Income from investment real estate 103 100 Income from subsidiaries and affiliated companies 466 556 Income from equity securities 14 13 Income from fixed income securities, mortgages and other loans 632 621 Income from derivative financial instruments – 72 Income from short-term investments 25 52 Income from alternative investments 35 46 Income from investment services 68 71 Valuation readjustments on investments 1 060 440 Realised gains on sale of investments 1 190 1 356
Investment management expenses –231 –300 Valuation adjustments on investments –856 –1 527 Realised losses on sale of investments –1 831 –324 Investment expenses –2 918 –2 151
Premiums and other receivables from reinsurance 5 922 361 6 283 5 007 60 5 067 Funds held by ceding companies 18 362 – 18 362 17 655 – 17 655
Liabilities for life and health policy benefits 13 887 –2 232 11 655 16 073 –3 415 12 658
Funds held under reinsurance treaties 302 3 383 3 685 2 4 799 4 801
Swiss Re 2010 Financial Report 207 6 Compensation, participations and loans of members of governing bodies
Total Compensation of the Executive Committee Total compensation for members of the Executive Committee was: The 2010 values shown in the table above reflect the compensation paid to seven members for the full year, and one member who joined in the last quarter. The 2009 values reflect the compensation paid to six members for the full year, two members who left during the first half of the year, and one member who joined in the second quarter of the year.
The fair value of the Value Alignment Incentive (VAI) is based on the nominal amount of the grant with a mark-up of 15% (grant years prior to 2010 were based on a mark-up of 25%). Subsequently, a disbursement factor is applied based on the economic results of the Group that can vary between 50% and 150%. The VAI disclosed in the above table assumes a disbursement factor of 100% at grant date. For a description of the VAI plans see page 94, Compensation.
Amounts reported under shares relate to incentive shares granted. Executive Committee members may elect the split between cash and incentive shares, and the shares granted are subject to a one-year blocking period.
Compensation due to two members leaving in 2009 1378 Funding of pension benefits 2 582 1 215 1 In the 2010 Compensation Report and this note, the LTI presentation approach has been changed to align and reflect all awards within a compensation cycle. The 2009 value now reflects the LTI granted in March 2010, and the 2010 value reflects the LTI granted in March 2011.
For US GAAP and Statutory reporting purposes, the cost of the incentive shares, VAI and LTI awards are accrued over the period during which they are earned. For the purpose of the disclosure required of this note, the value of awards granted are included as compensation in the year of performance.
Certain members of the Executive Committee and the Board of Directors participate in a defined contribution scheme and their pension funding compensation in the remuneration tables above reflects the actual employer contributions. Where defined benefit arrangements exist, the funding is determined on an actuarial basis, which can vary substantially from year to year depending on age and years of service of the benefiting members.
Total compensation for the members of the Board of Directors was: CHF thousands 2009 2010
Base salary and allowances 1 720 1 783 Cash variable pay for performance 2 500
Funding of pension benefits 252 172 1 In the 2010 Compensation Report and this note, the LTI presentation approach has been changed to align and reflect all awards within a compensation cycle. The 2009 value now reflects the LTI granted in March 2010, and the 2010 value reflects the LTI granted in March 2011.
Individual compensation for the Chairman and the Vice Chairman of the Board of Directors was: Walter B. Kielholz has been Chairman since May 2009. In recognition of the difficulties faced by the company in the financial year 2008, he elected to reduce his 2009 fee by 50% of the compensation for 2008, when his compensation as Vice Chairman amounted to CHF 2.5 million, before the waiver of fees.
Jakob Baer, Chairman of the Audit Committee 480 320 800 Raymund Breu, Member 225 150 375 Raymond K.F. Ch’ien, Member 225 150 375 John R. Coomber, Chairman of the Finance and Risk Committee 426 280 706 Rajna Gibson Brandon, Member 210 140 350 Malcolm D. Knight, Member1 121 80 201 Hans Ulrich Maerki, Member 195 130 325 Carlos E. Represas, Member1 120 81 201 Jean-Pierre Roth, Member2 90 61 151 Robert A. Scott, Chairman of the Compensation Committee 300 200 500 1 Elected to Swiss Re’s Board of Directors at the Annual General Meeting of 7 April 2010. 2 Elected to Swiss Re’s Board of Directors at the Annual General Meeting of 7 April 2010, effective 1 July 2010.
Compensation of former members of governing bodies In 2009 no compensation was paid to former members of governing bodies. In 2010 a total of CHF 1.15 million was paid to former members of the Executive Committee. This figure relates to three individuals and covers commitments of the company which arose following the retirement of the respective executives.
Executive Committee and Board of Directors share ownership, options and related instruments
The following unvested restricted shares were held by members of the Executive Committee as of 31 December: For the year ended 31 December 2010, no restricted shares were held by members of the Board of Directors.
Performance shares The Chairman and the Vice Chairman receive half of their fees in the form of a performance share plan with a three-year vesting period. For 2009 and 2010 plans, the number of performance shares granted during the year were; Vested options The following vested options were held by members of governing bodies as of 31 December: The range of expiry years for vested options held by members of governing bodies as of 31 December 2009 and 2010 was 2010 to 2015 and 2011 to 2015, respectively.
Weighted average share price in CHF as of grant date 36.18 28.66 David J. Blumer, Chief Investment Officer 203 342 176 342 Raj Singh, Chief Risk Officer 4 000 4 000
Mathis Cabiallavetta, Vice Chairman 41 667 27 986 1 As of 31 December 2010, all Performance shares were still outstanding.
Weighted average strike price in CHF as of grant date 120.36 121.81
Weighted average strike price in CHF as of grant date 110.44 109.13 Stefan Lippe, Chief Executive Officer 99 000 99 000 Brian Gray, Chief Underwriting Officer 18 200 17 000 Michel M. Liès, Chief Marketing Officer 128 000 114 000 George Quinn, Chief Financial Officer 46 600 42 000
Raj Singh, Chief Risk Officer 3 647 3 596 Total mortgages and loans not at market conditions to former members of the Executive Committee 7 354 7 298 Mortgages and loans to members of the Board of Directors
Swiss Re 2010 Financial Report 213 7 Further notes to the financial statements
Contingent liabilities Swiss Reinsurance Company Ltd has issued a number of guarantees to various of its subsidiaries in support of their business activities by securing either their overall capital positions or specific transactions. These guarantees are generally not limited by a nominal amount but rather by the exposure of the underlying business.
In addition, as a component of the Group’s financing structure, Swiss Reinsurance Company Ltd has guaranteed CHF 6 020 million (2009: CHF 7 735 million) of debt issued by certain of its subsidiaries and letter of credit facilities benefiting various subsidiaries of which no amount was utilised as of 31 December 2010 (2009: CHF 3 094 million).
Unfunded commitments As a participant in limited investment partnerships, Swiss Reinsurance Company Ltd commits itself to making available certain amounts of investment funding, callable by the partnerships in general for periods of up to 10 years. As of 31 December 2010, total commitments remaining uncalled were CHF 854 million (2009: CHF 1 587 million).
In addition, a financial lease of IT hardware is recognised on the balance sheet. The corresponding asset and liability of CHF 16 million (2009: CHF 15 million) are included in tangible assets and other liabilities, respectively.
In addition, a real estate portfolio with a carrying amount of CHF 676 million (2009: CHF 676 million) serves as collateral for short-term senior operational debt of CHF 650 million with an external counterparty.
Additionally, the Company performs the role of the collateral clearer for the Swiss Re Group, centrally managing and reducing counterpart credit exposure for the asset holding entities, providing funding diversification and enabling secured cash investment. As such the Company acts as principal in collateral transactions, borrowing securities from Swiss Re Group companies and entering into lending and borrowing as well as repurchase and reverse repurchase agreements with third parties. As a matter of policy, the Company requires that collateral, consisting of cash or securities, is provided to cover the assumed counterparty risk associated with such transactions.
The securities which were held and lent by investment funds are excluded from the table above.
Obligations towards employee pension fund Other liabilities include CHF 5 million (2009: CHF 4 million) payable to the employee pension fund.
Public placed debentures As of 31 December 2010, the following public placed debentures were outstanding: Instrument Issued in Currency Nominal in millions Interest rate Maturity/
Fair value of securities transferred to third parties 985 954 Fair value of securities transferred to Group companies 4 362 –
Treasury shares As of 31 December 2010, the Group held 17 015 088 treasury shares (2009: 16 950 852). In the year under report, 958 570 treasury shares (2009: 2 143 087) were purchased at an average price of CHF 47.22 (2009: CHF 27.51) and 894 334 treasury shares (2009: 2 166 063) were sold at an average price of CHF 47.63 (2009: CHF 29.53).
As of 31 December 2010, Swiss Reinsurance Company Ltd‘s total conditional capital amounted to CHF 18 534 760 (2009: CHF 17 441 974). CHF 16 000 000 was reserved for the exercise of conversion rights granted in connection with a convertible bond or a similar financial instrument in favour of Berkshire Hathaway Inc., CHF 839 479 for the exercise of conversion rights and warrants granted in connection with bonds and similar instruments and CHF 1 695 281 for employee participation purposes.
As of 31 December 2010, authorised capital with shareholders’ subscription rights amounted to CHF 18 000 000 (2009: CHF 18 000 000).
Release of undisclosed reserves In the year under report, undisclosed reserves on investments and on provisions were released by a net amount of CHF 88 million (2009: CHF 590 million).
b. BlackRock, Inc., 40 East 52nd Street, New York, NY 10022, USA, notified Swiss Reinsurance Company Ltd on 15 December 2009 that it held as of 1 December 2009, following the acquisition of Barclays Global Investors, through a number of group companies, in the capacity of investment manager for mutual funds and clients 14 420 521 registered Swiss Re shares, representing 3.97% of the voting rights of Swiss Reinsurance Company Ltd, which can be exercised autonomously of the beneficial owners.
e. Franklin Resources, Inc., 500 E. Broward Blvd., Ft. Lauderdale, FL 33394, USA, known as Franklin Templeton Investments, notified Swiss Reinsurance Company Ltd on 20 December 2010 that it held as of 15 December 2010, as a result of a change in group composition, through a number of group companies, in the capacity of investment manager for clients 15 907 924 registered Swiss Re shares, corresponding to 4.29% of the voting rights of Swiss Reinsurance Company Ltd, which can be exercised autonomously of the beneficial owners. On 14 December 2010 Franklin Resources, Inc. had reported that it held as of 13 December 2010, as a result of a change in group composition, through a number of group companies, in the capacity of investment manager for clients 15 925 239 registered Swiss Re shares, corresponding to 4.30% of the voting rights of Swiss Reinsurance Company Ltd, which can be exercised autonomously of the beneficial owners.
Risk assessment Article 663b lit. 12 of Swiss Company Law requires disclosure of information on the performance of a risk assessment.
Dividend payment out of disposable profit 342 707 0011 – Reclassification of legal reserves from capital contributions to other reserves – –942 206 438 Dividend payment out of other reserves – 942 206 4382 1 The number of registered shares eligible for dividend at the dividend payment date increased since the proposal for allocation of profit, dated 12 March 2010, due to the issuance of 105 new registered shares from options being exercised and the transfer of 1 771 shares for employee participation purposes from non-eligible to eligible for dividend. This resulted in a higher dividend of CHF 1 876 compared to the Board of Directors’ proposal, and in lower retained earnings brought forward from the previous year by the same amount.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether dueto fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the financial statements for the year ended 31 December 2010 comply with Swiss law and the company’s articles of incorporation.
David JA Law Dawn M Kink Audit expert Auditor in charge
Business contact details Swiss Re has over 50 office locations in over 20 countries. For a full list of our office locations and service offerings, please visit swissre.com Head Office Swiss Reinsurance Company Ltd Mythenquai 50/60, P.O. Box, 8022 Zurich, Switzerland
Beijing 23rd Floor, East Tower, Twin Towers, No. B12, Jian Guo Men Wai Avenue Chao Yang District Beijing 100022
Securities backed by notes or receivables against assets such as auto loans, credit cards, royalties, student loans and insurance.
The ratio of ordinary shareholders’ equity (excluding convertible perpetual capital instrument) to the number of common shares entitled to dividend.
Risk-based securities that allow insurance and reinsurance companies to transfer peak insurance risks, including natural catastrophes, to institutional investors in the form of bonds. Catastrophe bonds help to spread peak exposures (see insurance-linked securities).
Activities in connection with the investigation, settlement and payment of claims from the time of their occurrence until settlement.
The risk to which a pension fund or life insurance company could be exposed as a result of higher-than-expected payout ratios. Increasing life expectancy trends among policyholders and pensioners can result in payout levels that are higher than originally accounted for.
Net investment income on fixed income positions, including coupon income and amortisation, as a percentage of the cost of the securities.
New regulatory framework for EU re/insurance solvency rules scheduled to replace the current Solvency I regime by the end of 2012. Introducing a comprehensive, economic and risk-based regulation, Solvency II includes prudential requirements on solvency capital, risk modelling, supervisory control and disclosure.
Switzerland already introduced an economic and risk-based insurance regulation, similar to the objectives of the Solvency II project in the EU. Since 2008, all insurance and reinsurance companies writing business in Switzerland have had to implement the SST, and as of 1 January 2011, the SST-based target capital requirement will be in force and companies must achieve economic solvency.
Traditional US life business subject to the NAIC Valuation of Life Insurance Model Regulation or New York Regulation 147 (collectively: ‘Regulation XXX’). Regulation XXX states that business retained in the US does not require collateral, provided the reinsurer is licensed in the state of the company ceding business; however, business retroceded to a foreign reinsurer is subject to collateral (apart from funds withheld).
Swiss Re uses some of the term definitions provided by the glossary of the International Association of Insurance Supervisors (IAIS). For additional insurance terms, see Swiss Re’s online glossary of technical terms at: www.swissre.com
Certain statements and illustrations contained herein are forward-looking. These statements and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact.
Market risk Volatility and disruption in the global financial markets can expose the Group to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices and foreign currency exchange rates, which may adversely impact the Group’s financial condition, results of operations, liquidity and capital position. The Group’s exposure to interest rate risk is primarily related to the market price and cash flow variability associated with changes in interest rates. Exposure to credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads. When credit spreads widen, the net unrealised loss position of the Group’s investment portfolio
General information / Note on risk factors uses of funds include obligations arising in its reinsurance business (including claims and other payments as well as insurance provision repayments due to portfolio transfers, securitisations and commutations), which may include large and unpredictable claims (including catastrophe claims), funding of capital requirements and operating costs, payment of principal and interest on outstanding indebtedness and funding of acquisitions. The Group also enters into contracts or trading arrangements that could give rise to significant short-term funding obligations and, in connection with the Group’s trading operations, it could be subject to unexpected calls to deliver collateral or unwind trading positions at a net cost to it. The Group also has unfunded capital commitments in its private equity and hedge fund investments, which could result in funding obligations at a time when it is subject to liquidity constraints.
The Group may not be able to secure new sources of liquidity or funding, should projected or actual liquidity fall below levels it requires. The ability to meet liquidity needs through asset sales may be constrained by market conditions and the related stress on valuations, and through third-party funding may be limited by constraints on the general availability of credit and willingness of lenders to lend. In addition, the Group’s ability to meet liquidity needs may also be constrained by regulatory requirements that require regulated entities to maintain regulatory capital, or that restrict intra-group transactions, the timing of dividend payments from subsidiaries or the fact that certain assets may be encumbered or otherwise nontradable. Finally, any adverse ratings action could trigger a need for further liquidity (for example, by triggering termination provisions or collateral delivery requirements in contracts to which the Group is a party) at a time when the Group’s ability to obtain liquidity from external sources is limited by such ratings action.
As claims paying and financial strength ratings are key factors in establishing the competitive position of reinsurers, a decline in ratings alone could make reinsurance provided by the Group less attractive to clients relative to reinsurance from competitors with similar or stronger ratings. A decline in ratings could also cause the loss of clients who are required by either policy or regulation to purchase reinsurance only from reinsurers with certain ratings. A further decline in ratings could also impact the availability of unsecured financing and obligate the Group to provide collateral or other guarantees in the course of its reinsurance business or trigger early termination of funding arrangements. Any rating downgrades could also have a material adverse impact on the Group’s costs of borrowing and limit its access to the capital markets. Further negative ratings action could also impact reinsurance contracts.
General information / Note on risk factors operational systems and infrastructure. Even natural catastrophe events that occur in relatively sparsely populated areas, such as the volcanic eruption in Iceland in April 2010, can have severe and wide-reaching economic impact. In addition, the occurrence of future risks that the Group’s risk management procedures fail to identify or anticipate could have a material adverse effect on the Group.
Design: Addison Corporate Marketing, London Swiss Re Logistics Media Production, Design
 Swiss Re  Swiss Market Index  STOXX Europe 600 Insurance Index
Standard & Poor’s A+ Positive 12 October 2010 Moody’s A1 Stable 18 March 2010 A. M. Best A Positive 15 December 2010
Financial year 6 Group results 9 Property & Casualty 13 Life & Health 17 Asset Management 20 Legacy
General information 76 Cautionary note on forward-looking statements 77 Note on risk factors 82 Business contact details 83 Corporate calendar
Thanks to the hard work and expertise of our employees, we have strengthened our client franchise and ensured that our underwriting continued to be profitable, as evidenced by our performance in 2010. We also delivered on our internal cost efficiency programme, reducing costs by CHF 420 million over a two-year period. The Legacy process is, as of the end of 2010, essentially complete. And last but not least, we have terminated and repaid the convertible perpetual capital instrument (CPCI) issued to Berkshire Hathaway ahead of schedule.
Life & Health reported good results with operating income of USD 810 million, an increase of 18%. The benefit ratio increased 4.9 percentage points to 88.7%. Excluding the 2009 benefit derived from the rescission of a disability contract together with the impact of certain commutations, the benefit ratio increased 3.0 percentage points. Mortality experience was better than expected, although less favourable than the results recorded in the prior year. Morbidity was within expectations for both periods.
We are pleased that our strong full-year results and our capital strength allow us to return to a normal dividend policy and to take advantage of business growth opportunities. The Board of Directors will therefore propose at the Annual General Meeting on 15 April 2011 to increase the dividend to CHF 2.75 per share.
Swiss Re’s P & C January treaty business premiums grew strongly by 14%. The drivers for this performance were increased demand for tailored solutions from large clients and growth in insurance demand, especially in Asia. Swiss Re’s 2011 combined ratio is estimated at approximately 94%, assuming a normal large loss burden.
The new holding company structure will be established through an exchange offer, subject to applicable securities law restrictions. Further information on the exchange offer and new holding company structure will be provided in an offer prospectus on 31 March 2011.
Based on this assessment, combined with the progress that we have made over the past two years, we have established the following financial targets for the next five years: ̤ Return on equity (RoE): 700 basis points above risk free (average over 5 years) ̤ Earnings per share growth: 10% average annual growth rate (over 5 years) ̤ Economic net worth per share growth plus dividend: 10% average annual growth rate
Group results Swiss Re reported annual net income of USD 863 million in 2010, up 74% from USD 496 million in the previous year. Earnings per share were CHF 2.64 (USD 2.52), compared to CHF 1.49 (USD 1.46) in 2009.
Expenses Claims and claim adjustment expenses –8 336 –7 254 –13 Life and health benefits –8 639 –8 236 –5 Return credited to policyholders –4 597 –3 371 –27 Acquisition costs –4 495 –3 679 –18 Administrative expenses –2 321 –2 262 –3 Other expenses –644 –264 –59
Income before income tax expense 920 2 675 191 Income tax expense –221 –541 145 Net income before attribution of non-controlling interests 699 2 134 –
Full-year 2010 Group results Premiums earned decreased 15% to USD 10.9 billion for Property & Casualty, compared to the prior-year period. The combined ratio increased to 93.9% in 2010 from 88.3% in 2009, reflecting the higher impact from natural catastrophe losses in the current year, partly offset by the improved quality of the Group’s Property & Casualty portfolio. The net impact from natural catastrophes in 2011 was 3% above the expected level, compared to a benign natural catastrophe experience in the prior year.
The Group’s net investment income and net realised gains include the investment result from assets backing unit-linked and unitised with-profit policies. These returns are credited to policyholders’ accounts and are therefore excluded from the following comments on the investment performance of the Group.
Property & Casualty claims and claim adjustment expenses decreased 10% to USD 7.2 billion, mainly due to reduced premium volumes and continued disciplined underwriting, partly offset by a higher burden from natural catastrophes.
Other expenses decreased 59% to USD 264 million. The prior year was impacted by the restructuring plan the Group initiated in April 2009.
Financial year / Group results components of net income and total equity. Minority interests were classified as liabilities under the previous guidance. As of 31 December 2010, non-controlling interests totalled USD 1.6 billion.
Strategy and priorities Cycle﻿management﻿remains﻿one﻿of﻿ Swiss﻿Re’s﻿top﻿priorities:﻿we﻿continuously﻿ shift﻿capacity﻿to﻿those﻿segments﻿where﻿﻿ we﻿expect﻿the﻿most﻿attractive﻿returns﻿on﻿ our﻿capital.﻿This﻿led﻿us,﻿for﻿example,﻿to﻿ reduce﻿our﻿exposure﻿in﻿Credit﻿&﻿Surety﻿and﻿ Casualty,﻿allocating﻿the﻿released﻿capital﻿ to﻿other,﻿more﻿profitable﻿markets﻿and﻿ segments.﻿
Swiss﻿Re﻿writes﻿treaty﻿and﻿facultative﻿ reinsurance,﻿with﻿treaty﻿business﻿ comprising﻿85%﻿of﻿2010﻿gross﻿premium﻿ written﻿compared﻿to﻿86%﻿in﻿2009.﻿Treaty﻿ reinsurance﻿covers﻿entire﻿portfolios,﻿﻿ while﻿facultative﻿reinsurance﻿is﻿case-bycase ﻿risk﻿transfer.﻿Both﻿treaty﻿and﻿facultative﻿ reinsurance﻿can﻿be﻿on﻿a﻿proportional﻿﻿ or﻿non-proportional﻿basis.﻿In﻿proportional﻿ reinsurance,﻿the﻿reinsurer﻿assumes﻿an﻿ agreed﻿percentage﻿of﻿premium﻿and﻿ liabilities﻿arising﻿from﻿each﻿policy﻿an﻿insurer﻿ writes.﻿Non-proportional﻿coverage﻿(or﻿ excess﻿of﻿loss﻿as﻿the﻿most﻿common﻿form)﻿ reimburses﻿the﻿insured﻿for﻿losses﻿incurred﻿ above﻿a﻿fixed﻿limit.﻿
The﻿largest﻿part﻿of﻿the﻿premium﻿income﻿is﻿ generated﻿with﻿clients﻿from﻿the﻿Americas﻿ and﻿European﻿countries.﻿The﻿most﻿important﻿ factor﻿for﻿Property﻿&﻿Casualty﻿profitability﻿﻿ is﻿sound﻿and﻿disciplined﻿underwriting,﻿ ensuring﻿that﻿Swiss﻿Re﻿obtains﻿adequate﻿ prices﻿for﻿the﻿risks﻿it﻿assumes.﻿The﻿result﻿﻿ in﻿a﻿given﻿period﻿is﻿exposed﻿to﻿the﻿actual﻿ experience﻿in﻿large﻿catastrophic﻿events.﻿﻿ The﻿financial﻿markets﻿can﻿also﻿influence﻿ operating﻿income﻿through﻿changes﻿in﻿net﻿ investment﻿returns,﻿in﻿particular﻿for﻿long﻿﻿ tail﻿business.﻿
Expenses Claims﻿and﻿claim﻿adjustment﻿expenses –7﻿970 –7﻿200 –10 Acquisition﻿costs –2﻿203 –1﻿859 –16 Other﻿expenses –1﻿396 –1﻿184 –15 Total expenses –11﻿569 –10 243 –11
Net﻿realised﻿investment﻿gains/losses 39 32 71 –49 22 Other﻿revenues 34 34 Total revenues 5﻿144 3﻿037 1﻿799 780 1﻿147 2﻿382 14﻿289 793 15﻿082
Expenses Claims﻿and﻿claim﻿adjustment﻿expenses –2﻿904 –1﻿417 –967 –308 –250 –1﻿096 –6﻿942 –258 –7﻿200 Acquisition﻿costs –571 –338 –254 –63 –264 –287 –1﻿777 –82 –1﻿859 Other﻿expenses –489 –272 –97 –55 –30 –190 –1﻿133 –51 –1﻿184
Outlook Barring﻿high﻿claims﻿activity﻿or﻿a﻿sharp﻿rise﻿in﻿ interest﻿rates,﻿we﻿expect﻿that﻿current﻿market﻿ trends﻿in﻿the﻿Property﻿and﻿Specialty﻿ segments﻿will﻿continue﻿to﻿persist﻿in﻿the﻿near﻿ term.﻿Capacity﻿for﻿peak﻿natural﻿catastrophe﻿ remains﻿scarce﻿and﻿valued.﻿Those﻿markets﻿ and﻿policies﻿that﻿had﻿significant﻿claims﻿﻿ in﻿2010﻿are﻿seeing﻿price﻿increases﻿in﻿2011,﻿ but﻿prices﻿in﻿other﻿segments,﻿such﻿as﻿ insurance﻿and﻿reinsurance﻿of﻿commercial﻿ risks,﻿will﻿continue﻿to﻿feel﻿downward﻿ pressure.
We﻿continue﻿to﻿believe﻿that﻿Casualty﻿prices﻿ are﻿not﻿high﻿enough﻿in﻿many﻿regions﻿to﻿ meet﻿our﻿return﻿threshold,﻿particularly﻿in﻿a﻿ low﻿interest﻿rate﻿environment﻿–﻿yet﻿we﻿see﻿ few﻿signs﻿of﻿widespread﻿rate﻿improvement.﻿ Certain﻿segments﻿in﻿selected﻿markets,﻿ however,﻿have﻿been﻿forced﻿to﻿act.﻿The﻿ encouraging﻿signs﻿we﻿saw﻿in﻿several﻿ European﻿motor﻿markets,﻿for﻿example,﻿have﻿ begun﻿to﻿yield﻿positive﻿results.﻿In﻿general,﻿ though,﻿we﻿expect﻿to﻿see﻿continued﻿ample﻿ capacity﻿and﻿price﻿competition,﻿a﻿trend﻿that﻿ will﻿only﻿change﻿when﻿prior﻿years’﻿reserve﻿ releases﻿can﻿no﻿longer﻿mask﻿current﻿ profitability﻿challenges﻿–﻿a﻿point﻿unlikely﻿﻿ to﻿be﻿reached﻿during﻿the﻿first﻿half﻿of﻿2011.
Specialty lines The﻿credit﻿portfolio﻿benefited﻿from﻿ significantly﻿improved﻿technical﻿margins﻿ after﻿the﻿portfolio﻿changes﻿during﻿the﻿2010﻿ renewals,﻿better﻿current﻿year﻿claims﻿ experience﻿and﻿from﻿retained﻿positive﻿net﻿ claims﻿development﻿in﻿prior﻿years.﻿As﻿a﻿ result,﻿the﻿combined﻿ratio﻿decreased﻿﻿ to﻿69.6%﻿in﻿2010,﻿compared﻿to﻿100.9%﻿﻿ in﻿2009.
Life﻿&﻿Health﻿ Market environment Sales﻿of﻿new﻿life﻿insurance﻿policies﻿in﻿North﻿ America﻿and﻿Europe﻿gradually﻿recovered﻿ during﻿2010﻿from﻿their﻿drop﻿in﻿2009﻿ following﻿the﻿financial﻿crisis.﻿A﻿subdued﻿ housing﻿market,﻿however,﻿continued﻿to﻿ constrain﻿sales﻿of﻿mortgage-related﻿life﻿ cover,﻿particularly﻿in﻿the﻿UK.﻿Life﻿insurance﻿ markets﻿in﻿Canada,﻿Asia﻿and﻿Australia﻿ showed﻿higher﻿growth.
Strategy and priorities In﻿the﻿US,﻿Swiss﻿Re﻿continues﻿to﻿focus﻿on﻿ business﻿–﻿such﻿as﻿yearly﻿renewable﻿term﻿ reinsurance﻿–﻿that﻿plays﻿to﻿our﻿core﻿ strengths﻿in﻿mortality﻿coverage.﻿We﻿still﻿ provide﻿some﻿capacity﻿for﻿traditional﻿XXX﻿ term﻿coinsurance﻿business,﻿but﻿we﻿are﻿ increasingly﻿looking﻿to﻿address﻿our﻿clients’﻿ XXX﻿reserve﻿funding﻿needs﻿through﻿ alternative﻿structures.
Longevity﻿risk﻿protection﻿for﻿life﻿insurance﻿ companies﻿and﻿corporate﻿clients﻿continues﻿ to﻿be﻿a﻿strategic﻿priority﻿for﻿Swiss﻿Re.﻿The﻿ reinsurance﻿industry﻿has,﻿so﻿far,﻿coped﻿with﻿ the﻿demand﻿for﻿such﻿protection,﻿but﻿the﻿ sheer﻿scale﻿of﻿global﻿exposure﻿to﻿longevity﻿ risk﻿in﻿pension﻿schemes﻿and﻿insurance﻿ companies﻿–﻿estimated﻿at﻿more﻿than﻿﻿ USD﻿20﻿trillion﻿–﻿means﻿that﻿additional﻿ capacity﻿will﻿have﻿to﻿be﻿secured﻿through﻿﻿ the﻿capital﻿markets.﻿
Swiss﻿Re﻿is﻿at﻿the﻿forefront﻿of﻿developing﻿ longevity﻿insurance-linked﻿securities﻿and﻿﻿ is﻿a﻿founding﻿member﻿of﻿the﻿Life﻿and﻿ Longevity﻿Markets﻿Association,﻿a﻿non-profit﻿ organisation﻿promoting﻿a﻿liquid﻿traded﻿ market﻿in﻿longevity-﻿and﻿mortality-related﻿ risk.﻿With﻿the﻿transfer﻿of﻿USD﻿50﻿million﻿of﻿ longevity﻿trend﻿risk﻿to﻿the﻿capital﻿markets,﻿ Swiss﻿Re﻿completed﻿the﻿first﻿longevity﻿trend﻿ bond﻿in﻿December﻿2010.﻿The﻿transaction﻿ marks﻿an﻿innovative﻿transfer﻿of﻿longevity﻿ trend﻿risk﻿to﻿the﻿capital﻿markets,﻿as﻿it﻿ provides﻿protection﻿against﻿adverse﻿deviation﻿ in﻿mortality﻿improvements﻿for﻿both﻿ Swiss﻿Re’s﻿mortality﻿and﻿longevity﻿portfolios,﻿ whilst﻿taking﻿into﻿account﻿the﻿complementary﻿ nature﻿of﻿the﻿two﻿risks.﻿
Segment information The﻿Life﻿&﻿Health﻿business﻿segment﻿ comprises﻿three﻿lines﻿of﻿business,﻿Traditional﻿ Life,﻿Traditional﻿Health﻿and﻿Admin﻿Re®.﻿﻿ The﻿Traditional﻿Life﻿and﻿Traditional﻿Health﻿ lines﻿of﻿business﻿include﻿reinsurance﻿ contracts﻿for﻿individual﻿and﻿group﻿life,﻿ disability﻿income,﻿critical﻿illness﻿and﻿annuity﻿ products.﻿Admin﻿Re®﻿comprises﻿closed﻿ blocks﻿of﻿in-force﻿life﻿and﻿health﻿insurance﻿ business,﻿acquired﻿through﻿either﻿purchase﻿ of﻿legal﻿entities﻿or﻿via﻿reinsurance﻿contracts.﻿ Individual﻿life﻿and﻿unit-linked﻿products﻿ dominate﻿the﻿Admin﻿Re®﻿segment,﻿ although﻿the﻿acquired﻿businesses﻿include﻿ disability﻿income,﻿long-term﻿care﻿and﻿ annuity﻿products.
Revenues Premiums﻿earned 9﻿857 8﻿759 –11 Fee﻿income﻿from﻿policyholders 847 918 8 Net﻿investment﻿income 3﻿171 3﻿052 –4 Net﻿realised﻿investment﻿gains/losses 3﻿121 2﻿331 –25 Other﻿revenues Total revenues 16﻿996 15 060 –11
Net﻿investment﻿income﻿–﻿unit-linked 549 593 8 Net﻿investment﻿income﻿–﻿with-profit﻿business 152 145 –5 Net﻿investment﻿income﻿–﻿non-participating 2﻿470 2﻿314 –6 Net﻿realised﻿investment﻿gains/losses﻿–﻿unit-linked 3﻿332 2﻿034 –39 Net﻿realised﻿investment﻿gains/losses﻿–﻿with-profit﻿business 289 196 –32 Net﻿realised﻿investment﻿gains/losses﻿–﻿non-participating –500 101 –
Premiums earned and fee income Premiums﻿and﻿fees﻿decreased﻿to﻿﻿ USD﻿9.7﻿billion﻿from﻿USD﻿10.7﻿billion﻿in﻿ 2009.﻿The﻿decrease﻿was﻿largely﻿due﻿to﻿the﻿ US﻿individual﻿life﻿retrocession﻿transaction﻿ announced﻿in﻿January﻿2010.﻿Excluding﻿this﻿ and﻿the﻿effect﻿of﻿foreign﻿exchange﻿ movements,﻿premiums﻿and﻿fee﻿income﻿ increased﻿6%,﻿reflecting﻿new﻿business﻿ growth,﻿with﻿a﻿high﻿contribution﻿from﻿Asia,﻿ as﻿well﻿as﻿increased﻿fee﻿income﻿in﻿ Admin﻿Re®﻿as﻿financial﻿markets﻿improved.﻿
Net﻿investment﻿income﻿for﻿2010﻿was﻿﻿ USD﻿3.1﻿billion,﻿down﻿3.8%﻿from﻿2009.﻿ Excluding﻿foreign﻿exchange﻿movements,﻿ net﻿investment﻿income﻿decreased﻿2.9%.﻿ The﻿allocated﻿net﻿investment﻿return,﻿which﻿ is﻿based﻿on﻿the﻿net﻿reinsurance﻿reserves﻿ underlying﻿liabilities,﻿decreased﻿due﻿to﻿a﻿ decline﻿in﻿risk-free﻿rates.﻿Investment﻿income﻿ generated﻿on﻿unit-linked﻿contracts﻿is﻿﻿ passed﻿straight﻿through﻿to﻿contract﻿holders﻿ as﻿returns﻿credited﻿to﻿policyholders,﻿and﻿ therefore﻿does﻿not﻿directly﻿impact﻿the﻿ operating﻿result.﻿However,﻿as﻿the﻿market﻿ value﻿of﻿assets﻿underlying﻿the﻿unit-linked﻿ contracts﻿changes,﻿the﻿fee﻿income﻿ generated﻿will﻿vary.﻿Acquisition﻿costs﻿ decreased﻿20%﻿to﻿USD﻿1.8﻿billion﻿in﻿2010﻿ from﻿USD﻿2.3﻿billion﻿in﻿2009.﻿The﻿decrease﻿
Traditional life Operating﻿income﻿for﻿traditional﻿life﻿business﻿ rose﻿by﻿USD﻿480﻿million﻿from﻿USD﻿36﻿million﻿ in﻿2009﻿to﻿USD﻿516﻿million﻿in﻿2010.﻿The﻿ reporting﻿year﻿result﻿was﻿driven﻿by﻿better﻿ than﻿expected﻿mortality﻿experience,﻿ predominantly﻿within﻿North﻿America,﻿and﻿ gains﻿from﻿the﻿variable﻿annuity﻿and﻿﻿ pre-2000﻿guaranteed﻿minimum﻿death﻿ benefit﻿business﻿as﻿Swiss﻿Re’s﻿own﻿credit﻿ spreads﻿narrowed.﻿The﻿hedging﻿for﻿expected﻿ variable﻿annuity﻿cash﻿flows﻿performed﻿ within﻿expected﻿parameters.﻿These﻿results﻿ were﻿partially﻿offset﻿by﻿lapse﻿experience﻿ on﻿certain﻿US﻿term﻿life﻿insurance﻿products﻿ as﻿they﻿reached﻿the﻿end﻿of﻿the﻿fixed﻿
Outlook In﻿the﻿short﻿term,﻿sales﻿of﻿life﻿insurance﻿in﻿ developed﻿markets﻿will﻿continue﻿to﻿depend﻿ on﻿the﻿pace﻿and﻿strength﻿of﻿the﻿economic﻿ recovery.﻿Nevertheless,﻿the﻿insurance﻿ industry﻿can﻿benefit﻿from﻿a﻿substantial﻿ current﻿protection﻿gap﻿by﻿providing﻿ consumers﻿with﻿easily﻿accessible﻿and﻿ affordable﻿products﻿through﻿efficient﻿ distribution.﻿Government﻿reductions﻿in﻿ welfare﻿benefits﻿will﻿also﻿boost﻿demand﻿﻿ for﻿private﻿sector﻿alternatives.
On﻿the﻿positive﻿side,﻿the﻿global﻿recovery﻿ further﻿entrenched﻿itself.﻿Growth﻿in﻿the﻿US﻿ remained﻿more﻿muted﻿than﻿many﻿had﻿ expected﻿at﻿the﻿start﻿of﻿the﻿year﻿–﻿although﻿ the﻿pessimism﻿seemed﻿excessive﻿when﻿low﻿ US﻿GDP﻿growth﻿in﻿the﻿second﻿quarter﻿of﻿ 2010﻿drove﻿Treasury﻿bond﻿yields﻿close﻿﻿ to﻿new﻿lows﻿(the﻿ten-year﻿Treasury﻿yield,﻿﻿ for﻿example,﻿dropped﻿below﻿2.5%﻿in﻿ October﻿2010).﻿Emerging﻿countries,﻿having﻿ come﻿through﻿the﻿global﻿crisis﻿with﻿ relatively﻿healthy﻿debt﻿and﻿fiscal﻿indicators,﻿ grew﻿stronger,﻿attracting﻿the﻿bulk﻿of﻿inward﻿ investment.﻿In﻿broader﻿market﻿developments,﻿ low﻿yields﻿and﻿an﻿uncertain﻿macro-economic﻿ environment﻿proved﻿beneficial﻿for﻿credit﻿ risk,﻿with﻿USD﻿investment-grade﻿credit﻿again﻿ providing﻿exceptional﻿returns.﻿Equities﻿also﻿ advanced﻿in﻿2010,﻿reflecting﻿reduced﻿fears﻿ of﻿a﻿double-dip﻿recession.
Besides﻿making﻿progress﻿in﻿the﻿de-risking﻿ initiatives,﻿Asset﻿Management﻿implemented﻿ its﻿more﻿cautious﻿top-down﻿driven﻿ investment﻿plan.﻿Navigating﻿the﻿financial﻿ markets﻿in﻿2010﻿with﻿a﻿low﻿investment﻿﻿ risk﻿profile﻿proved﻿to﻿be﻿the﻿right﻿strategy﻿ given﻿the﻿bumpy﻿road﻿for﻿risky﻿asset﻿classes﻿ through﻿most﻿of﻿the﻿year.﻿With﻿the﻿view﻿﻿ at﻿the﻿start﻿of﻿2010﻿that﻿the﻿global﻿economy,﻿ in﻿particular﻿in﻿developed﻿economies,﻿was﻿ likely﻿to﻿face﻿sub-trend﻿growth﻿for﻿a﻿longer﻿ period,﻿the﻿investment﻿risk﻿was﻿increased﻿﻿ in﻿higher﻿rated﻿corporate﻿credit.﻿This﻿was﻿ achieved﻿by﻿lifting﻿hedges﻿and﻿increasing﻿ cash﻿exposure.﻿For﻿2010,﻿the﻿performance﻿ on﻿a﻿total﻿return﻿basis,﻿and﻿in﻿particular﻿﻿ in﻿risk-adjusted﻿terms,﻿proved﻿once﻿again﻿﻿ to﻿be﻿very﻿favourable﻿for﻿corporate﻿credit.
outlook,﻿the﻿investment﻿decision﻿taken﻿early﻿ in﻿2010﻿not﻿to﻿deviate﻿too﻿far﻿from﻿a﻿neutral﻿ duration﻿benchmark,﻿and﻿to﻿continue﻿ focusing﻿on﻿asset-liability﻿management﻿ (ALM)﻿in﻿the﻿rates﻿management﻿also﻿ positively﻿contributed﻿to﻿the﻿investment﻿ results.﻿With﻿respect﻿to﻿the﻿market﻿volatility﻿ induced﻿by﻿the﻿European﻿sovereign﻿debt﻿ crisis,﻿the﻿application﻿of﻿a﻿top-down﻿driven﻿ investment﻿strategy﻿also﻿proved﻿to﻿﻿ be﻿successful﻿in﻿maintaining﻿a﻿disciplined﻿ investment﻿approach﻿as﻿long-term﻿ investors.
Implementation﻿of﻿the﻿Risk﻿Budgeting﻿ process﻿significantly﻿increased﻿transparency﻿ and﻿accountability﻿throughout﻿the﻿investment﻿ process,﻿including﻿new﻿risk﻿and﻿profit﻿and﻿ loss﻿reports.﻿The﻿process﻿is﻿now﻿codified﻿ and﻿supported﻿by﻿sound﻿policies﻿and﻿ procedures,﻿giving﻿our﻿investment﻿governing﻿ bodies﻿the﻿transparency﻿they﻿need﻿for﻿ timely﻿exposure﻿analysis.﻿The﻿risk﻿budgeting﻿ process﻿not﻿only﻿allows﻿for﻿a﻿transparent﻿ performance﻿and﻿risk﻿attributions﻿in﻿an﻿﻿ ALM﻿context,﻿but﻿also﻿for﻿an﻿integrated﻿and﻿ stable﻿framework﻿in﻿navigating﻿volatile﻿ financial﻿markets.
Investment result Asset﻿Management’﻿s﻿primary﻿mandate﻿﻿ is﻿to﻿manage﻿the﻿assets﻿that﻿Swiss﻿Re﻿ generates﻿through﻿its﻿reinsurance﻿and﻿ insurance﻿business﻿using﻿a﻿clear,﻿robust﻿ asset-liability﻿management﻿framework.﻿ During﻿the﻿year,﻿there﻿was﻿a﻿continued﻿ reduction﻿of﻿securitised﻿products,﻿a﻿ reduction﻿of﻿hedges﻿on﻿the﻿corporate﻿credit﻿ portfolio,﻿and﻿a﻿deployment﻿of﻿cash﻿to﻿ additional﻿corporate﻿credit﻿and﻿newly﻿ created﻿equity﻿mandates.
Net﻿realised﻿gains﻿on﻿investments﻿in﻿Asset﻿ Management﻿were﻿USD﻿0.8﻿billion﻿for﻿ 2010,﻿compared﻿to﻿net﻿realised﻿losses﻿on﻿ investments﻿of﻿USD﻿0.7﻿billion﻿for﻿2009.﻿For﻿ 2010,﻿net﻿realised﻿and﻿unrealised﻿gains﻿﻿ of﻿USD﻿1.1﻿billion﻿were﻿partially﻿offset﻿by﻿ impairments﻿of﻿USD﻿0.3﻿billion.﻿The﻿ impairments﻿decreased﻿USD﻿1.1﻿billion﻿﻿ in﻿2010﻿from﻿2009,﻿and﻿hedges﻿lost﻿﻿ USD﻿17﻿million﻿compared﻿to﻿USD﻿1.8﻿billion﻿ in﻿2009,﻿as﻿we﻿reduced﻿the﻿hedging﻿ programme.
Credit and rates Swiss﻿Re’﻿s﻿Credit﻿&﻿Rates﻿investment﻿ portfolio﻿decreased﻿to﻿USD﻿85.7﻿billion﻿in﻿ 2010﻿from﻿USD﻿90.8﻿billion﻿at﻿the﻿end﻿of﻿ 2009﻿as﻿a﻿result﻿of﻿net﻿sales﻿of﻿government﻿ bonds﻿and﻿continued﻿de-risking﻿of﻿securitised﻿ products.﻿Net﻿investment﻿income﻿from﻿﻿ fixed﻿income﻿decreased﻿USD﻿0.9﻿billion,﻿ and﻿the﻿running﻿yield﻿for﻿Asset﻿Management﻿ declined﻿to﻿4.1%﻿in﻿2010﻿from﻿4.3%﻿during﻿ 2009.﻿This﻿was﻿mainly﻿due﻿to﻿lower﻿﻿ yields﻿on﻿new﻿purchases,﻿as﻿well﻿as﻿to﻿the﻿ impact﻿of﻿mark-to-market﻿gains﻿and﻿foreign﻿ exchange﻿movements.﻿This﻿reduction﻿in﻿net﻿ investment﻿income﻿was﻿more﻿than﻿offset﻿﻿ by﻿realised﻿gains﻿on﻿the﻿sale﻿of﻿investments﻿ of﻿USD﻿1.1﻿billion,﻿primarily﻿of﻿government﻿ bonds.
With﻿growth﻿likely﻿to﻿remain﻿more﻿modest﻿ than﻿would﻿typically﻿be﻿the﻿case﻿after﻿such﻿ a﻿massive﻿downturn,﻿monetary﻿policy﻿in﻿ developed﻿economies﻿is﻿set﻿to﻿remain﻿very﻿ accommodative,﻿at﻿least﻿through﻿the﻿first﻿ half﻿of﻿2011.﻿This﻿is﻿especially﻿true﻿for﻿﻿ the﻿Federal﻿Reserve﻿Bank,﻿which﻿has﻿shown﻿ a﻿preference﻿to﻿err﻿on﻿the﻿side﻿of﻿caution﻿in﻿ raising﻿interest﻿rates.﻿As﻿the﻿recovery﻿ continues,﻿however,﻿central﻿banks﻿will﻿begin﻿ re-examining﻿plans﻿to﻿extricate﻿themselves﻿ from﻿their﻿stimulating﻿role.
Net﻿investment﻿income 3﻿316 323 3﻿639 Net﻿realised﻿investment﻿gains/losses 769 39 808 Fees,﻿commissions﻿and﻿other﻿revenues 25 25
Income before income tax expense 920 2 675 Income tax expense –221 –541 Net income before attribution of non-controlling interests 699 2 134
Convertible perpetual capital instrument –203 –1 117 Net income attributable to common shareholders 496 863
Cash and cash equivalents (including 4 314 in 2009 and 4 139 in 2010 subject to securities lending) 27 810 16 928
Premiums and other receivables 11 773 11 095 Reinsurance recoverable on unpaid claims and policy benefits 7 11 251 12 637 Funds held by ceding companies 9 605 9 346
Liabilities Unpaid claims and claim adjustment expenses 6 68 412 64 690 Liabilities for life and health policy benefits 3, 7 39 944 39 551
Issue of common shares3 311 Convertible perpetual capital instrument issuance costs –9 Share-based compensation –10 48 Realised gains/losses on treasury shares 55 10 Balance as of period end 10 472 10 530
Treasury shares, net of tax Balance as of 1 January –1 540 –1 477 Cumulative effect of adoption of EITF 07-54 60 Purchase of treasury shares –54 –49 Sales of treasury shares 57 43 Balance as of period end –1 477 –1 483
Other-than-temporary impairment, net of tax Balance as of 1 January6 –263 –397 Other changes during the period –134 228 Balance as of period end –397 –169
Balance as of 1 January 0 0 Change during the period 1 410 Income attributable to non-controlling interests 154 Balance as of period end 0 1 564
Net income before attribution of non-controlling interests2 496 1 017 Other comprehensive income, net of tax: Change in unrealised gains/losses (tax: –38 in 2009 and –930 in 2010) 1 269 2 035 Change in other-than-temporary impairment (tax: 58 in 2009 and –115 in 2010) –397 228 Change in foreign currency translation (tax: –63 in 2009 and –226 in 2010) 1 149 –182 Change in adjustment for pension benefits (tax: –8 in 2009 and 8 in 2010) 44 –69
Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items –13 272 Net realised investment gains/losses –875 –2 783 Convertible perpetual capital instrument 203 1 117 Change in: Technical provisions, net –3 434 –1 745 Funds held by ceding companies and other reinsurance balances –508 13 Reinsurance recoverable on unpaid claims and policy benefits –194 –1 366 Other assets and liabilities, net –254 –1 610 Income taxes payable/recoverable –561 85 Income from equity-accounted investees, net of dividends received –187 –265 Trading positions, net 295 1 452 Securities purchased/sold under agreement to resell/repurchase, net –2 664 –2 273
Cash paid/received for acquisitions/disposal of reinsurance transactions, net 99 Net purchases/sales/maturities of other investments 1 224 –123 Net cash provided/used by investing activities 14 084 –2 052
From 1 January 2010, Swiss Re changed its presentation currency from Swiss francs (CHF) to US dollars (USD). US dollar is the currency in which a significant part of the reinsurance business of the Group is written and assets are invested in. Comparative periods have been retranslated at the closing rates for balance sheet items and at average rates for income statement items.
Subsequent events Subsequent events for the period covered by the current Financial Review have been evaluated up to 16 February 2011. This is the date on which the Financial Review is available to be issued.
In February 2010, the FASB issued “Amendments to Certain Recognition and Disclosure Requirements” (ASU No. 2010-9), an update to Topic 855 – Subsequent Events. As the Swiss Re Group is not a SEC filer, only the clarification on the reissuance disclosure provisions related to subsequent events applies to the Group. The Group adopted this standard as of the first quarter of 2010. It did not have an impact on the Group’s financial statements.
Investment income Net investment income by source (including unit-linked and with-profit business) was as follows: Dividends received from investments accounted for using the equity method were USD 53 million and USD 86 million for 2009 and 2010, respectively.
Investment expenses –575 –591 Interest charged for funds held –269 –165
Equity securities available-for-sale: Gross realised gains 199 22 Gross realised losses –31 –1
Other-than-temporary impairments –1 784 –423 Net realised investment gains/losses on trading securities –18 108 Change in net unrealised investment gains/losses on trading securities 4 469 2 372 Other investments: Net realised/unrealised gains/losses –2 581 213 Foreign exchange gains/losses –1 229 –552 Net realised investment gains/losses 875 2 783 2 Investments
Balance as of 1 January 551 1 409 Credit losses for which an other-than-temporary impairment was not previously recognised 984 196 Reductions for securities sold during the period –528 –775 Increase of credit losses for which an other-than-temporary impairment has been recognised previously, when the Group does not intend to sell, or more likely than not will not be required to sell before recovery 417 96 Impact of increase in cash flows expected to be collected –17 –69 Impact of foreign exchange movements 2 –28
As of 31 December 2009 and 2010, securities of USD 14 516 million and USD 12 802 million, respectively, were pledged as collateral in securities lending transactions and repurchase agreements. The associated liabilities of USD 5 005 million and USD 1 750 million, respectively, were recognised in accrued expenses and other liabilities.
Fixed income securities trading held for unit-linked business 2 380 2 302 Fixed income securities trading held for with-profit business 1 619 1 648 Fixed income securities trading 3 999 3 950 Equity securities trading held for unit-linked business 17 333 17 405 Equity securities trading held for with-profit business 1 203 1 135
Due in one year or less 4 345 4 352 2 342 2 379 Due after one year through five years 19 152 19 281 16 601 16 891 Due after five years through ten years 15 097 15 401 14 628 15 189
Mortgages, loans and real estate As of 31 December, the carrying values of investments in mortgages, policy and other loans, and real estate were as follows: The fair value of the real estate as of 31 December 2009 and 2010 was USD 2 961 million and USD 3 306 million, respectively. The carrying value of policy loans, mortgages and other loans approximates fair value.
As of 31 December 2009 and 2010, the Group’s investment in mortgages and other loans included USD 187 million and USD 270 million, respectively, of loans due from employees and USD 400 million and USD 356 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
Level 2 inputs are market based inputs that are directly or indirectly observable but not considered level 1 quoted prices. Level 2 inputs consist of (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical assets or liabilities in non-active markets (eg markets which have few transactions and where prices are not current or price quotations vary substantially); (iii) inputs other than quoted prices that are observable (eg interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates); and (iv) inputs derived from, or corroborated by, observable market data.
Certain financial instruments are classified within level 3 of the fair value hierarchy, because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity, less liquid corporate debt securities and certain asset-backed securities. Certain over-the-counter derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy. Pursuant to the election of the fair value option, the Group classifies certain Life & Health policy reserves to level 3 of the fair value hierarchy. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.
The fair values of assets are adjusted to incorporate the counterparty risk of non-performance. Similarly, the fair values of liabilities reflect the risk of non-performance of the Group, captured by the Group’s credit spread. These valuation adjustments from assets and liabilities measured at fair value using significant unobservable inputs are recognised in net realised gains and losses. For the year ended 31 December 2010, these adjustments were non-material. Whenever the underlying assets or liabilities are reported in a specific business segment, the valuation adjustment is allocated accordingly. Valuation adjustments not attributable to any business segment are reported in Group items.
In certain situations, the Group uses inputs to measure the fair value of asset or liability positions that fall into different levels of the fair value hierarchy. In these situations, the Group will determine the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value.
The Group’s OTC foreign exchange derivatives primarily include forward, spot and option contracts and are generally valued based on the cash flow discounting models utilising as main inputs observable foreign exchange forward curves.
Closing balance as of 31 December 2009 82 2 085 1 302 199 0 2 047 170 3 821 1 321 11 027
Transfers out of level 31 –85 –440 –1 3332 –238 –600 –148 –48 –97 –2 989 Impact of foreign exchange movements –2 –29 –4 1 –5 –3 –2 1 –9 –2 –54
Assets Fixed income securities trading 11 562 11 252 of which at fair value pursuant to the fair value option 782 01 of which at fair value pursuant to the fair value option 492 475 Liabilities Liabilities for life and health policy benefits –39 944 39 551 of which at fair value pursuant to the fair value option –293 –271 1 These fixed income securities matured in the second quarter of 2010.
Amount offset Where a right of setoff exists –6 475 6 475 Due to cash collateral –2 486 404
Total net amount of derivative financial instruments 3 980 –6 175 –2 195 1 The Group has revised its classification of hedging contracts and, as a result, the notionals of some contracts that were previously classified as foreign exchange contracts are now classified as interest rate contracts.
The notional amounts of derivative financial instruments give an indication of the Group’s volume of derivative activity. The fair value assets are included in other invested assets and the fair value liabilities are included in accrued expenses and other liabilities. The fair value amounts that were not offset were nil as of 31 December 2009 and 2010, respectively.
For the years ended 31 December 2009 and 2010, the Group recorded an accumulated net unrealised foreign currency remeasurement loss of USD 44 million and a gain of USD 171 million, respectively, in shareholders’ equity. These offset translation gains and losses on the hedged net investment.
The total fair value of derivative financial instruments containing credit risk-related contingent features amounted to USD 3 970 million and USD 1 975 million as of 31 December 2009 and 2010, respectively. For derivative financial instruments containing credit risk-related contingent features the Group posted collateral of USD 403 million and USD 335 million as of 31 December 2009 and 2010, respectively. In the event of a reduction of the Group’s credit rating to below investment grade, additional collateral would need to be posted with a fair value of USD 3 567 million and USD 1 640 million as of 31 December 2009 and 2010, respectively. The total equals the amount needed to settle the instruments immediately as of 31 December 2009 and 2010, respectively.
Credit derivatives written/sold The Group writes/sells credit derivatives, including credit default swaps, credit spread options and credit index products, and total return swaps. The total return swaps, for which the Group assumes asset risk mainly of variable interest entities, qualify as guarantees under FASB ASC Topic 460. These activities are part of the Group’s overall portfolio and risk management strategies. The events that could require the Group to perform include bankruptcy, default, obligation acceleration or moratorium of the credit derivative’s underlying.
The following tables show the fair values and the maximum potential payout of the credit derivatives written/sold as of 31 December 2009 and 2010, categorised by the type of credit derivative and credit spreads, which were based on external market data. The fair values represent the gross carrying values, excluding the effects of netting under ISDA master agreements and cash collateral netting. The maximum potential payout is based on the notional values of the derivatives and represents the gross undiscounted future payments the Group would be required to make, assuming the default of all credit derivatives’ underlyings.
The Group enters into long and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines short-term debt as debt having a maturity at the balance sheet date of less than one year and long-term debt as having a maturity of greater than one year. Interest expense is classified accordingly.
Long-term debt – financial and operational debt 19 184 18 427 1 The CPCI was reclassified from equity to short-term debt upon termination in the fourth quarter of 2010. Please refer to Note 8 Earnings per share for details on the accounting for the CPCI.
Maturity Instrument Issued in Currency Nominal in millions Interest rate… …first call in
Total subordinated debt as of 31 December 2010 8 861 Total subordinated debt as of 31 December 2009 10 692
Senior financial debt 46 75 Senior operational debt 272 349 Subordinated financial debt 272 266 Subordinated operational debt 253 248
Swiss Re 2010 Financial Review 57 7 Unpaid claims and claim adjustment expenses
Reinsurance recoverable –4 417 –6 307 Deferred expense on retroactive reinsurance –508 –455
Paid related to: Current year –1 426 –1 326 Prior year –10 250 –8 377
Deferred expense on retroactive reinsurance 455 401 6 Unpaid claims and claim adjustment expenses
Prior-year development Claims incurred development on prior years includes the impact of the adverse development cover (ADC) entered into with Berkshire Hathaway, covering non-life claims reserves for accident years 2008 and prior, with limited exceptions. The net prior-year development after the ADC cover was influenced by the reserves release below the ADC minimum commutation value, the Financial Guarantee developments, and a release from the provisions for future claims expenses.
All of the Group ś 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 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 ś ability to pay dividends may be restricted by these requirements.
Non-controlling interests –154 Interest on convertible perpetual capital instrument –203 –1 117 Net income attributable to common shareholders 496 863 Weighted average common shares outstanding 339 543 341 342 524 717 Net income per share in USD 1.46 2.52 Net income per share in CHF1 1.49 2.64
Federal securities class action lawsuit On 14 August 2009, Plumbers’ Union Local No. 12 Pension Fund, a Swiss Re shareholder, filed a second amended complaint in the federal securities class action lawsuit against Swiss Re, Swiss Re’s former Chief Executive Officer and Swiss Re’s Chief Financial Officer arising out of Swiss Re’s announcement, on 19 November 2007, that it would report a USD 1 billion mark-to-market loss on two credit default swaps. The lawsuit is pending in New York federal court. Plaintiff alleges that defendants violated the anti-fraud provisions of the US federal securities laws. Specifically, it contends that Swiss Re made false and misleading statements about its financial condition between March and November 2007, and that it failed to disclose that the Credit Solutions division had engaged in two credit default swaps that exposed the company to financial risk. Plaintiff seeks to certify a class of all US residents or citizens that purchased Swiss Re stock between 1 March 2007 and 19 November 2007. Swiss Re plans to vigorously defend the lawsuit. On 4 September 2009, Swiss Re filed a motion to dismiss and requested oral argument. Plaintiff filed an opposition to that motion on 25 September 2009, to which Swiss Re submitted a reply brief on 9 October 2009. Supplemental briefs were filed in July and on 29 July 2010, the Court heard oral argument on the motion to dismiss. By order dated 1 October 2010, all claims against Swiss Re and the individual defendants were dismissed with prejudice. Plaintiff’s deadline to file an appeal has lapsed.
The Group provides reinsurance, insurance and capital market solutions for clients that complement its (re)insurance offering throughout the world through its business segments. The business segments are determined by the organisational structure and by the way in which management reviews the operating result of the Group.
The allocation is based on technical reserves and other information, including duration of the underlying liabilities, and was allocated in the years ended 31 December of 2009 and 2010 as follows: 2009 USD millions Property & Casualty Life & Health Asset Management Legacy Group items Allocation Total
Other expenses –1 396 –781 –736 –52 –2 965 Interest expenses –1 011 –1 011 2010 USD millions Property & Casualty Life & Health Asset Management Legacy Group items Allocation Total
Other expenses –1 184 –817 –525 –2 526 Interest expenses –1 094 –1 094
Swiss Re 2010 Financial Review 65 b) Property & Casualty business segment – by line of business For the years ended 31 December 2009 USD millions
Net realised investment gains/losses –80 103 23 87 110 Other revenues –2 –2 2 0
Net investment income – unit-linked 36 557 593 Net investment income – with-profit business 145 145 Net investment income – non-participating 632 303 1 379 2 314 Net realised investment gains/losses – unit-linked –23 2 057 2 034 Net realised investment gains/losses – with-profit business 196 196 Net realised investment gains/losses – non-participating 120 –3 –16 101
68 Swiss Re 2010 Financial Review d) Asset Management For the years ended 31 December 2009 USD millions Credit & Rates
Net realised investment gains/losses 769 39 808 Other revenues 25 25
Swiss Re 2010 Financial Review 69 e) Net premiums earned and fee income from policyholders by geography Net premiums earned and fee income from policyholders by regions for the years ended 31 December
Variable interest entities Swiss Re Group enters into arrangements with variable interest entities (VIEs) in the normal course of business. The involvement ranges from being a passive investor to designing, structuring, and managing the VIEs. The variable interests held by the Group arise as a result of the Group’s involvement in a modified coinsurance agreement, certain insurance-linked and credit-linked securitisations, swaps in trusts, debt financing and other entities, which meet the definition of a VIE.
The total assets of the modified coinsurance vehicles in which the Group is the primary beneficiary were USD 3 245 million as of 31 December 2010.
Typically, the variable interests held by the Group arise through ownership of insurance-linked and credit-linked securities, or through protection provided under a total return swap for the principle of the collateral held by the securitisation vehicle.
As of of 1 January 2010, additional entities are included in the VIE disclosures due to the implementation of ASU No. 2009-17. Due to the required prospective application of the Update, the comparatives in this note were not restated.
The impact as of 1 January 2010 on the Group’s assets and liabilities due to the additional consolidations under ASU No. 2009-17 was as follows: The following table shows the total assets and liabilities on the Group’s balance sheet relating to VIEs of which the Group is the primary beneficiary as of 31 December: USD millions 2010
Fixed income securities available-for-sale 473 Short-term investments 362 Other invested assets –32 Cash and cash equivalents 793 Other assets 71 Total assets 1 667
Fixed income securities: Available-for-sale (whereof restricted: 2009: 5 447; 2010: 8 842) 7 443 8 842 Trading (whereof restricted: 2009: 988; 2010: 0) 1 132
In 2010, the Group set up total provisions of USD 93 million, related to the cost savings and efficiency programmes announced in early 2009, and released USD 16 million.
Changes in restructuring provisions are disclosed in the “Other expenses” line in the Group’s income statement.
USD millions Property & Casualty Life & Health Asset Management Total
Forward-looking statements typically are identified by words or phrases such as “anticipate”, “assume”, “believe”, “continue”, “estimate”, “expect”, “foresee”, “intend”, “may increase” and “may fluctuate” and similar expressions or by future or conditional verbs such as “will”, “should”, “would” and “could”. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others: ̤ further instability affecting the global financial system and developments related thereto; ̤ changes in global economic conditions; ̤ Swiss Re’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debt-like arrangements and collateral calls under derivative contracts due to actual or perceived deterioration of Swiss Re’s financial strength; ̤ the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on Swiss Re’s investment assets; ̤ changes in Swiss Re’s investment result as a result of changes in its investment policy or the changed composition of its investment assets, and the impact of the timing of any such changes relative to changes in market conditions; ̤ uncertainties in valuing credit default swaps and other credit-related instruments; ̤ possible inability to realise amounts on sales of securities on Swiss Re’s balance sheet equivalent to its mark-to-market values recorded for accounting purposes; ̤ the outcome of tax audits, the ability to realise tax loss carryforwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings; ̤ the possibility that hedging arrangements may not be effective; ̤ the lowering or loss of financial strength or other ratings of one or more of the companies in the Group or developments adversely affecting the ability to achieve improved ratings; ̤ the cyclicality of the reinsurance industry; ̤ uncertainties in estimating reserves; ̤ the frequency, severity and development of insured claim events; ̤ acts of terrorism and acts of war; ̤ mortality and morbidity experience; ̤ policy renewal and lapse rates; ̤ extraordinary events affecting Swiss Re’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events; ̤ current, pending and future legislation and regulation affecting Swiss Re or its ceding companies, and regulatory or legal actions; ̤ changes in accounting standards; ̤ significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions, including, in the case of acquisitions, issues arising in connection with integrating acquired operations; ̤ changing levels of competition; and ̤ operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks.
These risks can have a significant effect on investment returns, which in turn may affect both the Group’s results of operations and financial condition. During 2010, the Group continued to focus on asset-liability management for its investment portfolio, but pursuing even this strategy has its risks – including possible mismatch – that in turn can lead to reinvestment risk. The Group seeks to manage the risks inherent in its investment portfolio by repositioning the portfolio from time to time, as needed, and to reduce risk and fluctuations through the use of hedges and other risk management tools. The Group has moved to reduce risk to the portfolio by repositioning the components of the portfolio and, as a result, profitability will potentially be impacted, and, unless offset by underwriting returns, will be reduced.
The Group becomes aware of counterparty valuations either directly, through the exchange of information, or indirectly, for example, through demands to post collateral. These valuations may differ significantly from the Group’s estimates. Counterparty valuation estimates for collateral purposes are considered during the independent price verification process and may result in adjustments to initially indicated valuations. Resolution of any dispute in relation to asset valuation in which the Group may become involved with counterparties, in a manner adverse to it could have a material adverse effect on the Group’s financial condition and results of operations.
The Group may not be able to secure new sources of liquidity or funding, should projected or actual liquidity fall below levels it requires. The ability to meet liquidity needs through asset sales may be constrained by market conditions and the related stress on valuations and through third-party funding may be limited by constraints on the general availability of credit and willingness of lenders to lend. In addition, the Group’s ability to meet liquidity needs may also be constrained by regulatory requirements that require regulated entities to maintain regulatory capital, or that restrict intra-group transactions, the timing of dividend payments from subsidiaries or the fact that certain assets may be encumbered or otherwise nontradable. Finally, any adverse ratings action could trigger a need for further liquidity (for example, by triggering termination provisions or collateral delivery requirements in contracts to which the Group is a party) at a time when the Group’s ability to obtain liquidity from external sources is limited by such ratings action.
Counterparty risks The Group’s general exposure to counterparty risk was heightened during the credit crisis, and this risk could still be exacerbated to the extent defaults, or concerns about possible defaults, by certain market participants trigger more systemic concerns about liquidity. Losses due to defaults by counterparties, including issuers of investment securities (which include structured securities) or derivative instrument counterparties, could adversely affect the Group. In addition, trading counterparties, counterparties under swaps and other derivative contracts and financial intermediaries may default on their obligations due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons, which could also have a material adverse impact on the Group.
The Group could also be adversely affected by the insolvency of, or other credit constraints affecting, counterparties in its reinsurance operations. Moreover, the Group could be adversely affected by liquidity issues at ceding companies or at third parties to whom the Group has retroceded risk, and such risk could be exacerbated to the extent any such exposures are concentrated. The Group’s most significant single counterparty risk is in respect of Berkshire Hathaway Inc., with which it has a quota share arrangement, an
General information / Note on risk factors adverse development cover and a retrocession arrangement in respect of a closed block of US individual life reinsurance business.
Legal and regulatory risks The Group has been named, from time to time, as a defendant in various legal actions in connection with its operations. The Group is also involved, from time to time, in investigations and regulatory proceedings, certain of which could result in adverse judgments, settlements, fines and other outcomes. The number of these investigations and proceedings involving the financial services industry has increased in recent years. The Group could also be subject to risk from potential employee misconduct, including non-compliance with internal policies and procedures. Substantial legal liability could materially adversely affect the Group’s business, financial condition or results of operations or could cause significant reputational harm, which could seriously harm its business.
Insurance, operational and other risks As part of the Group’s ordinary course operations, the Group is subject to a variety of risks, including risks that reserves may not adequately cover future claims and benefits, risks that catastrophic events (including hurricanes, windstorms, floods, earthquakes, industrial
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