The Business Report appears separately. See Annual Report 2004 – Business Report.
Claims and claim adjustment expenses 7, 15 –14 898 –13 853
Fixed income securities: Available-for-sale, at amortised cost (fair value: 2003: 64 274; 2004: 77 376) 63 131 75 273
Short-term investments, at amortised cost, which approximates fair value 7 339 5 514
Assets held for linked liabilities 1, 2 2 448 12 619
Unpaid claims and claim adjustment expenses 7, 15 63 474 62 135
Change in unrealised gains/losses on securities, net (note 2) –24 –24
Adjustments to reconcile net income to net cash provided/used by operations: Depreciation, amortisation and other non-cash items 1 366 1 271
Change in reinsurance receivables and funds held by ceding companies –841 2 393
Cash and cash equivalents as of 1 January 3 773 5 429
Nature of operations The Swiss Re Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company (the parent company, referred to as “Swiss Re Zurich”) and its subsidiaries (collectively, the “Swiss Re Group” or the “Group”). The Group provides reinsurance, alternative risk transfer products and services to insurance companies, clients and others worldwide. Reinsurance and other related products and services are delivered to clients through a network of more than 70 offices in over 30 countries as well as through reinsurance brokers.
Scope of consolidation Companies which Swiss Re Zurich directly or indirectly controls through holding a voting majority or otherwise, are consolidated in the Group accounts (see also Recent accounting guidance and change in basis of presentation – Variable interest entities). Companies which Swiss Re Zurich does not control, but over which Swiss Re Zurich directly or indirectly exercises significant influence, are accounted for using the equity method and are included in other invested assets or in assets held for linked liabilities. The Swiss Re Group’s share of net profit or loss in investees accounted for under the equity method is included in net investment income. Equity and net income of these companies are adjusted as necessary to be in line with the Group accounting policies. The results of consolidated subsidiaries and investees accounted for using the equity method are included in the financial statements for the period commencing from the date of acquisition.
Use of estimates in the preparation The preparation of financial statements requires management to make significant estiof financial statements mates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the related disclosure including contingent assets and liabilities. The Swiss Re Group’s liabilities for unpaid claims and claim adjustment expenses and policy benefits for life and health include estimates for premium, claim and benefit data not received from ceding companies at the date of the financial statements. In addition, the Group uses certain financial instruments and invests in securities of certain entities for which exchange trading does not exist. The Group determines these estimates on the basis of historical information, actuarial analyses, financial modelling and other analytical techniques. Actual results could differ significantly from the estimates described above.
Mortgages and other loans are carried at amortised cost (effective yield method), net of any allowance for amounts estimated to be uncollectible. Other loans include mortgage participations associated with investment contracts where the contract holders bear the investment risk.
Short-term investments are carried at amortised cost which approximates fair value. The Group considers highly liquid investments purchased with an original maturity of one year or less, but greater than three months, to be short-term investments.
Derivative financial instruments The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange-traded financial futures as part of an overall risk management strategy. Derivative financial instruments 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 Group recognises all of its derivative instruments on the balance sheet at fair value. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings. If the derivative is designated as a hedge of the fair value of assets or liabilities, changes in the fair value of the derivative are recognised in earnings, together with changes in the fair value of the related hedged item. If the derivative is designated as a hedge of the variability in expected future cash flows related to a particular risk, changes in the fair value of the derivative are reported in other comprehensive income until the hedged item is recognised in earn ings. The ineffective portion of the hedge is recognised in earnings. Derivative financial instrument assets are generally included in other invested assets or financial services assets. Derivative financial instrument liabilities are generally included in accrued expenses and other liabilities or finan cial services liabilities.
Financial services assets and liabilities The Group uses long-term debt for general corporate purposes and 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 Other assets include deferred expenses on retroactive reinsurance, prepaid reinsurance premiums, real estate for own use, property, plant and equipment, accrued income and prepaid assets. Real estate for own use, property, plant and equipment are carried at depreciated cost. Deferred expenses on retroactive reinsurance policies are amortised through earnings over the expected claims-paying period.
Capitalised software costs External direct costs of materials and services incurred to develop or obtain software for internal use, payroll and payroll-related costs for employees who are directly associated with software development and interest cost incurred while developing software for internal use are capitalised and amortised on a straight-line basis over a period of three years through earnings.
Unpaid claims and claim adjustment Liabilities for unpaid claims and claim adjustment expenses for property and casualty expenses reinsurance contracts are accrued when insured events occur and are based on the estimated ultimate cost of settling the claims, using reports and individual case estimates received from ceding companies. A provision is also included for claims incurred but not reported, which is developed on the basis of past experience adjusted for current trends and other factors that modify past experience. The establishment of the appropriate level of reserves is an inherently uncertain process involving estimates and judgements made by management, and therefore there can be no assurance that ultimate claims and claim adjustment expenses will not exceed the loss reserves currently established. These estimates are regularly reviewed, and adjustments for differences between estimates and actual payments for claims and for changes in estimates are reflected in income in the period in which the estimates are changed or payments are made.
Liabilities for life and health Liabilities for life and health policy benefits from reinsurance business are generally calpolicy benefits and provisions for culated using the net level premium method, based on assumptions as to investment linked liabilities yields, mortality, withdrawals and policyholder dividends. Assumptions are set at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. The assumptions are based on projections from past experience, making allowance for possible adverse deviation. Interest assumptions for life and health reinsurance benefits liabilities range from 2.25% to 14%. Assumed mortality rates are generally based on experience multiples applied to the actuarial select and ultimate tables commonly used in the industry. Withdrawal assumptions for individual life reinsurance contracts issued by the Group range from 1% to 20% and are based on historical experience.
Liabilities for investment-type contracts, including separate account (unit-linked) life reinsurance business and contracts where the policyholder bears the investment risk, are based either on the contract account balance, if future benefit payments in excess of the account balance are not guaranteed, or on the present value of future benefit payments, if such payments are guaranteed (see also Recent accounting guidance and change in basis of presentation – Separate account and non-traditional long-duration life contracts).
Premiums Property and casualty reinsurance premiums are recorded when written and include an estimate for written premiums receivable at period end. Premiums earned are generally recognised in income over the contract period in proportion to the amount of reinsurance provided. Unearned premiums consist of the unexpired portion of reinsurance provided.
The excess of estimated liabilities for claims and claim costs payable over consideration received in respect of retroactive property and casualty reinsurance contracts which meet risk transfer tests is recorded as a deferred charge. The deferred charges are amortised over the expected settlement periods of the claims liabilities.
Stock-based employee compensation At 31 December 2004 the Group had a fixed option plan, a restricted share plan, and plans an employee participation plan. These plans are described in more detail in note 12.
Currency exchange rates in CHF per 100 units of foreign currency are as follows: Closing rate
Earnings per common share Basic earnings per common share are determined by dividing net income available to common shareholders by the weighted average number of common shares entitled to dividends during the year. Diluted earnings per common share reflect the effect on earnings and average common shares outstanding associated with dilutive securities.
Derivative financial instruments The Group implemented recent international guidance on accounting for derivatives effective from 1 January 2004. The guidance clarifies the scope of embedded derivatives in certain reinsurance agreements including modified coinsurance arrangements. The cumulative effect of complying with the guidance as of the effective date is reflected in a separate line in retained earnings in the statement of shareholders’ equity.
The Group applied the revised guidance to all VIEs created after 31 January 2003 in the 2003 annual financial statements. The revised guidance has now also been applied in the current year to all VIEs created before 31 January 2003. The application of the revised guidance to VIEs created before 31 January 2003 has resulted in the initial recognition of the assets and liabilities of some entities which were not consolidated under previous guidance, and in the derecognition of the assets and liabilities of certain other entities which were consolidated under previous guidance (see notes 6 and 16). The cumulative effect of complying with the guidance as of the effective date is reflected in a separate line in retained earnings in the statement of shareholders’ equity.
Treasury shares (formerly own shares) New guidance was issued under Swiss GAAP FER for the recognition and measurement of treasury shares effective from 1 January 2004. Treasury shares, which were previously reported as equity securities available-for-sale, are now reported at cost as a deduction from shareholders’ equity. In addition, all standalone derivative instruments indexed to treasury shares are reported at cost and classified in shareholders’ equity. As a result of this change, the reserve for own shares has been reclassified to retained earnings.
In 2004, the assets held for linked liabilities generated net realised gains of CHF 496 million and net investment income of CHF 257 million. The balance sheet as of 31 December 2003 has been reclassified to reflect the change, which does not impact net income or shareholders’ equity.
The business which meets the revised definition of separate account assets and liabilities has also been reclassified to the above categories and is accounted for as separate account business.
Investment income Net investment income by source was as follows: CHF millions 2003 2004
Realised gains and losses Realised gains and losses for fixed income, equity securities and other investments were as follows: CHF millions 2003 2004
Trading revenues Trading revenues generated by the trading activities of the Financial Services Business Group were as follows: CHF millions 2003 2004
Investments available-for-sale Amortised cost or cost and estimated fair values of investments in fixed income and equity securities classified as available-for-sale were as follows: As of 31 December 2003 CHF millions
Debt securities issued by governments and government agencies: Mortgage and asset-backed securities 5 128 138 –26 5 240
Debt securities issued by governments and government agencies: Mortgage and asset-backed securities 7 519 150 –39 7 630
As of 31 December 2003 and 2004, fixed income securities available-for-sale with a carrying value of CHF 8 086 million and of CHF 8 522 million, respectively, were lent to third parties that have the right to sell or repledge the borrowed securities. 2003 has been adjusted to reflect a refined allocation of securities lending. In addition, as of 31 December 2003 and 2004, fixed income securities available-for-sale with a carrying value of CHF 243 million and CHF 184 million, respectively, were lent to third parties that do not have the right to sell or repledge the borrowed securities.
Less than 12 months 12 months or more Total As of 31 December 2004 CHF millions
Investments by original currency The Group‘s investment portfolio at carrying value is comprised of concentrations in the following major currencies: As of 31 December 2003 CHF millions USD EUR GBP CAD CHF Other Total
As of 31 December 2004 CHF millions USD EUR GBP CAD CHF Other Total
Maturity of fixed income securities The amortised cost or cost and estimated fair values of investments in fixed income seavailable -for-sale curities 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 2003 and 2004, CHF 2 242 million and CHF 2 048 million, respectively, of fixed income securities were callable or had call options in the instruments’ structure.
Due in one year or less 1 534 1 550 3 187 3 199
Due after one year through five years 26 167 26 297 34 356 34 479
Assets on deposit or pledged As of 31 December 2003 and 2004, securities with a carrying value of CHF 573 million and CHF 599 million, respectively, were on deposit with regulatory agencies in accor dance with local requirements.
As of 31 December 2003 and 2004, the Group’s investment in mortgages and other loans included CHF 185 million and CHF 192 million, respectively, of loans due from employees and CHF 409 million and CHF 404 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
As of 31 December 2003 and 2004, investments in real estate included CHF 29 million and nil, respectively, of real estate held for sale.
Depreciation expense related to income-producing properties was CHF 31 million and CHF 36 million for 2003 and 2004, respectively. Accumulated depreciation on investment real estate totalled CHF 593 million and CHF 566 million as of 31 December 2003 and 2004, respectively.
Assets held for linked liabilities Assets held for linked liabilities by asset category were as follows: As of 31 December CHF millions 2003 2004
Other includes fixed income securities trading, separate account assets, and other assets. The fair value of assets held for linked liabilities was CHF 2 448 million and CHF 12 629 million as of 31 December 2003 and 2004, respectively.
Cash and cash equivalents Cash and cash equivalents include short-term deposits with a carrying value of CHF 2 404 million and CHF 4 134 million as of 31 December 2003 and 2004, respectively.
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 doc umented 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 fair value of derivatives outstanding at 31 December 2003 and 2004 is as follows: As of 31 December 2003 As of 31 December 2004
The notional or contractual amounts of derivatives represent a standard of measurement of the level of involvement in these types of transactions and are not a quantification of market risk or credit risk. Notional amounts represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps. These amounts are the sum of all outstanding positions, therefore inflating the notional values of all hedged positions. A considerable proportion of the credit default swaps in the trading book is hedged with offsetting positions.
However, the Capital Management and Advisory business sector does maintain open long and short positions in credit default swaps and related instruments as part of its trading function. The notional and contractual amounts of derivatives at 31 December 2003 and 2004 were CHF 438 033 million and CHF 635 338 million, respectively. Of these amounts CHF 328 087 million and CHF 461 074 million are interest instruments, CHF 28 412 million and CHF 62 158 million are currency instruments and the remaining CHF 81 534 million and CHF 112 106 million are other derivatives.
The contractual or notional amounts for credit derivatives (CHF 36 850 million and CHF 96 832 million, respectively) include portfolio credit default swap structures and corresponding credit default swaps transacted to hedge certain credit exposure within these structures (31 December 2003 and 2004: CHF 14 915 million and CHF 12 761 million, respectively). The swaps were underwritten by the Credit Solutions business sector of the Financial Services Business Group. Within these structures, the Group continues to maintain over 90% of the notional exposure assigned to the “Super-Senior” category.
On 24 August 2004, the Group acquired the shares of Life Assurance Holding Corporation (LAHC), including its life insurance subsidiary Windsor Life Assurance Company Limited, for GBP 333 million.
Goodwill During the years ended 31 December 2003 and 2004, goodwill of CHF 315 million and CHF 277 million, respectively, was amortised.
The percentage of the PVFP which is expected to be amortised in each of the next five years is 6%, 5%, 5%, 5% and 5%, respectively.
The Group enters into long- and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines long-term debt as debt having a maturity at the balance sheet date of greater than one year. The Group’s long-term debt as of 31 December 2004 was as follows: Long-term debt Senior debt
millions 2006 EMTN (Floating Rate Bond) 2003 CHF 50 3M Libor
+ 2bp 50 2006 Bank Loan 2003 USD 100 3M Libor
Senior debt as reported above is comprised of the following components: CHF millions
Total subordinated financial debt as of 31 December 2004 3 232
In 2000, the Group entered into three Payment Undertaking Agreements (PUAs), 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 PUAs were taken out by the Group. In 2003, the Group entered into sixteen PUAs. In 2004, the Group issued two PUAs for a total amount of USD 43 million with fixed interest rates of 5.23% and 5.24%. Both have maturities of 20 years. All interest rate risk is hedged to a one or three month Libor benchmark.
In April 2002, the Group privately placed GBP 100 million of subsidiary preference shares in the United Kingdom. These shares are redeemable, non-voting and were issued with a cumulative fixed rate dividend of 4.84% (payable semi-annually) and have a final redemption date in 2006.
In July 2003, the Group entered into one private placement structure. The transaction amounted to NZD 400 million with a maturity of 10 years and a coupon of 7.84%. Interest is payable monthly.
In August 2003, the Group issued under the EMTN programme a GBP 70 million bond with a coupon of 4.38% which is repayable annually over 7 years, ending April 2010.
In December 2003, the Group issued under the EMTN programme a CHF 50 million bond with an interest rate of three month Libor plus 2 basis points, maturing in 2006.
In December 2003, the Group entered into a bilateral credit agreement of USD 100 million. The respective bank loan bears interest at a rate equal to three month Libor plus 3 basis points and matures in December 2006.
In July 2004, the Group issued a mandatory convertible bond totalling EUR 672 million with an interest rate of 6.13% due in 2007. The securities will automatically convert into Swiss Re shares in three years (see note 9).
In the second half of 2004, the Group issued under the EMTN programme a note totalling EUR 10 million with an interest rate of 6.00% for the first two years and two notes totalling EUR 10 million with an interest rate of 4.00% for the first three years, due in 2009.
The Group maintains an active commutation strategy to reduce exposure. The number and amount of commutations were lower in 2004 compared to 2003, and paid claims decreased in 2004 versus 2003 due to the effect of this strategy. When commu tation payments are made, the traditional “survival ratio” is artificially reduced by premature payments which should not imply a reduction in reserve adequacy.
The Group provisions are the undiscounted value of potential ultimate claims payments and claims settlement charges, less amounts paid to date.
Provisions for long-latent injury claims outstanding at 31 December 2004 reflect the estimated future trend of claims payments and claims settlement charges. Due to the inherent uncertainties and assumptions on which these estimates are based, however, the Group cannot exclude the need to make further additions to these provisions in the future.
All of the Group’s reinsurance companies prepare statutory financial statements based on local laws and regulations. Most jurisdictions require reinsurers to maintain a minimum amount of capital in excess of a statutory definition of net assets or maintain certain minimum capital and surplus levels. In addition, some jurisdictions place certain restrictions on amounts that may be loaned or transferred to the parent company. The Group’s ability to pay dividends may be restricted by these requirements.
Weighted average common shares outstanding 310 379 068 309 274 654
Change in income available to common shares due to convertible bonds 33 48
In 2004 Swiss Re purchased 9 236 800 call options to offset the exposure to deliver Swiss Re shares under the Convertible bond issued in 2001 (see Derivatives indexed to Swiss Re shares).
Treasury shares As of 31 December 2003 and 2004, the Group held 1 280 875 and 933 128 treasury shares, respectively. These shares are available for stock-based compensation plans and other corporate purposes.
In 2004, 1 036 269 treasury shares were acquired at an average price of CHF 81.06 and 1 384 016 treasury shares were sold at an average price of CHF 87.43, including 698 561 treasury shares delivered to employees in connection with stock-based compensation plans.
Furthermore, Swiss Re purchased derivatives, indexed to Swiss Re shares, with respect to stock-based compensation plans and to offset the exposure to deliver Swiss Re shares under the convertible bond, issued in 2001. The underlying shares, previously committed to the convertible bond issued in 2001, were reallocated to the mandatory convertible bond, issued in 2004. For the above hedging transactions 10 436 524 call options were acquired at an average price of CHF 15.37 in 2004. As of 31 December 2003 and 2004, the Group held 1 000 000 and 10 436 524 call options, respectively.
The Group is generally subject to corporate income taxes based on the taxable net in come in various jurisdictions in which the Group operates. The components of the income tax charge were: CHF millions 2003 2004
The components of deferred income taxes were as follows: CHF millions 2003 2004
Benefit obligation as of 1 January 2 062 2 321 972 1 115 523 517
Fair value of plan assets as of 1 January 1 958 2 240 652 734
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was CHF 3 046 million and CHF 3 350 million as of 31 December 2003 and 2004, respectively.
Expected long-term return on plan c) Assumed medical trend rates at year end
Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one percentage point change in assumed health-care cost trend rates would have had the following effects for 2004: CHF millions point increase point decrease
Plan asset allocation by asset category The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2003 and 2004, and the target allocation for 2005 are as follows: Swiss plans actual allocation
The Group‘s pension plan investment strategy is to match the maturity profiles of the assets and liabilities in order to reduce the future volatility of pension expense and funding status of the plans. This involves balancing investment portfolios between equity and fixed income securities. Tactical allocation decisions that reflect this strategy are made on a quarterly basis.
Expected contributions and The employer contributions expected to be made in 2005 to the defined benefit pension estimated future benefit payments plans are CHF 170 million and to the post-retirement benefit plan are CHF 13 million.
As of 31 December 2004, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: CHF millions Swiss plans pension benefits Foreign plans pension benefits Other benefits
The fair value of each option grant is estimated on the date of the grant using a binomial option-pricing model, with the following weighted average assumptions used for grants in 2003 and 2004, respectively: dividend yield of 2.8% and 2.0%; expected volatility of 28.7% and 33.1%; risk-free interest rate of 2.3% and 1.7%; expected life of 6.0 years and 6.0 years.
Less: total stock-based employee compensation expenses determined under the fair value method, net of related tax effects –37 –34
Under these plans, 301 251 restricted shares were granted at a price of CHF 93 per share, which equals the market price of the shares on the date of grant. The shares issued vest at the end of the fourth year.
At 31 December 2004, CHF 12 242 million (2003: CHF 9 173 million) were guarantees on all present and future obligations in respect of Sale & Repurchase Agreements or Global Master Securities Lending Agreements, with expiry dates up to 2036. CHF 1 408 million (2003: 2 523 million) were guarantees issued to third parties in respect of obligations of a number of subsidiaries of the Group with varying expiry dates.
As a participant in limited investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnerships for periods
As part of its normal business operations, the Group enters into a number of lease agreements. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: As of 31 December 2004 CHF millions
The corresponding lease expenses incurred in 2003 and 2004 were CHF 43 million and CHF 48 million, respectively.
The Group acts as manager for certain pooled funds that operate similarly to mutual funds. As of 31 December 2003 and 2004, net third-party assets under management at market value were CHF 57 546 million and CHF 58 649 million, respectively.
The Group provides reinsurance and financial services throughout the world through three business groups, which are determined by the organisational structure. These are the Property & Casualty Business Group; the Life & Health Business Group; and the Financial Services Business Group, which includes the Risk Solutions, Credit Solutions, Capital Management and Advisory and Asset Management business sectors. The Corporate Centre provides direction and Group-wide support to the business groups.
The Financial Services Business Group presents certain income statement items in a different format to the Group. These items are reclassified to the Group income statement format in the reconciliation column. The main reclassifications are to allocate certain fee income from fees and commissions to net investment income, and certain investment expenses from other operating costs and expenses to net investment income. The reclassifications do not affect operating income.
Change in unpaid claims and claim adjustment ex penses; life and health benefits, gross –2 561 –1 759 –277 –4 597
Change in unpaid claims and claim adjustment ex penses; life and health benefits, retro –262 278 –116 –100
Change in unpaid claims and claim adjustment expenses; life and health benefits, gross –1 491 –2 165 –125 –3 781
Change in unpaid claims and claim adjustment ex penses; life and health benefits, retro –1 198 239 –393 –1 352
Claims and claim adjustment expenses; life and health benefits –11 474 –9 331 –2 379 –23 184
Claims and claim adjustment expenses –2 746 –4 282 –2 166 –393 –1 887 –11 474
e) Life & Health Business Group – by line of business 2003 CHF millions Life Health Total
Claims and claim adjustment expenses; life and health benefits –7 225 –1 860 –9 085
Claims and claim adjustment expenses; life and health benefits –7 677 –1 654 –9 331
CHF millions 2003 2004 h) Gross premiums written by line of business
Method of consolidation: f full e equity ¹ Net asset value instead of share capital ² Joint venture from accounting view
Swiss Re Life & Health America Holding Company 0 100 f
Variable interest entities The Group holds a variable interest in an entity due to a modified coinsurance agreement, certain insurance-linked and credit-linked securitisations, private equity limited partnerships and other entities, which meet the definition of a variable interest entity (VIE).
As of 31 December 2004, the total assets of VIEs where the Group is the primary beneficiary amounted to CHF 5 465 million.
As auditors of the Group, we have audited the consolidated financial statements (income statement, balance sheet, statement of shareholders’ equity, statement of comprehensive income, statement of cash flow and notes to the Group financial statements / pages 3 to 55) of Swiss Re Group for the year ended 31 December 2004.
The following commentary on the 2004 financial year of the parent company therefore complements the review of the financial year of the Swiss Re Group.
Financial year 2004 The business year was characterised by a sound technical result in stable reinsurance markets. The after-tax profit for the financial year based on the Swiss legal accounting regulations rose to CHF 1.4 billion, compared to CHF 1.2 billion in the previous year. This improved performance is a combination of a lower reinsurance result in 2004 compared to the prior year due to the higher frequency and severity of natural catastrophes, which was more than offset by the substantially improved investment result due to lower valuation adjustments.
Reinsurance Net premiums earned increased by 3% to CHF 17.8 billion. The reinsurance result decreased by CHF 688 million, mainly due to higher natural catastrophe claims and lower income from intragroup business. The result from reinsurance for the 2004 financial year was CHF 849 million which includes a release of CHF 206 million from the equalisation reserve.
Liabilities Liabilities from reinsurance rose by 14% to CHF 49.0 billion. The equalisation reserve as of 31 December 2003 in the amount of CHF 206 million was released in 2004.
As of 31 December 2004, the company held perpetual subordinated liabilities totalling CHF 2.0 billion. These liabilities have certain equity characteristics.
The nominal share capital of the company amounted to CHF 32 million on 31 December 2004.
Time period The 2004 financial year comprises the accounting period from 1 January to 31 December 2004.
Valuation methods: Income statement The result of property and casualty reinsurance is based on actuarial estimates over the contract life. In addition to the recognition of the reinsurance 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.
The result of life and health reinsurance is the amount that has been earned over the co verage period. Provisions for life and health business are determined by actuarial methods.
The taxes relate to the financial year and include taxes on income and capital as well as indirect taxes. Value-added taxes are included in the respective expense lines in the income statement.
Balance sheet/Assets The following assets are stated at cost, less necessary and legally permissible depreciation: – Investment real estate/own-use property (purchase or construction cost) – Investments in subsidiaries and affiliated companies – Equity securities and fixed income securities – Derivative financial instruments
With the exception of own-use property, tangible assets are stated at cost, less individually scheduled straight-line depreciation over their useful lives. Items of minor value are not capitalised. The same principles apply to the capitalisation of intangible assets which refer entirely to software development expenses.
Liabilities for life and health policy benefits are determined on the basis of actuarially calculated present values taking experience into account.
Foreign currency translation All items denominated in foreign currencies are translated into Swiss francs. Balance sheet figures are translated at the currency exchange rates applicable on the balance sheet date and, in the income statement, figures are stated at average exchange rates of the year under report.
Claims paid and claim adjustment expenses –7 564 691 –6 873 –5 988 15 –5 973
Other reinsurance income and expenses 144 –10 134 102 –15 87
Notes Swiss Reinsurance Company, Zurich Additional information on the financial statements
Income from fixed income securities, mortgages and other loans 408 533
Liabilities for life and health policy benefits 6 402 197 6 599 8 412 284 8 696
Shareholders’ equity on 31 December (previous year) 10 287 11 167
¹ Board of Directors’ proposal to the Annual General Meeting of 9 May 2005
Source of shareholders’ equity (after allocation of profit) CHF millions 2003 2004
Contingent liabilities Contingent liabilities, mainly towards Group companies, amounted on 31 December 2004 to CHF 2 546 million (2003: CHF 2 450 million). In addition, there were 28 unlimited guarantees; 24 of these are for obligations of Group companies. No payments are expected under these guarantees.
Securities lending Under securities lending agreements, on 31 December 2004, securities in the amount of CHF 5 664 million (2003 : CHF 1 275 million) were lent with the right to be sold or pledged by the borrowing entity, of which CHF 4 277 million (2003: nil) was to Group companies.
Investment funds Equity securities in the amount of CHF 4 155 million (2003: nil) and fixed income securities in the amount of CHF 4 451 million (2003: nil) were held in investment funds which are fully owned by Swiss Re Group companies and the Pension Fund of Swiss Re. The securities in these funds and their revenues continue to be reported in the corresponding asset category.
Fire insurance value of tangible assets The insurance value of tangible assets, comprising the real estate portfolio and other tangible assets, amounted on 31 December 2004 to CHF 2 526 million (2003: CHF 2 596 million).
Obligations towards employee The current account obligations towards employee pension funds amounted to pension funds CHF 10 million on the 2004 balance sheet date (2003: CHF 23 million).
Investments in subsidiaries Details on the Swiss Re Group‘s subsidiaries are to be found on pages 50 to 53.
Treasury shares Swiss Re Treasury shares held by the Swiss Re Group companies are stated on page 32.
Debt, liabilities from derivative These commitments contain long-term liabilities in the amount of CHF 3 034 million financial instruments, accrued expenses (2003: CHF 3 127 million) which include subordinated liabilities of CHF 1 958 million and other liabilities (2003: CHF 1 968 million) and short-term liabilities amounting to CHF 2 313 million
Personnel information Swiss Reinsurance Company, Zurich, worldwide employed a staff of 3 566 on the balance sheet date (2003: 3 520). Personnel expenses for the 2004 financial year amounted to CHF 870 million (2003: CHF 865 million).
The Annual General Meeting to be held in Zurich on 9 May 2005 has at its disposal the following profit: in CHF 2003 2004
Profit for the financial year 1 189 752 912 1 401 304 692
The Board of Directors proposes to the Annual General Meeting to allocate this profit as follows: in CHF 2003 2004
Swiss Reinsurance Company, Zurich, financial statements Proposal for allocation of profit
In our opinion, the accounting records and financial statements and the proposed appropriation of available earnings comply with Swiss law and the company‘s Articles of Association.
Swiss Reinsurance Company, Zurich, financial statements Report of the statutory auditors
Claims and claim adjustment expenses –8 057 –8 514 –9 333 –12 153 –16 266 –14 485 –14 898 –13 853
Income/loss before income tax expense 2 257 2 808 3 229 3 655 –104 36 2 336 3 367
Net income/loss on ordinary activities 1 777 2 161 2 446 2 966 –165 –91 1 702 2 475
Unpaid claims and claim adjustment expenses 41 876 45 866 54 072 59 600 68 618 62 652 63 474 62 135
Annual Report 2004 Financial Statements Swiss Reinsurance Company Mythenquai 50/60 P.O. Box 8022 Zurich Switzerland www.swissre.com
Cover page Yokohama Bay Bridge, Japan The port of Yokohama, which lies along the northwest shore of Tokyo Bay, symbolises the long-standing history of Asia as an international trading platform. The Yokohama Bay Bridge was completed in 2003 and, at 860 metres, is one of the longest suspension bridges in the world. It is part of a comprehensive plan to expand access routes to the busiest piers, lowering logistics costs, increasing efficiency and enhancing competitiveness.
 Property & Casualty  Life & Health  Financial Services 11%CHF millions30 000
Key figures CHF millions unless otherwise stated 2003 2004 Change in %
Return on total revenues, excluding proprietary asset management (in %) 14.7 12.9
¹ Subject to approval at the Annual General Meeting of 9 May 2005
News 2004  Net income of CHF 2.5 billion, up 45%; return on equity increased to 13.6%, above the three year average target of 13%
 Excellent investment return of 5.8% in low interest rate environment
 Life & Health Business Group: return on operating revenues increased to 9.1%; two largest Admin ReSM transactions successfully completed in the US and UK
 Financial Services Business Group: strong improvement in operating income of 25% mainly driven by premium business
We are pleased to report that in 2004 earnings increased by 45% to CHF 2.5 billion or CHF 8.00 per share. The return on equity was 13.6%. In a year characterised by ex ceptional natural catastrophe events, this result represents significant progress and highlights the value of Swiss Re’s diversified risk portfolio.
The New York Attorney General and other regulators have challenged insurers with respect to the transparency of certain industry practices, notably in relation to types of broker commission and so-called non-traditional contracts of insurance. We have responded quickly and fully to all requests for information by regulatory authorities and will continue to do so.
There has been an increasing level of discussion about appropriate models for managing capital and risk in the insurance industry, especially in the context of the European Union‘s Solvency II requirements. We are seeing, and warmly welcome, growing acceptance of risk-based internal models. We have included an expanded commentary on this important subject in the “Risk and capital management” section of our Business Report. We will continue to work with regulators, rating agencies and investors to help implement appropriate capital models, enhance disclosure requirements and make more apparent the benefits of a well-diversified reinsurance business.
The Board of Directors is pleased to recommend to shareholders a dividend increase from CHF 1.10 per share in 2003 to CHF 1.60 per share in 2004. This increase reflects the Board‘s confidence in future earnings and long-term growth prospects.
Rudolf Kellenberger and Bruno Porro reached retirement age in early 2005; their re spective responsibilities as Deputy CEO and Chief Risk Officer were passed to Jacques Aigrain and Christian Mumenthaler on 1 January 2005. We thank Ruedi and Bruno warmly for their long and outstanding contributions to the achievements of Swiss Re and wish Jacques and Christian every success in their new roles. At the same time, we congratulate Charlotte Gubler, who has taken over as Head of Communications & Human Resources from Walter Anderau. We wish Walter success in his new role as Chairman of Swiss Re‘s Centre for Global Dialogue. Swiss Re places high value on its extensive management development programmes and it is gratifying to observe that once again the right talent was available within the company at a time of change.
Peter Forstmoser John R. Coomber Chairman of the Board of Directors Chief Executive Officer
16 February Successful 2004 renewals Swiss Re reported successful January renewals.
25 March Swiss Re’s 2003 results Swiss Re’s 2003 results showed net premiums earned increasing to CHF 30.7 billion. Positive earnings from all three business groups contributed to net income of CHF 1.7 billion.
30 April Swiss Re completes Admin ReSM acquisition of CNA’s individual life insurance business Swiss Re completed, for USD 690 million, the Admin ReSM acquisition of CNA Financial Corporation‘s individual life insurance business in the United States.
14 May Annual General Meeting The 140th Swiss Re Annual General Meeting approved the dividend of CHF
1 140th Annual General Meeting in Zurich, 14 May 2004 2 Official opening of Japan branch in Tokyo, 18 May 2004 1.10 per share. Kaspar Villiger, former Federal Councillor and member of the Swiss government, was elected to the Board of Directors; George L. Farr and Rajna Gibson were re-elected for further four year terms.
17 May 2003 embedded value Swiss Re reported embedded value of CHF 16 billion and embedded value earnings increased by CHF 700 million to CHF 1.1 billion. Value added by new business was lower at CHF 314 million, reflecting lower capital investment and foreign exchange effects.
18 May Official opening of Japan branch in Tokyo Swiss Re became the first leading global reinsurer to operate a full-fledged branch in Japan, providing nationwide reinsurance services in both life and non-life business.
19 August–7 October Natural catastrophe claims The hurricane season saw an unusually high number of events, with the coast of Florida being hit by four severe hurricanes.
26 August Interim results 2004 Swiss Re reported that net income doubled to CHF 1.4 billion and total premiums earned declined by 2% in the first half 2004 compared to first half 2003, as the Group continued to underwrite selectively and focus on profitability. Shareholders ‘ equity increased by 5% over the 2003 year end figure to CHF 19.4 billion.
23 November Investors’ day Swiss Re presented its risk management framework, which determines the Group’s required capital and capital adequacy, as well as the economics of its Property & Casualty Business Group.
2005 to date 21 January Swiss Re completes securitisation of in-force life insurance policies Swiss Re announced its first securitisation of future profits from blocks of life insurance business previously acquired through Admin ReSM transactions. The USD 245 million issue benefits Swiss Re by transferring insurance risk to the capital markets, thereby increasing capital efficiency.
14 February 2005 renewals Swiss Re reported another successful January renewal. The continued focus on profitable underwriting allowed Swiss Re to maintain attractive pricing levels.
3 Hurricane season in the Caribbean, 19 August–7 October 2004 4 Investors’ day at the Centre for Global Dialogue in Rüschlikon, 23 November 2004
Financial Services Risk Solutions Credit Solutions Capital Management and Advisory Asset Management Corporate Development
Ann F. Godbehere a Chief Financial Officer, Head of the Finance Division
Jacques Aigrain a Deputy Chief Executive Officer b, Head of the Financial Services Business Group
Yury Zaytsev Group Information Officer, Head of the Information, Processes & Technology Division a Member of the Executive Board Committee b Since 1 January 2005
Stefan Lippe a Head of the Property & Casualty Business Group
Capturing market opportunities over the long term Swiss Re has positioned itself to benefit fully from growth and structural changes set to affect the industry within the next ten years.
The fundamentals for growth in the insurance industry remain attractive as retail and wholesale risk transfer markets are expected to continue to expand faster than global GDP. The proportion of world GDP spent on insurance premiums is also expected to rise from 8% to 9% by 2015. In the emerging markets, the Asian economies will be the key drivers of this growth. As GDP per capita increases in these countries, the demand for insurance as a means of protecting corporate and individual interests will accelerate. The emerging markets’ share of the world reinsurance market is expected to rise from 12% to 17%. Swiss Re will build on its leadership position, especially in Asia, to capture these growth opportunities.
The securitisation of insurance risk is becoming increasingly established as an efficient means of improving returns on risks flowing through reinsurers’ balance sheets. Just as the banking industry’s business model was significantly changed in the mid 1990s with the development of asset-backed securities, the securitisation of insurance risk is set to accelerate over the next ten years. Swiss Re is a leader in this field and will continue to use the capital markets as a capacity provider for insurance and reinsurance risks.
Four Group-wide strategic priorities In order to capture opportunities arising from changes in the industry, Swiss Re is focused on four strategic goals:  Actively manage the cycle for profits  Optimise organic and transactional growth  Extend leadership position in Asia  Accelerate the balance sheet through risk securitisation
These four strategic priorities are essential to driving Swiss Re’s growth in earnings and are therefore direct strategies of each of the business groups.
Actively manage the cycle for profits As a global company with a wide product range and geographical reach, Swiss Re allocates capital by balancing opportunities on a risk-adjusted basis to generate sustainable earnings and growth over the long term. To facilitate this strategy, Swiss Re has, in recent years, re-engineered the way business is managed and capital allocated to its various market segments. In non-life business, the instruments used to measure the dynamics of the cycle have improved and now include a centralised pricing process based on risk-adjusted return targets, global renewal guidelines and leading cycle-phase indicators gathered through quarterly surveys of underwriters around the world.
In life and health business, Swiss Re closely monitors the pricing assumptions and assesses the returns available over time across geographies and products.
Optimise organic and transactional growth Swiss Re has been able to grow at an average annual rate of 11% over the last ten years, outperforming the global reinsurance market, which grew at an average rate of 6%. This has been achieved through building market share, developing new areas of business and complementing organic growth with a targeted series of acquisitions. Swiss Re will continue to apply its full range of skills and encourage innovation in order to expand its business and drive organic growth while seizing attractive acquisition opportunities.
Accelerate the balance sheet through risk securitisation Since 1997, Swiss Re has been securitising peak risks in its natural catastrophe and mortality business to optimise the structure of its balance sheet. Risk securitisation, as seen in the banking industry with asset-backed securities, can provide Swiss Re with equally impressive opportunities. The size of Swiss Re’s risk portfolio becomes less dependent on its own capital base, because the Group is able to pass on a proportion of its risk to the capital markets. Recent transactions demonstrate Swiss Re’s ability to combine risk management and investment banking capabilities, thereby increasing capital efficiency and profit margin.
Steering for long-term value creation The implementation of Swiss Re’s Groupwide strategy is assessed through the Target Matrix and the Balanced Scorecard.
The Balanced Scorecard complements the Target Matrix: it monitors critical valuecreating activities and processes in organisational and people development, operational excellence and the client franchise, ensuring that client and shareholder needs are met. The Balanced Scorecard gives management an overview of the status of all critical activities and how they interconnect to create value.
Monitoring the risk landscape to identify business opportunities and to anticipate the potential impacts of key industry trends is essential to Swiss Re’s success. The Group fosters ongoing research and analysis as well as communication activities on Top Topics of strategic relevance. The table below shows a selection of Top Topics in 2004.
 The transfer of insurance risk to the capital markets allows a more efficient use of capital
 Investor interest in ILS continues to grow thanks to attractive returns
 Swiss Re is a market leader in ILS, having sponsored approximately USD 1.6 billion of peak risks, including natural catastrophe and extreme mortality, since 1997
 As the world’s largest life reinsurer, Swiss Re offers solutions to manage capital and diversify risk, reducing exposure to mortality “shocks”
 Ensuring adequate premium levels is key to maintaining a viable market for catastrophe risk
 Swiss Re continuously refines its state-of-the-art modelling tools to have a comprehensive view on all major catastrophe scenarios and offer clients optimal solutions for their risk portfolio management
 The number of regulatory initiatives on reinsurance supervision has accelerated
 Swiss Re is committed to ethical business practices and the exchange of know-how on sustainable development through research, publications and sponsorship
 Swiss Re promotes awareness of climate risks and develops risk financing solutions in the framework of sustainability
Developing expertise Knowledge and expertise are essential for business success – and Swiss Re has qualified experts on its staff drawn from a broad spectrum of disciplines, including actuaries, engineers, lawyers, natural scientists and many more. The Group ensures that its specialists develop their technical knowledge and competence through training, enabling them to drive economic success through business qua lity. In 2004 Swiss Re continued to develop its 15 Knowledge Networks designed to stimulate the exchange of expertise and innovation across the Group. Swiss Re’s international working environment and commitment to professional development make it an attractive employer.
Swiss Re’s Centre for Global Dialogue The Centre for Global Dialogue in Rüschlikon provides a forum to address global risk issues and facilitate new insight into future risk markets. International conferences attract industry experts and risk analysts, business managers, scientists and policy makers. The goal of these events is to gain better understanding, build stakeholder communities around topics and assess potential business solutions.
Highlights for 2004 included the Global Medical Forum in March, the Sustainability Forum in August, the Liability Regimes Conference in October, and an event on nanotechnology in December. These conferences brought together representatives from such organisations as the United Nations, the World Bank and Harvard Medical School, to discuss with Swiss Re’s experts risks and opportunities facing the insurance industry.
The global insurance industry further strengthened its capital base in 2004. Property and casualty reinsurance achieved good results despite exceptionally high natural catastrophe claims. Life reinsurance growth continued to outpace the primary markets. Reinsurance regulation increased, as did disclosure requirements for the industry.
Property and casualty insurance: positive underwriting results despite record catastrophe losses Available information suggests that the primary property and casualty insurers achieved very favourable underwriting results in 2004. In many markets, they outperformed the 2003 results. The commercial lines business in particular showed significant improvements. Credit claims, which largely depend on general eco nomic conditions, also developed favourably in 2004.
Credit spreads between government and corporate bonds, which had shrunk significantly in 2003, remained narrow in 2004.
Stock markets recovered further from their collapse between 2000 and 2002. Growth in 2004 was moderate, however, reflecting the sceptical mood of investors.
 United States  United Kingdom  Eurozone  Japan  Switzerland 6 in % Source: Datastream
Property and casualty premium growth slowed to a moderate level in 2004. Although improvements in general economic activity triggered a rise in insurance demand, there was no repeat of the substantial rate increases of 2002 and 2003, which led to high growth levels in those years.
Due to the ongoing restructuring of the primary life industry, the market for the management of closed blocks of business grew in 2004, particularly in the UK, as new market players were attracted to this segment.
These concerns have evolved into a multitude of regulatory initiatives. At the level of international organisations, the debate focuses on disclosure in the reinsurance sector and the need to maintain and build confidence in the financial stability of the sector.
Swiss Re has a team of 20 economists based in Zurich, New York and Hong Kong as the Group‘s centre of competence for the economic analysis of risk transfer and risk financing solutions, global business cycles and financial markets. The sigma studies, a recognised source of market information for more than 30 years and the team’s flagship publication series, analyse market trends in the insurance and financial industries.
Primary insurance premium volumes in industrialised countries are expected to grow in parallel with long-term GDP growth (between 3% and 4% per year). The demand for risk transfer will continue to increase while, at the same time, premium rates, although re maining at profitable levels, are expected to decline from their current high point in the cycle. Premium increases in emerging markets should outpace overall economic growth. Underwriting results for property and casualty insurance should remain strong in most segments through 2005 at least, with combined ratios of approximately 100% for primary business and below 100% for property and casualty reinsurance. Life reinsurance premium growth will exceed primary market growth in most countries, with the exception of the US and UK, where cession rates for new business have already reached very high levels.
Swiss Re is a leading provider of credit risk transfer solutions to trade credit and surety insurers as well as commercial banks. Its client base is globally spread from the Americas to Europe and Asia.
Where do you see the most promising areas of growth and innovation in your industry? We are currently assessing opportunities in Asian credit markets such as China and India. When it comes to product innovation, the key for us is to combine advanced structuring expertise with high underwriting standards from the very beginning. Innovation for our solutions is often inspired by de velopments in the financial markets, for example the securitisation of trade receivables. We have a team of professionals from various sectors of the financial services industry who can respond to these opportunities.
Do you feel that credit risk transfer from banks to insurance companies has become more widely accepted in the financial community? Yes, I do. Concerns have been alleviated by the professionalism of most participants, an increased transparency, and a better market and pricing discipline. Such findings have been confirmed by third-party studies, such as those conducted by the IMF or the Joint Forum. Swiss Re is also actively contributing to the discussion with regulatory bodies. Overall, these factors have caused a perceptible rise in confidence.
“ Our execution capabilities, the combination of insurance, reinsurance and capital market offerings and our longstanding expertise give us a competitive edge in the global credit market.” Markus A. Eugster, Credit Solutions, Swiss Re Financial Services, Zurich (left) Adrian Kärle, Credit Solutions, Swiss Re Financial Services, Zurich (right)
Premiums earned decreased by 4% to CHF 29.4 billion compared to 2003. Excluding the effect of foreign currency, the decrease was 1%.
Premiums in the Life & Health Business Group were stable at CHF 10.2 billion. Adjusting for the effect of currency exchange, premiums increased by 4%, due to growth in Admin ReSM business.
Net investment income was CHF 4.9 billion, compared to CHF 4.6 billion in 2003, representing a 10% increase at constant exchange rates. This favourable development was mainly driven by the combined volume effect of strong organic cash flows and large Admin ReSM transactions.
Net realised investment gains were CHF 1.1 billion in 2004, driven by a solid stream of capital gains on publicly traded and private equities. This is CHF 740 million more than in 2003, when substantial gains on the fixed income portfolios were partly offset by impairment charges.
Trading revenues were stable at constant rates of exchange. The credit and asset backed as well as insurance-linked securities businesses contributed to strong revenue growth. However, this excellent result was partially offset by trading losses associated with reduced market volatility.
Claims and claim adjustment expenses and life and health benefits decreased from CHF 24.0 billion to CHF 23.2 billion. Adjusted for the effects of foreign exchange, claims and claim adjustment expenses and life and health benefits increased by 1%. The significant impact from natural catastrophes during the year, net of equalisation, and continued adverse development in liability business was offset by the improvement in the underlying profitability of current business. Life and health benefits increased mainly due to the impact of Admin ReSM business.
Acquisition costs fell by 8% to CHF 6.3 billion in 2004 from CHF 6.9 billion in 2003. Adjusting for currency exchange effects, the decrease was 5%. The acquisition cost ratio decreased from 22.3% in 2003 to 21.5% in 2004.
Amortisation of goodwill fell by 12% compared to 2003. Adjusted for currency exchange effects, the decrease was 8%, reflecting lower goodwill in the balance sheet.
The tax expense in 2004 was CHF 892 million, compared to CHF 634 million in 2003. This represents an effective tax rate in 2004 of 26.5%.
The Group recorded net cash flow from operating activities of CHF 6.6 billion, up from CHF 4.8 billion in 2003, due mainly to strong reinsurance cash flows.
Shareholders‘ equity increased from CHF 18.5 billion to CHF 19.2 billion. The increase was mainly due to improved earnings, partly offset by currency exchange effects. Return on equity increased to 13.6% from 10.2% in 2003.
Financial targets updated Swiss Re is able to benefit from its leadership position by growing organically above the underlying market and simultaneously capturing additional growth opportunities. However, Swiss Re’s clear priority is profitability before premium volume, and it uses its tools and expertise to maximise economic profits throughout the insurance cycle. Swiss Re has therefore altered the way it sets its growth targets, which is now defined as 10% growth in earnings per share, which, together with the return on equity target of 13%, reflects the Group’s commitment to grow returns for shareholders.
– such as indirect taxes, capital taxes and interest charges – have been excluded in the assessment of each business group’s performance.
Key topics Strong economic growth, led by US consumers and China, made 2004 a relatively good year for investments – although investors ’ appetite for incremental risk appeared greater than returns would justify. The resulting high liquidity contributed to keeping interest rates low and credit spreads tight. But 2004 was not a uniform year and fixed income market participants faced very different conditions in the second half compared to the first half of the year. Despite the tightening of mon etary policy in the US and the general trend towards higher rates in the second quarter, long-term rates levelled off in the US and even receded below 1 January levels in Europe in the second half of the year, while short-term rates steadily increased. This produced a flatter yield curve and a wider difference between the long-term rates in the two regions. Two other important trends during the second half year were the rise in oil prices and the decline of the US dollar.
Swiss Re’s investment portfolio grew by close to 23% in Swiss francs, due both to strong organic cash flows and to the assets acquired in two large Admin ReSM transactions. The Group has certain business where policyholder funds are invested in defined assets, and policyholders bear the investment risk on the assets. These investments are now described as assets held for linked liabilities and have increased from CHF 2.4 billion in 2003 to CHF 12.6 billion in 2004, mainly due to the acquisition of Life Assurance Holding Corporation Ltd’s Windsor Life. Excluding these assets, Swiss Re’s investment portfolio growth was close to 12%; the fixed income share increased from 88% to 91% of total holdings; publicly traded equity holdings decreased from 8% to 5%; and other investments, mainly real estate and private equity holdings, remained stable at 4%.
Swiss Re’s fixed income portfolio increased to CHF 89 billion in 2004, compared to CHF 78 billion in 2003, due to the same factors that produced overall portfolio growth. Net investment income on the fixed income portfolio grew by 16% at constant exchange rates. Net realised gains were CHF 226 million in 2004, down from the very high level of CHF 1.0 billion achieved as fixed income investment values peaked in 2003.
Strong economic indicators and the continued tightening of monetary policy in the US all indicate that interest rates should rise from current levels, and Swiss Re continues to expect higher long-term interest rates by end 2005. However, there is a certain risk of lower rates and flatter curves in the short term, especially during the first half of the year. The threats to the positive economic outlook for 2005 continue to be rising oil prices, a potential hard landing of China’s economy and a sharp and disorderly downward dollar correction. Swiss Re will continue to actively monitor and manage these risks and has adopted barbell strategies to quickly change the duration profile of its fixed income portfolio. In publicly traded equities, Swiss Re will continue to seize opportunities as they arise within the context of modest market growth, and the Group expects another solid year for its private equity portfolio.
Total CHF 98.5 billion1 5% Equities 4% Real estate and other 91% Fixed income
Changes in shareholders’ equity CHF millions 2003 2004 Change in %
Unpaid claims and claim adjustment expenses 63 474 62 135 –2
Cash and cash equivalents as of 1 January 3 773 5 429 44
Cash and cash equivalents as of 31 December 5 429 6 402 18
Operating income increased by 29% to CHF 2.3 billion with the combined ratio remaining stable at 98.4% despite a high level of natural catastrophe claims. The business group maintained its focus on underwriting discipline.
(USV), which compare the price on offer with required profit margins and average price levels over the whole insurance cycle. The use of USV by all underwriters allows the business group to steer capital towards the most attractive market opportunities and helps underwriters maintain objectiv ity at a time when prices may come under pressure. As a consequence, underwriting discipline remained strong in 2004.
Unlike 2002 and 2003, which were marked by an absence of large claims, in 2004 the insurance industry experienced high claim activity in natural catastrophes, incurring almost USD 46 billion in large catastrophe claims. For Swiss Re’s Prop erty & Casualty Business Group, the pre-tax financial impact in 2004 of the four hurricanes, the typhoon and the tsunami was CHF 1.1 billion, although this was reduced by CHF 241 million through the release of equalisation reserves. The extent of these natural catastrophe claims was above average in 2004. This inevitably led the industry to refocus on catastrophe pricing during the renewals, whereby premium rates in the affected markets showed increases of up to 10%.
Swiss Re places great emphasis on underwriting quality and continuously invests in new training initiatives to develop this vital resource. In 2004 the Underwriting Development Programme (UDP) was launched, which is designed to hire and intensively train new underwriters. The emerging markets study undertaken by Swiss Re has shown that expansion in Asia will generate significant demand for underwriting skills, and the UDP aims to ensure that growing requirements in this region and elsewhere are met.
Claims from natural catastrophes reduced the result by CHF 0.8 billion after changes in the equalisation reserve, or 5% of premium. In 2003 total natural catastrophe claims for the business group with an individual value in excess of CHF 20 million were CHF 0.3 billion or less than 2% of earned premiums. The increased large claims burden was offset by the continued improvement in the underlying profita bility of current business, where the successful renewals in 2003 and 2004 and an unwavering underwriting focus on profitability are now being reflected in the results.
For Swiss Re, underwriting terms and conditions remained favourable in most lines of business, while profitability was above the average level to be expected over the cycle.
The growth in premiums earned was significantly influenced by the reduction in non-traditional business in all lines except liability, which showed an increase. Furthermore, the effects of lower prior year premiums impacted all lines. Allowing for these, the traditional business grew in accordance with expectations.
Despite the increased frequency of exceptionally large natural catastrophe claims, property continued to perform well in 2004, with its combined ratio improving to 80.1% from 80.5% due to the positive development for prior year business.
Liability premiums remained stable in Swiss francs but increased by 6% in original currencies. An increase in premiums from non-traditional business and the effect of prior year premiums described above had an impact on this line of business. This line benefited from the highest rate increases during the 2003 and 2004 renewals.
Both marine and engineering have gone through a comprehensive re-underwriting exercise in recent years, and while the high level of natural catastrophe activity affected both lines of business, underlying margins were sufficiently high for the combined ratio to show an improvement to 99.4% from 100.1%.
Swiss Re’s web-based tool CatNet™ provides business partners with quick and easy access to comprehensive information about worldwide natural hazard data and country-specific insurance information. The interactive natural hazard atlas contains frequently updated information on a variety of natural perils.
In addition, CatNet™ provides specific insurance information for 24 selected countries on a country -by-country basis as well as loss experience and loss potentials. This is complemented by comprehensive event loss and fatalities lists.
How does Swiss Re specifically approach natural catastrophe risk in China? A key element is the availability of data to quantify natural catastrophe risk. We have been conducting extensive research in this field in cooperation with Beijing Normal University and other key players. We make this knowledge available to our business partners in China and globally, for example via CatNet™, Swiss Re’s electronic natural hazards atlas available on our website. This extensive know-how is incorporated into
Do you feel you are sufficiently acquainted with the business culture in China? Yes, I do. The fact that we have a branch gives us proximity to the market, in terms of closer client relationships and better access to relevant information, which is indispensable to assess the risks we cover. We can also talk to the government, giving us the unique opportunity to contribute towards shaping the Chinese insurance industry, which is still very much in an evolutionary phase, not only regarding natural catastrophe risk but also regarding other important issues such as solvency and insurance regulation.
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Admin ReSM, one of Swiss Re’s key strategic offerings, has developed significantly since 1998. As the model has matured, it has embraced larger transactions: in 2004, it included the acquisitions of the individual life business of CNA in the US for USD 690 million and Life Assurance Holding Corporation Ltd (LAHC), including Windsor Life, in the UK for GBP 333 million. These transactions added considerable scale, with more than five million policies now under Swiss Re’s management, approximately four million in the US and one million in the UK.
Alongside the repricing exercise, the business group worked with individual US clients to align underwriting standards more closely to Swiss Re’s own philosophy. The business group also makes considerable efforts worldwide to ensure that client underwriting standards adhere to adequate risk management protocols.
In a number of key markets in 2004, Swiss Re launched Life Guide, a new Internet -based version of its established underwriting guidelines and rating information.
Swiss Re’s initial claim estimate for the tsunami. Excluding foreign exchange movements, the health operating result improved by CHF 96 million to CHF 173 million. The business group continues to see year-on-year volatility in the health business and expects this effect to decline gradually as exited health lines are run off.
For health business, the return on operating revenues increased to 7.2% in 2004 compared with 2.5% in 2003. This increase was largely due to positive experience from continuing income protection business, partially offset by higher claims developments in exited lines.
Premiums earned Premiums increased by 4% at constant rates of exchange to CHF 10.2 billion, reflecting the contributions of the recent acquisitions of CNA‘s individual life business in the US and LAHC in the UK. Life premiums increased by 7% at constant rates of exchange to CHF 8.4 billion; health business declined by 8% to
CHF 1.8 billion, reflecting the continuing run-off of much of this portfolio in North America and the UK. Growth in the main traditional business markets remained low, due to the US pricing review and lower sales of protection business in the UK primary market.
In North America and Europe, traditional life reinsurance is expected to grow by 6% per year in the medium term. In the short term, growth in the North American market may be lower, reflecting pressure on cession rates as reinsurance prices increase. Emerging markets, particularly in China and India, should see much higher rates of growth.
Swiss Re’s competitive advantages in closed life funds give it significant opportunities for Admin ReSM transactions offering attractive rates of return. Swiss Re will continue to explore these opportunities in key markets.
Capital market solutions supporting traditional and Admin ReSM offerings, such as securitisation, will continue during 2005 as part of Swiss Re’s strategy of accelerating its balance sheet and controlling risk.
Globally, regulatory and accounting changes continue at a rapid pace. In the short to medium term, this will affect the risk and capital management requirements of primary insurers and influence the ways in which reinsurers can offer support. In this changing environment, the business group will continue to focus on providing specific solutions to clients’ evolving needs and improving returns for shareholders.
Excluding currency exchange effects, net investment income grew by 9%, largely due to the Admin ReSM acquisitions in 2004, which increased funds under management by more than CHF 16 billion. This was offset to some extent by continuing low investment yields.
Swiss Re has acquired more than 40 blocks of business since 1998, with over five million po licies – spanning a range of product types – and assets in excess of CHF 33 billion under management (as at 31 December 2004).
Mr Miller, why is Swiss Re the leader for this type of transaction? Our unrivalled history and understanding of this highly specialised business set us apart from other players entering this field. We have many years’ experience of structuring these transactions, securing regulatory approval, converting administrative systems and managing books of business in run-off. Our leadership in this field derives from our strong understanding of local market products, our capacity for swift due diligence and our expertise in compliance, regulation, tax and employment issues.
Ms Kinnaird, when did Swiss Re undertake its first Admin ReSM transaction, and how has Admin ReSM developed since then? Swiss Re first offered the Admin ReSM solution in 1998. Since then we have steadily added to this portfolio. Each new block of business allows us to develop our knowledge, making sub sequent transactions run more smoothly and helping us to focus more sharply on possible integration challenges.
Mr Miller, why was the UK acquisition of Life Assurance Holding Corporation (LAHC) so significant? LAHC was of major strategic importance.
We added a substantial block of in-force business to our portfolio, but also acquired a robust administration operation and an experienced team of people. This has accelerated our ability to build on our UK portfolio with larger and more complex transactions.
Mr Miller, what are the prospects for further Admin ReSM deals? The increasing consolidation and disaggregation of non-core lines of business amongst primary insurers offers significant opportunities for Swiss Re. In the US, the outlook for further transactions remains positive; in the UK, the number of closed life portfolios, with total assets of close to GBP 200 billion, also offers significant potential. Swiss Re’s experience in Admin ReSM trans actions is supported by its financial strength and understanding of what makes this type of business sustainable in the long term. This final point is critical to the success of the business: to preserve the profitability of the in-force business, we must provide security to policyholders, de livering all of their contractual benefits, fairly and properly.
on a sustainable basis for our clients and shareholders.” John Fitzpatrick, Head of the Life & Health Business Group
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Business group results The Financial Services Business Group reported operating income of CHF 695 million, compared to CHF 558 million in 2003. Premium business was the main con tributor to this improvement. The capacity selectively deployed in the most attractive markets and products led to an excellent combined ratio for the traditional premium business of 92.9%, below the 95% three year average target. Fee business produced a return on total revenues of 12.9%, compared to 14.7% in 2003.
Premiums earned grew by 4% (8% excluding currency exchange effects). This is above the three year average target of 3%. This increase was largely driven by cautious growth in casualty, property and credit and surety, partly offset by lower premiums earned in aviation, principally in the facultative airline market. Non-traditional premium volume also increased due to new business written.
The total investment result was CHF 507 million, compared to CHF 358 million in
2003, mainly driven by an excellent contribution from realised gains on equities.
Claims and claim adjustment expenses were CHF 2.4 billion, which represents an increase of 9%, adjusting for currency exchange effects. Claims experience was favourable for aviation and credit and surety, but this was offset by heavier claims activity in casualty and property. Casualty performance nevertheless improved, although it continued to suffer from losses incurred by the pharmaceutical and financial services industries. Property remained satisfactory overall although the impact from natural catastrophes was more pronounced than in 2003.
Acquisition costs were CHF 628 million, compared to CHF 559 million in 2003. The increase is mainly due to premium growth and higher profit commissions, reflecting the improved profitability of the business.
Operating costs were CHF 250 million, compared to CHF 225 million in 2003. This is mainly due to the full year effects of increases in resources in 2003. These resources were added to take advantage of attractive market conditions across the premium businesses.
Total CHF 3.2 billion 17% Aviation 18% Property 21% Casualty27% Credit and surety 17% Non-traditional
Fees for proprietary asset management fell by 7%, reflecting the full impact of the cost savings achieved by Swiss Re Asset Management from the restructuring in 2003.
Acquisition costs totalled CHF 31 million in 2004. These costs are related to trading activities and are netted with the corresponding revenues.
Operating costs were CHF 600 million. Adjusting for currency effects, operating costs were 12% lower than in 2003. This is due to cost savings in proprietary asset management and lower variable costs in fee business.
Conning is an insurance specialist recognised as a leading provider of both strategic insurance research and full-service investment management. In the US, Conning is the third largest insurance asset manager. This success is now being leveraged in the UK and Europe. Today, as a global source of asset management and research services, Conning has offices in the United States, London and Dublin. Conning has been a member of the Swiss Re Group since July 2001.
Conning Asset Management has experienced strong growth in clients and assets under management, with 2004 being one of its best years for winning new business. As of 31 December 2004, the company served more than 125 clients extending from the US to Canada, Bermuda, the UK, Continental Europe and Japan. Conning’s global assets under management have grown to USD 48.5 billion with an additional USD 13.6 billion accounted for as advisory services. Accounting and reporting services were provided on another USD 34.2 billion, bringing total client assets serviced to USD 96.3 billion.
¹ 2004 assets are global (US: USD 47.4 billion; rest of world: USD 1.1 billion). Prior years are US only
Insurance securitisation is a good risk-transfer mechanism and means of increasing capital efficiency. An embedded value life securitisation monetises the present value of expected future profits. Risks embedded in future life profits include mortality, lapse (non-payment of policy premiums ), and investment risks, all of which have a historical basis for analysis.
Overall the premium business should continue to produce strong underwriting results, assuming that large claims are within expected levels. Indications from the January renewals show that premium growth may slow in 2005, given the business group’s stringent underwriting requirements and general market conditions. This should be partially offset by business expanding where relative returns are higher, and by expanding the business group’s presence in emerging markets, particularly in Asia.
The insurance-linked securities sector has started well in 2005 as new and repeat issuers continue to utilise the capital markets to cede peak natural catastrophe risk. A major trend is the extension of capital market solutions to the life insurance markets. Issuance of life securitisations exceeded natural catastrophe deals in 2004 and we expect this trend to be repeated in 2005.
The securitisation of life business continues to play a prominent role in Swiss Re’s insurance-linked security (ILS) strategy. Investor interest remains strong, underscoring the potential of this market.
Mr Ozizmir, what are Swiss Re’s aims in the life securitisation market? I see our aims as two-fold. One objective is to transfer peak risks arising from extreme mortality events, such as pandemics or terrorist attacks, to the capital markets. Our other objective is to optimise capital efficiency. The way we do the latter in our life business is by focusing on embedded value securitisations, in other words, monetising the value of future profits of the underlying insurance life policies. This also ties in with our strategy to expand our activities in Admin ReSM, which involves the purchase by Swiss Re of closed blocks of life and health insurance business. Using ILS complements our other sources of financing for these transactions and helps us to provide attractive returns to our shareholders and a constant supply of interesting investment opportunities to the capital markets.
How would you like to see the ILS market develop in the near future? I would like to see it continue on its current path. What we need is a growing and fluid marketplace demonstrating a lively demand across the board for these types of securities. As long as these conditions prevail we can transfer risk and free up capital for more profitable business. The evolution of the market hitherto points to a very positive outlook for ILS.
“Our expertise in capital markets solutions including securitisation, combined with sophisticated risk underwriting, provides an integrated and cost efficient product offering to our clients.” Jacques Aigrain, Deputy CEO and Head of the Financial Services Business Group
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 Clear accountability: Swiss Re operates on the principle of delegated authority. Business units are accountable for the risks they take and their incentives are aligned with Swiss Re’s overall business objectives.
 Independent risk management function: to avoid conflicts of interest, risktaking activities have independent oversight.
Within the Executive Board Committee the Chief Financial Officer (CFO) is responsible for the business planning process and strategic asset allocation. Responsibility for implementing the risk management framework across the Group lies with the Chief Risk Officer (CRO). The CRO leads the Group-wide risk management function, which includes Group Risk Management and the risk management departments in each of the business groups (see Figure 1).
Group Risk Management is the department, within Risk & Knowledge Division, responsible for creating transparency, at Group level, of the risks assumed through Swiss Re’s business origination and investment activities. It does not execute business; it sets risk management guidelines and standards based on best practice.
Risk management organisation The ultimate responsibility for the Swiss Re Group’s risk management principles and policies lies with the Board of Directors, which is also responsible for approving Swiss Re’s overall risk tolerance. The Board committees that deal with risk management issues include the Finance and Risk Committee, the Investments Committee and the Audit Committee.
 The Group Products and Limits Committee determines the Group’s product policy and standards, grants reinsurance and counterparty credit risk limits and decides on large or non-standard transactions.
Group Internal Audit monitors the execution of risk management processes within the Group.
The risks classified under Operational risks and Other risks are ancillary and arise as a consequence of undertaking business.
Swiss Re is unable to meet its shortterm financial obligations or to raise funds in the markets to finance its commitments at a reasonable cost.
 Reputational risk is the risk that a particular event or behaviour will affect Swiss Re and negatively impact stakeholders ’ perception of the Group, thus impairing its ability to operate effectively.
Funding and liquidity risk may result from larger than expected cash outflows or smaller than expected cash inflows and a restricted ability to raise short-term funds. In addition, sudden liquidity requirements may arise if covenants are triggered under specific adverse circumstances, requiring the collateralisation of debt obligations and third party guarantees with assets of a specified quality.
Maintaining an impeccable reputation is key to Swiss Re. Reputational risk is mitigated by adhering to clear values supported by the Group Code of Conduct; by processes that facilitate early identification of risks and problem areas; by clearly stated performance expectations and risk tolerance; and by fostering an open information culture.
Figure 1: Risk management – overview of Swiss Re’s key bodies and functions
Based on these principles, it is possible to obtain the probability distribution for the Group’s annual economic profit and loss, specifying the likelihood that profit or loss will fall within any given range. From this distribution a base capital requirement is derived that captures the potential for severe, but rare, aggregate losses over a one-year time horizon. The base capital requirement is then compared with available capital to determine the adequacy of Swiss Re’s capitalisation (see Capital management, page 52).
Various statistical measures can be used to summarise the risk distribution and define the base capital requirement. One widely used measure is the 99% Value at Risk (VaR): a maximum loss that will be exceeded in only one year out of a hundred. In addition to the overall Group 99% VaR, Table 1 gives the standalone 99% VaR for property and casualty, life and health, financial market, credit, and funding and liquidity risks. This clearly shows the diversification effect: the base capital requirement for the entire portfolio is smaller than the sum of the base capital requirements for the individual sub-portfolios.
In addition to the 99% VaR, Swiss Re considers other statistical measures. One such measure is the so-called 99% expected shortfall. While 99% VaR measures the maximum loss that will be exceeded in only one year out of one hundred, 99% expected shortfall measures the average of losses that occur with a frequency of less than once in one hundred years. The 99% expected shortfall is a more conservative risk measure. Based on mid 2004 exposure data, the Group’s 99% expected shortfall amounted to CHF 15.5 billion.
Risk management per core risk category Risk appetite and risk tolerance at Group level are defined by a set of limits and the annual Group plan that is approved by the Executive Board and the Board of Directors. The allocation of capacity to lower levels is carried out by the relevant Group or business group bodies.
Insurance risk management Property and casualty risk arises from the underwriting activities of the Property & Casualty and Financial Services business groups. The main exposures stem from the property, casualty, marine and aviation lines. Limits to prevent excessive exposure to any individual risk factor or to the same underlying risk (eg California earthquake, product liability for a specific company, etc) are monitored Group-wide and supported, where necessary, by a Group-wide clearing system. In addition, each underwriter is set limits per treaty programme and single risk. For exceptions there are well defined escalation procedures at various levels up to the Group Product and Limits Committee.
These procedures and limits define the underwriting process and are laid down in the Group Non-Life Reinsurance Underwriting Guidelines which are approved by the Group Product and Limits Committee. Further instructions at business group and divisional level complement the guidance for all risk takers.
permit timely reporting on risks assumed and regular monitoring of capacity usage. The Chief Underwriting Office, with its product management units, plays a major role in actively managing property and casualty risks by proposing the annual renewal strategy and closely monitoring renewal business. Where appropriate, Swiss Re also uses insurance-linked securities, retrocession and risk swaps as a means of balancing its portfolio.
Life and health risk is assumed through underwriting activities focusing on mortality covers and acquired life run-off business (Admin ReSM business). Local business units can accept business within agreed limit structures which would include per life retention limits for individual business, maximum market exposures for life and health catastrophe business and occupational scheme aggregation limits, designed to limit exposure in single locations. Any business that falls outside the specified limits must be approved by the business group. It is assisted in this task by Life Risk Management, which independently reviews and assesses large and non-standard transactions and new product referrals.
The estimated pre-tax claims in the life and health scenario (Table 3) are based on the average sum insured. It is assumed that excess mortality is evenly spread across the population, which does not allow for the typically lower mortality experienced among the insured population.
Financial market risk is identified using a risk inventory of the various risk factors that each business unit is exposed to. Each business group is responsible for measuring the financial market risk arising from their own activities; the results are captured in the Market Risk Aggregation & Reporting System (MARS), which is also used for risk modelling and risk reporting at Group level. The Asset Liability Management report summarises financial market risks at Group level. Risk reporting in PAM is done on a weekly basis, while a combination of daily and weekly risk reporting is done in CMA. These reports are the primary tools used to track exposures and monitor usage of limits.
Limits are monitored by the risk management function embedded within each business unit. The limits are reported to the head of the business unit who is also ultimately responsible for risk steering. The business unit heads seek to optimise their respective portfolios within their limits including the use of cash and derivative instruments.
The reporting process is supported by the Group Credit Risk Exposure Reporting, Management and Information Tool (GERMIT ) that contains all relevant information including counterparty details, ratings, credit risk exposures, credit limits and watch lists. It is accessible by all key credit practitioners in the Group, thus providing essential transparency to allow for the successful implementation of active exposure management strategies for specific counterparties, industry sectors and geographic regions.
Estimated economic impact of scenarios in CHF billions as of 31 December 2004
Jan 04 Feb 04 Mar 04 Apr 04 May 04 Jun 04 Jul 04 Aug 04 Sep 04 Nov 04 Dec 04Oct 04
 One day 99% VaR  Daily profit and loss range
The chart above shows the number of days on which market risk related revenues fell within particular ranges. Daily revenue was positive on 59% of the trading days during the year. The average daily revenue was USD 0.3 million and the largest daily loss was USD 3.9 million.
Capital management Capital management, like risk management, is one of Swiss Re’s key tasks and is based on the following guiding principles:  ensure that the Group is adequately capitalised at all times and able to maintain financial strength after a large loss event;  meet the capital requirements of Swiss Re’s legal entities;  actively manage the capital adequacy of the Group and its legal entities, taking into account internal economic and accounting views and rating agency and regulatory solvency models.
This superior capital position ensures that Swiss Re’s financial strength remains very strong even after an extremely adverse year.
Swiss Re’s funded business strategy Swiss Re continues to expand its funded business strategy, diversifying its business while offering value-added solutions for clients. Funded business creates assets and liabilities – usually capital market instruments – that generate additional revenue.
In funded transactions, foreign exchange and interest rate risks are typically offset. They do not significantly affect Swiss Re’s overall financial market profile. These transactions appear on the balance sheet as “Financial services assets” and “Financial services liabilities” (see page 4–5 of the Financial Statements) and are taken into account in Swiss Re’s risk management process.
Swiss Re‘s very strong capitalisation, outstanding business position, excellent diversification and prudent capital and risk management are reflected in superior
¹ Includes fixed income securities (excluding fixed income securities backing life and health reserves), investments in real estate, and own-use property
Regulatory developments The Swiss Federal Office of Private Insurance (FOPI) acts as lead regulator for Swiss Re at Group level and has issued a decree on Group supervision that became effective as of 1 January 2005. Similar decrees have been issued in the past for other major Swiss insurance conglomerates. The decree is considered equivalent to the EU Financial Conglomerate Directive. Group supervision is supplementary to the supervision of Swiss Re’s legal entities. These are subject to the regulations of the various countries in which they operate.
Group Treasury activities in 2004 In June 2004 Swiss Re repaid its USD 530 million Triple Exchangeable Bond, issued in 1999.
Swiss Re’s EUR 672 million mandatory convertible security, launched in July 2004, was the first ever hybrid capital issue from a European financial institution to achieve 100% equity credit from Moody’s, S & P and A.M. Best. The transaction was very well received and heavily oversubscribed. Underlying shares previously committed to Swiss Re’s convertible bond, issued in 2001, have been reallocated for this transaction by purchasing call options at favourable conditions. None of the conditional capital increase approved by the Annual General Meeting in May 2004 was used for this transaction. With the launch of the mandatory convertible security Swiss Re continued to improve its financial strength by moving from senior debt to hybrid capital.
Swiss Re successfully renewed its USD 5 billion European Medium Term Note (EMTN) programme, an actively used funding platform. At the end of December 2004 Swiss Re’s outstanding EMTN issues amounted to an aggregate book value of USD 2.1 billion.
Besides the continuing monitoring and managing of Swiss Re‘s risk landscape to achieve an optimal risk return profile, the focus of risk management in 2005 will be on two areas: the broadening of the operational risk management processes and working with regulators on emerging regulatory requirements, such as the Solvency II project on the European level and the Swiss Solvency Test on the Swiss level.
In Swiss Re’s efforts to address sustainability challenges affecting its business, climate change continues to be an important topic. In 2004 activities centred on awareness building, know-how exchange, risk transfer solutions and the Group’s own Greenhouse Neutral programme. Swiss Re’s sponsorship initiatives also focused on sustainability.
Milestones in 2004 included:  Swiss Re was invited to become an original member of the Climate Group, a coalition of public and private sector organisations at the forefront of tackling climate change. The group was officially launched in April 2004 by British Prime Minister Tony Blair, who warned that the economic costs of inaction would be greater than the costs of action. The Climate Group’s chief goal is to promote concerted action through sharing know-how and best practice.
Innovative solutions At present, there is no reliable statistical link between climate change and the frequency of tropical cyclones or European winter storms. Most of the observed rise in storm-triggered losses in recent years can be attributed to higher value concentrations in exposed areas. There are clearer signs, however, that the rise in the frequency and severity of floods and droughts may be related to climate change. More over, scientists believe climate change is likely to lead to an increase in the frequency of all kinds of extreme weather events.
While Swiss Re has continued to refine its risk analysis of natural catastrophes for traditional reinsurance, it is also pursuing innovative approaches to climate change. One such approach is securitising risk through the issuance of catastrophe bonds. So far, capital markets have been bearing only a small fraction of such large-scale risks and are thus ideally suited to complement traditional reinsurance solutions. At the end of 2004, the total market value of outstanding insurance-linked securities (ILS) was USD 4.4 billion. Swiss Re has the clear leadership position in the ILS sector: 40% of all bonds outstanding were transformed and/or underwritten by Swiss Re Capital Markets. 33% of all bonds have been sponsored by Swiss Re for own protection against natural catastrophe risks, as well as extreme mortality.
Swiss Re is also taking a strong interest in the emerging greenhouse gas emissions markets. The European Union (EU) has launched its emissions trading scheme in 2005. Swiss Re welcomes the intro duction of market-based mechanisms for reducing emissions and is developing products to facilitate them, including one that will enable the European pool to clear greenhouse gas emissions trades.
Greenhouse Neutral programme Swiss Re’s own business generates relatively little greenhouse gas. In addition, extensive efforts have been made over the last few years to improve the energy efficiency of the Group’s own office buildings. In Switzerland, for example, 17% of Swiss Re’s office space had been certified according to the stringent MINERGIE® standard by the end of 2004. Nevertheless, as part of its commitment to abating climate change, the Group launched a programme in 2003 to become greenhouse neutral within ten years. Physical emissions will be reduced by 15% with the remainder offset by investing in the World Bank’s Carbon Community Development Fund. The table on page 56 shows the data from the programme’s first year.
Progress on other initiatives EU Directive on Environmental Liability The EU Directive on Environmental Liability – aimed both at preventing environmental pollution and ensuring clean-up – came into effect at the end of April 2004. EU member states now have three years to adopt this directive into their respective national legal codes. No standardised insurance solutions currently exist, however, to cover liability for ecological damage as defined in the EU directive.
Swiss Re drew attention to this problem with its publication “Insurability of Ecological Damage”, in which it set out a basis for
a possible insurance solution. Swiss Re experts are participating in a number of internal and external forums, including the CEA (European Insurance Committee) and the environmental working group of the GDV (German Insurance Association), to help develop suitable products.
Sensitive business cases Swiss Re’s Group Code of Conduct lays out clear guidelines on sustainability and business ethics. To help underwriters and client managers implement these principles, a formal process for sensitive business cases has been embedded in Group Compliance. Underwriters and client managers who encounter situations that may raise important ethical questions can ask for swift internal advice. Around a dozen recommendations for such sensitive business cases – a third of which were deemed to be unsuitable – were issued at Group level during 2004. The process is emerging as an efficient and flexible risk management tool within Swiss Re’s corporate governance framework.
In addition to the television documentary series “The Great Warming” (see text on page 55), Swiss Re conferred the ReSource Award for the second successive year. This award acknowledges innovative projects in sustainable watershed management. First prize went to an initiative in the A’Vuong region of Vietnam, launched by WWF Indochina and the Quang Nam Forest Protection Department. The project was rewarded for its pioneering allocation of land and resource rights to indigenous people.
Swiss Re’s corporate citizenship programme also supports the communities in which the Group operates and locally based projects for its employees. The Dollars -4-Doers initiative, for example, provides financial support to organisations or projects in which employees play an active role.
In addition, the correlation between different locations becomes very obvious, which is the major advantage of the event-set approach. Knowing this correlation not only enables a more accurate assessment of expected claims in case of a spread portfolio, it is also a prerequisite for sophisticated risk management. Event claims can be added up across all acceptances to one total event claim for accumulation control purposes. Additionally, a tailor made and risk adequate loading (capital cost charge) can be charged to each transaction, as each acceptance ‘s contribution to each overall event claim is quantified.
As a further step, the natural perils portfolio can then be optimised by selectively writing those risks that provide the best relative diversification to the overall portfolio.
How much influence does event-based modelling actually have on your underwriting?
Corporate governance is the name applied to the framework comprising a company’s organisation, structure, management and assurance functions. A company‘s governance should be transparent to its shareholders and other stakeholders. Swiss Re fully endorses the values of state-of-the-art gov ernance and comprehensive transparency.
As a publicly listed Swiss company, Swiss Re is subject to the Directive on Information relating to Corporate Governance and its Annex and Commentary, issued by SWX Swiss Exchange (also referred to as the “SWX Directive“). As the SWX Directive has not changed since its inception, the information provided in this section of the Annual Report looks similar to last year, adhering strictly to the structure of the SWX Directive.
Listed Group companies Swiss Reinsurance Company, the Group’s parent company, is a joint stock company, listed on SWX Swiss Exchange, domiciled at Mythenquai 50/60 in 8022 Zurich, and organised in accordance with the laws of Switzerland. Please see page 90–91 (“Swiss Re shares”) for details on share information. For the other listed Group companies please refer to the Financial Statements, note 16 on “Subsidiaries, equity investees and variable interest entities”, page 50–55.
2.1 Capital Please refer to the “Statement of shareholders’ equity” of Swiss Reinsurance Company, Zurich on page 66 of the Financial Statements.
2.3 Changes in capital In 2002 Swiss Reinsurance Company’s share capital remained at CHF 32 million. Total reserves increased by CHF 163 million to CHF 10.1 billion. The lower profit for the financial year of CHF 106 million (compared to CHF 930 million in 2001) led to a reduction in disposable profit from CHF 943 million to CHF 122 million. Total shareholders’ equity before allocation of profit decreased from CHF 10.9 billion to CHF 10.3 billion. At the Annual General Meeting shareholders approved a reduced dividend payment of CHF 310 million, compared to CHF 776 million in the previous year.
2.4 Shares As of 31 December 2004, Swiss Reinsurance Company’s share capital, including shares reserved for corporate purposes, amounted to CHF 32 206 617.40. It is fully paid-in and divided into 322 066 174 registered shares (each with a nominal value of CHF 0.10), of
2.5 Profit-sharing certificates Profit-sharing certificates in the sense of the SWX Directive are particular types of nonvoting securities that substitute or complement shares. These do not exist at Swiss Re.
Procedure and conditions for cancelling statutory privileges and limitations on transferability
Unless previously converted, each MCS will be mandatorily converted on the maturity date into such number of registered shares of Swiss Re as is equal to the maturity conversion ratio. The maturity conversion ratio equals the arithmetic average of the 15 conversion ratios (calculated to five decimal places) calculated on the basis of the CHF closing prices of the shares on the virt-x (“closing price”) on each of the 15 consecutive trading days ending on the third trading day prior to the maturity date. For the purposes of calculating such arithmetic average, the conversion ratio for a given trading day is determined as follows: (i) if the closing price is less than or equal to the minimum conversion price of CHF 80.4140, the conversion ratio shall be equal to the maximum conversion ratio of initially 18.956 shares per MCS; (ii) if the closing price is greater than or equal to the maximum conversion price, of CHF 96.4968, the conversion ratio shall be equal to the minimum conversion ratio of initially 15.796 shares per MCS; and (iii) if the closing price is greater than the minimum conversion price, but less than the maximum conversion price, the conversion ratio shall be equal to EUR 1 000 multiplied by the fixed exchange rate (EUR 1 = CHF 1.5243) and divided by the closing price. Based on the closing price Swiss Re will be required to deliver between 10.6 million and 12.7 million shares created from conditional capital.
Options For details on stock options granted to Swiss Re employees and other derivatives indexed to Swiss Re shares, please refer to note 12 on “Stock compensation plans” on page 37–38 and note 9 on “Shareholders’ equity” on page 31–32 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. Mr Forstmoser has been a law professor at the University of Zurich since 1974 and a partner of Niederer Kraft & Frey, Attorneys, in Zurich, since 1975. He is also chairman of the board of directors of Hesta AG and Hesta Tex AG, Zug, and a member of the boards of Mikron Holding AG, Biel, and Bank Hofmann AG, Zurich.
Mr Bechtler also serves on the boards of directors of Credit Suisse Group, Zurich, Bucher Industries, Niederweningen, Sika Finance AG, Baar, and Conzzeta Holding, Zurich. From 1987 to 1999 he served as chairman of “Swisscontact”, a large Swiss development foundation, and from 1987 to 2002 as chairman of the Zurich Art Society.
Mr Farr joined Swiss Re’s Board of Directors in November 1996. His mandate was renewed in 2000 and 2004, each time for a further four year period. Mr Farr has been managing partner of Muirhead Holdings LLC, Greenwich, CT, since 1998. Prior to that he was vice chairman of American Express Company, New York, from 1995 until his retirement in 1998. Before 1995, Mr Farr was a director of McKinsey & Co, New York. Mr Farr also serves 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.
Ms Gibson, a Swiss citizen born in 1962, studied business and economics at the University of Geneva, graduating with a BA in 1982 and a PhD in economics and social sciences in 1987.
Mr 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. He will stand for reelection at the Annual General Meeting on 9 May 2005. He was a general partner of Darier Hentsch & Cie, Private Bankers, Geneva, from 1985 until 2001 and chaired the Swiss Private Bankers Association from 1998 until 2001. In 2004, he founded GEM – Global Estate Managers – as well as Banque Bénédict Hentsch & Cie S.A., both entities dedicated to global wealth management. He is a member of the board of the ISC Foundation and the MLE-Stiftung, both at the University of St. Gallen.
step down at the 2005 Annual General Meeting. Mr Lemann is an entrepreneur with significant stakes in InBev, an international brewer, and Lojas Americanas, a discount store chain in Brazil. He also serves on the board of directors of Ambev, The Gillette Company, InBev, Lojas Americanas and the board of the Associates at the Harvard Business School. Moreover, he serves on the international advisory board of DaimlerChrysler Corp., Auburn Hills, Michigan, and as chairman of the Latin American Advisory Committee of the New York Stock Exchange.
Mr Scott joined Swiss Re’s Board of Directors in 2002 for a four year term. He is a retired group chief executive of CGNU plc. In the 1990s, he was group chief executive of General Accident and, following the merger with Commercial Union in 1998, was appointed group chief executive of CGU plc. Following the merger in 2000 with Norwich Union, Mr Scott became group chief executive of CGNU plc, retiring in May 2001. Mr Scott was also chairman of the Association of British Insurers in 2000–2001, and board member in the previous four years.
Mr Scott is chairman of the board of directors of Yell Group plc, and a non-executive director of the Royal Bank of Scotland Group plc, Jardine Lloyd Thompson Group plc, and Focus DIY Group Limited. In addition, he is a member of the international advisory board of Sapiens International Corporation.
Mr Smith is chairman of Delta Air Lines and a director of The Procter & Gamble Company and The Nature Conservancy. He is also chairman of the Alix Partners LLC/Questor Partner advisory board. In addition, he is a member of the chancellor’s executive committee of the University of Massachusetts and of the board of trustees at Boston University.
al Department of Finance. He continued in this function until his retirement at the end of 2003. Mr Villiger was President of the Swiss Confederation in 1995 and 2002. Mr Villiger is also on the boards of directors of Nestlé and the newspaper “Neue Zürcher Zeitung”.
Changes in the course of the business year 2004 At the Annual General Meeting of 14 May 2004, the shareholders elected Mr Kaspar
Villiger to be a member of the Board of Directors, with a four year term.
Changes since 31 December 2004 Mr Jorge Paulo Lemann has decided to step down from the Board of Directors at the
Annual General Meeting of 9 May 2005 in order to be able to devote more time to his own businesses.
Nomination for the election to be held at the Annual General Meeting of 9 May 2005 The Board of Directors has decided to nominate the following candidate for initial election to the Board with a four year term of office: Mr Jakob Baer, a Swiss citizen born in 1944. Mr Baer became an attorney-at-law in 1971 and graduated from the University of Bern in 1973 with a doctorate in law. He began his career in the legal department of the Federal Finance Administration. In 1975 he joined Fides Trust Company. Following the successful planning and execution of a management buy-out of Fides’ advisory business, he became a member of the management board of KPMG Switzerland in 1992. In 1994, he was appointed CEO of KPMG Switzerland and a member of KPMG’s European and international management boards. He retired from KPMG in September 2004, having reached the statutory retirement age. Mr Baer then joined Adecco S.A. as a non-executive director. In addition he is a member of the boards of directors of Emmentalische Mobiliar Versicherungs-Gesellschaft and IFBC – Integrated Financial Business Consulting AG.
Thomas W. Bechtler, Director, is also a director of Bucher Industries, Conzzeta Holding, Credit Suisse Group and Sika Finance AG.
Jorge Paulo Lemann, Director, is also a director of Ambev, The Gillette Company, InBev and Lojas Americanas.
Robert A. Scott, Director, is also chairman of the board of directors of Yell Group plc and a director of The Royal Bank of Scotland Group plc and Jardine Lloyd Thompson Group plc.
3.5 Internal organisational structure The organisational structure is laid down in the Corporate Bylaws, which also define the responsibilities of the Board of Directors, its five committees, the executive management as well as the reporting procedures. The Corporate Bylaws are, therefore, a key regulation in respect of corporate governance. Given their significance, the Corporate Bylaws are reviewed annually by both the Governance and Shareholder Relations Committee and the Board for compliance with domestic and international laws, regulations and best practice standards.
b. Committees of the Board of Directors: members, tasks and responsibilities General provisions for all Committees The Board of Directors may delegate certain responsibilities, including the preparation and execution of its resolutions, to Committees or individual members of the Board. Any such Committee or member must keep the Board apprised on a timely basis of the Committee’s or member’s actions and determinations.
More specific duties and responsibilities of the Committee are listed in its charter of duties.
thereto; and it reviews portfolio risk management activities. The Finance and Risk Committee reviews its own performance annually.
Peter Forstmoser, Chair George L. Farr Bénédict G. F. Hentsch Walter B. Kielholz John F. Smith, Jr. Kaspar Villiger
Tasks and responsibilities The Committee measures the Group’s governance against relevant best practice standards 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 practice in the markets deemed most relevant; it monitors the Corporate Philosophy, the corporate culture, the corporate social engagement and the Group’s orientation towards sustainability; it monitors investor relations; 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; it has initial responsibility for reviewing material transactions with any of the Group’s significant shareholders; and it establishes a procedure for the directors to comment on the Board’s performance. The Governance and Shareholder Relations Committee reviews its own performance annually.
c. Work methods of the Board of Directors and its Committees The Board typically meets six times per year for two consecutive days. The first day is reserved for the Committees, while on the second day the full Board meets for as long as required, mostly the whole day. The regular meetings are typically held in February, March, May, June, August and December. Additional meetings are called at short notice if and when required. Each of the Board meetings has a special focus, broadly determined by Swiss Re’s reporting schedule, and including such issues as strategic issues, the financial statements, the analysis of internal results, interim results, the medium-term business plan, and corporate governance.
Meeting invitations and agendas are delivered to the directors about ten days before the meeting together with written materials to permit meaningful review.
The attendance rate at the regular Board meetings was 97% throughout the year.
For every meeting it is contemplated that an executive session shall be held for discussions between the Board of Directors and the Chief Executive Officer, discussions involving all members of the Board, or discussions among the independent members of the Board, as the case may be.
Assurance functions in Swiss Re comprise an internal audit organisation, a dedicated organisation that ensures compliance with legal and regulatory requirements as well as ethical standards, a risk management system designed for the size, complexity and risk profile of the company, an actuarial reserves group and a specially qualified external auditor.
Compliance Compliance at Swiss Re means the upholding of legal, regulatory and ethical standards by all staff throughout the Group. Swiss Re has developed a Group-wide Code of Conduct (see www.swissre.com/About Us/Corporate governance/Regulations) which lays down the Group’s core principles and values, and offers guidance on how to apply these in all business activities. The Code of Conduct also sets out certain behavioural standards which all Swiss Re employees are expected to maintain. A Group Compliance pro-
Actuarial review The Board of Directors has appointed Mr Freddy Delbaen as an external actuary to conduct a review of the balance sheet provisions for the life reinsurance business of Swiss Reinsurance Company and European Reinsurance Company. His review focuses on the appropriateness of the reserving assumptions that, combined with the margins in the reserves, provide a reasonable level of prudence over the company‘s best-estimate assumptions. Mr Delbaen is a professor and has held the position of Chair of Financial Mathematics at the Swiss Federal Institute of Technology (ETH) in Zurich since 1995.
4 Executive Board 4.1 Members of the Executive Board Status as at 31 December 2004
Mr Aigrain, a Swiss and French citizen born in 1954, received a PhD in economics in 1981 from the Sorbonne, in France, after studying law at the Sorbonne and economics at Paris-Dauphine University.
Andreas Beerli Head of the Americas Division within the Property & Casualty Business Group
John H. Fitzpatrick Head of the Life & Health Business Group, Member of the Executive Board Committee
Mr Fitzpatrick joined Swiss Re in July 1998 as Chief Financial Officer and was appointed to his current position in April 2003. Before joining, he was senior managing director and
Ms Godbehere, a Canadian and British citizen born in 1955, qualified as a Certified General Accountant (CGA) in Canada in 1984 and became a fellow of the Certified General Accountants’ Association (FCGA) in 2003.
Rudolf Kellenberger Deputy Chief Executive Officer and Member of the Executive Board Committee until 31 December 2004
Mr Kellenberger, a Swiss citizen born in 1945, studied civil engineering at the Swiss Federal Institute of Technology (ETH) in Zurich, graduating in 1970.
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 as Head of Europe Division.
Benjamin Meuli Chief Investment Officer, Head of the Asset Management business sector within the Financial Services Business Group
Mr Meuli joined Swiss Re in April 2004 to assume his current position. After his graduation, he embarked on a 20-year career with JP Morgan, where he became a managing director, in charge of the European Debt Capital Markets and the European Financial Institutions Group. He also held the positions of chief executive of JP Morgan Life Assurance Ltd and chief operating officer of the global fixed income division. In 1998 he joined Morgan Stanley as managing director with primary responsibility for investment banking, fixed income, equities, real estate, and associated asset and liability management issues linked to large multinational insurance groups.
Mr Ozendo, a US and French citizen born in 1950, attended the University of San Francisco from 1968 to 1971, studied political science and earned a bachelor of arts degree.
utilisation section and assumed responsibility for the Group’s catastrophe fund covers. From 1989 he had marketing responsibilities in the Latin American and Iberian areas. He was appointed to the Executive Board in 1995. In 1998, he was named Chief Risk Officer and became a member of the Executive Board Committee. Mr Porro stepped down from the Executive Board on 31 December 2004 as he will reach retirement age in 2005. Prior to joining Swiss Re, Mr Porro had various assignments at the Swiss Federal Institute of Technology (ETH).
Mr Wilson, a US citizen born in 1961, graduated from the Vanderbilt University School of Law in Nashville, Tennessee in 1986 with a doctorate in jurisprudence. He also holds a BA in political science from the University of Alabama in Huntsville, Alabama.
Mr Zaytsev, a US citizen born in 1949, studied engineering and computer technology at the Technical University of Lvov, Ukraine, graduating in 1971 with a master’s degree in mechanical engineering.
Board on 19 February 2004 with effect from 19 April 2004. For details, please refer to the section above.
Changes since 31 December 2004 Jacques Aigrain was appointed Deputy Chief Executive Officer from 1 January 2005.
Jacques E. Dubois discontinued his function as Deputy Head of the Life & Health Business Group as of 31 December 2004. He refocused his role on corporate development and US public affairs. He continues to serve as an Executive Board member and as chairman of Swiss Re America Holding Corporation.
Charlotte A. Gubler was appointed Head of Communications & Human Resources with effect from 1 January 2005. She also joined Swiss Re’s Executive Board on that date. Ms Gubler, a Swiss citizen born in 1952, holds a degree from the Graduate School of Business Administration in Zurich. She began her professional career in general merchandise trading and the retail industry. She then joined a management consultancy firm where she spent eight years focusing on the acquisition and execution of strategic, marketing, organisation and human resources mandates. In 1993, she joined Swiss Re as Senior Credit Risk Manager in the company’s Credit & Surety Department with the primary mandate of assessing credit risks in the global retail industry. Two years later, she was appointed to establish a global Credit Risk Management Function, first for the company’s initial Alternative Risk Transfer Division and subsequently for the Swiss Re Group. In 2000, she became a Member of the Executive Team of the Financial Services Business Group and Head of Credit Solutions, a business sector of Swiss Re, which encompasses the Group’s global credit risk underwriting business.
Rudolf Kellenberger will retire on 30 April 2005. In view of this, he handed over his responsibilities as Deputy CEO to Jacques Aigrain on 1 January 2005 and stepped down from the Executive Board.
Bruno Porro stepped down from the Executive Board on 31 December 2004 as he approached retirement age. He handed over his responsibilities to Christian Mumenthaler on 1 January 2005.
Computer Sciences Corporation Contract Swiss Re Life & Health America Inc. and certain of its life insurance affiliates, each of which is a United States life insurance subsidiary of Swiss Reinsurance Company (such US insurance subsidiaries are together referred to as “Swiss Re”), are parties to a third party administration contract (the “TPA Agreement”) with affiliates of Computer Sciences Corporation, a Nevada corporation (together “CSC”). The TPA Agreement provides for CSC to carry out most of the policyholder administration services, including customer service, claims processing, and audit and regulatory compliance support, at mutually agreed and measured service levels for direct life insurance policies and annuities of Swiss Re and its clients. Currently, CSC is providing such policyholder administration services for approximately 2 million direct life insurance policies and annuities of Swiss Re and its clients and, later this year, it is expected to administer an additional approximately 1 million direct life insurance policies and annuities acquired by Swiss Re in 2004. Under the TPA Agreement, CSC provides these policyholder administration services at a number of operational sites throughout the United States. Subject to certain early termination provisions, the TPA Agreement has a ten year term ending in 2013.
Aberdeen Contract Windsor Life Assurance Company Limited (“Windsor Life”), an indirect wholly-owned subsidiary of Swiss Reinsurance Company, entered into an Investment Management Agreement (“IMA”) with Aberdeen Asset Managers Limited (“AAM”) on 31 May 2001. The IMA has a term of ten years but may be terminated early with six months’ notice. In accordance with the IMA, AAM will act as exclusive manager of the Windsor Life investment portfolio subject to the guidelines in the Investment Handbook and instructions by Windsor Life. Compensation to AAM is based on a schedule of rates per annum applied to the value of assets.
remit also includes responsibility for the compensation philosophy and approving compensation plans.
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 bonus can be either in cash or shares that are deferred for four years. Furthermore, all Executive Board members are obliged to take a minimum of 25% of their annual bonus in deferred bonus shares.
The Executive Board’s performance assessment is based on annual objectives involving financial and qualitative elements. The bonuses distributed for a year’s service are paid in April of the following year. All amounts disclosed relate to the performance year 2004 with some elements to be credited in April 2005.
The disclosure follows the SWX Directive, which requires differentiation between the executive members of the Board of Directors and the management board in total and the non-executive members of the Board of Directors in total. This applies to the tables shown on page 81–84. CHF millions 18 executive members (Executive Vice Chairman and 17 Executive Board members) 40.9 10 non-executive members (members of the Board of Directors) 2.9
Executive Board members must receive between 25% and 100% of their performance related pay in shares. All shares awarded to the Executive Board are subject to a four year deferral period. The bonus plan stipulates that Executive Board members must decide on the final split between cash and shares by April. For the purpose of this disclosure, we have assumed a take-up rate of 75%, which is in line with experience from previous years. Such shares have a discounted taxable value of CHF 65.60.
The options run for ten years and have a four year restriction period during which there is a forfeiture risk. The deferred shares have a discounted taxable value of CHF 65.60. Based on the value of the shares, the option has a value of CHF 20.70 at grant date.
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.
In line with the legal provisions, any shareholder with a voting right may have his/her shares represented at any General Meeting by another person authorised in writing or by corporate bodies, independent proxies or proxies for deposited shares. Such representatives need not be shareholders.
6.4 Agenda The Board of Directors announces the agenda. Shareholders with voting powers whose combined holdings represent shares with a nominal value of at least CHF 100 000 may, up to 45 days before the date of the meeting, demand that matters be included in the agenda. Such demands must be in writing and must specify the items and the proposals to be submitted.
7 Changes of control and defence measures 7.1 Duty to make an offer Swiss Re has not taken any defence measures against take-over attempts. The governing bodies believe that the best protection is a fair valuation of the shares. They believe in the efficiency of a free market rather than relying on defence measures that normally have a long-term negative effect on the share price development. Therefore, there are no
7.2 Clauses on change of control Unvested bonus shares, share options, and certain other employee benefit programmes would vest upon a change of control. Rights of members of the governing bodies are identical to those of employees generally.
8.1 Duration of the mandate and term of office of the head auditors
The Board of Directors has established the Audit Committee, which holds four meetings a year and to which the two head auditors are regularly invited as advisory guests. The Audit Committee evaluates the external auditor annually and, having considered alterna-
tives, recommends one firm to the Board for election at the following Annual General Meeting of shareholders. The Audit Committee cooperates closely with the elected external auditor. In particular, it consults the auditor in respect of significant risks, contingencies or other obligations of the company; it reviews and approves the planned audit services and discusses the audits with the auditor; it approves in advance non-audit services expected to be provided by the auditor and reviews and approves other non-audit services that have been pre-approved by the Chairman of the Audit Committee between Audit Committee meetings; it reviews major changes to the company’s accounting principles and practice brought to its attention by the auditor; together with the auditor, it reviews the adequacy and efficacy of the financial reporting process, the system of internal controls and quality control procedures, as well as any other significant findings and recommendations; according to its charter, it would periodically meet with the auditor to review any significant disagreement between management and the auditor, if and when such disagreements arise; it discusses with the auditor the results of the annual audit, and in particular the auditor’s report on the financial statements, necessary changes in the audit plan, critical accounting policies and alternative accounting treatments that have been discussed with management. The Audit Committee’s discussions include considering the possible consequences of using such alternatives and investigating the treatment preferred by the auditor. It also discusses other material written communications with management, such as management letters or schedules of unadjusted differences; the auditor is requested, at least once a year, to supply a formal written statement delineating all relationships with the company that might affect auditor independence; it actively engages in a dialogue with the auditor in respect of any disclosed relationships or services that might impact the auditor’s objectivity and independence, and recommends to the Board of Directors appropriate action in response to the aforementioned statement; it obtains from the auditor and reviews, at least annually, a report describing the auditor’s own quality control procedures, and any material issues raised by the most recent internal reviews, or inquiries or investigations by governmental or professional authorities within the preceding five years, and any steps taken to deal with any such issues; and it reviews the audit fees and the fees paid to the auditor in respect of non-audit services.
Swiss Re prevents selective disclosure by observing ad-hoc publicity rules, and a policy of restrictions for the so-called “close period” during which the financial results are finalised. The close period commences on a given date preceding the official publication of
the financial results and lasts until such publication has been made. No meetings are held with analysts or investors during this close period. In addition, members of the governing bodies, their secretariats and employees preparing or communicating material non-public financial information are subject to close period communication and trading prohibitions.
For contact information, please see back cover of the Business Report 2004.
SwiftRe is the first e-business reinsurance solution that offers front- and back-office functionalities in one system. In addition to receiving immediate quotes and capacity, clients have access to their facultative business placed with Swiss Re and can actively manage it around the clock and worldwide.
News release 25 March Annual reporting 2003 News release, press conference and analysts’ meeting in Zurich (including telephone conference and webcasting)
3 June Announcement of appointments as of 1 January 2005: Christian Mumenthaler as Chief Risk Officer and Charlotte A. Gubler as Head of Communications & Human Resources
News release and telephone conference 1 July Placement of EUR 672 million mandatory convertible securities
August to October Claims estimates for US hurricanes and Japanese typhoon
News release 23 November Insight into the Group’s risk management framework and disclosure of internal risk model
SwiftRe’s strength lies in the system’s design, which incorporates input from the client. Every launch that we have completed has involved a pilot phase to ensure the system caters to clients’ needs. This has given the system a strong market orientation. SwiftRe is designed to be flexible to evolve continually with changing client needs. It was developed to handle this small to medium-sized business segment on a fully automated basis, leaving Swiss Re and our clients more time to focus together on complex business approaches and innovative solutions and consequently even increase personal contacts.
Swiss Re’s goal is to provide the financial community with appropriate corporate disclosure, thereby allowing the most efficient pricing of its securities. The Group considers the capital market’s appreciation of its credibility and its diversified investor base as key assets.
Shareholder base Swiss Re’s shareholder base is well diversified, both geographically and in its ratio of private to institutional investors. Around 92% of Swiss Re’s 57 057 shareholders are private individuals, of whom 90% hold fewer than 2 000 shares. Institutional shareholders hold roughly two thirds of Swiss Re’s share capital.
On 1 February 1996, Swiss Re launched an American Depository Receipts (ADR) level 1 programme in cooperation with Morgan Guaranty Trust Company of New York. Under this programme, level 1 ADRs are not listed but traded over-the-counter.
As of 31 December 2004 Number of shareholders in % Number of shares in %
Share custody Swiss Re offers its shareholders the opportunity to deposit shares in their name with the Share Register in Zurich. Share custody is free of charge and the application form can be downloaded from Swiss Re’s homepage.
Price per share year-end 179.05 163.55 194.25 167.00 90.70 83.50 81.10 85.25
Price per share year low 101.30 136.00 127.55 114.00 70.10 49.60 66.35 80.65
¹ The 1998–2000 figures have been adjusted by the 20-for-1 share split in 2001 ² Dividend divided by year-end share price of corresponding year ³ Based on shares entitled to dividend ⁴ All data as of 28 February 2005 ⁵ Subject to approval at the Annual General Meeting of 9 May 2005
Accident insurance 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.
Casualty insurance Branch of insurance – mainly comprising accident and liability business – which is separate from property, engineering and life insurance. In the US this term is used for non-life insurance other than fire, marine and surety business.
Commission Remuneration paid by the insurer to its agents, brokers or intermediaries, or by the reinsurer to the insurer, for costs in connection with the acquisition and administration of insurance business.
Equalisation reserves Reserves prescribed by local regulatory authorities for future claim fluctuations and for large and catastrophic losses which are established and included in the unpaid claims and claim adjustment expenses liabilities.
Facultative reinsurance Reinsurance of the insurer’s risks on an individual basis. The reinsurance company looks at each individual risk and determines whether to accept or decline coverage.
Product liability insurance Insurance of the liability of the manufacturer or supplier of goods for damage caused by their products.
Professional indemnity insurance Liability insurance cover which protects professional specialists such as physicians, architects, engineers, lawyers, accountants and others against third party claims arising from activities in their professional field; policies and conditions vary according to profession.
Retention Amount of risk which the policyholder or insurer does not insure or reinsure but keeps for its own account.
Return on investment Investment result as a percentage of average invested assets. Invested assets include investments, funds held by ceding companies, net cash equivalents and net reinsurance assets. Average invested assets are calculated as opening balance plus one half of the net asset turnover.
Risk Used in an abstract sense to indicate a condition of the real world in which there is a possibility of loss; also used by insurance practitioners to indicate the property insured or the peril insured against.
Risk management Management tool for the comprehensive identification and assessment of risks based on knowledge and experience in the fields of natural sciences, technology, economics and statistics.
Surety insurance Sureties and guarantees issued to third parties for the fulfilment of contractual liabilities.
Surplus reinsurance Form of proportional reinsurance in which risks are reinsured above a specified amount.
The web version of the Annual Report 2004 is available at: www.swissre.com/annualreport