Swiss Re’s knowledge and services find applications in many fields and countries around the globe. The photographs in this Annual Report show the diversity of real world situations to which Swiss Re is directly connected through its reinsurance business. It is a documentary approach, covering the application of Swiss Re’s core competencies through its guiding principles.
Foresee the nature of risks An insight into IBM’s nanotechnology lab in Zurich, where researchers are creating atomic-based functional structures, revolutionising the future face of computing, engineering and medicine. New technology, new risks: a challenge for Swiss Re’s experts.
Maintain a global yet local perspective Swiss Re’s Asia Pacific headquarters are located in Hong Kong. The city’s transportation system is an essential service for the island’s seven million people. Risk management meetings and site inspections by the client, insurer and reinsurer help keep safety training and preparedness at optimum levels.
■ Property & Casualty ■ Life & Health ■ Financial Services
* Net income divided by average of shareholders’ equity (1996 estimated)
*Subject to approval at the Annual General Meeting of 12 May 2003
Combined ratio 124% 104% – excluding changes in equalisation reserves 128% 104% Life & Health
■■ Swiss Re ■■ Swiss Performance Index ■■ DJ Stoxx Insurance Index * Year to 19 March 2003
The most significant item affecting the 2002 result was the decline in net realised investment gains/losses of CHF 3.2 billion due primarily to impairments on equities. In order to deal with the three-year decline in equity markets, Swiss Re has reduced its exposure to equities from over 30% in 2000 to less than 10% currently, net of hedges. In June 2002, we commenced a programme of hedging transactions which created a gain of CHF 576 million, offsetting part of the loss from impairments. Significantly lower interest rates also had a negative impact on current income from the fixed-interest portfolio. The poor performance of equity markets led to a charge to our life insurance portfolio of CHF 280 million in respect of guarantees on certain life policies in the US. Notable insurance losses included the summer floods in central and eastern Europe, which cost CHF 204 million, and claims arising from credit and risk solutions business written in prior years.
The Property & Casualty Business Group benefited from the effect of the hard market, delivering both strong growth and much improved earnings. The headline growth rate of 9% understates the actual progress achieved. Adjusted for currency exchange effects and business transfers (aviation and credit) to the Financial Services Business Group, the underlying increase was 19%. This growth was driven by higher premium rates and new business. At the same time, the business group met its target of a 104% combined ratio.
provisions in respect of the Guaranteed Minimum Death Benefit contracts previously mentioned, it achieved a return on operating revenues in excess of 9% for the fourth consecutive year and continued to provide a stable earnings contribution.
The Financial Services Business Group increased its net premiums earned to CHF 2.7 billion, which represents an 11% rise. Adjusted for exceptional items, including the sale of NCM and the business transfers from the Property & Casualty Business Group, the increase was 31%. The result, a loss of CHF 633 million, is not satisfactory. Claims on contracts written in prior years and the decline in equity markets were the major factors contributing to the loss. Various measures have been undertaken during the last year to improve the efficiency and effectiveness of this business group, including the creation of a centralised credit risk management function and the consolidation of the private equity unit into wider asset management operations. We believe Financial Services is now well placed to benefit from the favourable business climate for its products.
The 2002/2003 renewals demonstrated that the property and casualty market is responding to this message with rate increases for Swiss Re averaging 10% on business renewed. Policy conditions are as critical as price in producing an attractive risk portfolio. Holding fast to our requirements in terms of both price and policy conditions has led to the cancellation or replacement of more than a quarter of the business available for renewal. However, this has been replaced by contracts with improved terms and by new business accounts.
Capital constraints have also impacted life clients, albeit to a lesser extent in the important US market. Swiss Re expects to continue the profitable development of its life reinsurance book.
John R. Coomber has 30 years’ experience in various management functions in the company, mostly in Life & Health but also as Head of the UK operations, including executive responsibility for property and casualty business. John R. Coomber was appointed to the Executive Board in April 1995 with responsibility for the Group’s Life & Health Division and, in 2001, he became Head of the newly formed Life & Health Business Group. In June 2000, he became a member of the Executive Board Committee.
On 1 April 2003, Ann F. Godbehere will take over as Chief Financial Officer from John H. Fitzpatrick, who will become Head of the Life & Health Business Group on the same date. The fact that everyone involved in this reassignment of responsibilities was already employed at Swiss Re testifies to the depth of management talent available at the company.
Swiss Re has always considered good corporate governance an essential part of managing a successful company. Our corporate governance procedures are well established and include implementation of the relevant processes, rules and regulations and the requisite control measures. Our aim is to ensure that strong ethical and human values are central to our corporate culture. In this Business Report, we have devoted a large section to corporate governance: our reporting fully complies with the guidelines of the Swiss Exchange SWX, although it is somewhat more comprehensive.
This photograph was taken at the Rüschlikon Centre for Global Dialogue.
Yury Zaytsev Information, Processes & Technology 17Walter Anderau Communications & Human Resources * Members of the Executive Board Committee 1 until March 2003 2 from April 2003
Swiss Re’s mission is to be the leading authority in managing capital and risk for its clients. This means setting high standards in whatever the Group undertakes – from launching innovative products and services to disseminating specialist knowledge or building close partnerships with clients, business partners and other stakeholders. The company’s competitive advantages are its superior expertise in the integrated management of capital and risk and its overall financial strength.
Swiss Re’s core competencies are defined by three essential business disciplines: Risk transfer Swiss Re identifies, evaluates, underwrites and diversifies risk in order to minimise the total capital cost of carrying such risk.
■ be a global company built on teams with unrivalled risk and capital expertise, professionalism and commercial insight.
The implementation of the strategy is reinforced through clear financial targets – expressed in the Target Matrix – and a new Group Balanced Scorecard, which includes non-financial objectives.
As a leading global reinsurer, Swiss Re strives to understand and anticipate market trends and developments in the capital and risk arena. Swiss Re’s strategic landscape sets the direction for the Group and communicates its most important aspects to all stakeholders.
Asset management Swiss Re combines its analysis of insurance liabilities, its reinsurance products and its asset management skills to optimise the total return on financial assets.
Business group Key figures 2003 to 2005 Property & Casualty Combined ratio 98%
Premium growth 8% Life & Health Return on operating revenues 9%
The Target Matrix, revised in March 2003, sets financial goals for the individual business groups and for the Swiss Re Group. Each business group is measured against a profitability and a growth target. These are accompanied by a return on investment target for Asset Management and an expected return on equity.
Swiss Re developed a Group Balanced Scorecard during 2002 to enhance implementation and communication of its strategy. The Balanced Scorecard is a framework to evaluate the Group’s strategy from four aspects: financials; clients; internal; and people and knowledge.
Building on its strategy, its commitment to sustainability and its strong research and communication capabilities, Swiss Re has set up a formal “Top Topics” process to identify, analyse and communicate topics that influence the company’s business activities and corporate values. In doing so, the company actively shapes its current and future business and social environment.
A selection of Top Topics for 2002 On the issue of terrorism, Swiss Re has formulated and communicated a clear position on the need for a joint effort from the (re)insurance industry and governments to address this risk exposure. New underwriting guidelines have been implemented, threat scenarios have been analysed and a socio-political risk research unit has been established.
Swiss Re has intensified its research efforts on mortality trends, focusing on epidemics. Its communication efforts have been directed at short-term shocks to the general improvement in mortality trends (including epidemics) and the challenges these may pose to life insurers.
Swiss Re and Tokio Marine arranged the largest-ever risk swap, lowering their respective peak risks. USD 550 million of Japanese earthquake and typhoon risks were exchanged with California earthquake, Florida hurricane and European windstorm risks. This transaction, made possible through recent advances in risk modelling technology, means a more balanced basket of risks for both partners, thus enhancing their use of capital.
Bridges are particularly exposed to natural catastrophes: the Bay Bridge in San Francisco was damaged in the 1989 Loma Prieta event. Following recent advances in research and technology, California Department of
In addition, 2002 saw major turbulence in the financial markets, rising oil prices and a series of geopolitical crises, each of which had a lasting effect on investor and consumer confidence.
In the aftermath of 11 September 2001, insurers in the OECD countries, particularly those in Europe, continued to experience difficulties due to economic conditions and the state of the financial markets in 2002. The decline of stock market values meant that many European insurers,
■■ France ■■ Germany ■■ Japan ■■ Switzerland ■■ UK ■■ US Source: Datastream
Stock market turbulence made 2002 another year of very low profitability for insurers in both sectors, as well as for reinsurers. This is reflected in the market performance of their shares, which has been extremely weak during the past 12 months. The financial distress faced by insurers is also reflected in various rating agency downgrades.
Preliminary data suggest that premium growth in the primary non-life markets remained healthy, at over 5%. Technical profitability had already shown improvements during 2001, a trend which continued in 2002. US-reported underwriting results improved across the board, although this cyclical upswing was overshadowed by substantial strengthening of reserves among several larger insurers. In western Europe, revenue growth and its related improvement in underwriting results were less pronounced.
In a very positive development, the life sector seemed to pick up again in 2002, after having suffered a decline in 2001. In the US, demand for variable life and annuity products shifted to fixed-income products, while in Europe growth was supported by a steady demand for private pension products.
Year 2002 26 February Successful 2002 renewals and solid outlook Swiss Re reported successful 2002 renewals, with a substantial improvement in prices and conditions.
13 March Man-made losses take on a new dimension Swiss Re’s sigma study revealed that man-made and natural catastrophes had claimed more than 33 000 lives worldwide in 2001. At USD 34.4 billion, the burden on property insurance from catastrophe losses was extremely high – with an estimated USD 19 billion incurred by property and business interruption losses arising from the 11 September 2001 event.
10 April Swiss Re’s 2001 result Swiss Re’s 2001 result was impacted primarily by the terrorist attack of 11 September 2001. The final result for 2001 was a net loss of CHF 165 million.
6 May Annual General Meeting The 138th Swiss Re Annual General Meeting approved a dividend of CHF 2.50 per share, unchanged from the previous year. The shareholders also confirmed the proposed nominees for the Board of Directors: Oswald J. Grübel and Bob Scott.
9 October Swiss Re sigma study: non-life insurance industry to face a time of lasting capacity shortage Swiss Re’s sigma study outlined the trends in the major non-life insurance markets: the need for improved underwriting results persists in an environment of shrinking insurance capacity and diminished investment prospects. Further price increases were to be expected for the coming years.
23 October Baden-Baden Conference: Swiss Re hosts media event focused on insurability of floods and catastrophe reinsurance At this important annual reinsurance industry meeting, Swiss Re concluded that reinsurers should enter the 2003 renewal season with a “back-to-basics” approach to natural catastrophe underwriting. Among the key issues addressed were the latest developments in the global reinsurance market and the insurance of flood-related risks.
11 November Swiss Re appoints John R. Coomber as Chief Executive Officer The Board of Directors appointed John R. Coomber as Chief Executive Officer of Swiss Re, effective 1 January 2003. John R. Coomber was Head of Swiss Re’s Life & Health Business Group. Walter B. Kielholz became Vice Chairman of the Board of Directors, from 1 January 2003. John H. Fitzpatrick, Swiss Re’s current Chief Financial Officer, will succeed John R. Coomber as Head of the Life & Health Business Group as of 1 April 2003.
13 November Swiss Re sigma study: robust growth for third party asset management as insurers seek to bolster investment performance Swiss Re’s sigma study predicted robust growth for the outsourcing by insurance companies of their asset management operations. The study estimated that the combined markets for third party asset management in the US and Europe would grow by an average of 10% per year over the next decade.
25 November Investors’ meeting about Financial Services Business Group A meeting was held in Rüschlikon to discuss the Financial Services Business Group’s vision and the added value it delivers; this takes the form of complementing the Group’s traditional business and diversifying its earnings base, while sharing the same core competencies and clients.
10/11 December Swiss Re hosts annual Economic and Insurance Industry Forum in London and New York The events offered perspectives on economic performance in 2002 and provided forecasts for 2003. Attendees were Swiss Re clients and members of the international media.
Net premiums earned increased by 15.2% to CHF 29.1 billion. Excluding the impact of the sale of NCM and the effect of the stronger Swiss franc, the increase was 25.7%.
The Property & Casualty Business Group reported net premiums earned of CHF 15.1 billion. Adjusting for currencyexchange effects and the transfer of the credit and aviation business to the Financial Services Business Group, the increase over 2001 was 19.4%.
The Financial Services Business Group increased premiums earned to CHF 2.7 billion, up 11.1% from 2001. Excluding the impact of the sale of NCM, the transfer of business from the Property & Casualty Business Group and the currency-exchange effects, underlying growth was 24.3%. This was mainly due to rate increases for corporate risks.
Net current investment income declined by 4.5% from CHF 5.8 billion in 2001 to CHF 5.5 billion in 2002, mainly as a result of the stronger Swiss franc and a fall in income from the Group’s equity-accounted investments. The return on investment was also affected by the decrease in interest rates.
The Group’s non-life reserve ratio (reserves relative to premiums) at the end of 2002 was 265%, down from a currency -adjusted 322% at the end of 2001.
The decrease was caused mainly by the growth in premium volume and the effect on reserves of the claims payments related to 11 September 2001.
Swiss Re incurred a net loss of CHF 91 million in 2002, compared with a net loss in the prior year of CHF 165 million. This loss was primarily due to the impact of impairment charges caused by the decline in equity markets, which offset improvements in property and casualty reinsurance, and the absence of an event such as
Acquisition costs increased to CHF 6.2 billion in 2002, from CHF 5.7 billion in 2001, an increase of 9.9%. This is less than the increase in net premiums earned and is principally due to a reduction in the commission rates in property and casualty business.
The expense ratio in the Life & Health Business Group rose from 4.6% to 5.0%, due to the acquisition of Lincoln Re, which prior to Swiss Re’s ownership had a higher expense ratio.
The following table reconciles the income from Swiss Re’s business groups and the operations of its Corporate Centre with Group consolidated net income/loss before tax.
In the first half of 2002, investor confidence was eroded by a stream of bankruptcies and accounting scandals. This led to a first correction in equity prices. In the second half of 2002, risk aversion, coupled with geopolitical threats, prompted institutional and private investors to reduce their equity holdings even further, exerting renewed downward price pressure. Overall, the major stock markets declined between 17% and 34% in value during 2002, with most of the losses being posted in the second half of the year. The euro zone suffered the greatest loss, followed by Switzerland and the US. In relative terms, most Asian markets performed significantly better.
Swiss Re’s equity position, which is marked to market in the balance sheet, was negatively affected by this market weakness. A significant portion of this market decline negatively affected the income statement as it was considered a nontemporary adjustment of valuation levels.
Swiss Re generates substantial cash flows which it invests in a well-diversified portfolio of bonds, stocks, real estate and cash. The diversification of the portfolio is designed in such a way that adverse movements in one market are mitigated by favourable movements in other markets to reduce the overall risk of the portfolio. Within Swiss
■ USD 55.4% ■ EUR 21.2% ■ GBP 9.3% ■ CHF 4.9% ■ CAD 5.0% ■ Other 4.2% Total CHF 86 728 million
The return on investment is 4.7%, compared with 8.0% in the prior period; the difference mainly reflects the impairments on equities and, to a lesser extent, lower realised gains and the lower yield on fixedincome investments.
■ Fixed-income investments 80.8% ■ Equity securities* 14.1% ■ Other investments 5.1% Total CHF 86 728 million * Net of hedges, equities are 9.1%
The following information is a summary of the audited consolidated financial statements of the Group that have been prepared in accordance with Swiss GAAP FER and the Swiss Company Law. For more details, please refer to the Group’s financial statements.
Expenses Claims and claim adjustment expenses –16 266 –14 485 –11 Life and health benefits –8 532 –10 084 18
Income/loss before income tax expense –104 36 Income tax expense –61 –127 108 Net income/loss –165 –91 45
Net income/loss –165 –91 45 Change in unrealised gains/losses on securities, net –3 455 –2 974 14 Foreign currency translation adjustments 417 –2 201 Dividends –713 –776 –9 Capital repayment –117
Cash flow from operating activities 3 023 3 930 30 Cash flow from investing activities –8 385 –6 562 22 Cash flow from financing activities 6 795 1 838 –73 Effect of foreign currency translation 152 –451 Change in cash and cash equivalents 1 585 –1 245 Cash and cash equivalents as of 1 January 3 433 5 018 46 Cash and cash equivalents as of 31 December 5 018 3 773 –25
Integrated businesses face a broad spectrum of risks: physical, operational and financial. Sharing experience and understanding, Swiss Re and its client, a global leader in agricultural processing, structured an enterprise-wide blended multi-line cover.
This company owns the world’s largest agricultural transportation network: thousands of trucks, railroad cars, barges and tugboats. Sourcing, processing and shipment are managed centrally to maximise operating efficiency and reduce operational risks.
Crushed and mixed with water – corn shortly after the inlet Dumping truck loads of corn into the “mouth” of the processing plant International commodities trading floor – buying and selling
Some composite companies disposed of reinsurance operations that were considered non-core. A few second-tier reinsurers left the market entirely or withdrew from selected lines of business or geographical areas. The sixth largest reinsurer ceased writing new business and sought buyers for several of its businesses. The availability of capacity varied widely by line of business, type of peril and geographical location. Recent market entrants, mostly located in Bermuda, were competing mainly for property catastrophe business and showed little risk appetite for long-tail lines of business.
An increased focus on reinsurers‘ financial strength was evident, especially in those lines of business where claims take several years to emerge. The balance sheet strength of the top-tier reinsurers continues to attract security-conscious ceding companies.
New pooling mechanisms for terrorism risk have emerged in France and Germany, combining the capacity of the insurance and reinsurance industry with governmental guarantees.
Property & Casualty Business Group to 104% was driven by higher rates and tighter underwriting, leading to much improved terms and conditions in all the major markets.
excluding such risks as biological, chemical or nuclear warfare. At the end of the day, relatively little terrorism insurance was actually purchased. The long-awaited Terrorism Risk Insurance Act (TRIA) was enacted in the United States just before year-end. The legislation authorises the US Government to pay up to USD 100 billion per year to cover insurers’ terrorism losses. Once specific insurer or industrywide retentions are reached, the US Government would cover 90% of an insurer’s loss from terrorism. In 2003, the industry retention level is set at USD 10 billion, increasing to USD 15 billion by 2005. The TRIA programme will require additional legislation to continue beyond 2005.
Swiss Re’s Property & Casualty Business Group continued its strategy to better leverage its knowledge and risk management skills operating through one global group. Local business units took the lead in implementing strong global guidelines. The integration of Bavarian Re into the brand name Swiss Re was successfully completed with a retention rate of approximately 95% of the combined portfolio.
The underwriting measures introduced in 2001 were further pursued last year. Swiss Re participated in the design of the terrorism pool solutions in France and Germany.
In the natural perils area, the company also pursued its strategy of pushing for non-proportional solutions. This permits a more refined pricing and risk management approach. Sub-limits were imposed for the reinsurance of contingent business interruption.
Decades ago, unlimited coverage of motor liability was mandated by law in a number of countries. The insurance and reinsurance industry extended the marketing of such coverages to countries where this legal requirement does not apply. In a further risk management initiative, Swiss Re ceased writing new unlimited coverage of motor liabilities in Germany, Switzerland and Spain. Swiss Re will continue the dialogue with its ceding companies and the national insurance authorities to further reduce and manage these liabilities.
Expenses Claims and claim adjustment expenses –13 055 –11 587 –11 Acquisition costs –3 371 –3 345 –1 Other operating costs and expenses –706 –740 5 Total expenses –17 132 –15 672 –9
Premiums earned grew by 9%. The relative strength of the Swiss franc had a negative impact on premium growth; at constant rates of exchange the underlying improvement was 16%. Most of the aviation and credit and surety business was transferred to the Financial Services Business Group on 1 January 2002 and, excluding this effect, ie on a comparable basis, growth was 19%.
Operating income has increased from CHF 281 million to CHF 309 million, despite realised investment losses of CHF 611 million, compared to gains of CHF 1 855 million in the previous year. The result, before realised gains and losses, improved by CHF 2 494 million, from a loss of CHF 1 574 million in 2001 to a profit of CHF 920 million in 2002. The previous year included a loss of CHF 1 839 million relating to 11 September 2001. Excluding this event, the absolute improvement is CHF 655 million.
This comprises a significant improvement in the underwriting result of CHF 834 million, less an offsetting reduction in net investment income of CHF 179 million, reflecting both the impact of foreign exchange and the lower interest rate environment.
For the industry, Swiss Re Economic Research & Consulting estimates that non-life insured losses from natural catastrophes and man-made losses, incurred worldwide during the calendar year 2002, totalled USD 13.5 billion, which is considerably below the previous year’s level of USD 35 billion. The most costly natural events were the floods in Europe and the storms in the US. The non-life insured loss arising from man-made disasters, such as major fires and explosions, amounted to USD 2.1 billion worldwide.
Premiums earned for motor business declined by 8% in 2002. Premium income from the European portfolio decreased by 19%, mainly due to cancellations in some eastern European countries. Premiums earned in the Americas grew by 27% and in Asia by 25%. In the US, growth was generated by two large transactions and in Asia by increased rates, new business and larger shares. Although the underwriting result improved by CHF 48 million, the combined ratio remains unsatisfactory at 107%. Further rate increases and portfolio improvements will be implemented in 2003.
The combined ratio stands at 100%, an increase of 5 percentage points over the previous year, which benefited from a non-recurring discounting change in the US. Even in today’s environment of lower interest rates, a combined ratio of 100% represents a profitable book due to the long-tail nature of some of this business.
All lines of business, except accident and marine, contributed to the combined ratio improvement due to increased rates and a reduced level of natural catastrophes and other large losses.
Premiums earned increased by 8% at original exchange rates. The growth emanated from the Asia (+41%) and Americas (+27%) divisions, where rates continued to rise and significant new business was written, including some large single transactions, and higher shares, which more than compensated for the cancellations. Europe Division’s premiums earned declined by 10%, reflecting more moderate rate increases, the cancellation of some large but unsatisfactory quota shares and the weakness of the euro against the Swiss franc.
Engineering: premiums earned grew by 6%, driven mainly by higher rates and new business in the Americas and Asia divisions. There is tight capacity in most markets as some reinsurers have withdrawn, and many others have reduced their capacity. The combined ratio improved by 22 percentage points, due to re-underwriting the portfolio and new, better priced business. The improvement ranges from 3 percentage points in Asia to 37 percentage points in Europe. In all divisions, but especially in Europe, this is the result of narrower scope of cover, reduced commissions and the absence of major losses. However, there still remains scope to improve the profitability of this business further.
Marine: all three divisions increased their income from premiums earned, resulting in a 31% overall increase. The reinsurance rate level continued to rise across the board, leading ceding companies to reevaluate their reinsurance programmes as the coverage available per premium dollar became much lower. Hull rates increased considerably, and the price for offshore energy coverage soared due to a capacity shortage while cargo rates stagnated. The combined ratio worsened by 20 percentage points due to two large losses in 2002: fire aboard the luxury cruise ship “Diamond Princess” while still under construction and a fire on the freighter “Hanjin Pennsylvania”, which took four weeks to extinguish. Following years of unsatisfactory rates, the two large claims mentioned above, as well as other highly publicised shipping accidents, marine rates are set for further substantial increases.
where the technical level has been achieved and for further rate increases and the tightening of terms and conditions in those lines of business and geographical areas which still need to improve. Clearly, primary insurers and reinsurers need to reduce combined ratios well below the historic level to compensate for low investment income. Reinsurers with strong balance sheets will benefit most from the hard market conditions. The war in Iraq will have little impact on insurance and reinsurance results as the risk is largely excluded (property and casualty) or coverage can be cancelled at short notice (marine).
The 1 January 2003 renewal was successful. While property rates are still increasing in many areas, in others they have stabilised at a satisfactory level. The rise in property rates started in 2000, continued in 2001 and accelerated sharply following 11 September 2001. In the liability, motor, marine and engineering lines, where losses generally emerge gradually, recovery started later and was slower, but accelerated considerably in 2002 and was sustained at the 1 January 2003 renewal.
■ Property 33.6% ■ Liability 25.2% ■ Motor 18.2% ■ Accident 7.8% ■ Other 15.2% Total CHF 15 059 million
While some new capital has been raised in the industry, it does not, by any means, compensate for the decline in capital generated by falling investment returns, reserve strengthening and escalating losses. Both the insurance and reinsurance industries are adjusting to this new environment, boding well for the maintenance of rates and conditions in those lines of business
The capital base of many life insurance companies has declined significantly. This is particularly the case in the UK and Europe, where companies historically have maintained a significant exposure to equities. In addition, many factors have placed substantial pressure on the ability of life insurers to sustain profitability: exposure to corporate bond defaults, lower sales of variable annuity products and exceptionally low interest rates. This has accelerated the consolidation of new business into larger companies as consumers follow a widely predicted “flight to quality ”. Primary insurers increasingly focus on the management of their capital bases, which has prompted reductions or withdrawals from new business markets and simultaneously has increased prospective volumes for the sale of in-force blocks of business.
The life reinsurance market in Asia, excluding Japan, is expected to grow faster than other OECD countries over the next five years, mainly from the growth of the primary markets and the removal of certain regulatory restrictions on writing reinsurance. In particular, as assets backing the reserves of primary insurers have weakened, the increased focus on capital management through risk transfer should provide interesting opportunities for strongly capitalised reinsurers.
The life reinsurance market is going through significant change and consolidation. As the world leader in life reinsurance, Swiss Re’s commitment to the business and its financial strength are increasingly sought after by its clients.
Swiss Re has continued to demonstrate strong new business growth in North America, reflecting Swiss Re’s leadership position and the growth in the underlying protection market. Further, Swiss Re has demonstrated a continuing focus on the mortality protection business and away from less profitable accident and health business. This has led to its withdrawal of reinsurance coverage for poor performing sectors, such as guaranteed critical illness business in the UK and its focus on new developing areas such as AdminReSM business in the US.
The integration of Lincoln Re is now complete, including a full systems conversion and planned reductions in staff. New business volumes were in line with expectations, reflecting a favourable response from clients. The dispute with Lincoln National was resolved in October 2002. Under the terms of the settlement, Lincoln National paid Swiss Re USD 295 million in cash to satisfy Swiss Re’s demand for additional assets to support the closing balance-sheet liabilities delivered by Lincoln and to extinguish Lincoln’s obligation to indemnify Swiss Re for adverse development on Lincoln Re’s exited lines of business. The resolution had a favourable impact on Swiss Re’s financial position as the payment resulted in a reduction in the effective purchase price for Lincoln Re.
■ North America 70.0% ■ Europe 22.6% ■ Rest of the world 7.4% Total CHF 11 275 million
Premiums earned increased by 26% to CHF 11 275 million in 2002 despite an adverse foreign exchange impact of CHF 606 million (7%). Lincoln Re contributed CHF 2 445 million to this growth, including CHF 266 million from the Employer Stop Loss business that was sold in July 2002. Excluding the impact of Lincoln Re and foreign exchange movements, premiums increased by 6% during the year.
Operating result, excluding net realised investment gains/losses 1 167 1 344 15
Management expense ratio in % 4.6 5.0 Return on operating revenues in % 9.5 9.1
Net investment income grew by 3%, as increased investment income resulting from the acquisition of Lincoln Re and new business written was partially offset by the decline in global interest rates and in the US dollar. The decline in equities was the primary reason for the capital loss of CHF 28 million, compared to CHF 515 million in gains in the prior year.
The return on operating revenues was 9.1%, the fourth consecutive year above 9%.
GMDB is a product feature contained in many variable annuity contracts. The product feature guarantees the beneficiary the greater of account value or minimum death benefit which is based on the amount deposited. Certain GMDB contracts provide an additional feature in which the death benefit is reset each year to the maximum anniversary account value. For many of these contracts, the death benefits are currently set at the equity market peak achieved during the period 1999–2000.
Swiss Re began reinsuring GMDB in 1995 and exited the market in late 1998. Swiss Re’s exposure to these contracts is based upon the difference between the guaranteed death benefit and the current account value. The movement of the underlying account values is approximately correlated to the movement in the S&P 500 Index.
The Financial Services Business Group reported a loss of CHF 633 million in 2002, which was mainly attributable to the Lloyd’s Central Fund, US surety business, corporate client-related transactions and the weak equity markets. Operating revenues were up by 9%, driven by improvements in Corporate Risk Underwriting.
Net premiums earned rose by 11%, primarily due to price increases in Corporate Risk Underwriting. Operating revenues (gross revenues excluding net realised investment gains/losses) were up by 23% in local currencies, when adjusted for NCM’s 2002 deconsolidation and the transfer of aviation and credit business from the Property & Casualty Business Group at the beginning of 2002.
The Financial Services Business Group took several steps to improve the risk profile, create efficiencies and free up capital for deployment in Swiss Re businesses with a potentially higher return: ■ The structured credit business was shifted from capital-intensive, portfoliobased activities to transaction-based tradeable credit markets products. The business group continues to be active in offering credit risk services and products, including traditional credit and surety underwriting, and financial guaranty (re)insurance, as well as credit
Swiss Re Annual Report 200236 securitisation and credit trading/distribution in both cash and derivative form.
■ Private equity investments were reduced and in early 2003, Capital Partners was integrated into Swiss Re Asset Management, with resulting efficiency gains going forward.
The Risk Solutions unit includes Corporate Risk Underwriting and Structured Risk Finance. Corporate Risk Underwriting, the unit’s larger component, provides conventional (re)insurance products to large corporate clients, financial institutions and the aviation market in the high-severity / low-frequency risk segment. Structured Risk Finance is Swiss Re’s centre of competence for non-traditional insurance solutions.
Net investment income 342 360 5 Net realised investment gains/losses 296 –290 Fees and commissions 59 31 –47
Expenses Acquisition costs –125 –56 –55 Claims and claim adjustment expenses –2 850 –2 012 –29
Risk Solutions continued its policy of writing business at higher attachment points and of systematically narrowing terms and conditions. The repositioning of the portfolio during the last year began to pay off as overall claims frequency dropped. The property book suffered no losses from natural catastrophes and experienced a low frequency of man-made losses. Aviation renewals were once again at historically high levels, and relatively modest losses helped the aviation business to finish the year with a highly positive result. However, casualty experienced increased claims (as reported in the Interim Report), mostly from pharmaceutical contracts written between 1998 and 2000. The overall technical result of the traditional business generated a combined ratio of around 97%.
Disappointingly, the negative development of some mainly corporate client transactions written in prior years (discontinued activities) and net realised investment losses produced an operating loss of CHF 175 million.
The Credit Solutions unit offers trade credit and surety reinsurance as well as structured credit solutions. Traditional credit reinsurance constitutes more than two-thirds of the credit risk portfolio.
Revenues increased strongly to CHF 402 million as Financial Products became fully operational. In the absence of any major credit losses (compared with 2001), the combined operating results of Financial Products and Fox-Pitt, Kelton were positive prior to adjustment for startup costs. Including start-up costs, the unit had an operating loss of CHF 4 million.
Despite a difficult equity capital market environment, Fox-Pitt, Kelton produced comparatively strong revenues, down only slightly compared with 2001. Brokerage commissions rose by 6% in its researchdriven activity.
Expenses Acquisition costs –15 –14 –7 Claims and claim adjustment expenses
At year-end 2002, total assets under management were CHF 137 billion, including CHF 54.1 billion from third parties. Approximately 85%, or CHF 115.3 billion, represented fixed-income assets, with 12% or CHF 17.6 billion in equity assets, and the remainder being real estate and other assets.
Advisory & Capital Markets should benefit from the higher returns on Financial Products activities and from efficiency gains across the two operating platforms, Financial Products and Fox-Pitt, Kelton.
Gross revenues Premiums earned Net investment income 155 88 –43 Net realised investment gains/losses –19 –20 –5 Trading revenues Fees and commissions 263 253 –4
The risk landscape changes continuously. So does the challenge of managing future risks.
It is a dynamic process, requiring the timely perception and screening of emerging hazards: keeping a finger on the pulse of tomorrow.
At IBM’s labs in Zurich, Switzerland, engineers work on the “Millipede” project: a nanomechanical approach to data storage that could store the information from a stack of books almost 6 miles high in an area the size of a postage stamp.
Nanotechnology encompasses physics and chemistry, mechanical engineering and electronics, serving a diverse range of applications: micromachinery, computing and biomedical uses such as gene therapy, drug discovery and drug delivery.
Nanoscale science at IBM’s labs in Zurich extends the application of scanning probe techniques used in the most sensitive microscopes.
At this early stage, it is difficult to predict the exact course of the nanotechnology revolution and its effect on daily life. What is sure is that it will have a profound impact on many commercial sectors – particularly electronics, where demand for faster data processing at lower cost shows no sign of weakening.
Swiss Re actively promotes transparency regarding its financial management and governance (please refer to pages 43 and 44 on Capital management and pages 52–71 on Corporate governance for more information). Meeting high requirements and standards has enabled Swiss Re to ensure sound financial strength and continued robustness in reserves.
The Group Human Resources (HR) data warehouse, introduced in summer 2002, marked an important milestone in implementing the strategy of consistent management of HR data from over 70 offices in more than 30 countries. The new solution provides a single source of information for managing Swiss Re’s human capital – over 8 000 employees across a decentralised organisation – while ensuring compliance with all data protection requirements.
As a result of active cost management, the Corporate Centre’s operating expenses were reduced by 3% to CHF 437 million.
with the changing liability regime, supporting the claims organisation in managing large and complex claims and coordinating claims management for Swiss Re’s three business groups.
In socio-political risk research, a new unit will be responsible for monitoring, analysing and assessing social and political trends and events. This will further enhance the Group’s risk assessment and risk management skills.
Swiss Re’s reported shareholders’ equity was affected by the fall in the stock markets and the decline in the value of the US dollar in 2002.
Despite lowering Swiss Re’s ratings, the rating agencies continue to assess Swiss Re’s capitalisation as very strong and acknowledge the company’s excellent diversification and historically conservative reserving.
The decline in capital has affected many (re)insurers even more significantly than Swiss Re, and the rating agencies have therefore reduced many of Swiss Re’s clients’ and competitors’ ratings. These circumstances have prompted a “flight to quality” and are producing excellent opportunities for Swiss Re’s core business.
In order to take advantage of these opportunities, Swiss Re is committed to continuing the prudent management of its capital and to maintaining its superior financial strength for the benefit of its clients. Swiss Re believes that a strategy of maintaining a superior balance sheet strength will maximise value for the company ’s shareholders. Two consecutive years of loss caused by the 11 September 2001 tragedy, and now in 2002 by a historic three-year decline in equity markets, have created the unsatisfactory situation whereby dividends must be paid out of capital rather than income. In these circumstances the Board believes some reduction of dividend is in line with Swiss Re’s tradition of prudent financial management.
Therefore, the Board of Directors will propose to the Annual General Meeting a reduction in the dividend to CHF 1.00 per share.
In late summer 2002, Swiss Re successfully approached the market to renew an existing USD 2.5 billion syndicated credit line, first closed in 1999. The banks reaffirmed their commitment to Swiss Re and showed interest in maintaining a strong relationship. In October 2002, Swiss Re signed a new USD 3.5 billion syndicated letter of credit facility. Swiss Re’s ability to market these two facilities simultaneously – with a material oversubscription for the syndicated letter of credit facility – demonstrates its continued excellent creditworthiness in a difficult environment.
Extraordinary recent events have shown how vulnerable companies can be without a well-established risk management process. What does risk management mean for Swiss Re? Risk management means assessing, monitoring, steering and optimising Swiss Re’s risk landscape – making sure that the organisation, processes and tools are in place to implement the business strategy on risk content.
Were any important activities in this field implemented during 2002? Yes, indeed. I can offer four examples: the first is steering and optimising the risk landscape for natural catastrophes through insurance-linked securities. The second is the implementation of a substantial hedge programme on the company ’s equity portfolio. The third is the completion of a central credit risk data repository, and the fourth is the implementation of operational risk management.
And what did Swiss Re complete in the insurance-linked securities area in 2002? In 2002, Swiss Re received USD 334 million of four-year natural catastrophe protection from an innovative securitisation structure called PIONEER 2002 Ltd. The product is a subclass of insurance-linked securities called “cat bonds” covering five peak natural catastrophe risks: hurricane in the North Atlantic, windstorm in Europe and earthquake in California, Japan and central US. Each area protects Swiss Re’s balance sheet from severe but rare events – that is, events that would most probably trigger an additional capital shortage in the reinsurance industry.
But why have you chosen to use cat bonds instead of classical retrocession?
Cat bonds have existed for many years now, and more than USD 5 billion of them have been issued since 1997. What is so special about the Pioneer structure? We have introduced sophisticated physical trigger mechanisms based on objectively measurable data, such as wind speeds, to determine when an event has happened and how much needs to be paid to Swiss Re. These indices increase transparency for investors and, at the same time, minimise basis risk for Swiss Re. An additional innovative feature of the Pioneer structure is that the protection can be scaled up over time by issuing additional bonds. This will reduce Swiss Re’s peak exposures over time, leading to an even more diversified risk portfolio and, therefore, more efficient use of our capital.
Risk is Swiss Re’s business, which makes risk management the key to Swiss Re’s success. The risk landscape is in a state of constant, sometimes very rapid, change, which necessitates the ongoing development of the methods and processes used to assess, quantify, classify, monitor and control risk. The following interview with Bruno Porro,
Executive Board Committee member and Chief Risk Officer, provides an overview of recent developments in risk management at Swiss Re.
You mentioned two other examples of innovative risk management for 2002; what is the third example? It is the Group credit risk Exposure Reporting and Management Information Tool (GERMIT). Effectively, this is Swiss Re’s central credit risk data repository, offering a comprehensive overview of our total credit risk landscape. Credit risk exposures originating from all relevant business segments are reported to this central database in a standardised form that allows us to manage the overall credit risk portfolio in an integrated way. The tool covers all the units and transactions that generate credit risk.
Can you explain GERMIT in more detail? It has three pillars. The first is the counterparty database, containing up-to-date information on more than 100 000 groups of companies worldwide; a sound counterparty database provides the basis for proper credit risk management. The second pillar is the transactions database with details of the transactions that generate credit risk exposures. These details are used by the system to calculate potential and actual credit risk exposures. The third pillar is the credit risk exposures themselves. The various originating units throughout the Swiss Re Group periodically report their gross credit exposures to GERMIT – mainly through automatic interfaces with the different transaction systems.
The combination of these three pillars allows us to analyse our credit risk landscape using a broad range of parameters, naturally including breakdowns by counterparty, rating class, industry and country
What are the benefits of this system for Swiss Re? GERMIT is a powerful tool for credit risk management. It allows for accurate exposure and credit limit management, as well as for credit risk portfolio management, which has served us quite well in the current tough economic conditions. It forms the basis for all of Swiss Re’s internal credit risk publications and serves as data input for credit risk capital allocation models. Apart from its central credit risk management function, GERMIT also fulfils an important role in credit risk underwriting support.
And what is your fourth example? Swiss Re’s Group Operational Risk Management organisation and processes: a very important entrepreneurial task. Swiss Re defines operational risk as the risk of direct or indirect loss resulting from inadequate or failed internal processes, systems, or from external events. These include risks to reputation and to the implementation of strategy. Swiss Re excludes risks that it deliberately underwrites as its core business, as well as strategic risks and the risk of change in its business volume.
Rüschlikon is also dedicated to building tomorrow’s leaders for the Group through its management development programmes. While providing an excellent opportunity for management to network with their peers and share best practices, these programmes provide them with access to cross-divisional representatives, enabling them to share and discuss strategy, ethics and corporate behaviour. This fostering of a strong corporate culture underscores the Swiss Re brand.
The Centre for Global Dialogue is a place where enquiring minds look ahead to the future of risk. One of the priorities of the Centre is to stage events around topics –
Swiss Re’s Asia Division headquarters in Hong Kong brings the company’s services to the heart of the Asian markets, joining local skills and expertise with global resources.
Hong Kong’s MTR is one of the most modern and heavily used mass transport systems in the world. Construction began in 1975 and the system continues to develop and extend to serve the transportation needs of 7.5 million residents and visitors.
The operation of railroad risks includes man-made hazards such as fires, machinery breakdown, derailments, collisions and natural hazards such as floods or typhoons. An all-risk policy covers those risks and includes business interruption caused by such events.
Swiss Re is committed to meeting the highest standards and actively fosters transparency. Corporate governance is the way in which a company is organised, managed and controlled. An extensive degree of disclosure is required as part of good corporate governance.
Exchange issued a corporate governance directive. The description of Swiss Re’s corporate governance therefore follows the suggested structure as described in the directive’s annex. Unless otherwise stated, the information relates to the 2002 business year or reflects the conditions on 31 December 2002, as appropriate.
1. Group structure and shareholders 1.1 Group structure a. Operational Group structure
2.5 Bonus certificates Bonus certificates in the sense of the SWX directive are particular types of non-voting securities that substitute or complement shares. These do not exist at Swiss Re.
Trustees or nominees who act as fiduciaries of shareholders are entered without further inquiry in Swiss Re’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 amounting to or exceeding 0.5% of the outstanding share capital. Such nominees must in addition comply with the disclosure requirements of the Stock Exchange Act.
b. Listed Group companies Please refer to the Financial Statements, note 16 on Subsidiaries and equity investees, pages 48–51.
c. Non-listed Group companies Please refer to the Financial Statements, note 16 on Subsidiaries and equity investees, pages 48–51.
2. Capital structure 2.1 Capital Please refer to the statement of shareholders ’ equity on page 6 of the Financial Statements.
2.2 Authorised and conditional capital At the Annual General Meeting of 31 May 2001, the creation of conditional capital was approved as follows: a nominal amount of CHF 900 000 for conversion rights and warrants granted in connection with bonds or similar financial instruments issued by the company or by Group companies; a further nominal amount of CHF 700 000 for employee participation purposes, of which CHF 36 948 was issued as per 31 December 2002. No additional authorised and/or conditional capital was created in 2002.
ii) Holders may convert the bonds due 2021 into registered shares, nominal value CHF 0.10 per share, of Swiss Reinsurance Company at any time on and after 22 November 2001, and prior to the close of business on 21 November 2011, at a conversion price of CHF 207.19 per share.
b. Options Regarding stock options granted to Swiss Re employees, please refer to note 12 on Stock compensation plans on page 34 of the Financial Statements.
Mr Forstmoser was elected to the Board in 1990. His mandate was renewed in 1994, 1998 and 2002, each time for a further four years. The Board of Directors elected him Chairman on 30 June 2000.
Swiss Reinsurance Company at the price of CHF 224.661 per share and 66.3533 Swiss Re shares for each note; b) Credit Suisse shares at a price of CHF 96.538 per share and 154.4159 Credit Suisse shares for each note; c) Novartis shares at a price of CHF 79.030 per share and 188.6246 Novartis shares for each note.
Mr Kielholz, a Swiss citizen born in 1951, studied business administration at the University of St. Gallen, Switzerland, graduating in 1976 with a master’s degree in business finance and accounting.
Mr Kielholz joined Swiss Re in 1989. In 1993 he was appointed a member of the Executive Board. He became Swiss Re’s Chief Executive Officer on 1 January 1997. In June 1998 he was elected to Swiss Re’s Board of Directors, which at the same time appointed him its Delegate. His directorship was renewed for a further four-year period in 2002. As Chief Executive Officer he resigned at the end of 2002 due to his election as chairman of Credit Suisse Group.
Mr Bechtler, a Swiss citizen born in 1949, received his doctor iuris degree from the University of Zurich in 1973, and a master’s degree in law from Harvard Law School in 1975.
Mr Bechtler has never had a managing position in the Swiss Re Group and has no important business connections with Swiss Re or any of its Group companies.
Mr Farr joined Swiss Re’s Board of Directors in November 1996. His mandate was renewed in 2000 for a further four-year period. He 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 Farr serves also as chairman of the board of directors of Covanta Energy, New York, and as a director of Misys plc, London, and Meridian Rail Company, New York.
Bénédict G. F. Hentsch was elected to Swiss Re’s Board of Directors in 1993. His mandate was renewed in 1997 and 2001, each time for a further four-year term of office. He was a partner of Darier Hentsch & Cie, Geneva, from 1985 until October 2001 and chaired the Swiss Private Bankers Association from 1998 until 2001. He continues to be a member of the board of directors of the newspaper “Le Temps” and a member of the board of the “Avenir Suisse” foundation.
Mr Hentsch has never had a managing position in the Swiss Re Group and has no important business connections with Swiss Re or any of its Group companies.
Mr Lemann, a Brazilian and Swiss citizen born in 1939, graduated from Harvard University, Boston, in 1961.
Mr Lemann joined Swiss Re’s Board of Directors in 1999 for a four-year term of office. He will stand for re-election at the Annual General Meeting of 12 May 2003.
Lukas Mühlemann’s mandate expired at the Annual General Meeting of 6 May
Oswald J. Grübel, who became a director at the Annual General Meeting of 6 May 2002, stepped down on 11 July 2002 when he resumed his earlier position on Credit Suisse Group’s executive board.
c. Changes since 31 December 2002 The position of Vice Chairman was transferred to Walter B. Kielholz from Thomas W. Bechtler, on 1 January 2003.
The Board of Directors intends to nominate the following candidates for initial election to the Board, each with a fouryear term of office: Raymund Breu Non-executive and independent director
Mr Breu, a Swiss citizen born in 1945, graduated from the Swiss Federal Institute of Technology, Zurich, with a doctorate in mathematics in 1971.
Mr Smith has been chairman of the board of directors of General Motors Corporation, Detroit, since 1996. From 1992 to 2000 he also served as chief executive officer of that company.
3.2 Other activities and functions Please refer to the information provided in section 3.1.
Each proposed election and re-election is substantiated by the Chairman at the Annual General Meeting and is separately voted upon.
3.5 Internal organisational structure a. Allocation of tasks within the Board of Directors Chairman of the Board of Directors The Chairman of the Board of Directors exercises ultimate supervision of the Executive Board on behalf of the Board of Directors; he supervises Group Internal Audit and appoints its head, subject to confirmation by the Audit Committee; he convenes meetings of the Board of Directors and the Committees of Directors; he makes preparations for, and presides at, the meetings of the Board of Directors; he presides at the Annual General Meeting of shareholders; he represents the company in matters involving shareholders; he makes decisions concerning the authority of the Board of Directors or its committees to the extent that the Board does not make such a decision itself; he makes decisions about the applicability and interpretation of the Corporate Bylaws to the extent that the Board does not make such a decision itself.
Governance and Shareholder Relations Committee (GSRC) Members Peter Forstmoser, Chair George L. Farr Bénédict G. F. Hentsch Walter B. Kielholz
Tasks and responsibilities The Committee measures the Group’s governance against relevant best-practice recommendations and informs the Board of its findings and emerging trends; it ensures compliance with corporate governance disclosure requirements; it reviews and evaluates the Group’s disclosure policy; it reviews the Group’s external communications policy in the context of best practices in the markets deemed most relevant; it monitors investor relations activities; it examines how reports are made, especially with regard to whether they fulfil the needs and expectations of international investors; it monitors the shareholder structure; it has initial responsibility for assessing any merger and take-over proposals submitted to the Group; and it has initial responsibility for reviewing material transactions with any of the Group’s significant shareholders.
Tasks and responsibilities As regards risk management, the Committee approves the basic reinsurance principles; it evaluates the bases on which the Board of Directors determines the risk tolerance level in reinsurance and capital investments; it reviews the methodology for risk measurement; it reviews the results of risk-adjusted capital calculations; it assesses the risk reports; it reviews the most important risk exposures categorised by business groups and products including underwriting risk, financial market risk, credit risk, liquidity risk, model risk, operational risk and their corresponding limits; it reviews the appropriateness of the risk management techniques employed; and it reviews the methodology of determining the claims reserves, their development and adequacy.
In 2002, the following meetings were held: At the meetings of the Board Committees, those members of the Executive Board are normally present who have the information and expertise required for the respective Committee to perform its duties. The Head of Group Internal Audit and two senior representatives of the external auditor are also regular participants in the meetings of the Audit Committee.
The attendance rate was 100% at the regular meetings throughout the year. At the extraordinary meetings, which were, by definition, called at shorter notice, it was slightly less; however, the excused directors expressed their opinions bilaterally.
3.7 Information and control instruments The internal control system comprises a risk management system designed for the size, complexity and risk profile of the company, an internal auditing procedure and an organisation that ensures adherence to certain standards (compliance).
Swiss Re is thus organised as follows: a. Group Risk Management The decentralisation of business activities and the increasing complexity of the transactions, performed in various units involving many different skills, has led to the creation of a strong Group Risk Management in parallel with the formation of business groups and the separation of tasks between the Corporate Centre and the business groups. Group Risk Management forms part of the Risk & Knowledge Division. It reports to the Chief Risk Officer and is responsible for creating transparency in the risks assumed by the business units, in the investment process and in strategic asset allocation.
January regular February regular March regular regular regular regular regular April regular regular regular regular May regular regular regular regular August regular regular regular November extra December regular regular regular regular December extra
There is a clear separation of tasks between the business units (with their own risk management organisations) and Group Risk Management. Group Risk Management sets the guidelines and standards, based on best practice. It is also responsible for developing risk measurement techniques, updating guidelines and managing the risk reporting process. The business units are responsible for implementing Group guidelines in their particular areas of activity, adhering to limits and procedures, and managing data in the reporting process. The risks under consideration are underwriting risks, financial -market risks, credit risks, and operational risks. Swiss Re’s risk landscape is updated and quantified whenever larger changes occur, such as movements in the market values of securities, acquisition of companies, or very large transactions. The results of Group Risk Management analyses are regularly discussed by both the Executive Board and the Finance and Risk Committee.
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
Each year the external auditor is required to provide a formal written statement to the Audit Committee defining all relationships it has with the Swiss Re Group. The Audit Committee and external auditor discuss any disclosed relationships or services that might affect the external auditor ’s objectivity and independence.
John R. Coomber Chief Executive Officer from 1 January 2003, Member of the Executive Board Committee, and Head of the Life & Health Business Group until 31 March 2003
Jacques Aigrain joined Swiss Re in June 2001, to assume his current position. Previously, Mr Aigrain worked for JPMorgan in various positions and locations, predominantly in investment banking, capital markets, and mergers and acquisitions. Immediately prior to joining Swiss Re, he was a managing director and a member of JPMorgan’s investment banking management committee, where he was co-head of client coverage, responsible for the financial institutions and classical economy sectors.
In the cultural field, he is chairman of the board of trustees of the Wohnmuseum Bärengasse in Zurich and a member of the foundation committee of the Monastery of St. John in Müstair (Graubünden), a UNESCO world heritage site.
Andreas Beerli Member of the Executive Board, Head of the Americas Division within the Property & Casualty Business Group
Mr Beerli, a Swiss citizen born in 1951, graduated in law in 1976 and received a doctor iuris degree from the University of Basle in 1983.
Mr Beerli joined Swiss Re in 1979, serving in various marketing functions until 1984. He then worked for Credit Suisse in private banking and the Baloise Insurance Group where he served in the company’s foreign operations. He rejoined Swiss Re in 1993. In 1997, he restructured and integrated the newly acquired Italian reinsurance company Uniorias. In 1998, he assumed the additional position as Head of the Global Clients Unit. He was promoted to his current position in January 2000.
Giuseppe Benelli Chief Investment Officer, Member of the Executive Board Committee, Head of the Asset Management Unit within the Financial Services Business Group
Mr Benelli, a Swiss citizen born in 1953, gained his doctorate in economics from the University of Berne in 1982. Before graduating, he spent several semesters at the Graduate School of Management, University of Rochester, New York. He went on to complete a programme in security analysis and portfolio management at the International Center for Monetary and Banking Studies in Geneva.
Mr Dubois, a US citizen born in 1949, graduated from the College of the Holy Cross in Worcester, Massachusetts, in 1970 with a degree in mathematics. He also received a master’s degree in business administration in 1972 from the Amos Tuck School at Dartmouth College, Hanover, New Hampshire.
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, Mr Dubois cofounded Life Re Corporation in view of the purchase of the General Reassurance Company by way of a leveraged buy-out from General Reinsurance Corporation. He served as president and chief operating officer of Life Re Corporation from 1988 to 1998. He continued as a partner of Insurance Investment Associates until December 1998, when he resigned upon the acquisition of Life Re Corporation by Swiss Re.
John H. Fitzpatrick Chief Financial Officer until 31 March 2003, Member of the Executive Board Committee, designated Head of the Life & Health Business Group effective 1 April 2003
John H. Fitzpatrick is a member of the Financial Services Chapter Board of the Swiss-American Chamber of Commerce, having been its chairman from June 1999 to 2002.
John J. Hendrickson Member of the Executive Board, Head of the Capital Partners Unit within the Financial Services Business Group until
John J. Hendrickson joined Swiss Re in July 1998 to assume his current position. He is chairman of Securitas Capital, LLC, the management company of the Securitas investment programme, a joint venture between Swiss Re and Credit Suisse Group. Prior to his association with Swiss Re, Mr Hendrickson served as an investment banker with Smith Barney, Inc.
Rudolf Kellenberger Deputy Chief Executive Officer, member of the Executive Board Committee
Mr Kellenberger, a Swiss citizen born in 1945, studied civil engineering at the Swiss Federal Institute of Technology in Zurich, graduating in 1970.
Mr Kellenberger is also a member of the board of the Swiss Insurance Association and of the supervisory board of Wüstenrot & Württembergische AG, Stuttgart, as well as vice chairman of Gerling NCM Credit and Finance AG, Cologne, and a member of the international advisory board of Fortis, Brussels.
Mr Liès, a citizen of Luxembourg born in 1954, received a degree in mathematics from the Swiss Federal Institute of Technology, Zurich, in 1974.
Mr Liès joined Swiss Re’s life department in 1978. Based in Zurich, he first covered the Latin American market. From 1983 to 1993, he was responsible for France and the countries of the Iberian Peninsula. In 1994 he moved to the non-life sector of the Southern Europe/Latin America department, which he headed from 1997. Mr Liès became a member of the Executive Board and Head of the Latin America Division in 1998. On 1 April 2000, he assumed his current function. Prior to joining Swiss Re, Mr Liès was in charge of the finance department at the Brazilian branch of an Italian company.
Mr Liès is also a non-executive director of CNP Assurances, Paris.
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.
Bruno Porro Chief Risk Officer, Member of the Executive Board Committee, Head of the Risk & Knowledge Division
Mr Porro joined Swiss Re in 1978, where he established a group involved with the assessment of natural hazards. In 1987 he became head of the development and capacity utilisation section and assumed responsibility for the catastrophe fund covers of Swiss Re and its Group companies. In 1989 he moved to the Spain/Portugal marketing area, becoming Deputy Head of the Latin America/Spain/Portugal Department in 1994. He was appointed to the Executive Board in 1995, with responsibility for Southern Europe and Latin America. In 1998, he was named Chief Risk Officer and also became a member of the Executive Board Committee. Prior to joining Swiss Re, Mr Porro had various assignments at the Swiss Federal Institute of Technology.
Mr Stroup joined Life Re Corporation in 1996, where he served as director, executive vice president and chief financial officer until Swiss Re acquired the company in 1998. He was appointed a member of Swiss Re’s Executive Board on 1 January 2002. Before joining Life Re, Mr Stroup worked with Ernst & Young LLP, where he served as a partner from 1993 to 1996.
Yury Zaytsev Group Information Officer, Member of the Executive Board, Head of the Information, Processes & Technology Division
4.2 Important changes since 31 December 2002 On 19 December 2002, the Board of Directors appointed Ann F. Godbehere to the position of Chief Financial Officer and Member of the Executive Board Committee with effect from 1 April 2003. She succeeds John H. Fitzpatrick who will become Head of the Life & Health Business Group from the same date.
Swiss Re also grants its top management options as a long-term performance incentive. The size of the option grant depends on the labour market, the degree of influence on the Group result, and the potential and acceptability of the resulting dilution. Swiss Re options have a total duration of ten years with a four-year vesting period. In the event of resignation during this period, entitlement to the options is forfeited.
The Board of Directors receives an honorarium in the form of shares that are deferred for four years. Only the Chairman and the Delegate receive an additional emolument, which includes performancerelated pay.
Swiss Re has a “pay for performance” philosophy. The Executive Board is paid a base salary and variable bonus. The fixed salary consists of a cash payment, while
The compensation figures for the Chief Executive Officer, who was simultaneously an executive member of the Board of Directors, are included in the Executive Board amounts in accordance with the SWX directive. This principle is also applied in the other tables where a differentiation is made between the Executive Board and the Board of Directors.
Board of Directors (1 member) 16 182 5.3 Compensation for former members of governing bodies
Mortgages and loans to Executive Board members (14) 35.5 Mortgages and loans to members of the Board of Directors none
Compensation (in the sense of para. 5.2) 3.2 Number of shares (in the sense of para. 5.4) 55 432 Number of options (in the sense of para 5.6) 60 000
c. Procedure and conditions for cancelling statutory voting-right restrictions As there are no voting-right restrictions, there is neither a procedure nor a condition for their cancellation.
d. Statutory rules on participating in the Annual General Meeting of shareholders if differing from legal provisions A shareholder wishing to be represented may appoint as proxy only another shareholder with voting rights. However, proxies for deposited shares need not be shareholders. Business firms, partnerships and corporate bodies may be represented by legal or authorised representatives or other proxies, married shareholders by their spouses, minors and wards by their guardians, even though such representatives are not shareholders.
6.5 Registrations in the share register There is no statutory rule on the deadline for registering shareholders in connection with the attendance of the Annual General Meeting. In recent years, Swiss Re has acknowledged voting rights of shares which were registered at least two working days before the Annual General Meeting. In 2003, the qualifying date shall be Thursday, 8 May, while the Annual General Meeting will be held on Monday, 12 May.
8.2 Auditing honorarium The following table summarises fees for professional services for the year ended
Audit-related fees comprise, among other things, amounts for due diligence services, comfort letters, accounting advice, information systems reviews and reviews of internal controls.
Income tax compliance and related tax services CHF 1.2 m Other fees CHF 2.1 m
8.4 Supervisory and control instruments vis-à-vis the auditors The Board of Directors established the Audit Committee, which evaluates external auditors from time to time and recommends one firm to the Board for election at the Annual General Meeting of shareholders. The Audit Committee closely cooperates with the elected external auditors. In particular, it consults them in respect of significant risks, contingencies or other obligations of the company; it reviews and approves the plans of audit and discusses the audits with them; it considers and reviews with them the adequacy and efficacy of the financial reporting process, the system of internal controls and quality control procedures as well as any of their significant findings and recommendations; it discusses with them the results of the annual audit, and in particular their report on the financial statements, necessary changes in the audit plan, and any serious difficulties or differences in opinion with management encountered during the audit; it obtains from them, at least annually, a formal written statement delineating all relationships relevant to auditor independence between them and Swiss Re; it actively engages in a dialogue with them in respect of any disclosed relationships or services that may impact their objectivity and independence, and recommends to the Board of Directors appropriate action in response to their report; it obtains from them and reviews, at least annually, a report describing the external auditors’ own quality control procedures, and any material changes or relevant issues in this regard that may have a bearing on the auditor’s responsibilities to the company.
One of the guiding principles in Swiss Re’s Corporate Philosophy is “clear and open communication”. As a result, the Group’s information policy goes beyond legal requirements, aiming to meet best practice standards with global industry peers.
Swiss Re reports semi-annually on its financial performance and on an ad-hoc basis for important corporate news. Furthermore, Swiss Re organises events with investors and analysts where specific topics are discussed.
In addition to these events, Swiss Re holds frequent meetings with institutional investors and participates in investors’ conferences organised by investment banks.
Contact addresses are referred to on the last pages of the Annual Report (inside cover).
Fitzpatrick as Head of the Life & Health Business Group 25 November Investors’ meeting re- Meeting in Rüschlikon (telephone confergarding Financial ence) Services Business Group 19 December Appointment of Ann F. News release Godbehere as Chief Financial Officer
Survival rates for Sardinian males above the age of 80 are among the highest in the world. Some scientists are convinced that genetic factors play a role.
Genes may be behind the high number of centenarians in Sardinia.
A population study by the University of Sassari in Italy has shown that the island’s proportion of men to women who achieve extreme life spans is 1 to 2, compared with 1 to 5 elsewhere.
Insurance of individuals or groups against economic risks in the event of death or temporary or permanent disability by accident. A branch of non-life insurance.
Insurance against the financial effects of an insured loss on a company’s income. The insurance covers overhead costs and loss of profits.
Maximum amount of risk that can be accepted in insurance. One factor in determining capacity is government regulations that define minimum solvency requirements. Capacity also refers to the amount of insurance coverage: 1) allocated to a particular policyholder or 2) in the marketplace in general.
Creating capital efficiency for companies by combining capital market solutions and insurance techniques.
Insurance against financial losses sustained through the failure for commercial reasons of policyholders’ clients to pay for goods or services supplied to them.
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.
Insurance of construction and erection of objects during the construction or erection period and the insurance of machinery in operating plants.
Form of reinsurance that provides risk financing which may be combined with elements of traditional risk transfer.
Insurance against fire, lightning or explosion; it can also embrace insurance against windstorm, earthquake, flood and other natural hazards or political risks.
Insurance of crops in open fields and of greenhouses and their contents against hail, storm and other natural hazards.
Insurance of industrial, commercial, employers’, product, professional or private liability to third parties.
Insurance protection of the mortgage against loss of capital and interest.
Form of reinsurance in which the reinsurer assumes that part of the insurer’s claims which exceed a certain amount.
Totality of risks assumed by an insurer or reinsurer; also the totality of investments of a company.
Insurance for insurance companies which spreads the risk of the direct insurer, making the risk of its portfolio more homogeneous. Includes various forms such as facultative, financial, non-proportional, proportional, quota-share, surplus and treaty reinsurance.
Rate of return achieved on the 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.
Measure of profitability in the Life & Health Business Group: the operating result (operating income excluding realised gains and losses) as a percentage of operating revenue (premiums earned and net investment income).
Measure of profitability in the Financial Services Business Group: the operating result (operating revenues – acquisition costs – claims and claim adjustment expenses – operating costs) as a percentage of operating revenues (premiums earned and net investment income and trading revenues and fees and commissions).
Possibility of an insured object, hazard or interest causing a loss, or of a loss being larger than previously estimated.
The process of aggregating similar instruments, such as credit portfolios or catastrophe risks, and marketing them to investors as a negotiable security.
Annual Report 2002 Business Report Swiss Reinsurance Company Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland publications@swissre.com
Notes to the Group financial statements 1. Organisation and summary of significant accounting policies 9 3. Derivative financial instruments 21 4. Acquisitions and dispositions 24 5. Deferred acquisition costs and acquired present value of future profits 24 7. Unpaid claims and claim adjustment expenses 29 8. Personnel expenses 29 9. Shareholders’ equity 30 10. Income taxes 31 11. Benefit plans 32 12. Stock compensation plans 34 13. Commitments and contingent liabilities 35 14. Assets under management 37 15. Information on business segments 38 16. Subsidiaries and equity investees 48 17. Restructuring provision 52
Net realised investment gains/losses 2 2 665 –515 Other revenues 455 365
Amortisation of goodwill 4 –368 –350 Other operating costs and expenses –3 384 –3 240 Total expenses –34 208 –34 379
Earnings/losses per share in CHF Basic 9 –0.57 –0.29 Diluted 9 –0.57 –0.29
Short-term investments, at amortised cost, which approximates fair value 3 722 3 356
Acquired present value of future profits 5 7 674 6 668
Common paid-in gains/losses, adjust- Retained for own CHF millions stock capital net of tax ments earnings shares Total
Net income/loss –91 –91 Change in unrealised gains/losses on securities, net (note 2) –2 974 –2 974 Foreign currency translation adjustments –2 201 –2 201 Dividends –776 –776 Change in own shares (note 9) 81 –81 Equity issued 212 212 Additional minimum liability, net (note 11) –82 –82
Cash flows provided/used by operating activities Net income/loss –165 –91 Adjustments to reconcile net income/loss to net cash provided/used by operations: Depreciation, amortisation and other non-cash items 859 983 Net realised investment gains/losses –2 665 515 Change in technical provisions, net 8 506 1 577 Change in reinsurance receivables and funds held by ceding companies –3 012 617 Change in other assets and liabilities –64 123 Change in income taxes payable/recoverable –276 76 Income from equity-accounted investees, net of dividends received –160 130
Cash flows provided/used by investing activities Fixed-income securities: Proceeds from sale of investments 60 101 76 036 Purchase of investments –63 593 –84 018 Net purchase/sale of short-term investments 827 –4
Effect of foreign currency translation 152 –451 Change in cash and cash equivalents 1 585 –1 245 Cash and cash equivalents as of 1 January 3 433 5 018 Cash and cash equivalents as of 31 December 5 018 3 773
Equity investments AFS are carried at fair value, based on quoted market prices, with the difference between original cost and fair value included in shareholders’ equity. The cost of equity securities is reduced to fair value, with a corresponding charge to realised loss on investments for declines in value that are other than temporary.
Subsequent recoveries to original cost for equity securities that are deemed to be a reversal of the impairment are recognised in income.
Mortgages and other loans are carried at amortised cost (effective yield method), net of any allowance for amounts estimated to be uncollectible. Other loans consist of mortgage participations associated with linked investment contracts where the contractholders bear all investment risk.
Swiss Re shares purchased by the Group are recorded at market value and are classified and accounted for as equity securities AFS. Unrealised gains and losses are recorded in equity. The specific identification method is used to determine the cost of own shares sold. Any gains or losses on the disposition of own shares are recorded in the income statement.
Group’s own shares. Derivative financial instrument assets are included in other invested assets and are primarily used as a means of managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities and also to lock in attractive investment conditions for funds which become available in the future.
The acquired present value of future profits (“PVFP”) of business in force is recorded in connection with the acquisition of life and/or health operations. The initial value is determined actuarially by discounting estimated future gross profits as a measure of the value of business acquired. The resulting asset is amortised on a constant yield basis over the expected revenue recognition period of the business acquired, generally over periods ranging up to 30 years, with the accrual of interest added to the unamortised balance at the earned rate.
Swiss Re uses long-term debt to finance general corporate purposes but also to fund “Financial services assets and liabilities“ (funded business). “Financial services assets and liabilities“ are structured with the intention of creating assets and liabilities that generate offsetting foreign exchange and interest rate risks. Long-term debt that is strictly used for funded business is classified as operational debt. Operational debt is generally excluded from financial leverage calculations. “Financial services assets and liabilities“ are valued according to the relevant principles for the underlying instruments.
Other assets include investments for separate-account business relating to certain types of insurance contracts where the contract-holder bears the investment risk, deferred expenses on retroactive reinsurance, prepaid reinsurance premiums, own-use real estate, property, plant and equipment, accrued income and prepaid assets.
Separate-account business assets and liabilities are valued at market value, and unrealised gains/losses are included in the income statement. Own-use real estate and property, plant and equipment are carried at depreciated cost. Deferred expenses on retroactive reinsurance policies are amortised into income over the expected claims-paying period.
External direct costs of materials and services incurred to develop or obtain internal-use software, payroll and payroll-related costs for employees who are directly associated with software development and interest cost incurred while developing internal-use software are capitalised and amortised on a straight-line basis over a period of three years through the income statement.
At 31 December 2002 the Group had a fixed option plan and an employee participation plan. These stock-based employee compensation plans, which are described in more detail in note 12, are accounted for using the intrinsic value method. In accordance with the intrinsic value method, the fair value of options is not reflected in net income. The pro-forma impact on net income is given in note 12.
The Group has adopted additional balance sheet categories for the financial services assets and liabilities generated by the financial services business activities, principally in the Advisory & Capital Markets Business Unit. The balance sheet and cash flow statement as of 31 December 2001 have been reclassified to reflect the change. The reclassification does not affect total assets, liabilities or shareholders’ equity.
Dividends received from investees accounted for using the equity method were CHF 175 million and CHF 198 million in 2001 and 2002, respectively.
Realised gains and losses for fixed-income, equity securities and other investments were as follows: CHF millions 2001 2002
As of 31 December 2002, fixed-income securities available-for-sale with a carrying value of CHF 4 422 million and equity securities available-for-sale with a carrying value of CHF 48 million were lent to third parties that have the right to sell or repledge the borrowed securities. In addition, as of 31 December 2002, fixed-income securities available-for-sale with a carrying value of CHF 159 million were lent to third parties that do not have the right to sell or repledge the borrowed securities.
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 2001 and 2002, CHF 2131 million and CHF 2 198 million, respectively, of fixed-income securities were callable or had call options in the instruments’ structure.
As of 31 December 2001 and 2002, investments with a carrying value of CHF 6 441 million and CHF 6 945 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities. 2001 has been adjusted to reflect a reclassification.
As of 31 December 2001 and 2002, the Group’s investment in mortgages and other loans included CHF 204 million and CHF 206 million, respectively, of loans due from employees and CHF 342 million and CHF 364 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange-traded financial futures in its trading and hedging strategies, in line with the Group’s overall risk management strategy. The objectives include managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities as well as to lock in attractive investment conditions for future available funds.
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 below 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 nonperformance by all counterparties and based on the market replacement cost at 31 December 2001 and 2002 approximated CHF 253 million and CHF 1 533 million, respectively. These values are net of amounts offset pursuant to rights of set-off and qualifying master netting arrangements with various counterparties.
Notes to the Group financial statements 3. Derivative financial instruments (continued)
Interest rate contracts Forwards and futures 35 349 12 –55 –43
Equity and index contracts Forwards and futures 185 13 –36 –23
On 14 November 2002, the Group decreased its holding in Partner Reinsurance Company from 28% to 16% and received proceeds of CHF 434 million. The Group realised a gain of CHF 145 million on this transaction.
During 2002, the Group sold interests in three US property and casualty insurance companies for total proceeds of CHF 275 million.
Reclassification –65 194 Effect of acquisitions and disposals 4 240 319
Effect of change in unrealised gains/losses –133 121 Effect of foreign currency translation –3 6 –504 –1 286
Maturity Instrument Issued in Currency in millions rate millions 2006 Fixed Term Preferred Shares 2002 GBP 100 4.840% 223 2006 Insurance-linked Placement 2002 USD 209 3M Libor 289
Various Payment Undertaking Agreements 2000 USD 162 Various 268 Various Payment Undertaking Agreements 2001 USD 91 Various 150 Various Payment Undertaking Agreements 2002 USD 464 Various 695 Total senior debt as of 31 December 2002 3 921 Total senior debt as of 31 December 2001 3 533 1 Assumed in the acquisition of Underwriters Re Group 2 Assumed in the acquisition of Life Re Corporation
Senior debt as reported above is comprised of the following components: CHF millions 2001 2002
+37.5bp – Subordinated Perpetual Loan 1998 DEM 110 6M Libor 2010 82
+45bp – Subordinated Perpetual Loan 1999 EUR 250 6M Euribor 2006 363
(SUPERBs) Total subordinated financial debt as of 31 December 2002 3 456 Total subordinated financial debt as of 31 December 2001 3 785
Total financial debt reported in the financial statements as long-term debt is comprised of the following components: CHF millions 2001 2002
Swiss Re uses long-term debt to finance general corporate purposes but also to fund “Financial services assets and liabilities“ (funded business). “Financial services assets and liabilities“ are structured with the intention of creating assets and liabilities that generate offsetting foreign exchange and interest rate risks. Long-term debt that is strictly used for funded business is classified as operational debt and is included in financial services liabilities. Operational debt is generally excluded from financial leverage calculations.
In July 1997, the Group issued a straight bond with a face value of CHF 500 million, bearing interest at 3.75%, maturing on 2 July 2007, in exchange for proceeds of CHF 511 million. Interest is payable annually and the principal is due at maturity.
In June 1999, the Group also issued EUR 250 million of subordinated Perpetual Auction Reset Capital Solvency bonds, with a coupon of six-month Euribor plus 55 basis points for the first seven years. After seven years, and every five years thereafter, an auction will be conducted to determine the re-offer yield.
In 2000, the Group entered into three Payment Undertaking Agreements (PUA’s) which are a form of financing transaction in which a counterparty deposits funds with the Group having fixed repayment terms and interest rates on the deposited funds. In 2001 and 2002, respectively, three and seventeen additional PUA’s were taken out by the Group. The PUA’s have fixed interest rates between 1.41% and 6.77% and mature between 2010 and 2050. All interest rate risk is hedged to a one- or three-month Libor benchmark.
In June 2001, the Group issued under the European Medium Term Note (EMTN) programme a straight bond totalling CHF 150 million with a coupon of 4% and a 14-year maturity. In August 2001, an additional GBP 150 million was issued under the EMTN programme with a maturity of 4 years and a coupon of 5.625%.
In October 2001, the Group issued USD 10 million of Index Linked Notes. 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 2002, the Group issued under the EMTN programme index-linked notes. In April, EUR 24 million was issued with a three-year maturity and an index-linked coupon. In June 2002, EUR 10 million was issued with an index-linked coupon, maturing in 2009.
At 31 December 2002, the Group reclassified USD 200 million and USD 70 million of Insurance-linked Placements.
Claims incurred –12 –1 Claims paid –293 –213 Effect of foreign currency translation 78 –436 Effect of acquisitions 23 11
The Group maintains an active commutation strategy to reduce exposure, although the number and amount of commutations was lower in 2002 compared to 2001. Paid claims have declined in 2002 versus 2001 due to the effect of this reduction. When commutation payments are made, the traditional “survival ratio” is artificially reduced by premature payments, which does not necessarily imply a reduction in reserve adequacy.
The Group had 8 287 employees at 31 December 2002, compared to 8 623 at 31 December 2001. The decrease is mainly due to disposals and to reorganisation in the Americas.
The effects of debt conversion have not been included in the 2001 and 2002 earnings/ losses per share. The effect, in both years, of converting the debt to 9 236 800 shares, was anti-dilutive. In addition, 585 886 and 319 766 employee options have not been included in the 2001 and 2002 earnings/losses per share, respectively, as they were anti-dilutive.
The following own shares of Swiss Re Zurich are held by the Group: Number of registered CHF
The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: CHF millions 2001 2002
The components of deferred income taxes were as follows: CHF millions 2001 2002
Gross deferred tax assets 5 449 5 562 Valuation allowance –311 –434
Deferred tax liabilities Present value of future profits 2 633 2 115 Deferred acquisition costs 778 415
As of 31 December 2002, the Group had CHF 3 732 million of domestic and CHF 2 641 million of foreign net operating tax loss carryforwards, expiring as follows: CHF 34 million in 2003, CHF 2 million in 2004, CHF 417 million in 2007 and CHF 5 920 million after 2008. The Group also had capital loss carryforwards of CHF 7 million, expiring as follows: CHF 3 million in 2004, CHF 2 million in 2005 and CHF 2 million in 2006.
Income taxes paid in 2001 and 2002 were CHF 339 million and CHF 23 million, respectively.
The Group sponsors various funded defined benefit pension plans covering the majority of its worldwide operations. Employer contributions to the plans are charged to income on a basis which recognises the costs of pensions over the expectedservice lives of employees covered by the plans. The Group’s funding policy for these plans is to contribute annually at a rate that is intended to maintain a level percentage of compensation for the employees covered. A full valuation is prepared at least every three years.
Benefit obligation as of 1 January 2 782 2 753 425 480
Benefits paid –112 –98 –8 –13 Acquisitions/disposals –323 Reclassification 98 Foreign currency translation adjustments –2 –99 Fair value of plan assets as
The Group sponsors a number of defined contribution plans to which employees and the Group make contributions.The accumulated balances are paid as a lump sum at the earlier of retirement, termination, disability or death.The amount expensed in 2001 and in 2002 was CHF 20 million and CHF 20 million, respectively. One of the defined contribution plans was reclassified as a defined benefit plan in 2002.
The following table summarises the status of fixed stock options outstanding as of 31 December 2002: Range of Weighted average Weighted average exercise remaining contrac- exercise price in CHF Number of options tual life in years price in CHF
From the annual option plans 1995–2002, an aggregate of 1 547 600 options to purchase the same number of shares were held by members of the Executive Board, as of 31 December 2002.
Net income/loss, as reported –165 –91 Less: total stock-based employee compensation expenses determined under the fair value method, net of related tax effects –29 –37 Pro-forma net income/loss –194 –128 Earnings/losses per share
Basic – as reported –0.57 –0.29 Basic – pro-forma –0.67 –0.41 Diluted – as reported –0.57 –0.29 Diluted – pro-forma –0.67 –0.41
In 2001and 2002, 452 660 and 361 758 options, respectively, were issued to employees and the Group contributed CHF 6 million and CHF 14 million, respectively, to the plan.
As of 31 December 2001 and 2002, the Group had outstanding guarantees of CHF 5 792 million and CHF 4 994 million, respectively.
At 31 December 2002, CHF 3 215 million related to guarantees on all present and future obligations in respect of Repurchase Agreements or Global Master Securities Lending Agreements. CHF 1779 million related to guarantees that have been issued to third parties in respect of obligations of a number of subsidiaries of the Group.
The Group had five and four guarantees as of 31 December 2001 and 2002, respectively, which primarily indemnify the purchasers of former Group entities for possible runoff losses or claims for pending litigation.
The Group enters into a number of guarantees, limited by the underlying business, with purchasers of former Group entities, regulators and others in the ordinary course of business.
As part of its normal business operations, the Group enters into a number of agreements for the leasing of premises. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: As of 31 December 2002 CHF millions
The corresponding lease expenses incurred in 2001 and 2002 were CHF 45 million and CHF 43 million, respectively.
Following the 11 September terrorist attack, 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 judicial declaration of its rights and obligations with respect to all parties in interest. That action is captioned SR International Business Insurance Ltd. v. World Trade Center Properties, LLC, Case No. 01 CV 9291 (JSM). The defendants have filed counterclaims and joined other insurers to the lawsuit.
The lessees contend that the destruction of the World Trade Center constitutes more than one occurrence under the coverage that the Group agreed to provide. A trial is likely to be held in the autumn of 2003. If judgement is granted in favour of the insured, then this could have a material impact on the Group’s results of operations or statement of financial position.
Lincoln Re acquisition In 2002, a dispute arose between the Group and Lincoln National Corporation (Lincoln) regarding amounts due resulting from the preparation of closing financial statements for the business acquired from Lincoln. The Group initiated legal action to compel arbitration of the disputes. In October 2002, the parties agreed to settle the dispute.
The Group acts as manager for certain pooled funds that operate similarly to mutual funds. As of 31 December 2001 and 2002, net third-party assets under management at market value were CHF 60 040 million and CHF 54 084 million, respectively.
a) Business group results 2001 Property & Life & Financial Corporate ReconciliCHF millions Casualty Health Services Centre Other ation Total
Expenses Claims and claim adjustment expenses; life and health benefits –13 055 –8 502 –3 241 –24 798
Amortisation of goodwill –350 –350 Other operating costs and expenses –740 –741 –1 008 –437 –594 280 –3 240
Claims and claim adjustment expenses; life and health benefits, gross –5 846 –1 634 –2 568 –10 048 Claims and claim adjustment expenses; life and health benefits, retro 380 –9 69 440
Claims and claim adjustment expenses; life and health benefits, net –5 466 –1 643 –2 499 –9 608
Change in equalisation reserves 622 829 1 451 Claims and claim adjustment expenses; life and health benefits –13 055 –8 502 –3 241 –24 798
Acquisition costs Acquisition costs, gross –3 632 –2 216 –338 –6 186
Change in unearned premiums, gross –643 32 –54 –665 Change in unearned premiums, retro –122 –1 –124 –247
Claims and claim adjustment expenses; life and health benefits, gross –831 –2 088 –797 –3 716 Claims and claim adjustment expenses; life and health benefits, retro –134 –42 14 –162
Claims and claim adjustment expenses; life and health benefits, net –965 –2 130 –783 –3 878
Change in equalisation reserves Claims and claim adjustment expenses; life and health benefits –11 587 –10 084 –2 898 –24 569
Acquisition costs Acquisition costs, gross –3 599 –2 782 –310 –6 691
Life and health policy benefits 41 083 287 41 370 1 These balances are included in other assets. 2 These balances are included in reinsurance balances payable. 3 These balances are included in accrued expenses and other liabilities.
Expenses Claims and claim adjustment expenses –3 576 –2 987 –2 266 –845 –1 913 –11 587 Acquisition costs –1 022 –867 –581 –266 –609 –3 345 Other operating costs and expenses –290 –185 –98 –62 –105 –740
Management expense ratio in % 4.4 5.3 4.6 Return on operating revenues in % 11.1 3.5 9.5
Expenses Claims and claim adjustment expenses; life and health benefits –8 334 –1 750 –10 084 Acquisition costs –1 933 –649 –2 582 Other operating costs and expenses –575 –166 –741
Net realised investment gains/losses 296 –59 –19 218 Trading revenues 8 –62 –54
Expenses Claims and claim adjustment expenses –2 012 –886 – 2 898 Acquisition costs –56 –237 –14 –307
Method of consolidation: f full e equity * Joint venture from accounting view 16. Subsidiaries and equity investees Share capital Affiliation in % Method of
United Kingdom Banian Investments UK Ltd 668 100 f Cyreniac Investments (UK) Ltd 1 336 100 f Dex Hold Ltd 0 100 f European Credit and Guarantee Insurance PCC Ltd 9 100 f Fox-Pitt, Kelton Group Ltd and group companies 0 100 f Palatine Insurance Company Ltd 17 100 f Princess Management & Insurance Ltd 3 49.99 e SR Delta Investments (UK) Ltd 14 100 f SR International Business Insurance Company Ltd 274 100 f Swiss Re (UK) House Ltd 0 100 f Swiss Re Capital Markets Ltd 83 100 f Swiss Re Financial Services Ltd 16 100 f Swiss Re GB Plc 1 422 100 f Swiss Re Investment Management Ltd 0 100 f Swiss Re Life & Health UK Ltd 423 100 f Swiss Re Services Ltd 0 100 f Swiss Re Specialised Investments Holdings (UK) Ltd 2 100 f Swiss Reinsurance Company UK Ltd 933 100 f The Mercantile & General Re Insurance Company Ltd 311 100 f
Luxembourg Special Risk Insurance and Reinsurance Luxembourg SA 109 18.18* e Swiss Re Management (Luxembourg) SA 12 100 f Swiss Re Treasury (Luxembourg) SA 12 100 f
Canada Swiss Re Life & Health Canada 99 100 f Swiss Reinsurance Company Canada 9 100 f SwissRe Holdings (Canada) Inc 98 100 f
Notes to the Group financial statements 16. Subsidiaries and equity investees (continued)
Method of consolidation: f full e equity * Joint venture from accounting view
Grand Cayman Ampersand Investments (UK) Ltd 1 336 100 f Argonaut Ltd 0 100 f Dunstanburgh Finance (Cayman) Ltd 0 100 f Swiss Re Funding (UK) Ltd 0 100 f Swiss Re Strategic Investments (UK) Ltd 0 100 f
Share capital Affiliation in % Method of (CHF millions) as of 31.12. 2002 consolidation
Swiss Re Asset Management (Australia) Ltd 0 100 f Swiss Re Australia Ltd 16 100 f Swiss Re Life & Health Australia Ltd 1 100 f The Mercantile and General Reinsurance
South Africa Swiss Re Asset Management (SA) Ltd 0 100 f Swiss Re Life & Health Southern Africa Ltd 0 100 f Swiss Re Southern Africa Ltd 2 100 f
The Property & Casualty Business Group paid CHF 17 million in redundancy benefits to employees. These costs related to the termination of certain functions in Italy following the conversion of the operating company into a branch office. Other charges of CHF 3 million were incurred in connection with this change. Both amounts were charged against the liability held for this purpose at 31 December 2001.
During 2001 the Group established a restructuring provision of CHF 70 million as part of the purchase of the reinsurance operations of Lincoln National Corporation. This did not result in a charge to net income. During 2002 CHF 32 million of this provision was utilised reflecting severance and other personnel-related costs.
Following the creation of the Financial Services Business Group, a restructuring provision of CHF 75 million was established in 2001 in respect of redundancy costs and lease abandonment. During 2002 it was determined that the provision for lease abandonment was not sufficient and this was increased by CHF 39 million. Also during 2002 expenses of CHF 60 million in respect of the lease abandonment were incurred, as were redundancy costs of CHF 14 million, which were charged against the restructuring provision.
2002 Property & Life & Financial CHF millions Casualty Health Services Total
Restructuring provision Balance as of 1 January 36 70 75 181 Increase in provision 62 62 Costs incurred –20 –32 –74 –126 Effect of foreign currency translation –8 –11 –19
The following commentary on the 2002 financial year of the parent company therefore complements the review of the financial year of the Swiss Re Group and is intentionally kept short.
Swiss Reinsurance Company, Zurich, modified its accounting policy in 2002 to adapt more to the Group’s valuation principles, mainly with respect to the use of average exchange rates in the income statement, accounting for property and casualty, life and health and derivative transactions. The prior-year comparative figures have not been restated. The valuation principles are described on pages 60 to 62.
The negative result from the deposit account was due largely to the implementation of the new accounting policy and the relating transition impact. This charge was offset by the release of technical provisions included in the technical account.
Investment expenses increased by CHF 1 623 million to CHF 3 272 million, due to depreciation on securities, which was substantially higher than in the previous year.
As of 31 December 2002, the company held four perpetual subordinated liabilities totalling CHF 1 893 million. These liabilities combine elements of debt and equity, and may be included in solvency calculations.
The nominal share capital of the company amounted to CHF 32 million on 31 December 2002.
Claims incurred –11 163 –9 900 Change in future policy reserves –757 –1 671 Change in equalisation reserve 1 262 22 Commissions incurred –2 322 –3 747 Other technical result 198 410 Operating expenses –1 116 –1 140 Allocated investment return 740 600 Result from technical account –2 208 –1 237
Result from deposit account 1 – –267 Result from technical and deposit account –2 208 –1 504
Investments in subsidiaries and affiliated companies 19 406 17 099 Loans to subsidiaries and affiliated companies 3 421 3 007 Mortgages and loans 652 685
Short-term investments 1 600 819 Assets in derivative financial instruments 0 681
Cash at bank and in hand 639 341 Intangible assets 94 117 Tangible assets 941 843 Other assets and accruals 196 131
Retained earnings brought forward 13 16 Profit for the financial year 930 106
The accompanying notes are an integral part of the financial statements.
Accounting policies were modified in 2002 to be more in line with the presentation of the Group financial statements. The transition impact from the change in accounting policy is included in the 2002 income statement. Most notably, income statement items are newly reported at average exchange rates for the year. Also, reporting of property and casualty business is now congruent with Group accounting policies as is the accounting for contracts not meeting risk transfer requirements which are considered as deposit arrangements. Derivative financial instruments which are embedded in reinsurance contracts are split out and classified as investments.
The 2002 financial year comprises the accounting period from 1 January to 31 December 2002.
The result of property and casualty business is based on actuarial estimates over the contract life. In addition to the recognition of the technical accounts as reported by the ceding companies, empirical experience is taken into consideration. The allocation to the business year is in relation to the amount of reinsurance coverage provided.
At the direction of the Swiss insurance supervisory authority, an equalisation reserve has been established.
Other provisions are formed according to business principles and are based on estimated needs and in accordance with tax regulations. Provisions for taxation contain prospective taxes on the basis of the financial year just ended.
All currency differences arising either from the revaluation of the opening balance sheet, the adjustments from application of year-end and average rates or from foreignexchange transactions are booked via a corresponding provision.
Change in provisions for claims outstanding –6 025 956 –5 069 –6 091 406 –5 685
Change of future policy reserves –487 –270 –757 –1 491 –180 –1 671
Investment management expenses –74 –182 Valuation adjustments on investments –1 111 –2 248 Realised losses on sale of investments –464 –842 Investment expenses –1 649 –3 272
Allocated investment return –740 –605 Investment result2 3 201 –733 2 2002 including transition impact of CHF –163 million 3. Other income and expenses
Other expenses –160 –856 Total other income and expenses –47 2 467 4. Liabilities
Shareholders’ equity on 31 December (previous year) 6 839 10 945 Dividend paid for the previous year –713 –776 Capital repayment –117 – Capital increase including premium 4 006 12 Profit for the financial year 930 106 Shareholders’ equity on 31 December before allocation of profit 10 945 10 287 Dividend payment – 776 –3101
Source of shareholders’ equity (after allocation of profit) CHF millions 2001 2002
Notes Swiss Reinsurance Company, Zurich Additional information on the financial statements (continued)
The current account obligations towards employee pension funds amounted to CHF 220 million on the 2002 balance sheet date (2001: CHF 49 million).
This item contains provisions for taxation in the amount of CHF 81 million (2001: CHF 94 million) and other provisions totalling CHF 667 million (2001: CHF 3 872 million). Other provisions include a provision for currency fluctuations of CHF 450 million. A financial provision of CHF 3 165 million was released in 2002. This provision was established in 1999 in connection with a realised gain on group internal restructuring of participations.
These commitments contain long-term liabilities in the amount of CHF 3 838 million (2001: CHF 4 609 million) which include subordinated liabilities of CHF 1 893 million (2001: CHF 1 912 million), and short-term liabilities amounting to CHF 1 594 million (2001: CHF 782 million).
Swiss Reinsurance Company, Zurich, employed a staff of 2 941 on the balance sheet date (2001: 2 831). Personnel expenses for the 2002 financial year amounted to CHF 870 million (2001: CHF 775 million).
The Annual General Meeting to be held in Zurich on 12 May 2003 has at its disposal the following profit: in CHF 2001 2002
Profit for the financial year 929 594 286 105 502 459
The Board of Directors proposes to the Annual General Meeting to allocate this profit as follows: in CHF 2001 2002
After deduction of the Federal Withholding Tax of 35%, the dividend will be paid from 15 May 2003 by means of a dividend order to shareholders recorded in the Share Register or to their deposit banks.
As statutory auditors, we have audited the accounting records and the financial statements (income statement, balance sheet and notes / pages 57 to 67) of Swiss Reinsurance Company for the year ended 31 December 2002.
Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
Amortisation of goodwill –75 –91 –211 –310 –368 –350 Other operating costs and expenses –1 940 –2 698 –2 785 –3 074 –3 384 –3 240
Income/loss before income tax expense 2 257 2 808 3 229 3 655 –104 36 Income tax expense –480 –647 –783 –689 –61 –127 Net income/loss on ordinary activities 1 777 2 161 2 446 2 966 –165 –91 Extraordinary income 450 Extraordinary charges –450
Number of shares entitled to dividend 292 403 220 286 156 220 286 156 220 284 872 460 310 189 318 310 379 068 310 379 068
Dividend paid per share in CHF 1.50 2.20 2.40 2.50 2.50 2.50 1.004
Equity per share1 in CHF 62.15 69.75 86.80 80.05 72.85 52.86
Shareholder structure Data as of 31 December 2002 Shareholders % Shares %
Stock exchange listing Swiss Re shares are listed on the main board of the SWX Swiss Exchange and traded on the virt-x under the symbol “RUKN”. In addition, on 1 February 1996, an American Depositary Receipts programme (ADR level I, over-the-counter) was launched together with Morgan Guaranty Trust Company of New York. One ADR corresponds to one Swiss Re share.
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