risk management principles, reviews their implementation, the appropriateness of the Group’s risk management framework and its implementation. In respect of risk strategy, it evaluates the bases on which the Board determines the overall risk tolerance and the risk appetite for the Group’s most significant risk-taking activities and keeps itself informed of the Group’s risk limits for individual investment asset classes; in respect of risk controlling, it reviews the methodology for risk measurement, the results of risk adjusted capital calculations and the most significant risk exposures and their limits, and it receives reports on the Group-wide use of derivative instruments; in respect of the balance sheet, it reviews the valuation of assets and liabilities for economic, accounting and regulatory purposes and the treasury strategy; it reviews capital adequacy, the ratings received from the rating agencies and management’s reaction and recommendations thereto; and it reviews the Group’s integrated portfolio risk management activities. The Finance and Risk Committee reviews its own performance annually.
Governance and Shareholder Relations Committee Members Peter Forstmoser, Chair George L. Farr Bénédict G. F. Hentsch Walter B. Kielholz John F. Smith, Jr. Kaspar Villiger
Investments Committee Members Raymund Breu, Chair (from 9 May 2005, previously George L. Farr) Thomas Bechtler (from 9 May 2005) George L. Farr Bénédict G. F. Hentsch Walter B. Kielholz
Tasks and responsibilities The Committee reviews the principles to be applied in capital investments and makes corresponding recommendations to the Board; it keeps itself informed of the Group’s risk limits for individual investment asset classes, the valuation of investment assets, and the guidelines governing asset management; it reviews the tactical allocation of assets for the next financial reporting period; it reviews the financial performance of the asset management operations; and it reviews the business relationship of the asset-managing units with their counterparties, as well as associated transaction fees.
c. Work methods of the Board of Directors and its Committees The Board typically meets six times per year for two consecutive days. The first day is reserved for the Committees, while on the second day the full Board meets for as long as required, mostly the whole day. The regular meetings are typically held in February, March, May, June, August and December. Additional meetings are called at short notice if and when required. Each of the Board meetings has a special focus, broadly determined by Swiss Re’s reporting schedule, and including such topics as strategic issues, the financial statements, the analysis of internal results, interim results, the medium-term business plan, and corporate governance.
¹ Board of Directors ⁴ Finance and Risk Committee ² Audit Committee ⁵ Investments Committee dissolved as of 1 March 2006 ³ Compensation and Appointments Committee ⁶ Governance and Shareholder Relations Committee
Normally, the members of the Executive Committee attend the meetings of the Board in an advisory capacity. Attendance at Committee meetings is normally restricted to those members of executive management with the information and expertise required for the relevant Committee to perform its duties. The Head of Group Internal Audit and two senior representatives of the external auditor regularly participate in Audit Committee meetings.
Risk Management For the risk management organisation and its responsibilities, please see the detailed section on page 47 of the Business Report.
Organisationally independent of management, the Head of Group Internal Audit reports directly to the Chairman of the Board of Directors and regularly reports to the Audit Committee. Group Internal Audit focuses its activities primarily on those areas identified as possessing the highest operating and control risks within the Group. Group Internal Audit maintains a regular dialogue with the external auditor to share reports and risk issues arising from their respective audits and to coordinate their activities.
Compliance Compliance at Swiss Re means the upholding of legal, regulatory and ethical standards by all staff throughout the Group. Swiss Re has developed a Group-wide Code of Conduct (see www.swissre.com, About Us, Corporate governance, Regulations), which lays down the Group’s core principles and values, and offers guidance on how to apply these in all business activities. The Code of Conduct also sets out certain behavioural standards which all Swiss Re employees are expected to maintain. A Group Compliance Programme defines the accountabilities and duties of both management and Compliance Officers at Swiss Re. The Compliance Officers, supporting management in ensuring compliance with laws, regulations and ethical standards, report to the Group Compliance Officer on any instances of non-compliance or other compliance-relevant matters. In certain areas, the Compliance Officers also assist management in ensuring compliance with internal Group procedures and local or regional practices. Training for staff and Compliance Officers is carried out regularly at both local and Group level to ensure ongoing best practice in compliance matters. Each Compliance Officer also conducts periodic compliance risk assessments and advises management on appropriate control measures. An essential and growing feature of the compliance function is to ensure that Swiss Re complies with regulatory requirements at both legal entity and Group levels. Headed by the 3.7 Information and control instruments 3.7 Information and control instruments
Chief Regulatory Officer, Swiss Re has established a Group Regulatory Affairs function and a Group Regulatory Affairs Network supporting the Group to ensure regulatory compliance at all levels, to monitor regulatory developments with a Group impact and ensure a consistent representation of Swiss Re’s regulatory interests at all levels, and to prepare and coordinate Swiss Re’s strategic regulatory positions. In cooperation with key functions such as Group Regulatory Affairs, Group Risk Management, Group Internal Audit and line management, the Compliance Officer network subsequently organises the implementation of corresponding action plans. The Group Compliance Officer and the Chief Regulatory Officer inform the Audit Committee regularly.
Mr Coomber started his career with the Phoenix Insurance Company. He joined Swiss Re in 1973. Having qualified as an actuary in 1974, he first specialised in the company’s life reinsurance. He was Swiss Re (UK)’s appointed actuary from 1983 to 1990. In 1987 he assumed responsibility for the life division, and, in 1993, was made head of the company ’s UK operations. Mr Coomber was appointed Member of the Executive Board in April 1995, responsible for the Group’s Life & Health Division. In June 2000, he became a member of the Executive Committee. In November 2002, the Board of Directors appointed him CEO with effect from 1 January 2003, a position he held until his retirement on 31 December 2005. Mr Coomber also serves as a member of the supervisory board of Euler Hermes, Paris.
Mr Aigrain, a Swiss and French citizen born in 1954, received a PhD in economics in 1981 from the Sorbonne, in France, after a master’s degree in economics at ParisDauphine University.
Mr Beerli, a Swiss citizen born in 1951, graduated in law in 1976 and received a doctorate in law from the University of Basle in 1983.
Mr Beerli is a member of the board of the Reinsurance Association of America, a member of the executive committee of the International Insurance Society, and is also on the board of directors of the Insurance Information Institute.
Mr Liès, a citizen of Luxembourg born in 1954, received a degree in mathematics from the Swiss Federal Institute of Technology (ETH) in Zurich in 1974.
Mr Fitzpatrick joined Swiss Re in July 1998 as Chief Financial Officer and was appointed Head of the Life & Health Business Group in April 2003. In September 2005, he became Head of Financial Services Business Function.
John Fitzpatrick is also a member of the board of the Association of British Insurers.
The Executive Board comprises the members of the Executive Committee, mentioned above, and the following individuals: Michel M. Liès Head of Client Markets Business Function and Member of the Executive Committee (from September 2005), Head of Europe Division within the Property & Casualty Business Group (until September 2005)
Michel M. Liès Head of Client Markets Business Function and Member of the Executive Committee (from September 2005), Head of Europe Division within the Property & Casualty Business Group (until September 2005)
Phillip Colebatch Australian 61 Head of Capital Management and Advisory –
Brian Gray Canadian 43 Head of Property & Specialty – Products
Benjamin Meuli British 49 Head of Asset Management – Financial Services
W. Weldon Wilson US 44 Head of Americas Life & Health and
Changes in the course of the business year 2005 As part of the organisational realignment which took effect in September 2005, Agostino Galvagni, Brian Gray, Martin Oesterreicher and Martyn Parker were appointed to the Executive Board with effect from 12 September 2005. Also as part of the realignment, various members of the Executive Board took on new functions and responsibilities. For details, please refer to the section above. On 31 December John Coomber retired as Chief Executive Officer.
Changes from 1 January 2006 On 1 January 2006, Jacques Aigrain took over as Chief Executive Officer. On the same date Andreas Beerli joined the Executive Committee to become Chief Operating Officer, a new position within executive management. Pierre L. Ozendo moved to the US to succeed Andreas Beerli as Head of Americas Property & Casualty. Until a successor for Asia is named, the function of Head of Asia is being performed ad interim by the Deputy Head for Asia, Robert Watts, who is not a member of the Executive Board. Phillip Colebatch retired on 31 January 2006 as Head of Capital Management and Advisory, Financial Services Business Function. He was succeeded by Philip Lotz who is not a member of the Executive Board.
Mr Dubois joined Swiss Re in conjunction with the company’s acquisition of Life Re in 1998. In June 2000, he was appointed a member of the Executive Board. From June 2000 to December 2004 he was Deputy Head of the Life & Health Business Group.
Mr Dubois began his business career at Philo Smith & Co., a securities firm specialising in insurance stock research and the merger and acquisition of insurance companies. In 1979, he joined Insurance Investment Associates, an investment banking partnership focused exclusively on mergers and acquisitions of life insurance companies. In 1988, Jacques Dubois co-founded Life Re Corporation, which was established to purchase the General Reassurance Company from General Reinsurance Corporation in a leveraged buy-out. He served as president and chief operating officer of Life Re Corporation from 1988 to 1998.
Mr Galvagni is an Italian citizen born in 1960. He graduated in business management from the Università Commerciale Luigi Bocconi in Milan and then joined Bavarian Re, Munich, as a trainee.
After undertaking various activities in the fields of underwriting and marketing as well as project work, he joined Swiss Re New Markets, New York in 1998, structuring and marketing insurance-linked and asset-backed securities. He returned to Bavarian Re in 1999 as Member of the Board of Management. In 2001, Mr Galvagni joined Swiss Re, Zurich, as Head of the Globals Business Unit and member of the Europe Division Executive Team. He was appointed to the Executive Board with effect from September 2005 to head the newly formed Globals & Large Risks unit within the Client Markets Business Function.
Phillip Colebatch Head of Capital Management and Advisory, Financial Services Business Function
Agostino Galvagni Head of Globals & Large Risks, Client Markets Business Function
Ms Gubler is a Swiss citizen born in 1952. She holds a degree from the Graduate School of Business Administration in Zurich.
Mr Meuli, a British citizen born in 1956, was educated at Oxford University where he graduated with an MSc in Economics in 1978.
Mr Meuli joined Swiss Re in April 2004, assuming his current position. After his gra duation, he embarked on a 20-year career with JP Morgan, where he became a managing director, in charge of the European Debt Capital Markets and the European Financial Institutions Group. He also held the positions of chief executive of JP Morgan Life Assurance Ltd and chief operating officer of the global fixed income division. In 1998 he joined Morgan Stanley as managing director with primary responsibility for investment banking, fixed income, equities, real estate, and associated asset and liability management issues linked to large multinational insurance groups.
Mr Ozendo joined the Swiss Re Group in 1995, taking on an assignment as chief executive officer of the subsidiary Union Re, with effect from 1 January 1996. Mr Ozendo was appointed to Swiss Re’s Executive Board on 1 July 1996. He was named Head of the Group’s Asia Division in 1998 following Union Re’s integration into Swiss Re. With effect
from 1 January 2006, he was appointed Head of Americas Property & Casualty within the Client Markets Business Function. Before joining Swiss Re, Mr Ozendo worked for General Reinsurance Corporation from 1975 to 1995. In 1986 he moved to Switzerland as general manager of General Reinsurance Corporation (Europe) in Zurich. He was appointed president and managing director of General Re Europe Limited in 1994. Mr Ozendo was previously employed as an underwriter by the New York Life Insurance Company in San Francisco.
Mr Parker was appointed to Swiss Re’s Executive Board and became Head of Life & Health Products in September 2005. With over 30 years of life reinsurance experience he has held a number of senior international positions with Swiss Re, including Chief Executive Officer of the UK Life and Health company in 2001, as well as Member of the Swiss Re Life Executive Board, responsible for Africa, the Middle East, Israel and the Indian Sub-Continent. Before moving to London, he was Managing Director of Swiss Re Life & Health Africa Ltd., based in Cape Town, South Africa.
Mr Wilson joined Swiss Re in 1998 as general counsel, secretary and director of Swiss Re Life & Health America Inc. and its subsidiaries. Previously, Mr Wilson was with Life Re from 1991 to 1998. Before his appointment to the Executive Board in 2003, Mr Wilson held the position of executive vice president and head of the business engineering services unit, where he was responsible for overseeing the firm’s Admin ReSM programme as well as other reinsurance solutions for life and health clients in North America. Before joining Life Re, Mr Wilson worked for two Texan law firms as an associate attorney.
W. Weldon Wilson Head of Americas Life & Health & Global Admin ReSM, Client Markets Business Function
Yury Zaytsev Group Information Officer, Head of Information Technology 4.3 Management contracts 4.3 Management contracts
Compensation of the Chairman of the Board of Directors, the Executive Vice Chairman, the CEO and other members of the Executive Board is set by the Board’s Compensation and Appointments Committee. The Committee convenes three to four times a year and presents its proposals to the full Board for approval. The Committee’s remit, inter alia, includes responsibility for the compensation principles and approving compensation plans.
The members of the Board of Directors receive a compensation of CHF 250 000 per annum. A minimum of 25% of the honorarium must be taken in Swiss Re shares with a four-year deferral period. The Chairman of the Board, the Executive Vice Chairman and the Chairman of the Audit Committee receive a higher compensation to reflect their greater responsibilities and engagements. The Chairman of the Board and the Executive Vice Chairman are, in addition, eligible for a variable payment based on the company’s performance. The non-executive members are not eligible for any pension benefits or long-term incentive plans.
The Executive Board’s performance assessment is based on annual objectives involving financial and qualitative elements. The bonuses distributed for a year’s service are paid in April of the following year. All amounts disclosed relate to the performance year 2005 with some elements to be credited in April 2006.
21 executive members (1 Executive Vice Chairman and 20 Executive Board members) CHF millions 2004 2005
Actuarial funding of pension benefits 10.80 13.56 5.1 Content and method of determining the compensation and shareholding programmes 5.1 Content and method of determining the compensation and shareholding programmes 5.2 Compensation for acting members of governing bodies 5.2 Compensation for acting members of governing bodies
The payments made to former members of the Executive Board relate to periodic services on behalf of the firm or uplift on deferred shares.
Members of the Board of Directors receive an honorarium, a mandatory 25% of which is in the form of shares; the remainder may be taken either in the form of cash or shares with a four-year deferral period. On the basis of the closing price for the financial year 2005, deferred shares would have a discounted taxable value of CHF 76.20, while shares without a deferral period would have a value of CHF 96.20.
All options have a four year vesting period, during which there is a risk of forfeiture, and an exercise period of six years. The exchange ratio is 1:1, ie each option entitles the beneficiary to purchase one share at an unadjustable strike price.
In brackets: number of participating members 5.6 Options and related instruments5.6 Options and related instruments
All credit is secured against real estate or pledged shares. The terms and conditions of loans and mortgages are the same as those available to all Swiss Re employees in the respective locations. Fixed-rate mortgages have a maturity of five years and interest rates that correspond to the five year Swiss franc swap rate plus a margin of 10 basis points. Adjustable-rate mortgages have no agreed maturity dates. The basic preferential interest rates equal the corresponding interest rates applied by the Zurich Cantonal Bank minus one percentage point. To the extent that fixed or adjustable interest rates are preferential, such values have been factored into the compensation sums given to the governing body members under 5.2 Compensation for acting members of governing bodies, on page 89.
5.7 Additional fees and remuneration5.7 Additional fees and remuneration 5.8 Loans to members of governing bodies 5.8 Loans to members of governing bodies 5.9 Highest total compensation5.9 Highest total compensation
Statutory rules on participating in the General Meeting of shareholders if differing from legal provisions In line with the legal provisions, any shareholder with a voting right may have his/her shares represented at any General Meeting by another person authorised in writing or by corporate bodies, independent proxies or proxies for deposited shares. Such representatives need not be shareholders.
There is no statutory rule on the deadline for registering shareholders in connection with the attendance of the General Meeting. In recent years, Swiss Re has acknowledged voting rights of shares which were registered at least two working days before the General Meeting. In 2005, the qualifying date was 5 May, while the Annual General Meeting was held on 9 May 2005.
Swiss Re has not taken any defence measures against take-over attempts. The governing bodies believe that the best protection is a fair valuation of the shares. They believe in the efficiency of a free market rather than relying on defence measures that normally have a long-term negative effect on the share price development. Therefore, there are no statutory rules on “opting up” or “opting out”. Should a shareholder reach the threshold of 33⅓% of all voting rights, then, pursuant to the Stock Exchange Act, he/she would be required to submit a general take-over offer. (“Opting up” is a statutory rule based on which the triggering threshold would be lifted to a higher percentage, while “opting out” is a statutory rule waiving the legal duty to submit an offer.)
Unvested bonus shares, share options, and certain other employee benefit programmes would vest upon a change of control. Rights of members of the governing bodies are identical to those of employees generally.
The following summarises fees for professional services for the year ended 31 December 2005.
The Board of Directors has established the Audit Committee, which holds at least four meetings a year and to which the two head auditors are regularly invited as advisory guests. The Audit Committee evaluates the external auditor annually and, having considered alternatives, recommends one firm to the Board for election at the following Annual General Meeting of shareholders. The Audit Committee cooperates closely with the elected external auditor. In particular, it consults the auditor in respect of significant risks, contingencies or other obligations of the company; it reviews and approves the planned audit services and discusses the audits with the auditor; it approves in advance nonaudit services expected to be provided by the auditor and reviews and approves other non-audit services that have been pre-approved by the Chairman of the Audit Committee between Audit Committee meetings; it reviews major changes to the company’s accounting principles and practice brought to its attention by the auditor; together with the auditor, it reviews the adequacy and efficacy of the financial reporting process, the system of internal controls and quality control procedures, as well as any other significant findings and recommendations; according to its charter, it would periodically meet with the auditor to review any significant disagreement between management and the auditor, if and when such disagreements arise; it discusses with the auditor the results of the annual audit, and in particular the auditor’s report on the financial statements, necessary changes in the audit plan, critical accounting policies and alternative accounting treatments that have been discussed with management. The Audit Committee’s discussions include considering the possible consequences of using such alternatives. It also discusses other material written communications with management, such as management letters or schedules of unadjusted differences; the auditor is requested, at least once a year, to supply a formal written statement delineating all relationships with the company that might affect auditor independence; it actively engages in a dialogue with the auditor in respect of any disclosed relationships or services that might impact the auditor’s objectivity and independence, and recommends to the Board of Directors appropriate action in response to the aforementioned statement; it obtains from the auditor and reviews, at least annually, a report describing the auditor’s own quality control procedures, and any material issues raised by the most recent internal reviews, or inquiries or investigations by governmental or professional authorities within the preceding five years, and any steps taken to deal with any such issues; and it reviews the audit fees and the fees paid to the auditor in respect of non-audit services.
In addition to these events, Swiss Re holds frequent meetings with institutional investors and participates in investors’ conferences organised by investment banks. Presentations which are used to present Swiss Re at such conferences are made available to the public on the company’s website.
The Investor Relations unit at Swiss Re is responsible for managing all contacts with investors and analysts. For contact information, please see the back cover of the Business Report 2005.
News release 14 February Reporting of 2005 non-life renewals News release and telephone conference 17 March Annual reporting 2004 News release, press conference and analysts’ meeting in Zurich (including telephone conference and webcast)
News release 15 June Update of internal risk model including capital adequacy and property and casualty business
Swiss Re provides the financial community with corporate disclosure, allowing the most efficient pricing of its securities. Swiss Re’s share price rose by 18.6% in 2005.
In the United States, Swiss Re’s American Depositary Receipts (ADR) rose by 2.0% year-on-year, reflecting the strong appreciation of the US dollar against the Swiss franc.
Swiss Re’s weighting in indices as of 31 January 2006 Swiss/blue chip indices Index weight (in %)
Swiss Re share trading Swiss Re’s shares are listed on the main board of the SWX Swiss Exchange (SWX) and traded on virt-x (an exchange for pan-European blue chip shares) in its EU regulated segment under the symbol “RUKN”. The average daily traded share volume for 2005 was 1.5 million shares on-exchange and 0.5 million shares offexchange. The highest volume traded in 2005 was on 8 December, when Swiss Re placed CHF 1 billion in mandatory convertible securities: 15.6 million shares changed ownership, 9.6 million of which were off-exchange. On 18 November 2005, the day of the announcement of the acquisition of GE Insurance Solutions, Swiss Re’s shares were suspended from trading on virt-x from 9:00 am to 12:55 pm CET at the request of Swiss Re. During the rest of the day, 9.4 million shares were traded, including 1.6 million off-exchange.
On 1 February 1996, Swiss Re launched an American Depository Receipts (ADR) level 1 programme in cooperation with Morgan Guaranty Trust Company of New York.
Additional shares held in nominee form (within Share Register) 33 811 457 10.50
Price per share, year-end 163.55 194.25 167.00 90.70 83.50 81.10 96.20 94.60
Price per share, year high 192.40 196.25 200.15 171.25 108.00 97.05 103.40 98.20
Price per share, year low 136.00 127.55 114.00 70.10 49.60 66.35 75.10 93.00
Index representation As well as its relevant industry indices, Swiss Re is a member of various global, European and Swiss indices – including SMI, Financial Times Stock Exchange (FTSE) Eurotop 100 and S & P GLOBAL 100. The composition of these indices is usually based on free-float market capitalisation; this favours Swiss Re, as it has a 100% free float in relation to its shares entitled to dividend. Swiss Re is also a member of various sustainability indices, including the Dow Jones Sustainability and FTSE4Good index families.
Swiss Re pays its dividend annually, three working days after the Annual General Meeting; as of that day, the share price is ex-dividend.
Asset-liability management (ALM) Management of a business in a way that coordinates decisions on assets and liabilities. Specifically, the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities in an attempt to achieve financial objectives for a given set of risk tolerances and constraints.
All claims payments plus the adjustment in the outstanding claims provision of a business year and claim adjustment expenses.
Embedded value Actuarially determined estimate of the economic value of the in-force life and health insurance operations of an insurance company (excluding any value attributable to future new business). Embedded value earnings, defined as the change in the embedded value over the year (after adjustment for any capital movements such as dividends and capital injections), provide a measure of the performance of the life and health insurance operations of an insurance company.
Employers’ liability insurance Insurance taken out by employers covering employees against injuries arising out of their employment.
European Medium Term Note (EMTN) A vehicle for raising funds by borrowing from the capital markets or from private investors. The EMTN programme itself is effectively a platform, under a standard documentation framework, from which to launch such issues on an ongoing basis.
Financial reinsurance Reinsurance that combines risk transfer with elements of risk finance.
Fire insurance Insurance against fire, lightning or explosion; it can also include insurance against windstorm, earthquake, flood and other natural hazards or political risks.
Funded cover A reinsurance contract under which the ceding company pays high premiums to build a fund from which to pay expected losses. The premium less the reinsurance charge is paid out to the ceding company in the future as loss payments, returned premiums, or contingent commissions.
Insurance-linked securities (ILS) In risk securitisation, bonds issued by an insurance or reinsurance company or corporation and purchased by institutional investors. The underlying risk of the bond is a peak or volume insurance risk, and the payment of interest and/or principal depends on the occurrence or severity of an insurance event.
Layer Section of cover in a non-proportional reinsurance programme in which total coverage is divided into a number of consecutive layers starting at the retention or attachment point of the ceding company up to the maximum limit of indemnity. Individual layers may be placed with different (re)insurers.
Net reinsurance assets Receivables related to deposit accounting contracts (contracts which do not meet risk transfer requirements) less payables related to deposit contracts.
Present Value of Future Profits (PVFP) Intangible asset primarily arising from the purchase of life and health insurance companies or portfolios.
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.
Return on investments Investment result as a percentage of average invested assets. Invested assets include investments, funds held by ceding companies, net cash equivalents and net reinsurance assets. Average invested assets are calculated as opening balance plus one half of the net asset turnover.
Risk Indicates a condition in which there is a possibility of loss; also used by insurance practitioners to indicate the property insured or the peril insured against.
Securitisation The process of aggregating similar instruments, such as credit portfolios or insurance risks, and marketing them to investors as a negotiable security.
Stop-loss reinsurance A form of reinsurance that protects the ceding insurer against an aggregate amount of claims over a period, in excess of either a stated amount or a specified percentage of estimated benefit costs. An example of this type of cover is Employer Stop Loss (ESL) which is used by US companies to cap losses on self-funded group health benefit programmes. The stop-loss can apply to specific conditions or aggregate losses.
Value at Risk (VaR) Maximum possible loss in market value of an asset portfolio within a given time span and at a given confidence level.
Swiss Re uses some of the term definitions provided by the glossary of the International Association of Insurance Supervisors (IAIS). For additional insurance terms, please refer to Swiss Re’s online glossary of technical terms at www.swissre.com
Photographs: Laif, REA, Christophe Ena (cover flap, cover) Markus Bühler, Zurich (p 5–6) Markus Bühler, Zurich and Willy Spiller, Zurich (p 7) Markus Stücklin, Pratteln (p 9) Keystone, EPA, Peter Foley (p 17) Nasa/Corbis (p 18) Corbis, Jim Reed (p 18) Urs Siegenthaler, Zurich (p 18) Laif, OnAsia, Natalie Behring (cover flap, inside cover, p 31–32) Keystone, EPA, Adrian Bradshaw (p 33) Getty Images, Chris Baker ( cover flap, inside cover, p 37–38) Laif, Tim Wegner (p 39) Laif, Gaby Gerster ( cover flap, inside cover, p 43–44) Getty Images, Justin Sullivan (p 45) Corbis, Michael S. Yamashita (cover flap, inside cover, p 59–60) Getty Images, Thayer Syme (p 61)
The web version of the Annual Report 2005 is available at: www.swissre.com /annualreport
The Business Report appears separately. See Annual Report 2005 – Business Report.
Equity securities: Available-for-sale, at fair value (cost: 2004: 4 586; 2005: 6 980) 4 959 8 116
Short-term investments, at amortised cost, which approximates fair value 2 412 4 041
The Group has revised the classification between certain balance sheet categories as described in Note 1, and adjusted the comparative balance sheet positions.
Unpaid claims and claim adjustment expenses 7, 15 61 619 71 272
Other comprehensive income: Change in foreign currency translation –1 224 2 181
Adjustments to reconcile net income to net cash provided/used by operations: Depreciation, amortisation and other non-cash items 1 271 796
Fixed income securities: Proceeds from sale/maturities of investments 35 037 49 883
Equity securities: Proceeds from sale of investments 7 206 4 975
Cash paid/received for acquisitions/disposals and reinsurance transactions, net –1 300 633
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 and other related products and services to insurance companies, clients and others worldwide, through a network of more than 70 offices in over 30 countries as well as through reinsurance brokers.
The accompanying consolidated financial statements have been prepared in accordance with Swiss GAAP FER and comply with Swiss corporate legislation. They include the financial statements of Swiss Re Zurich and its subsidiaries. The presentation requirements of FER 14 have been complied with except that certain financial information has been disclosed in the notes and not in the primary financial statements. All significant intercompany transactions and balances have been eliminated on consolidation.
Under the Financial Reporting Directive of the Swiss Stock Exchange (SWX), issuers of equity securities that are listed in the main trading segment of SWX are required, as of the financial year commencing on or after 1 January 2005, to apply either IFRS or US GAAP. The Admission Board of SWX has exempted the Group from this requirement for the 2005 and 2006 financial statements.
Companies which Swiss Re Zurich directly or indirectly controls through holding a voting majority or otherwise, are consolidated in the Group accounts. Companies which Swiss Re Zurich does not control, but over which Swiss Re Zurich directly or indirectly exercises significant influence, are accounted for using the equity method and are included in other invested assets or in assets held for linked liabilities. The Swiss Re Group’s share of net profit or loss in investments accounted for under the equity method is included in net investment income. Equity and net income of these companies are adjusted as necessary to be in line with the Group accounting policies. The results of consolidated subsidiaries and investments accounted for using the equity method are included in the financial statements for the period commencing from the date of acquisition.
The Group’s investments in fixed income and equity securities are classified as availablefor -sale (“AFS”) or trading. Fixed income securities AFS are carried at amortised cost. Equity securities AFS are carried at fair value, based on quoted market prices, with the difference between original cost and fair value being recognised in shareholders’ equity. Trading fixed income and equity securities are carried at fair value with unrealised gains and losses being recognised in earnings.
Investment in real estate that the Group intends to hold for the production of income is carried at depreciated cost, net of any write-down for impairment in value. An impairment in value is recognised if the recoverable amount of the real estate asset is less than its carrying value. Impairment in value, depreciation and other related charges or credits are included in net investment income. Investment in real estate held for sale is carried at the lower of cost or fair value, less estimated selling costs, and is not depreciated. Reductions in the carrying value of real estate held for sale are included in realised investment losses.
Short-term investments are carried at amortised cost which approximates fair value. The Group considers highly liquid investments with a remaining maturity at the date of acquisition of one year or less, but greater than three months, to be short-term investments.
The excess of the cost of acquired businesses over the fair value of net assets acquired is recorded as goodwill (purchase method). It is amortised using the straight-line method over periods that correspond to the benefits expected to be derived from the related acquisition. Goodwill is amortised over periods of between 5 and 20 years.
Other assets include deferred expenses on retroactive reinsurance, prepaid reinsurance premiums, real estate for own use, property, plant and equipment, accrued income and prepaid assets. Real estate for own use, property, plant and equipment are carried at depreciated cost. The excess of estimated liabilities for claims and claim costs payable over consideration received in respect of retroactive property and casualty reinsurance contracts which meet risk transfer tests is recorded as a deferred expense. Deferred expenses on retroactive reinsurance policies are amortised through earnings over the expected claims-paying period.
External direct costs of materials and services incurred to develop or obtain software for internal use, payroll and payroll-related costs for employees directly associated with software development and interest cost incurred while developing software for internal use are capitalised and amortised on a straight-line basis through earnings over three years.
Linked liabilities include separate account business and other contracts where the Group invests the contract holder’s funds, as directed by the contract holder, in designated investment alternatives or in accordance with specific investment objectives or policies. All investment performance, net of contract fees, is passed through to the contract holder. The provisions for linked liabilities represent the current account value of the contract holder’s assets. The assets held for linked liabilities are measured according to the relevant principles for the underlying assets. Deferred assets and liabilities are recognised in the relevant balance sheet line items. The change in contract holder liability is debited or credited against the investment return on the assets.
The Group uses retrocession arrangements to increase its aggregate underwriting capacity, to diversify its risk and to reduce the risk of catastrophic loss on reinsurance assumed. The ceding of risks to retrocessionaires does not relieve the Group of its obligations to its ceding companies. The Group regularly evaluates the financial condition of its retrocessionaires and monitors the concentration of credit risk to minimise its exposure to financial loss from retrocessionaires’ insolvency. Premiums and losses ceded under retrocession contracts are reported as reductions of premiums earned and claims and claim adjustment expenses. Amounts recoverable for ceded claims and claim adjustment expenses and ceded unearned premiums under these retrocession agreements are reported as assets in the accompanying consolidated balance sheet.
The Group has a fixed option plan, a restricted share plan, and an employee participation plan. These plans are described in more detail in note 12. The fixed option plan is accounted for using the intrinsic value method. In accordance with the intrinsic value method, the fair value of options is not reflected in earnings, and the pro-forma impact on net income is provided in note 12. The grant date fair value of the restricted shares in the restricted share plan is recognised in earnings.
The comparative balances in 2004 have been revised accordingly. The reclassifications do not impact net income or shareholders’ equity.
Realised gains and losses for fixed income, equity securities and other investments were as follows: CHF millions 2004 2005
Amortised cost or cost and estimated fair values of investments in fixed income and equity securities classified as available-for-sale were as follows: As of 31 December 2004 Amortised Gross un- Gross un- Estimated CHF millions cost or cost realised gains realised losses fair value
Less than 12 months 12 months or more Total As of 31 December 2004 Fair Unrealised Fair Unrealised Fair Unrealised CHF millions value losses value losses value losses
Less than 12 months 12 months or more Total As of 31 December 2005 Fair Unrealised Fair Unrealised Fair Unrealised CHF millions value losses value losses value losses
Mortgage and asset-backed securities 7 141 131 1 179 44 8 320 175
As of 31 December 2005 CHF millions USD EUR GBP CAD CHF Other Total
The amortised cost or cost and estimated fair values of investments in fixed income securities by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2004 and 2005, CHF 2 048 million and CHF 2 250 million, respectively, of fixed income securities were callable or had call options in the instruments’ structure.
Due after one year through five years 34 356 34 479 26 973 26 827
As of 31 December 2004 and 2005, securities with a carrying value of CHF 599 million and CHF 663 million, respectively, were on deposit with regulatory agencies in accordance with local requirements.
As of 31 December 2004 and 2005, investments with a carrying value of approximately CHF 7 839 million and CHF 8 823 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities.
Investment Affiliated Investment Affiliated CHF millions real estate companies real estate companies
Development of real estate and investments in affiliated companies Development of real estate and investments in affiliated companies
Other includes fixed income securities trading, separate account assets, and other assets. The fair value of assets held for linked liabilities was CHF 12 629 million and CHF 14 692 million as of 31 December 2004 and 2005, respectively.
Cash and cash equivalents include short-term deposits with a carrying value of CHF 7 236 million and CHF 6 080 million as of 31 December 2004 and 2005, respectively. The Group has revised the classification between cash and cash equivalents and short-term investments in 2005.
The fair values represent the gross carrying value amounts at the reporting date for each class of derivative contract held or issued by the Group. The fair values are not an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA master agreements or their equivalent. Management believes that such agreements provide for legally enforceable set-off in the event of default, which substantially reduces credit exposure.
The maximum potential loss assuming non-performance by all counterparties, and based on the market replacement cost at 31 December 2004 and 2005 approximated CHF 2 479 million and CHF 2 889 million, respectively. These values are net of amounts offset pursuant to rights of set-off and qualifying master netting arrangements with various counterparties.
The fair value of derivatives outstanding at 31 December 2004 and 2005 is as follows: Carrying Carrying Positive Negative value Positive Negative value fair fair assets/ fair fair assets/ CHF millions value value liabilities value value liabilities
During the years ended 31 December 2004 and 2005, goodwill of CHF 277 million and CHF 274 million, respectively, was amortised.
As of 31 December 2004 and 2005, the balance of accumulated goodwill amortisation was CHF 1 570 million and CHF 2 033 million, respectively.
The percentage of the PVFP which is expected to be amortised in each of the next five years is 5%, 5%, 4%, 4% and 4%, respectively.
Total senior debt as reported above is comprised of the following components: 31 December 31 December CHF millions 2004 2005
– Subordinated Perpetual Loan 1998 DEM 340 6M Libor 2008 270
Interest expense on long-term debt for the years ended 31 December 2004 and 2005, respectively, was as follows: CHF millions 2004 2005
During 2001 the Group issued a private placement in Switzerland, which is a form of financing transaction. The private placement was issued in June in the amount of CHF 100 million and is due in 2008 with a coupon of 3.60%.
In October 2001, the Group issued USD 10 million of index-linked notes under the EMTN programme. The notes have a maturity of 12 years and interest payments based on the three-month Libor, as well as an index-related component.
In June 2002, the Group issued under the EMTN programme index-linked notes, totalling EUR 10 million with a seven-year maturity.
In August 2003, the Group issued a GBP 70 million bond under the EMTN programme, with a coupon of 4.38% which is repayable annually over 7 years, ending April 2010.
In September and December 2004, the Group received cash collateral totalling CAD 560 million to secure counterparty risk arising from a basket of credit default swaps which mature in 2009 and 2010.
In April 2005, the Group issued CHF 600 million under the EMTN programme, with a five-year maturity and a coupon of 2%, and in May, CHF 25 million with a five-year maturity and a coupon of 1.765%.
In August 2005, the Group issued JPY 8 100 million under the EMTN programme, with a three-year maturity and a coupon of three-month Libor and a further CHF 300 million with a four-year maturity and a coupon of 1.25%.
In September 2005, the Group issued USD 150 million under the EMTN programme, with a three-year maturity and a coupon of 4.125%.
In October 2005, the Group issued CHF 250 million under the EMTN programme, with a two-year maturity and a coupon of three-month Libor plus 0.5 basis points.
Change in income available to common shares due to convertible bonds 48 72
In 2004 Swiss Re purchased 9 236 800 call options to offset the exposure to deliver Swiss Re shares under the Convertible bond issued in 2001 (see “Treasury shares”).
As of 31 December 2004 and 2005, the Group was short 465 000 and 262 000 put options, respectively. In 2005, 1 505 000 put options were sold at an average price of CHF 5.26. Also, the Group was long no put options as of 31 December 2004 and 262 000 put options as of 31 December 2005.
Furthermore, in 2004 Swiss Re purchased derivatives, indexed to Swiss Re shares, with respect to stock-based compensation plans and to offset the exposure to deliver Swiss Re shares under the convertible bond, issued in 2001. The underlying shares, previously committed to the convertible bond issued in 2001, were reallocated to the mandatory convertible bond, issued in 2004. In 2005, Swiss Re purchased derivatives with respect to stock-based compensation plans, indexed to Swiss Re shares. For the above hedging transactions, in 2004 and 2005, 10 436 524 and 1 200 000 call options were acquired at an average price of CHF 15.37 and CHF 22.67, respectively. As of 31 December 2004 and 2005, the Group held 10 436 524 and 11 636 524 call options, respectively.
The mandatory convertible issued in 2005 includes a conversion feature which is bifurcated from the host contract for accounting purposes. In accordance with the Group’s accounting policies, this bifurcation also impacts the 2004 mandatory convertible. The bifurcated conversion features total CHF 96 million.
The components of deferred income taxes were as follows: CHF millions 2004 2005
Benefit obligation as of 1 January 2 321 2 454 1 115 1 332 517 519
Benefit obligation as of 31 December 2 454 2 803 1 332 1 712 519 620
Foreign plans Swiss plans pension benefits Other benefits pension benefits weighted average weighted average a) Assumptions used to determine obligations at the end of the year b) Assumptions used to determine net periodic pension costs for the year ended
Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one percentage point change in assumed health-care cost trend rates would have had the following effects for 2005: 1 percentage 1 percentage CHF millions point increase point decrease
The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2004 and 2005, and the target allocation for 2006 are as follows: Swiss plans Foreign plans Swiss Foreign actual allocation actual allocation plans plans
Equity securities include Swiss Re common stock of CHF 10 million (0.3% of total plan assets) and CHF 12 million (0.3% of total plan assets) as of 31 December 2004 and 2005, respectively.
The employer contributions expected to be made in 2006 to the defined benefit pension plans are CHF 181 million and to the post-retirement benefit plan are CHF 14 million.
A summary of the activity of the Group’s fixed stock option plan is as follows: Weighted Weighted average exercise 2004 average exercise 2005 price in CHF shares price in CHF shares
The following table summarises the status of fixed stock options outstanding as of 31 December 2005: Range of Weighted average Weighted average exercise price Number remaining contractual exercise price in CHF of options life in years in CHF
The Group does not recognise compensation expense at fair value for the fixed option plan. If compensation expense had been recognised at fair value, the Group’s net income and earnings per share would approximate the pro-forma amounts in the following table: CHF millions 2004 2005
In 2004 and 2005, 287 477 and 1 068 610 options, respectively, were issued to cover the duration of the schemes incepting in those years. The Group contributed CHF 17 million and CHF 15 million, respectively, to the plan.
At 31 December 2005, CHF 16 681 million (2004: CHF 12 242 million) were guarantees on all present and future obligations in respect of Sale & Repurchase Agreements or Global Master Securities Lending Agreements, with expiry dates up to 2036. CHF 1 343 million (2004: CHF 1 408 million) were guarantees issued to third parties in respect of obligations of a number of subsidiaries of the Group with varying expiry dates.
As a participant in limited investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnerships for periods of up to 10 years. The total commitments remaining uncalled as of 31 December 2004 and 2005 were CHF 586 million and CHF 869 million, respectively.
The Group enters into a number of guarantees, limited by the underlying business, with purchasers of former Group entities, regulators and others, with varying terms in the ordinary course of business.
After the destruction of the World Trade Center the Group initiated litigation against the lessees, its lenders and the Port Authority of New York and New Jersey in the United States District Court for the Southern District of New York to obtain a declaration of the Group’s rights and obligations with respect to all parties in interest. The defendants filed counterclaims and joined other insurers in the lawsuit.
The Group also provided approximately 25% of the USD 1.5 billion excess coverage to the Port Authority of New York and New Jersey. The Port Authority is the lessor of the World Trade Center and owns additional property in and around the World Trade Center complex. The Port Authority’s separate property damage claim was being adjusted in the ordinary course until March 2005 when representatives of the Port Authority indicated the Port Authority intended to pursue a “two occurrence” claim under its separate property insurance coverage. Swiss Re filed a declaratory judgment action against the Port Authority on 27 September 2005 seeking to limit its liability under the Port Authority coverage to a single policy limit. The litigation against the Port Authority is in the earliest stages. The Port Authority has moved to dismiss or stay the case pending final resolution of the Silverstein litigation. Swiss Re has opposed the Port Authority’s motion. No hearing date has been scheduled.
The Group acts as manager for certain pooled funds that operate similarly to mutual funds and for third-party invested assets. As of 31 December 2004 and 2005, net third-party assets under management at market value were CHF 58 649 million and CHF 72 447 million, respectively.
Financial Services provides structuring support for certain transactions, for example insurance-linked securities, issued on behalf of the business segments. The Financial Services business segment includes the fees charged in net investment income. The business segments provide origination services for certain transactions underwritten and accounted for within another business segment. The commissions are included in acquisition costs.
Other operating costs and expenses –919 –704 –666 –343 –453 145 –2 940 2005 Property & Life & Financial Corporate ReconciliaCHF millions Casualty Health Services Centre Other tion Total
Claims and claim adjustment expenses; life and health benefits –13 851 –9 521 –327 –23 699
Change in unpaid claims and claim adjustment expenses; life and health benefits, retro –1 565 239 –26 –1 352
2005 Property & Life & Financial CHF millions Casualty Health Services Total
Change in unpaid claims and claim adjustment expenses; life and health benefits, net –3 123 –1 759 62 –4 820
Reinsurance recoverable on life and health policy benefits 3 519 3 519
Unpaid claims and claim adjustment expenses 47 831 11 280 1 331 60 442
The Group has revised the classification of amounts between unpaid claims and claim adjustment expenses, funds held under reinsurance treaties and reinsurance balances payable (see Note 1).
d) Property & Casualty business segment – by line of business (incl Risk Solutions)
Property & Casualty Specialty Traditional Risk 2004 Property Liability Motor Accident Lines excl Risk Solutions Total Non– CHF millions Traditional Traditional Traditional Traditional Traditional Solutions Traditional Traditional Traditional Total
e) Life & Health business segment – by line of business
Claims and claim adjustment expenses; life and health benefits –7 813 –1 708 –9 521
¹ Net realised investment gains in which policyholders directly participate of CHF 51 million and CHF 91 million for 2004 and 2005, respectively, are included in operating revenues and in the operating result.
The Asset Management business sector provides investment management services to other business sectors. These management services fees are included in fees and commissions.
Bermuda 30 St Mary Axe (Bermuda) L. P. 192 100 f
The Mercantile and General Reinsurance Company of Australia Ltd. 13 100 f
The Group holds variable interests in an entity due to a modified coinsurance agreement, certain insurance-linked and credit-linked securitisations, private equity limited partnerships and other entities, which meet the definition of a variable interest entity (VIE).
The securitisation vehicle generally retains the issuance proceeds as collateral. The variable interests arise through ownership of insurance-linked or credit-linked securities, or through protection provided for the value of the collateral held. The Group’s maximum exposure to loss equals the higher of the carrying amount of the collateral protected or the carrying amount of the insurance-linked or credit-linked securities held. The collateral held usually consists of investment grade securities.
In other securitisations, the Group provides credit enhancement which is a variable interest in the securitisation vehicle.
The consolidation of the VIEs results in a minority interest in the balance sheet of CHF 591 million mainly due to the modified coinsurance agreement. The minority interest is included in accrued expenses and other liabilities. The net minority interest in income related mainly to the modified coinsurance agreement is CHF 20 million, net of tax as of 31 December 2005. The income statement impacts are generally included in the relevant segment with the underlying movement in income or expenses.
The assets and liabilities arising from the Group’s variable interest in these VIEs are accounted for under applicable existing guidance.
In 2005 the Property & Casualty business segment set up and utilised provisions by CHF 4 million, mostly related to the closing of the Melbourne office. The Life & Health business segment utilised CHF 4 million for lease abandonment. The Financial Services business segment increased the provision by CHF 14 million due to a reorganisation and utilised CHF 15 million for severance, outplacement and other personnel related expenses.
The business year was characterised by a substantial rise in claims due to the number of natural catastrophes, in particular hurricanes in the United States. The negative effect of these claims on the reinsurance result was largely offset by the higher investment result, due to increased earnings on equities and higher realised gains.
Claims and claim adjustment expenses increased from CHF 10.7 billion to CHF 12.4 billion reflecting the impact of substantial natural catastrophe claims in the property and off-shore marine portfolios in 2005.
The increase in gross life and health benefits reflects the increased business written by Swiss Re’s subsidiaries and the increase in retroceded benefits was due to the ALPS II securitisation.
The investment result rose by CHF 0.8 billion to CHF 2.2 billion. This favourable development was a combination of growth in invested assets, attractive market conditions and increased realised gains.
Other income and expenses increased from CHF –0.6 billion to CHF 26 million, mainly due to the disappearance of foreign currency revaluation losses in the year under report (2004: CHF –387 million).
Liabilities rose by 30% to CHF 71.4 billion. This development predominantly originated from the foreign currency revaluation, mainly due to the strengthening of the US dollar, the impact of large claims, predominantly resulting from the hurricanes, an increase in life and health policy benefits and an increase in reinsurance from Swiss Re’s subsidiaries.
Shareholders’ equity at 31 December 2004 amounted to CHF 12.2 billion before allocation of profit. After the dividend payment of CHF 497 million for 2004 and the inclusion of the profit for the 2005 financial year, shareholders’ equity increased to CHF 12.8 billion at year-end 2005.
Premiums and other receivables from reinsurance 3 5 783 7 411
Liabilities for life and health policy benefits 4 8 696 13 153
The other assets are carried at nominal value in the balance sheet, after deduction of known credit risks if applicable.
Funds held under reinsurance treaties contain mainly cash deposits withheld from retrocession which are stated at redemption value.
Liabilities from derivative financial instruments are valued using the same principles applied for the derivative financial instruments included under investments.
Assets and liabilities denominated in foreign currencies are translated at the rates of exchange on the balance sheet date into Swiss francs. Revenues and expenses are translated at average exchange rates of the year under report into Swiss francs.
All currency differences arising from the revaluation of the opening balance sheet, the adjustments from application of year-end and average rates, or foreign-exchange transactions are booked via a corresponding provision.
Claims paid and claim adjustment expenses –5 988 15 –5 973 –8 016 886 –7 130
Other reinsurance income and expenses 102 –15 87 –30 –10 –40
Income from fixed income securities, mortgages and other loans 529 660
The company has revised the classification between certain balance sheet categories, as described in the notes on page 63, and adjusted the comparative income statement positions.
Funds held under reinsurance treaties 49 1 406 1 455 – 2 885 2 885 5. Shareholders’ equity
Shareholders’ equity on 31 December (previous year) 11 167 12 227
Shareholders’ equity on 31 December before allocation of profit 12 227 12 802
Under securities lending agreements, on 31 December 2005, securities of CHF 6 048 million (2004: CHF 5 043 million) were lent with the right to be sold or pledged by the borrowing entity, of which CHF 4 542 million (2004: CHF 4 277 million) was to Group companies. The securities which were held and lent by the Swiss Re Institutional Fund, a separate legal entity, are newly excluded. Due to this fact, the previously reported 2004 figures have been changed accordingly.
Other liabilities contain a payable to the employee pension funds of CHF 6 million (2004: CHF 10 million).
“Debentures” includes: 3¾% interest, CHF 500 million, 2 July 1997–2007. 3¾% interest, CHF 600 million, perpetual from 15 June 1999 but not less than 12 years.
The Extraordinary General Meeting held on 27 February 2006 approved the creation of authorised capital of CHF 9 000 000 and an increase of conditional capital by CHF 2 000 000.
The Capital Group Companies, Inc., Los Angeles, informed SWX Swiss Exchange on 22 November 2005 that its holdings increased to 5.10 % of Swiss Re’s voting rights.
The calculation of the allocated investment return was changed in the current financial year and is newly based on investment balances covering average technical provisions. In previous years opening technical provisions balances were used as the calculation basis. In addition, cash deposits are newly excluded from the calculation basis, whereas in previous years they were included and the actual interest income on such deposits was deducted from the calculated return. As a consequence, allocated investment return for 2005 was CHF 155 million higher than it would have been under the previously applied calculation method.
The Annual General Meeting, to be held in Zurich on 21 April 2006, has at its disposal the following profit: in CHF 2004 2005
After deduction of the Federal Withholding Tax of 35%, the dividend will be paid from 26 April 2006 by means of dividend order to shareholders recorded in the Share Register or to their deposit banks.
Net realised investment gains/losses 1 281 2 509 3 588 4 275 2 665 –730 376 1 116 1 249
Amortisation of goodwill –75 –91 –211 –310 –368 –350 –315 –277 –274
Other operating costs and expenses –1 940 –2 698 –2 785 –3 074 –3 384 –3 240 –2 942 –2 940 –3 125
Net income/loss on ordinary activities 1 777 2 161 2 446 2 966 –165 –91 1 702 2 475 1 451
Earnings/losses per share in CHF 5.90 ¹ 7.35 ¹ 8.55 ¹ 10.39 ¹ –0.57 –0.29 5.48 8.00 4.68