Expenses Claims and claim adjustment expenses 7,15 –14 485 –14 898 Life and health benefits 15 –10 084 –9 085
Equity securities – Available-for-sale, at fair value (cost: 2002: 13 080; 2003: 6 335) 12 259 6 751 Mortgages and other loans 6 939 6 133
Liabilities Unpaid claims and claim adjustment expenses 7,15 62 652 63 474 Liabilities for life and health policy benefits 15 37 269 37 244
Change in foreign currency translation –513 –513 Dividends –310 –310 Change in own shares (note 9) 27 –27 Equity repurchased –148 –148 Additional minimum liability, net (note 11) –22 –22
Cash flows provided/used by operating activities Net income/loss –91 1 702 Adjustments to reconcile net income/loss to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items 983 1 366 Net realised investment gains/losses 730 –376 Change in technical provisions, net 1 577 3 152 Change in reinsurance receivables and funds held by ceding companies 617 –841 Change in other assets and liabilities 49 –789 Change in income taxes payable/recoverable 76 290 Income from equity-accounted investees, net of dividends received 130 89 Change in financial services assets and liabilities –191 218
Cash flows provided/used by investing activities Fixed income securities: Proceeds from sale of investments 74 133 59 042 Purchase of investments –78 856 –63 402 Net purchase/sale of short-term investments 85 –4 392
Equity securities: Proceeds from sale of investments 13 144 13 905 Purchase of investments –12 321 –6 826
Cash paid/received for acquisitions/disposals and reinsurance transactions, net 1 056 –360 Other investments, net –1 275 310 Net cash provided/used by investing activities –4 034 –1 723
The accompanying consolidated financial statements have been prepared in accordance with Swiss GAAP FER and comply with Swiss corporate legislation. They include the financial statements of Swiss Re Zurich and its subsidiaries. The presentation requirements of FER 14 have been complied with except that certain financial information has been disclosed in the notes and not in the primary financial statements. All significant inter-company transactions and balances have been eliminated on consolidation.
The preparation of financial statements requires management to make significant estimates 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 consist of mortgage participations associated with linked investment contracts where the contract -holders bear all investment risk.
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. These instruments include derivative financial instruments indexed to the
Group’s own shares. Derivative financial instrument assets are included in other invested assets and are primarily used as a means of managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities and also to lock in attractive investment conditions for funds which become available in the future. The Group recognises all of its derivative instruments on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is used to hedge the fair value of assets or liabilities, changes in the fair value of the derivative are recognised in earnings, together with changes in the fair value of the related hedged item. If the derivative is used to hedge the variability in expected future cash flow related to a particular risk, changes in the derivative’s fair value are reported in other comprehensive income until the hedged item is recognised in earnings. The ineffective portion of the hedge is recognised in earnings.
The acquired present value of future profits (“PVFP”) of business in force is recorded in connection with the acquisition of life and/or health operations. The initial value is determined actuarially by discounting estimated future gross profits as a measure of the value of business acquired. The resulting asset is amortised on a constant yield basis over the expected revenue recognition period of the business acquired, generally over periods ranging up to 30 years, with the accrual of interest added to the unamortised balance at the earned rate. The carrying value of PVFP is reviewed periodically for indicators of impairment in value. Adjustments to reflect impairment in value are recognised in income during the period in which the determination of impairment is made.
Swiss Re uses long-term debt to finance general corporate purposes but also to fund “Financial services assets and liabilities“ (funded business). “Financial services assets and liabilities“ are structured with the intention of creating assets and liabilities
Other assets include investments for separate account business relating to certain types of insurance contracts where the contract-holder bears the investment risk, deferred expenses on retroactive reinsurance, prepaid reinsurance premiums, own-use real estate, property, plant and equipment, accrued income and prepaid assets. Separate account business assets and liabilities are valued at market value, and unrealised gains/losses are included in the income statement. Own-use real estate and property, plant and equipment are carried at depreciated cost. Deferred expenses on retroactive reinsurance policies are amortised into income over the expected claims-paying period.
Liabilities for life and health policy benefits from reinsurance business are generally calculated using the net level premium method, based on assumptions as to investment yields, mortality, withdrawals and policyholder dividends. Assumptions are set at the
The excess of estimated liabilities for claims and claim costs payable over consideration paid 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.
In 2002 the Group adopted additional balance sheet categories for the financial services assets and liabilities generated by the financial services business activities, principally in the Capital Management and Advisory business sector. The cash flow statement has been reclassified to reflect this change as of 31 December 2002.
Swiss GAAP FER has issued new guidance for the recognition and measurement of own shares. Own shares will be reported at cost as a deduction from shareholders’ equity rather than as an asset. The new measurement and recognition method is effective as of 1 January 2004.
Equity securities 358 259 Mortgages and other loans 651 555 Investment real estate 96 89 Short-term investments 106 71 Other current investments 66 41 Equity in earnings of equity-accounted investees 68 –39 Cash and cash equivalents 69 67 Deposits with ceding companies 910 734
Realised gains and losses for fixed income, equity securities and other investments were as follows: CHF millions 2002 2003
Trading revenues generated by the trading activities of the Financial Services Business Group were as follows: CHF millions 2002 2003
Gross trading revenues 420 667 Interest expense –192 –195 Trading revenues 228 472
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: Gross Gross As of 31 December 2002 Amortised unrealised unrealised Estimated CHF millions cost or cost gains losses fair value
Gross Gross As of 31 December 2003 Amortised unrealised unrealised Estimated CHF millions cost or cost gains losses fair value
Debt securities issued by governments and government agencies: Mortgage and asset-backed securities 5 128 138 –26 5 240 Fixed income securities available-for-sale 63 131 1 927 –784 64 274 Equity securities available-for-sale 6 335 560 –144 6 751
Less than 12 months 12 months or more Total As of 31 December 2003 Fair Unrealised Fair Unrealised Fair Unrealised CHF millions value losses value losses value losses
The Group’s investment portfolio at carrying value is comprised of concentrations in the following major currencies: As of 31 December 2002 CHF millions USD EUR GBP CAD CHF Other Total
The amortised cost or cost and estimated fair values of investments in fixed income securities by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2002 and 2003, CHF 2 198 million and CHF 2 242 million, respectively, of fixed income securities were callable or had call options in the instruments’ structure.
As of 31 December 2002 and 2003, securities with a carrying value of CHF 552 million and CHF 573 million, respectively, were on deposit with regulatory agencies in accordance with local requirements.
As of 31 December 2002 and 2003, the Group’s investment in mortgages and other loans included CHF 206 million and CHF 185 million, respectively, of loans due from employees and CHF 364 million and CHF 409 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
The Group’s investment in mortgages and other loans included CHF 1676 million and CHF 1064 million of mortgage participations associated with linked investment contracts as of 31 December 2002 and 2003, respectively. Contract-holders bear all investment risk related to mortgage participations. Fair value for other loans is considered to be equal to carrying value.
Depreciation expense related to income-producing properties was CHF 30 million and CHF 31 million for 2002 and 2003, respectively. Accumulated depreciation on investment real estate totalled CHF 569 million and CHF 593 million as of 31 December 2002 and 2003, respectively.
The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange-traded financial futures in its trading and hedging strategies, in line with the Group’s overall risk management strategy. The objectives include managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities, as well as to lock in attractive investment conditions for future available funds.
The fair values represent the gross carrying value amounts at the reporting date for each class of derivative contract held or issued by the Group. The fair values below are not an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA master agreements or their equivalent. Management believes that such agreements provide for legally enforceable set-off in the event of default, which substantially reduces credit exposure.
As of 31 December 2002 and 2003, the remaining 33% and 59%, respectively, are credit default swaps on the trading book of the Capital Management and Advisory business sector. This figure is reported as the sum of 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 business sector does maintain open long and short positions in credit default swaps and related instruments as part of its trading function.
The Group has reclassified the notional amount and the positive and negative fair values of certain swap transactions from interest rate swaps to foreign currency swaps. The presentation of the fair values has been adjusted to show the net position of the swaps rather than the gross position. The reclassifications do not impact the net carrying values, net income, net equity, or the maximum potential loss.
Interest rate contracts Forwards and futures 17 202 3 –11 –8
Foreign currency Forwards and futures 440 –12 –12 Options 660 –16 –16
On 30 June 2003, the Group acquired Guarantee Reserve Life Insurance Company for CHF 165 million. On 31 October 2003, the Group purchased the stock of Zurich Life Assurance Company Ltd., which has been renamed Reassure UK Life Assurance Company Ltd., for CHF 354 million. These acquisitions are administrative reinsurance (Admin ReSM) transactions. Admin ReSM is the purchase of closed blocks of in-force business and can be achieved through either a stock purchase or reinsurance.
As of 31 December 2002 and 2003, the balance of accumulated goodwill amortisation was CHF 1131million and CHF 1378 million, respectively.
Reclassification –65 194 –17 Effect of acquisitions and disposals 319 383
Effect of change in unrealised gains/losses 121 Effect of foreign currency translation –504 –1 286 –149 –617
+3bp 2006 Fixed Term Preferred Shares 2002 GBP 100 4.840% 221 2006 Insurance-linked Placement 2002/03 USD 349 3M Libor 431
2007 Trust-preferred Stock (TruPs)2 1997 USD 42 8.720% 66 2008 Private Placement (step-up) 2001 CHF 100 3.600% 100 2009 EMTN (Index-linked Notes) 2002 EUR 10 Index 16 2013 EMTN (Index-linked Notes) 2001 USD 10 Index 12
Senior debt as reported above is comprised of the following components: 31 December 31 December CHF millions 2002 2003
Nominal Interest . . . to first in CHF Maturity Instrument Issued in Currency in millions rate . . . reset in millions
– Subordinated Perpetual Loan 1998 DEM 340 6M Libor 2008 271
Total financial debt reported in the financial statements as long-term debt is comprised of the following components: 31 December 31 December CHF millions 2002 2003
Senior financial debt 104 53 Senior operational debt 42 128 Subordinated financial debt 132 142
In July 1997, the Group issued a straight bond with a face value of CHF 500 million, bearing interest at 3.75%, maturing on 2 July 2007, in exchange for proceeds of CHF 511 million.
In May 1998, the Group issued CHF 1010 million of multi-currency subordinated debt with a perpetual term, bearing interest at the rate of six month Libor plus 37.5 basis points for the first tranche of CHF 300 million, six month Libor plus 40 basis points for a tranche of DEM 340 million, six month Libor plus 45 basis points for a tranche of DEM 110 million, payable semi-annually, and 5.71% for a tranche of DEM 400 million, payable annually. The loan is subordinated in the event of liquidation to all senior creditors of Swiss Re Zurich, but will be paid in priority to all holders of its equity.
In June 1999, the Group also issued EUR 250 million of subordinated Perpetual Auction Reset Capital Solvency bonds, with a coupon of six month Euribor plus 55 basis points for the first seven years. After seven years, and every five years thereafter, an auction will be conducted to determine the re-offer yield.
In 2000 the Group entered into three Payment Undertaking Agreements (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 for a total amount of USD 166 million. Thirteen PUAs have fixed interest rates between 4.37% and 6.84%, while three PUAs have floating rates. All maturities are between 2010 and 2050. All interest rate risk is hedged to a one or three month Libor benchmark.
In November 2001, concurrent with its global equity offering, the Group issued USD 1150 million of subordinated convertible bonds. The bonds have a maturity of 20 years and a fixed coupon of 3.25% during the first 10 years, which will be reset to a floating six month Libor plus 180 basis points for the last 10 years. Up to and including 21 November 2011, the bonds can be converted into Swiss Re shares at a price of CHF 207.19 per share with a fixed USD exchange rate of 1.6641. The bonds have been issued by the Group and are unconditionally and irrevocably guaranteed on a subordinated level.
In 2003, the Group continued the insurance-linked securities programme, called Pioneer 2002, which provides for Swiss Re to receive payments if specified large natural catastrophe events occur. USD 140 million of these securities were privately placed with institutional investors during 2003. A total amount of USD 349 million had been cumulatively placed with an average interest rate of three month Libor plus 4.74% maturing in 2006.
In 2003, the Group issued under the EMTN programme six notes in USD, CHF and JPY currencies totalling CHF 700 million. The maturities ranged from 18 months to three years and were all either issued at or hedged to three month floating interest rates.
In August 2003, the Group issued under the EMTN programme a GBP 70 million bond with a coupon of 4.375% which is repayable annually over 7 years, ending April 2010.
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 7.838%. Interest is payable monthly.
A reconciliation of the beginning and ending reserve balances for asbestos, environmental and other long-latent liability claims and claim adjustment expenses for the periods presented is as follows: CHF millions 2002 2003
The Group maintains an active commutation strategy to reduce exposure. The number and amount of commutations were higher in 2003 compared to 2002, and paid claims have increased in 2003 versus 2002 due to the effect of this strategy. When commutation payments are made, the traditional “survival ratio” is artificially reduced by premature payments, which should not imply a reduction in reserve adequacy.
Provisions for long-latent injury claims outstanding at 31 December 2003 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.
The Group had 7 949 employees at 31 December 2003, compared to 8 287 at 31 December 2002. The decrease is mainly due to disposals and to reorganisation in the Financial Services Business Group and in the Americas.
Effect of dilutive securities Change in income available to common shares due to: Convertible bond 33
Own shares The following own shares of Swiss Re Zurich are held by the Group: Number of registered CHF
Own shares held as of 1 January at cost 824 664 75
The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: CHF millions 2002 2003
Current taxes 162 548 Deferred taxes –35 86 Income tax expense 127 634
The components of deferred income taxes were as follows: CHF millions 2002 2003
Deferred tax liabilities Present value of future profits 2 115 1 985 Deferred acquisition costs 415 465
Income taxes paid in 2002 and 2003 were CHF 23 million and CHF 309 million, respectively.
Amendments 4 –4 –4 Actuarial gains/losses 89 220 29 –34 Benefits paid –98 –133 –13 –13
Effect of foreign currency translation –118 –28 –28 –15 Benefit obligation as of 31 December 3 034 3 436 523 517
Effect of foreign currency translation –99 –16 Fair value of plan assets as of 31 December 2 610 2 974
A summary of the activity of the Group’s fixed stock option plan is as follows: Weighted Weighted average average exercise 2002 exercise 2003 price in CHF shares price in CHF shares
Weighted average fair value of options granted during the year per share 36 16
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 2002 and 2003, respectively: dividend yield of 2.3% and 2.8%; expected volatility of 25.1% and 28.7%; risk-free interest rate of 3.4% and 2.3%; expected life of 6.0 years and 6.0 years.
The Group does not recognise compensation expense for these options. If compensation expense for the options had been recognised, the Group’s net income/loss and earnings/ losses per share would approximate the pro-forma amounts in the following table: CHF millions 2002 2003
The employee compensation expense reflects the four-year vesting period of options.
Employee participation plan Swiss Re’s employee participation plan consists of a savings scheme lasting two or three years. Employees combine regular savings with the purchase of either actual or tracking options. Swiss Re contributes to the employee savings.
At 31 December 2003, CHF 9 173 million (2002: CHF 3 215 million) were guarantees on all present and future obligations in respect of Sale & Repurchase Agreements or Global Master Securities Lending Agreements, expiring between 2032 and 2036. CHF 2 523 million (2002: CHF 1779 million) were guarantees issued to third parties in respect of obligations of a number of subsidiaries of the Group with varying expiry dates.
The corresponding lease expenses incurred in 2002 and 2003 were CHF 43 million and CHF 43 million, respectively.
The Group directly underwrote approximately 25% of the excess coverage for the USD 3.5 billion in first party insurance obtained by the lessees of the World Trade Center complex.
The lessees contend that the destruction of the World Trade Center constitutes more than one occurrence under the coverage that the Group agreed to provide. The jury trial currently underway in the US Federal District Court of the Southern District of New York is to determine which insurers bound coverage on a policy form known as the WilProp form. Two courts have already ruled that if an insurer bound coverage on the WilProp policy form, the insureds are entitled to recover a maximum of one policy limit of USD 3.5 billion. This trial is not about the one or two occurrence question. If judgement is granted in favour of the insureds, (ie that the insurers were not bound on the WilProp policy form), the insurers will have an opportunity to litigate the one versus two occurrence question in a later trial. If judgement is granted in favour of the insureds in the second trial, then there would be a third trial assessing damages. The outcome of that third trial, in a final disposition, could have a material impact on the Group’s results of operations and statement of financial position.
Net realised investment gains/losses –611 –28 –350 259 –730 Trading revenues 228 228 Fees, commissions and other revenues 456 97 –188 365
Expenses Claims and claim adjustment expenses; life and health benefits –11 587 –10 084 –2 791 –107 –24 569
Net realised investment gains/losses 371 55 39 –89 376 Trading revenues 472 472 Fees, commissions and other revenues 423 24 –211 236
Expenses Claims and claim adjustment expenses; life and health benefits –12 660 –9 085 –2 285 47 –23 983
The Group has allocated the investment return on certain proprietary assets, previously included in the Asset Management business sector, to the other business groups and to the Credit and Risk Solutions business sectors in the Financial Services Business Group. The effect of restating 2002 would have been to increase the operating loss of the Financial Services Business Group, principally in Asset Management, by CHF 22 million while increasing operating income in the Property & Casualty and Life & Health business groups by CHF 18 million and CHF 4 million, respectively. The reallocation does not affect the Group’s net income.
The Financial Services Business Group has revised the classification of certain experience related features in acquisition costs and claims expense and adjusted 2002 accordingly as described in note 15f).
Claims and claim adjustment expenses; life and health benefits, net –965 –2 130 –783 –3 878 Change in equalisation reserves Claims and claim adjustment expenses; life and health benefits –11 587 –10 084 –2 898 –24 569
2003 Property & Life & Financial CHF millions Casualty Health Services Total
Change in unearned premiums, gross –184 13 274 103 Change in unearned premiums, retro 2 –145 –143
Claims and claim adjustment expenses; life and health benefits, gross –2 561 –1 759 –277 –4 597 Claims and claim adjustment expenses; life and health benefits, retro –262 278 –116 –100
Reinsurance recoverable on paid and unpaid claims 3 104 1 075 529 4 708 Reinsurance recoverable on life and health policy benefits 1 735 1 735
Unpaid claims and claim adjustment expenses Unpaid claims and claim adjustment expenses 41 365 11 349 9 332 62 046 Equalisation reserves 1 428
Life and health policy benefits 37 244 37 244 1 These balances are included in other assets. 2 These balances are included in reinsurance balances payable. 3 These balances are included in accrued expenses and other liabilities.
Management expense ratio in % 4.9 5.6 5.0 Return on operating revenues in % 7.9 13.8 9.1
Capital 2002 Risk Credit Management Asset CHF millions Solutions Solutions and Advisory Management Total
Expenses Claims and claim adjustment expenses –1 905 –886 –2 791 Acquisition costs –163 –237 –14 –414 Operating costs –188 –87 –392 –341 –1 008
Capital 2003 Risk Credit Management Asset CHF millions Solutions Solutions and Advisory Management Total
Net investment income 271 48 319 Net realised investment gains/losses 24 15 –1 1 39
The Group has revised the definition of trading revenues for the business group and has reflected the change in line items in 2002. Risk Solutions is the business sector impacted for the full year 2002. The change does not impact total revenues or operating income.
Certain contracts include experience related features that can result in reclassifications which impact acquisition costs and claims expense. The business group now classifies experience related changes of the contracts in line with the recognition of the original estimate. Prior year 2002 comparatives have been adjusted to be consistent with this policy. This has no impact on operating income or net equity.
CHF millions 2002 2003 h) Gross premiums written by line of business
Credit/surety 915 991 Aviation and space 867 831 Other lines 341 369
Method of consolidation: f full e equity * Joint venture from accounting perspective 16. Subsidiaries, equity investees and variable interest entities
Share capital Affiliation in % Method of (CHF millions) as of 31.12. 2003 consolidation
Bermuda Englewood Ltd 0 100 f Fields Holding Company Ltd 0 100 f Life Re International Ltd 0 100 f Old Fort Insurance Company Ltd 0 100 f Parkwood Reinsurance Company Ltd 0 100 f SwissRe Capital Management (Bermuda) Ltd 0 100 f SwissRe Finance (Bermuda) Ltd 0 100 f SwissRe Investments (Bermuda) Ltd 0 100 f
Canada Swiss Re Life & Health Canada 108 100 f Swiss Reinsurance Company Canada 10 100 f Swiss Re Holdings (Canada) Inc 113 100 f
United States Conning Corporation and group companies 0 100 f Facility Insurance Corporation 1 100 f Facility Insurance Holding Corporation 0 100 f Fort Wayne Health & Casualty Insurance Company 6 100 f Life Re Capital Trust I 4 100 f North American Capacity Insurance Company 5 100 f North American Elite Insurance Company 4 100 f North American Specialty Insurance Company 15 100 f Reassure America Life Insurance Company 3 100 f Sage Life Holdings of America Inc 0 100 f Southwestern Life Insurance Company 4 100 f Swiss Re America Holding Corporation 0 100 f Swiss Re Asset Management (Americas) Inc 46 100 f Swiss Re Atrium Corporation 1 100 f Swiss Re Capital Markets Corporation 0 100 f Swiss Re Financial Products Corporation 0 100 f Swiss Re Financial Services Corporation 0 100 f Swiss Re Life & Health America Holding Company 0 100 f Swiss Re Life & Health America Inc 5 100 f Swiss Re Management Corporation 0 100 f Swiss Reinsurance America Corporation 7 100 f Washington International Insurance Company 5 100 f
South Africa Swiss Re Asset Management (SA) Ltd 0 100 f Swiss Re Life & Health Africa Ltd 0 100 f Swiss Re Africa Ltd 2 100 f
The Group holds a variable interest in certain insurance-linked securitisations, private equity limited partnerships and other entities, created or acquired after 31 January 2003, which meet the definition of a VIE.
As of 31 December 2003, the total assets of and estimated maximum exposure to loss in VIEs, created or acquired after 31 January 2003, in which the Group holds a significant variable interest but is not the primary beneficiary, amounted to CHF 2 331 million and CHF 1739 million, respectively.
In addition, it is reasonably possible that the Group will be considered to hold, as of 1 January 2004, a significant variable interest in certain VIEs created or acquired before 31 January 2003. The assets and liabilities arising from the Group’s variable interest in these VIEs are currently accounted for under applicable existing guidance. The implementation of the revised guidance on VIEs is not expected to change the accounting for these assets and liabilities.
In 2003 the Property & Casualty Business Group paid out CHF 6 million for restructuring activities, principally in the form of employee redundancy benefits.
The Life & Health Business Group utilised CHF 5 million in respect of lease abandonment relating to the purchase of the reinsurance operations of Lincoln National Corporation in 2001.
The Financial Services Business Group has provided a further CHF 33 million for lease abandonment, severance and other personnel-related costs connected with ongoing restructuring. Expenses of CHF 35 million were incurred and charged against the provision.
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 53) of Swiss Re Group for the year ended 31 December 2003.
As of 31 December 2003, the company held perpetual subordinated liabilities totalling CHF 1968 million. These liabilities combine elements of debt and equity, and may be included in solvency calculations.
Shareholders’ equity at 31 December 2002 amounted to CHF 10 287 million before allocation of profit. After deduction of the dividend payment of CHF 310 million and the inclusion of the profit for the financial year 2003, shareholders’ equity equalled CHF 11167 million at year-end 2003.
The nominal share capital of the company remained unchanged at CHF 32 million on 31 December 2003.
Claims incurred –9 900 –10 324 Change in future policy reserves –1 671 –2 378 Change in equalisation reserve 22 206 Commissions incurred –3 747 –3 382 Other technical result 410 582 Operating costs –1 140 –1 183 Allocated investment return 600 688 Result from technical account –1 237 1 463
Result from deposit account 1 –267 74 Result from technical and deposit account –1 504 1 537
Investment expenses –3 272 –3 036 Allocated investment return –605 –686 Investment result –733 139
Other income and expenses 3 Other interest income 22 42 Other interest expenses –158 –161 Other income and expenses 2 603 16 Result from other income and expenses 2 467 –103
Investments in subsidiaries and affiliated companies 17 099 14 817 Loans to subsidiaries and affiliated companies 3 007 4 309 Mortgages and other loans 685 711
Short-term investments 819 1 742 Assets in derivative financial instruments 681 1
Assets from technical and deposit account Debtors from technical account 6 062 5 368 Deposits from technical account 6 748 9 845 Other assets from technical account 1 054 1 223 Debtors from deposit account 652 313 Deposits from deposit account 331 2 478 Total assets from technical and deposit account 14 847 19 227
The 2003 financial year comprises the accounting period from 1 January to 31 December 2003.
The result of property and casualty business is based on actuarial estimates over the life of the contract. In addition to the recognition of the technical accounts as reported by the ceding companies, empirical experience is taken into consideration. The allocation to the business year is in relation to the amount of reinsurance coverage provided.
The allocated investment return contains the calculated interest generated on the investments covering the technical provisions. The interest rate reflects the currencyweighted, five-year average yield on five-year government bonds.
The overall management expenses are allocated to the reinsurance business and the investment business on an imputed basis.
These assets are not subject to revaluation. Discounted securities are valued at their amortised cost. The valuation rules as prescribed by the Swiss insurance supervisory authority are observed.
Notes Swiss Reinsurance Company, Zurich Additional information on the financial statements 1. Result from technical and deposit account
Change in unearned premium reserves –1 571 9 – 1 562 –217 74 –143
Change in future policy reserves –1 491 –180 –1 671 –2 382 4 –2 378
Investment management expenses –182 –89 Valuation adjustments on investments –2 248 –1 278 Realised losses on sale of investments –842 –1 669 Investment expenses –3 272 –3 036
Payables from deposit account 1 147 2 779 Deposits from deposit account 68 63 Total liabilities from deposit account 1 215 2 842
Shareholders’ equity on 31 December (previous year) 10 945 10 287 Dividend paid for the previous year –776 –310 Capital increase including premium 12 – Profit for the financial year 106 1 190 Shareholders’ equity on 31 December before allocation of profit 10 287 11 167 Dividend payment –310 –3411
Remaining contract term up to 1 year 1 4 Remaining contract term up to 5 years 13 15 Remaining contract term more than 5 years 2 –
These off-balance sheet commitments pertain primarily to office and apartment space rented by the company. The amounts are shown for the non-cancellable contract period only.
Own shares held by the Swiss Re Group are stated on page 31.
The undisclosed reserves on investments in securities and participations, as the difference between the cost or lower market valuation and the book values, and other financial provisions decreased by a net amount of CHF 199 million (2002: decrease of CHF 3 654 million) in the year under report.
Franklin Resources, Inc., Ft. Lauderdale, Florida, known as Franklin Templeton Investments, announced on 23 December 2003 that, in its capacity as investment manager for mutual funds and clients and through a number of its group companies, it has an aggregate voting right of 5.02% which may be exercised autonomously of the beneficial owners.
Withdrawal from reserves –195 000 000 – Allocation to reserves – 795 000 000
After deduction of the Federal Withholding Tax of 35%, the dividend will be paid from 19 May 2004 by means of dividend order to shareholders recorded in the Share Register or to their deposit banks.
As statutory auditors, we have audited the accounting records and the financial statements (income statement, balance sheet and notes / pages 57 to 66) of Swiss Reinsurance Company for the year ended 31 December 2003.
Net realised investment gains/losses 1 281 2 509 3 588 4 275 2 665 –730 376 Trading revenues 228 472
Liabilities Unpaid claims and claim adjustment expenses 41 876 45 866 54 072 59 600 68 618 62 652 63 474 Liabilities for life and health policy benefits 9 963 15 143 23 279 29 300 41 370 37 269 37 244
Annual Report 2003 Financial Statements Swiss Reinsurance Company Mythenquai 50/60 P. O. Box 8022 Zurich Switzerland www.swissre.com
As a leading global reinsurer, Swiss Re strives to anticipate market trends in the capital and risk arena. Building on the from a wide range of disciplines and cultural backgrounds, Swiss Re identifies, analyses and communicates on key industry issues affecting its business activities, financial results and corporate values. The photographic sections in this year’s Annual Report highlight Swiss Re’s global expertise on these “Top Topics”.
Gene technology Thomas Epprecht, biochemist and risk expert in Zurich, monitors scientific research and assesses the risks associated with gene technology.
Mortality trends Ronald Klein, actuary and expert in mortality trends in London, analyses the effects of the growing obesity epidemic on mortality patterns.
The “Altbau” building – the historical centre of Swiss Re’s expertise at the company’s headquarters in Zurich, Switzerland.
Swiss Re is one of the world’s leading reinsurers and the world’s largest life and health reinsurer. The company operates through more than 70 offices in over 30 countries. Swiss Re has been in the reinsurance business since its foundation in Zurich, Switzerland, in 1863.
■ Net income of CHF 1.7 billion, primarily driven by strong increase in underwriting profitability in non-life reinsurance
■ Property & Casualty Business Group: combined ratio of 98.4%, exceeding target of 100%
■ Swiss Re ■ Swiss Performance Index ■ DJ Stoxx Insurance Index
We are pleased to report that Swiss Re returned to profit in 2003, generating net income of CHF 1.7 billion or CHF 5.48 per share. All business groups contributed to this positive development, with the strengthening recovery in non-life markets taking the lead. Based on our substantially improved results and the opportunities for further development of our business, the Board of Directors will recommend a dividend of CHF 1.10 per share at the Annual General Meeting on 14 May 2004.
Swiss franc. Revenue growth of 6% disguises a strong underlying growth achievement which measured 16% in original currencies. The Group adopts a neutral policy towards currency fluctuations, generally pursuing a strategy of matching assets and liabilities by currency.
Our Life & Health Business Group was most affected by currency movements, as it is substantially US dollar denominated, but it maintained its strong contribution to net income. The business group achieved a margin on operating revenues of 8.7%, just below its average target over three years of 9%. Growth in revenues was flat in original currencies (negative 10% in Swiss francs), reflecting continued run-off of some health lines, declining interest rates and the first effects of repricing initiatives currently underway.
Significant expense efficiencies were realised in our investment activities through the integration of Capital Partners division into the Asset Management business sector and the decision to focus investment management operations in two locations – Zurich and New York. The three business groups and Corporate Centre also implemented expense reduction programmes, the benefits of which were only partially realised in 2003.
While Swiss Re is committed to managing cost ratios efficiently, our aim is to generate sustainable growth in profit. At the heart of our ability to create long-term value is knowledge building and expertise. We therefore strongly promote the professional and personal development of our global team in pursuing our business objectives.
Over the last 20 years the insurance industry has experienced periodic surges in claim liabilities resulting from new interpretations of the scope of insurance coverage and from expanding burdens of risk for our clients. These conditions are often retrospectively applied and are most evident in the US. We fully support the award of proper compensation to those who have suffered loss (eg from exposure to defective products). However, we also believe that in some instances awards are excessive or simply not merited where there has been no loss or impairment.
Global warming may not always correspond to our daily weather experience, but climate change is nevertheless a reality. While we cannot identify direct causal links to specific weather events, rising temperatures are making it increasingly difficult to forecast the frequency and severity of related insurance risk. Swiss Re believes that we should not simply be observers of this changing pattern of risk, but should also promote solutions.
To this end, we are active in building awareness of the need to switch to renewable energy sources and to reduce carbon emissions. Individuals, corporations and governments all have a role to play. In 2003 the Group demonstrated its resolve by committing itself to reducing its own carbon emissions, and to becoming “greenhouse neutral”
Looking ahead, we see a positive outlook for our company. The 2004 renewals for our non-life business saw Swiss Re making further progress in our largest business group.
The strong price rises experienced in recent years may now be plateauing but we expect prices to remain at attractive levels and to generate improved returns for shareholders.
We are delighted to report that Mr Kaspar Villiger has made himself available for election to our Board of Directors. His election will be proposed at the Annual General Meeting of 14 May 2004. Having pursued a successful career as a businessman, Mr Villiger served as a Federal Councillor in Switzerland from 1989 until the end of 2003, and twice as President of the Swiss Confederation. His outstanding experience in politics and business would make him an excellent addition to our Board of Directors.
Ann F. Godbehere1 Chief Financial Officer, Head of the Finance Division
Financial Services Business Group Jacques Aigrain1 Head of the Financial Services Business Group
Benjamin Meuli2 Chief Investment Officer, Head of the Asset Management business sector 1 Member of the Executive Board Committee
Swiss Re has a clearly defined Corporate Philosophy and strategy designed to serve as a coherent framework for long-term value creation. The Corporate Philosophy sets out common standards of behaviour in which Swiss Re as a company believes, and aims to guide decisions and behaviour across the business groups and divisions in more than 70 offices worldwide. Four core values form the centrepiece of this philosophy: ■ Excellence, defining Swiss Re’s standards of knowledge and expertise; ■ Efficiency, governing quality and costeffectiveness; ■ Sustainability, setting the balance between Swiss Re’s economic, social and environmental responsibilities; and
Building upon its mission and value framework, Swiss Re has defined four strategic goals: ■ To be the global market leader in property and casualty and life and health reinsurance; ■ To be the premier provider of capital, risk and asset management solutions in business-to-business financial services with a specific focus on insurers and other financial institutions; ■ To deliver attractive returns to shareholders whilst maintaining top financial strength and ratings; ■ To be a global company built on teams with unrivalled risk and capital expertise, professionalism and commercial insight.
In order to achieve these goals, Swiss Re actively pursues a strategy of diversification through its business groups, Property & Casualty, Life & Health and Financial Services, allocating resources to those businesses which present the best risk/ return profile. Each business group maintains, fosters and further develops longterm client relationships, applies sound risk management and underwriting discipline and pursues effective cost management.
“Our strategy and the expertise of our global team differentiates Swiss Re and enables us to grow and sustain our earnings power.” John R. Coomber, CEO
Target Matrix Business group Key figures Average target 2004 to 2006
in the US and other accounting boards worldwide. Swiss Re collaborates with insurers and industry organisations to try to assess the effects of proposed accounting changes on the insurance industry.
■ Insurance-linked securities (ILS): since the inception of the market for catastrophe bonds in 1996, Swiss Re has been at the forefront of developing ILS, both as a sponsor and as an underwriter of these supplementary methods of managing peak risks. Swiss Re concluded three successful ILS related transactions in 2003 and continuously shares its expertise with clients.
■ Natural catastrophes: the insurance industry is experiencing an increasing frequency and severity of losses triggered by natural disasters. This accumulation is due primarily to the increased concentration of insured values, especially in highly exposed areas.
■ Reinsurance regulation and supervision: the regulatory environment for reinsurers is about to change significantly as many European countries are reforming their prudential rules. Enhanced disclosure provisions and new risk based capital adequacy requirements are being introduced. Swiss Re closely monitors these developments and interacts with private sector groups and regulatory bodies at national and international level. As a leading reinsurer, Swiss Re supports cost efficient measures encouraging insurers to implement high level risk management processes.
■ Sustainability: climate change and the deteriorating quality and availability of natural water resources have an increasing impact on the insurance and reinsurance industries. Swiss Re is committed to promoting responsible approaches to the natural environment and is developing appropriate risk transfer solutions (for more information, see page 42).
Balanced ScorecardThe Balanced Scorecard complements the Target Matrix, measuring value-creating activities and supporting sound management of Swiss Re’s performance drivers. It ensures that client focus, underwriting expertise, knowledge and skills, and excellence in operational business processes generate financial benefits for Swiss Re’s clients and, ultimately, create value for its shareholders.
Swiss Re was active as a sponsor of third party research in 2003, including a major joint project with the Harvard Medical School and the United Nations Development Programme, dedicated to assessing the impact of climate change on public health. Another project, conducted by the US Geological Survey, assessed the probability of a major Tokyo earthquake. More recently, Beijing Normal University and Swiss Re jointly published an atlas on natural disasters in China. Such activities enhance Swiss Re’s internal knowledge base, further position the company as a global leader in managing capital and risk and help the company meet its corporate social responsibilities.
Swiss Re attaches great importance to researching issues that may have an impact on the risk landscape and strives to translate its findings into new or enhanced products and services. This is achieved through several channels: Swiss Re’s Centre for Global Dialogue in Rüschlikon, a wide range of publications, and third party research which Swiss Re commissions and makes available to interested stakeholders.
Swiss Re is a knowledge company: its essential skills are embodied in its workforce. The company aims to attract, develop and retain the most qualified, talented and motivated professionals in the field. Reflecting its activities in risk transfer, risk finance and asset management, Swiss Re’s employees are drawn from a broad spectrum of disciplines, and include actuaries and accountants, economists, engineers, lawyers, IT specialists, natural scientists, pharmacists, veterinary surgeons, and many more.
Swiss Re’s success is based on the knowledge, experience and creativity of its employees. Generating and deploying expertise is a mindset reflected in many aspects of the company, from its Corporate Philosophy to its brand.
The increasing use of genetically modified organisms (GMOs) in the production of pharmaceuticals, and in agriculture and foodstuffs, is changing the risk landscape and has triggered a worldwide debate. Swiss Re recognised early in this debate that growing public sensitivity would not be without consequences for liability insurance. It has therefore not only been actively monitoring scientific research and assessing the risks associated with gene technology, but has also been engaged in ongoing dialogue with clients and other stakeholders on conditions of insurability.
How is Swiss Re addressing this issue? Swiss Re started addressing worrying developments in liability law and the impact of such trends on insurability at an early stage. It does so both through risk dialogue and through publications. Regular contact with clients enables us to monitor scientific developments and related trends in the biotech industry very closely. In 2003, we also organised an International Biotechnology Forum focusing on risk perception, liability and insurability. Hosted at Swiss Re’s Centre for Global Dialogue, this event provided an excellent platform for an open debate with various stakeholders. Insights gained at such conferences and through client contact are incorporated into our risk assessment and underwriting.
The transgenic crops propagated in these greenhouses are carefully contained and monitored.Scientists are researching biochemical factors and microbe interaction in genetically modified cassava plants.
Notwithstanding these improvements, high currency exchange rate fluctuations heavily impacted the balance sheets and the results of global firms for the second successive year. Most notable was the decline of the US dollar against the European currencies (EUR –17%, CHF –11%) in the course of 2003, which significantly reduced US dollar denominated income.
Nevertheless, some adverse developments affected the 2003 figures and prevented the industry from registering even better financial results: ■ The latest data indicate reserves for liability claims were under-estimated, especially in the US and UK, highlighting significant under-pricing during the soft market in the second half of the 1990s. These reserves had to be strengthened, causing earnings from current profitable business to be reduced.
Direct non-life premium volume grew strongly in 2003, although at a slower pace than in 2002, when growth rates were at their highest since the liability crisis of the mid 1980s. Growth was fuelled once again by further premium rate increases in many markets, particularly in industrial lines of business. Many commercial lines have seen prices increase by over 50% over the last four years.
Profitability improved due to the more favourable investment environment in the second half of 2003 as well as the industry ’s successful efforts to cut costs. However, cost reductions and lower bonus payments were not sufficient to bring life insurers back to past levels of profitability, for the following reasons: ■ Many life insurers today are tightly restricted in their investment strategies.
■ Unlike property and casualty insurers, which have far greater flexibility to reprice much of their business every year, many life insurers still carry a large in-force portfolio of policies offering investment return guarantees above the rate that can be earned in the current, historically low, interest rate environment.
Life reinsurers have typically concentrated on reinsuring the mortality and morbidity risks of life business, and are therefore less affected by the interest rate guarantees of the primary insurers.
Primary insurance premium volume in industrialised countries in both life and property and casualty is generally expected to grow with the long-term trend growth of GDP (between 3% and 4% per year), and premium increases in emerging markets will outpace overall economic growth. The underwriting result in the property and casualty insurance industry will remain attractive in most segments through 2005 at least, with combined ratios of approximately 100% for primary business; combined ratios for reinsurance are expected to be below 100%. Life reinsurance growth will exceed growth in primary markets in most countries, with the exception of the US and UK, where cession rates for new business are unlikely to increase beyond the current high levels.
■ United States (S&P 500) ■ Japan (TOPIX) ■ United Kingdom (FTSE 100) ■ Germany (DAX 30) ■ France (CAC 40) ■ Switzerland (SMI)
16 Swiss Re Annual Report 2003 26 February 2003 renewals successful; impairment charges to impact results Swiss Re reported successful January renewals, continuing the trend towards substantial improvements in both pricing and conditions. However, impairment charges were expected to affect the 2002 results.
27 March Swiss Re’s 2002 result Swiss Re’s 2002 result showed net premium income up 15% at CHF 29.1 billion but a negative impact from asset impairments. The final result for 2002 was a net loss of CHF 91 million.
7 May Shareholder restructuring of Gerling NCM Swiss Re, Deutsche Bank, Sal. Oppenheim and Gerling signed a contract reorganising the ownership of Gerling NCM.
Swiss Re increased its stake to 47.5% in the new company, renamed Atradius.
7 May Swiss Re sells stake in Partner Re Swiss Re, one of the original co-founders of Partner Re, sold its remaining stake in the company. Swiss Re’s capital gain was CHF 230 million.
12 May Annual General Meeting The 139th Swiss Re Annual General Meeting approved a reduced dividend of CHF 1.00 per share. Shareholders confirmed the nominations of Raymund Breu and John F. Smith Jr. to the Board of Directors, while Jorge Paulo Lemann was re-elected for a further four year term.
9 July Life & Health reports 2002 embedded value Swiss Re’s Life & Health Business Group reported embedded value of CHF 16.3 billion for 2002. Growth in embedded value of CHF 1.2 billion from earnings and capital movements was more than offset by the negative impact of exchange rate movements.
4 August USD 100 million catastrophe risk swap arranged Swiss Re and Mitsui Sumitomo arranged a USD 100 million catastrophe risk swap involving Japan typhoon, North Atlantic hurricane and European windstorm risks. This transaction diversifies peak risks for both parties.
29 August Swiss Re’s half-year result 2003 Swiss Re reported a solid earnings increase to CHF 691 million in the first half of 2003, with total premiums earned up 19% in original currencies. Shareholders’ equity increased by CHF 1.2 billion to CHF 17.9 billion.
22 September Swiss Re sponsors study on impact of climate change and loss of biodiversity on human health Together with the United Nations Development Programme (UNDP) and Harvard Medical School’s Center for Health and the Global Environment, Swiss Re embarked on an innovative research study aimed at evaluating health and economic damage caused by climate change and associated extreme weather events.
30 October Swiss Re to become greenhouse neutral Swiss Re demonstrated its continued commitment to sustainability with the implementation of a ten year programme to become fully greenhouse neutral. The Group-wide programme combines a reduction of in-house emissions and an investment in the World Bank Community Development Carbon Fund.
19 December Swiss Re opens branch office in China Swiss Re officially opened its Beijing branch, providing nationwide yuandenominated reinsurance services in both life and health and property and casualty lines of business to China’s rapidly growing insurance market.
2004 to date 5 February Swiss Re to acquire CNA’s book of life and health business in Admin ReSM
2 March Benjamin Meuli appointed Chief Investment Officer The Board of Directors appointed Benjamin Meuli Chief Investment Officer and Member of the Executive Board of Swiss Re, effective 19 April 2004.
Net realised investment gains were CHF 376 million, including the impact of the equity portfolio hedge, compared to net realised losses of CHF 730 million in 2002. The net impairment charge fell to CHF 725 million and was primarily incurred in the first half of 2003, compared to CHF 3.9 billion in impairments in 2002.
Other revenue decreased to CHF 236 million from CHF 365 million in 2002, due primarily to reduced brokerage fees and the sale in 2002 of non-core activities at the Group’s Conning third party asset management subsidiary.
Excluding currency exchange effects, these expenses increased by 7%, compared with premium growth over the same period of 16%. In 2002 the claims related to credit business and the reserve increase in the Guaranteed Minimum Death Benefits business, resulting from poor equity markets in that year, did not recur in 2003. Adverse development in 2003 in casualty claims, principally those originating in the United States, was more than offset by improvements in all other lines of business worldwide. Swiss Re’s review of its US asbestos and environmental exposures in 2003 resulted in only a minor change in its reserves held.
Acquisition costs rose to CHF 6.9 billion in 2003 from CHF 6.2 billion in 2002, an increase of 10%. Adjusting for currency exchange effects, the increase was 20%, which is primarily due to the growth in the underlying business.
Premiums in the Life & Health Business Group decreased by 9% to CHF 10.2 billion. Adjusting for the effect of currency exchange, premiums increased by 1%.
The Financial Services Business Group increased premiums earned to CHF 3.1 billion, up 14% compared to the previous year. Excluding currency exchange effects, underlying growth was 25%.
Net investment income was CHF 4.6 billion, compared to CHF 5.5 billion in 2002. The main reasons for the fall were the depreciation of the US dollar against the Swiss franc, combined with lower market interest rates; these were partially offset by an increase in total investment assets (up 5% in original currencies) and lower investment management expenses.
Shareholders’ equity increased from CHF 16.7 billion to CHF 18.5 billion. The increase was mainly due to improved earnings and the change in unrealised gains and losses on equities, partly offset by currency exchange effects. Return on equity increased to 10.2% from –0.5% in 2002.
The following table reconciles the income from Swiss Re’s business groups and the operations of its Corporate Centre with the Group consolidated net income before tax.
Net realised gains or losses on certain financial instruments, amortisation of goodwill, and other income and expenses – such as indirect taxes, capital taxes, and interest charges – have been excluded in the assessment of each business group’s performance.
Other fundamental trends in 2003 were the rapid decline of the US dollar, most markedly against the yen and the euro, coupled with widening macroeconomic and trade imbalances, most notably the US current account and federal deficits – as well as the emergence of China as a prime destination for foreign investment.
At the end of 2003, Swiss Re’s investment portfolio was valued at CHF 88 billion – little changed in Swiss franc terms from the end of 2002, although the portfolio grew by 5% in local currencies. The proportion of fixed income investments increased during 2003 to 88% of the overall portfolio. Two Admin ReSM transactions in the US and one in the UK supported the expansion of the fixed income portfolio. Investments in equities represented slightly under 8% of the total, down from 14% (before hedge) at the end of 2002. Active sales of equities, including the divestment of Swiss Re’s holding in Partner Re, contributed to this trend.
The investment result of CHF 5 billion represents a return on investment of 5.1%.
After reaching historic lows in June 2003, interest rates ended the year slightly above their levels at the end of 2002. The main central banks broadly maintained their expansive monetary policies throughout the year. A steepening yield curve became more apparent in the third and fourth quarters, responding to evidence of good economic performance and expectations that interest rates would rise further. Corporate bond spreads continued to tighten, most markedly in the lower credit quality areas, offering less incentive for investors to take additional credit risk.
In a historically low interest rate environment, the current income (coupon) earned on the portfolio remained solid.
The major stock markets all posted significant gains in local currencies during 2003, with the eurozone lagging behind the US and, to a lesser extent, the UK. Equity valuations remained relatively attractive compared to bonds. Given the removal of uncertainty over the war in Iraq and clear signs of reflation arising from massive US fiscal and monetary stimulus, investors were prepared to increase their risk tolerance and shift into equities.
Unpaid claims and claim adjustment expenses 62 652 63 474 1
Liabilities for life and health policy benefits 37 269 37 244 0
Obesity is a growing epidemic. With links to cardiovascular disease, hypertension, diabetes and many types of cancer, its effects have become a major public health concern worldwide. Understanding mortality trends is core to Swiss Re’s life reinsurance business. Despite dramatic improvements in mortality in recent decades, the prevalence of obesity has increased two to threefold in most developed countries and is taking hold in the developing world. The life insurance industry must respond to the challenge by ensuring that ratings and pricing remain up to date and in line with emerging experience.
How widespread is the trend? Is this purely a problem for developed countries? No. The significance of obesity as a global health concern has been recognised by the World Health Organisation. Excessive weight gain is no longer confined only to North America and other developed countries, but is also becoming an increasingly serious issue in other regions, including Asia.
How should society confront the problem? Is it really such an urgent challenge? In the United States, obesity will soon overtake smoking as the number one cause of preventable death. Like the health effects of smoking, obesity usually stems from a choice about lifestyle. Society dealt with smoking through a variety of measures including education and persuasion. Confronting obesity is now an equally pressing task. It calls for a combined and determined effort by all parties: governments, the medical profession, food manufacturers and consumers need to be alert to this emerging risk and play a role in alleviating it. Healthy eating to promote a better life expectancy is clearly a major step in the right direction.
Improved education about the health effects of junk food could help alleviate the obesity problem.
26 Swiss Re Annual Report 2003 phases of the market cycle. Common processes across the business group allow the company to set targets, create pricing transparency and measure performance in line with the Group’s Target Matrix.
The processes introduced have significantly enhanced the business group’s ability to measure pricing adequacy early in the renewal process and take immediate corrective action. This approach has been used successfully to manage the Group’s natural catastrophe exposures for several years; it is now showing returns in other areas, both during 2003 and through the 2004 renewal.
The improved market discipline of 2002 continued, to a large extent, into 2003: early fears of a significant market softening proved to be overly pessimistic. In fact, the low interest rate environment and growing catastrophe loss potentials due to increasing concentrations of insured values, caused the reinsurance market to remain strong.
Swiss Re was also able to benefit from such concerns. Our superior balance sheet strength provided a significant competitive advantage, particularly in long-tail lines such as liability.
The business group was again able to deliver significant premium growth. Premiums earned grew by 16% in 2003, with an annual average growth rate of 18% since 2000. In original currencies the growth in 2003 was 25%.
The profitability of the business group substantially increased in 2003 with the combined ratio improving to 98.4%, down from 104.1% in 2002. This was achieved through rate increases, disciplined underwriting and efficiency gains. Premiums earned grew 25% in original currencies.
The business group delivered a combined ratio of 98.4% in 2003, a 5.7 percentage point improvement over 2002. Positive developments were recorded in all combined ratio components; the claims ratio, acquisition ratio and expense ratio all decreased in the year under review.
The expense ratio again improved in 2003, as the business group’s focus on cost management and efficient processes continued. Absolute expenses decreased by 6%.
Combined ratio over time 1 Excluding the 11 September event, the combined ratio was 110.5%
The re-underwriting initiatives of 2002 and 2003 reaped rewards across all lines of business. Swiss Re cancelled poorly performing contracts and also expanded into the most profitable segments.
There was substantial damage from wildfires in Southern California, Canada and Australia; the catastrophe market was also affected by tornadoes in the US Midwest, and by Hurricane Isabel, which hit the US mid-Atlantic and northeastern states. Each of these events produced insured market losses in excess of USD 1 billion. Typhoon Maemi, which was the largest recorded windstorm ever to strike South Korea, also occurred in the second half of the year.
The year 2003 saw only two large “man-made” losses in the property portfolio: an explosion in a pharmaceutical plant in the US and another explosion and fire at a gas plant in Australia.
The steady improvement in the liability combined ratio over recent years received a serious setback in 2003. The low incidence of new claims, which had already begun in 2002, continued in 2003 – but this was more than offset by adverse development (CHF 755 million) from prior years in medical malpractice, product liability, directors’ and officers’ and professional liability in general.
Swiss Re completed a review of its US asbestos and environmental (A&E) related exposures during 2003. The net A&E impact on the business group’s result for the year was a charge of CHF 88 million.
During this period of re-underwriting, premiums earned grew strongly by 46%, with the majority of the increases coming from Europe (63%) and, to a lesser extent, Asia (13%). Much of the premium growth was due to improved pricing rather than an increase in exposure, as in 2003 many planned infrastructure projects were postponed due to geopolitical uncertainties.
Marine Marine saw a significant turnaround in 2003, with a 17% improvement in the combined ratio to 100.8%. Premiums earned reduced by 2%. The major contributors to the overall performance were Europe and the Americas, but Asia also saw an improvement in profitability. There is room for further progress in this line.
Increasing retentions in certain areas mean less reinsurance premium is available in the market, and increased competition is putting pressure on property rates, especially in the US. Nevertheless, the recent renewals indicate that, overall, the market remains strong. Reinsurers with a strong balance sheet and the right risk selection will outperform the market.
Swiss Re is committed to underwriting discipline, proactive capacity allocation to the best performing lines of business, and bottom line profitability. The Property & Casualty Business Group’s pricing and capacity control processes have been significantly enhanced and it remains confident it can continue to provide clients with consistent and financially sound reinsurance support.
Conditions in an increasing number of markets are creating opportunities for Admin ReSM. Primary life insurance markets – particularly in the UK and US – are experiencing significant consolidation and disaggregation of non-core lines of business, generating additional opportunities for Admin ReSM. In 2003, Swiss Re expanded its Admin ReSM portfolio to the UK for the first time with the acquisition of the closed book of Zurich Life. This acquisition provided the Life & Health Business Group with responsibility for administering an additional 225 000 life insurance policies in the UK and added a further CHF 1.1 billion in assets to the balance sheet. This is the first transaction outside the US, representing an important step in the expansion of Admin ReSM
Swiss Re completed another two Admin ReSM transactions in the US during 2003: Guarantee Reserve and Clarica. These two transactions added an additional CHF 1 billion in assets to the Group’s balance sheet.
In February 2004, Swiss Re announced an Admin ReSM deal in the US with CNA’s individual life business. It is anticipated
The structure of the risk coverage was based on a combined mortality index. The principal of the notes is at risk if, during any single calendar year in the risk coverage period, the combined mortality index exceeds 130% of its baseline 2002 level.
Life & Health Business Group 30 Swiss Re Annual Report 2003
Following strong investor demand for this innovative transaction, the business group is exploring further arrangements for transferring life insurance risk into the capital markets. Swiss Re intends to develop its capabilities in life insurancelinked securitisation, extending the range of solutions it offers.
Mortality Mortality risk is the core business of the Life & Health Business Group. Historically, mortality rates in insured populations have shown significant improvement as medical treatments have substantially raised life expectancy through the elimination of early deaths. Advances in medicine suggest that the extension of normal lifespan is becoming increasingly feasible. Research conducted by the business group suggests that the overall trend is one of sustained improvement, but that its extent will vary considerably according to age group and market.
Excluding currency exchange movements, the operating result decreased by CHF 63 million, reflecting a CHF 252 million increase in the life business and a CHF 315 million decrease in health business.
Life & Health Business Group results CHF millions 2002 2003 Change in %
Claims and claim adjustment expenses; life and health benefits –10 084 –9 085 –10
Swiss Re’s main life and health market continues to be North America, which contributed 67% of total premiums in 2003, compared to 70% in 2002. The UK remains the principal market in Europe, with 14% of total premiums in 2003. The “rest of the world” includes both growing markets such as Asia – which expanded by 17% in 2003 (excluding currency exchange effects) – and established businesses in South Africa and Australia.
Excluding currency exchange movements, investment income declined by 1%, due to the continuing decline in global interest rates. This was, to some extent, offset by a greater volume of funds under management, stemming in part from two new Admin ReSM transactions in the US.
At constant ex- CHF millions 2002 2003 Change in % change rate in %
The management expense ratio improved significantly, from 5.0% in 2002 to 4.4% in 2003. This reflects a number of key initiatives resulting in both recurring and one-off expense savings. The expense ratio is higher for Admin ReSM business than for traditional business due to the increased maintenance costs associated with direct business and with handling individual policy records and policyholder communications. This ratio is therefore expected to rise as the volume of Admin ReSM business grows.
Financial Services Business Group results CHF millions 2002 2003 Change in %
Claims and claim adjustment expenses were CHF 2.3 billion, which represents a reduction of 9%, adjusting for currency exchange effects. Property, aviation and credit claims were all lower due to the absence of large claims that had occurred in 2002, as well as to improved terms and conditions achieved in the 2003 renewals. On the other hand, casualty claims stemming from older years were above expected levels. Non-traditional products performed well with favourable run-off experience.
Acquisition costs were CHF 559 million, compared to CHF 400 million in 2002. The increase is mainly due to premium growth and higher profit commissions reflecting the improved profitability of the business.
Operating income in the fee businesses was CHF 84 million in 2003, compared to a loss of CHF 24 million in 2002. The return on total revenues in 2003 was 9.7%. Excluding proprietary asset management, which involves internal fees charged to the Group, the return on revenues was 13.3%.
Trading revenues, fees and commissions grew from CHF 639 million in 2002 to CHF 807 million in 2003. This includes internal fees charged to the Group for asset management services (CHF 162 million in 2003). Adjusting for currency exchange effects, the overall revenue increase was more than 40%. This is significantly ahead of the target growth of 15%. The primary reasons for this were strong growth in insurance-linked and asset-backed securities, structured transactions, and traded credit.
Overall fees in the asset management businesses remained flat. The Conning third party asset management operation in North America continued to grow strongly, increasing assets under management from USD 31 billion to USD 39 billion. This was offset by weaker performance in Europe. Third party asset management operations in Europe were restructured in late 2003 and the Conning management team has now assumed responsibility for third party asset management globally. Third party fee income fell as a result of the disposal of some non-core asset management operations in late 2002 and early 2003.
Excluding proprietary asset management –3.5 13.3 1 In 2003, the Group allocated the investment return on certain proprietary assets, previously included in Asset Management, to the other business groups and to other business sectors of the Financial Services Business Group.
The Financial Services Business Group expects the premium business to continue to produce strong underwriting results, assuming that large losses are within expected levels. It is important to note that the corporate risk business of the business group is subject to significant individual exposures and, as a result, the reported combined ratio may be volatile. Premium growth is expected to moderate given the business group’s stringent underwriting requirements and the general market conditions in the premium business.
Swiss Re is exposed to market risk through trading in financial products where the underlying risk factors may include equity risk, interest rate risk (including spread risk), currency risk and commodity price risk. Value at Risk (VaR) is one of the primary tools used for setting trading limits. VaR measures the adverse impact that potential changes in market rates and prices could have on the value of the portfolio over a specified period of time. VaR takes into account the risk diversification in the underlying portfolio. Swiss Re’s Capital Management and Advisory business sector calculates parametric VaR at a 99th percentile level using a 10-day time horizon.
The chart below compares market risk related revenues to the 1-day VaR (calculated by scaling back the 10-day VaR) and shows that there were no days on which losses exceeded VaR. This performance is consistent with the 99th percentile confidence level.
The average daily revenue was USD 1.1 million and the largest daily loss was USD 4.2 million.
Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 Nov 03 Dec 03Oct 03
Sandbags protect historical buildings in the Old Town in Prague, in August 2002.
Josef Breitsameter Munich-based natural scientist and expert on flood risk assessment, monitoring floodstricken regions.
The catastrophic European floods in summer 2002 have confirmed that Swiss Re’s strategic decision to invest in developing state-of-the-art flood risk analysis techniques over a period of several years was a wise one. The company has focused considerable resources on researching Eastern European countries, and launched a Flood Risk Assessment Tool (FRAT) for the Czech insurance market in August 2003.
Prague Kampa: historical houses from several architectural periods submerged in the swollen
40 Swiss Re Annual Report 2003 with appropriate measures to changes in its markets. Swiss Re gauges financial market risk using standard risk measurement methods and adjusts its asset allocation strategy accordingly. The company has developed powerful tools to manage its credit risks and addresses operational risks through clearly defined business and control processes and by promoting an appropriate risk culture.
Swiss Re’s risk management organisation and processes are designed to ensure a disciplined approach to risk selection, prompt implementation of strategy, monitoring of the current risk profile and clearly defined responses to changing situations. Good corporate governance dictates the need for a clear separation of responsibilities between risk taking and risk and performance measurement. This principle is evidenced by the fact that Swiss Re’s Chief Risk Officer, a member of the Executive Board Committee, does not accept risk on behalf of the company.
Actuarial models, guidelines and underwriting discipline allow Swiss Re to balance underwriting risks and react
Focus in 2003 In 2003 Swiss Re continued to shift the composition of its portfolio towards underwriting risk and away from credit and financial market risk. A hard market environment contributed to strong growth in property and casualty. At the same time, Swiss Re further reduced its financial market risk exposure by divesting equity holdings for the fourth consecutive year.
Focus in 2003 In late summer 2003, Swiss Re renewed its maturing USD 2.5 billion Syndicated Credit Line and USD 3.5 billion Syndicated Letter of Credit Line with a combined line. Initially, Swiss Re launched the line at USD 5.5 billion, but after an oversubscription of more than 50%, it decided to increase the total amount to USD 6 billion.
Long-term debt used strictly for funded business is classified as operational debt. In 2003 Swiss Re took advantage of favourable conditions to issue medium and long-term operational debt. The aggregate value of European Medium Term Notes issued in 2003, maturing after the fiscal year 2004, was the equivalent of USD 540 million, with a weighted average maturity of 1.7 years.
USD 165 million, with a weighted average maturity exceeding 12 years. All interest rate and currency risk arising from operational debt is hedged.
42 Swiss Re Annual Report 2003 pany’s sustainability and corporate citizenship initiatives can be found on Swiss Re’s website, at www.swissre.com.
Climate change is a fact: average temperatures continue their gradual rise. This phenomenon is likely to increase both the average loss burden from natural catastrophes and its fluctuations – but it will also create new business opportunities in risk cover and management.
Swiss Re is committed to sustainable value creation: the company’s continued success depends on recognising the long-term challenges facing society and on determining the impact these may have on its business. The principle of sustainability – creating economic value while preserving natural resources and acting responsibly towards society – is therefore a core value of the Group, reflected in its management structure, corporate governance and compliance regime. It continues to be a topic of extensive dialogue with internal and external stake-holders. This section describes some of Swiss Re’s major sustainability related initiatives and achievements in 2003. More information on the comincentives are becoming more prevalent.
In 2003 the Parliament of the European Union approved the regulatory framework for its emissions trading system, which comes into force in 2005. This will cover 40% of European CO2 emissions and create approximately EUR 15 billion worth of carbon assets and liabilities per year. The Kyoto Protocol still requires ratification by key countries to come into force. The Russian government is expected to reconsider ratification in the new legislative period. Emissions reduction programmes are also planned in Canada, Japan and ten states in the US. As a global risk expert, Swiss Re is well placed to provide products that facilitate emissions trading and other compensation schemes for corporations.
Initiatives in 2003: ■ Swiss Re designated wind energy as a strategic sector for new risk solutions. As average installation and turbine size increase, capital requirements have risen correspondingly, creating demand for insurance capacity and structured finance.
■ Swiss Re formed a carbon branding joint initiative (“Greenhouse Neutral”) with the Commonwealth Bank of Australia to help companies reduce and offset their greenhouse gas emissions. The initiative provides governments with a system that complements regulation and stimulates private sector investment in abatement activities.
Swiss Re committed itself to becoming greenhouse neutral. Other major topics addressed in the course of the year included ecological damage legislation and global water risks.
Efforts have been made to reduce these emissions through internal measures promoting energy efficiency, energy savings and energy substitution (such as choosing video conferences over business travel). To reduce its emissions footprint to zero, the company announced in October 2003 a ten year programme to become greenhouse neutral. Swiss Re is the largest financial services company to have launched such an initiative.
Stakeholder dialogue Swiss Re supports continuous dialogue with its stakeholders to establish clear understanding of the risks and opportunities associated with climate change.
The conference “Beyond Carbon – Emerging Markets for Ecosystem Services“, held at Swiss Re’s Centre for Global Dialogue, focused on the crucial challenge of attaching monetary value to the “services ” provided by natural ecosystems, eg carbon absorption, water purification and soil retention. Swiss Re takes a keen interest in the development of such ecosystem markets, which create further opportunities to develop sophisticated risk management solutions.
Swiss Re is a member of the Climate Change Working Group of the United Nations Environmental Programme Finance Initiative (UNEP FI), set up to establish industry best practice. During 2003, the working group put particular emphasis on promoting market based climate protection approaches and on disseminating the financial sector’s expert opinion. It published a CEO briefing on emissions trading, presented at the ninth Conference of the Parties (COP 9) in Milan, laying out the principal challenges that emissions trading markets must address if they are to be economically efficient.
Regulations designed to enforce the “polluter pays” principle in European Union (EU) countries are currently something of a patchwork, despite the fact that several international agreements have been signed to address the problem. In the EU, the debate on how best to handle environmental damage and harmonise existing legislation has been underway for some time.
Insurers already offer products to deal with environmental liability. However, these covers only apply to liability for personal injury or property damage resulting from environmental impairment, and for the cleanup of privately owned land. The proposed “EU Directive on Environmental
In 2003 Swiss Re issued a publication entitled “The insurability of ecological damage”. This publication describes the current political and legal frameworks for covering environmental losses and surveys selected insurance markets to present an overview of the insurers’ perspective.
Swiss Re’s revised Group Code of Conduct came into force in 2003, providing employees with more practical guidance for conducting daily business in accordance with the Group’s core values.
The complexity of today’s business environment, with its increasingly rigorous standards of accountability, means that employees may encounter situations that raise important ethical questions. For instance, an employee may be faced with making a decision on whether to participate in a large infrastructure project which might have substantial environmental and social impacts, and which may not fully respect internationally recognised best practice. The revised Code of Conduct is part of a formal process involving Group Compliance which can assist employees in dealing with such “sensitive business cases”. The Group Non-Life Reinsurance Guidelines have also been amended to refer to the revised Code of Conduct, thereby ensuring that the close link between Swiss Re’s business procedures and its core values is maintained.
Over the past two years, Swiss Re has been a market leader in sponsoring and underwriting insurance-linked securities (ILS) or catastrophe bonds (cat bonds), with over USD 3.2 billion underwritten. Swiss Re remains committed to using the capital markets as a capacity provider for insurance and reinsurance risks.
Swiss Re’s trading floor in New York where insurance-linked securities are bought and sold in the secondary market.
Doppler-type radar has made it possible to predict both the precipitation intensity and the velocity of hurricanes.
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 76–77 (“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 48–53.
Non-listed Group companies Please refer to the Financial Statements, note 16 on “Subsidiaries, equity investees and variable interest entities”, page 48–53.
Corporate governance is the name applied to the system comprising a company’s organisation, structure, management and control instruments. It is designed to ensure transparency, protecting the interests of its shareholders and creating value for all stakeholders. Swiss Re remains committed to continuously improving its corporate governance and to meeting the highest standards of transparency.
The Capital Group Companies, Inc., domiciled in Los Angeles, informed SWX Swiss Exchange on 24 June 2002 that it held 5.06% of Swiss Re’s voting rights on behalf of funds and clients.
Authorised and conditional capital At the Annual General Meeting in 2001, the creation of conditional capital was approved as follows: a maximum nominal amount of CHF 900 000 for conversion rights and warrants granted in connection with convertible bonds or similar financial instruments issued by the company or by Group companies, of which CHF 550 000 was used as underlying capital for the convertible bond issued in 2001; a further maximum nominal amount of CHF 700 000 for employee participation purposes, of which CHF 36 948 was issued as per 31 December 2003.
No additional conditional capital and no authorised capital was created or approved in
With regard to the conditional capital for convertible bonds or similar financial instruments, shareholders’ subscription rights are excluded. Shareholders’ pre-emption rights may be restricted or excluded by decision of the Board of Directors in order to finance or refinance the acquisition of companies, parts of companies, holdings, or new investments planned by the company, or in order to issue convertible bonds and warrants on the international capital markets. If pre-emption rights are excluded, then (1) the bonds are to be placed at market conditions, (2) the exercise period is not to exceed five years from the date of issue for options and ten years for conversion rights, and (3) the exercise price for the new shares is to be set at least in line with the market conditions prevailing at the date on which the bonds are issued.
Shares reserved for corporate purposes Prior to the revision of company law in Switzerland, as laid down in the Swiss Code of Obligations, Swiss Re issued shares reserved for corporate purposes. These were paid in only at a nominal value of CHF 0.10 for a total amount of CHF 794 228 and therefore are not entitled to dividend.
With a profit for the financial year of CHF 930 million, the disposable profit for 2001 amounted to CHF 943 million. Total shareholders’ equity before allocation of profit increased in 2001 from CHF 6.8 billion to CHF 10.9 billion.
In 2002 Swiss Reinsurance Company’s share capital remained unchanged at around 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.
Bonus certificates Bonus certificates in the sense of the SWX directive are particular types of non-voting securities that substitute or complement shares. These do not exist at Swiss Re.
Convertible bonds and options Convertible bonds As stated in the notes to the Group financial statements (note 6 on “Debt” on page 25–29), a convertible bond issued in 2001 and maturing in 2021 is outstanding. In addition, an exchangeable bond (TRIPLES), issued in 1999, will be maturing in 2004.
Options For details on stock options granted to Swiss Re employees, please refer to note 12 on “Stock compensation plans” on page 34–36 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 is a law professor at the University of Zurich and has been 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, vice-chairman of the board of Mikron Holding AG, Biel, as well as a board member of Bank Hofmann AG, Zurich.
Mr Kielholz, a Swiss citizen born in 1951, studied business administration at the University of St. Gallen, Switzerland, and graduated in 1976 with a degree in business finance and accounting.
His career began at the General Reinsurance Corporation, Zurich. After working in the United States, the United Kingdom and Italy, he assumed responsibility for the company ’s European marketing activities. In 1986 he moved to Credit Suisse, Zurich, where he was responsible for client relations with large insurance groups in the Multinational Services department.
Mr Breu was elected to Swiss Re’s Board of Directors in 2003 for a four year term of office. He is Chief Financial Officer of the Novartis Group and member of the executive committee of Novartis, positions he assumed when Novartis was created in December 1996. He joined the group treasury of Sandoz, a predecessor company of Novartis, in 1975. Ten years later, he was appointed CFO of Sandoz Corporation in New York. In 1990, he became group treasurer of Sandoz Ltd., and, in 1993, head of group finance and member of the Sandoz executive board.
Ms Gibson, a Swiss citizen born in 1962, studied business and economics at the University of Geneva, graduating with a BA in 1982 and with a PhD in economics and social sciences in 1987.
Ms Gibson was elected to Swiss Re’s Board of Directors in June 2000 for a four year term of office. She will stand for re-election at the Annual General Meeting on 14 May 2004. She has been a professor of financial economics at the Swiss Banking Institute of the University of Zurich since March 2000. Ms Gibson was previously a professor of finance at the University of Lausanne. She is also a member of the Swiss Federal Banking Commission, a director of the National Centre of Competence in Research (NCCR) “Financial Valuation and Risk Management” research network, and an adviser to scientific councils of various educational institutions.
Bénédict G. F. Hentsch was elected to Swiss Re’s Board of Directors in 1993. His mandate was renewed in 1997 and 2001, each time for a further four year term. He was a partner of Darier Hentsch & Cie, Geneva, from 1985 until October 2001 and chaired the Swiss Private Bankers Association from 1998 until 2001. He continues to be a member of the board of the “Avenir Suisse” foundation and the ISC Foundation, University of St. Gallen.
Mr Lemann joined Swiss Re’s Board of Directors in 1999. He was re-elected for a further four year term at the Annual General Meeting in 2003. He is an entrepreneur with controlling stakes in AmBev, a brewery, and Lojas Americanas, a discount store chain; in addition, he holds a minority stake in GP Investimentos, a buy-out and restructuring firm with interests in Brazilian railways, supermarkets, amusement parks and telecommunications. He also serves on the board of directors of The Gillette Company, Boston, 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, an English and Australian citizen born in 1942, was educated at Scots College, Wellington, New Zealand. He has been a Senior Associate of the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) since 1965 and was made a Commander of the British Empire (CBE) in 2002.
Mr Smith, a US and Swiss citizen born in 1938, received his Bachelor of Business Administration from the University of Massachusetts in 1960 and a Master of Business Administration from Boston University in 1965.
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 Aber Partner/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.
Changes in the course of the business year 2003 At the Annual General Meeting of 12 May 2003, the shareholders elected Mr Raymund Breu and Mr John F. Smith, Jr. to be members of the Board of Directors, each with a four year term.
Changes since 31 December 2003 No changes have occurred since 31 December 2003.
Nomination for the election to be held at the Annual General Meeting of 14 May 2004 The Board of Directors has decided to nominate the following candidate for initial election to the Board with a four year term of office: Kaspar Villiger, a Swiss citizen born in 1941, graduated from the Swiss Federal Institute of Technology (ETH) in Zurich, with a degree in mechanical engineering in 1966.
As an entrepreneur, Mr Villiger co-owned and managed two businesses from 1966 until 1989. Simultaneously, Mr Villiger had several political positions, first in the parliament of canton Lucerne and, from 1982, in the Swiss Federal Parliament. He became a Federal Councillor in 1989. He initially served as Defence Minister, with responsibility for the Federal Military Department. He then became Finance Minister, charged with running the Federal Department of Finance in 1995. He continued in this function until his retirement at the end of 2003. Mr Villiger was President of the Swiss Confederation in
Other activities and functions Please refer to the information provided in each director’s biography on page 52–55.
Cross-involvement There are no cross-involvements to be reported between the boards of directors of listed companies.
First election and remaining term of each director Please refer to the information provided in each director’s biography on page 52–55.
Internal organisational structure Allocation of tasks within the Board of Directors Chairman of the Board of Directors The Chairman of the Board of Directors (the “Board”) exercises ultimate supervision of the Executive Board on behalf of the Board; he attends the meetings of the Executive Board and the Executive Board Committee and receives all related documentation and minutes; he is responsible for Group Internal Audit and appoints its head, subject to confirmation by the Audit Committee; he convenes meetings of the Board and its committees; he makes preparations for, and presides at, the meetings of the Board; he presides at the Annual General Meeting of shareholders; he ensures adequate reporting to the Board by the Executive Board, the Executive Board Committee and the Board committees; he coordinates the activities of the Board committees; he represents the company in matters involving shareholders; in cases of doubt, he makes decisions concerning the authority of the Board or its committees and about the applicability and interpretation of the Corporate Bylaws.
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.
Audit Committee Members Thomas W. Bechtler, Chair Raymund Breu Rajna Gibson Bob Scott John F. Smith, Jr.
Tasks and responsibilities The central task of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities as they relate to the integrity of the company’s financial statements, the company’s compliance with legal and regulatory requirements, the external auditor’s qualifications, and the performance of the company’s internal audit unit and the external auditor.
The Committee serves as an independent and objective monitor of the company’s financial reporting process and system of internal control, and facilitates ongoing communication between the external auditor, management, Group Internal Audit and the Board with regard to the company’s financial position and affairs.
All members of the Compensation and Appointments Committee must be non-executive and independent.
Tasks and responsibilities This Committee approves the fundamental risk management principles employed by the Group; it evaluates the bases on which the Board determines the overall risk tolerance and the risk appetite for the most significant risk taking activities; it reviews the methodology for risk measurement, the results of risk adjusted capital calculations, risk reports, the most important risk exposures and their limits, as well as the appropriateness of the risk management framework and its implementation.
Governance and Shareholder Relations Committee Members Peter Forstmoser, Chair George L. Farr Bénédict G. F. Hentsch Walter B. Kielholz John F. Smith, Jr.
Tasks and responsibilities The Committee measures the Group’s governance against relevant best practice recommendations and informs the Board of its findings and of 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 investor relations activities; it examines how reports are made, especially with regard to whether they fulfil the needs and expectations of international investors; it monitors the shareholder structure; it has initial responsibility for assessing any merger and take-over proposals submitted to the Group; and it has initial responsibility for reviewing material transactions with any of the Group’s significant shareholders.
Tasks and responsibilities As regards Group assets, the Committee reviews the principles to be applied in capital investments; it approves the guidelines regulating the use of derivative instruments; it keeps abreast of other guidelines relating to asset management; it reviews the tactical allocation of assets for the next financial reporting period; it reviews the performance of the asset-managing units, measured against benchmarks; it receives reports, at least
In respect of Group finance, the Committee reviews cash management, the relationships with banks and all of the Group’s open derivative positions.
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 the financial statements, the analysis of internal results, interim results, the medium-term business plan, strategic issues and corporate governance.
Normally, either the entire Executive Board or the Executive Board Committee is in attendance at the meetings of the Board of Directors.
Attendance at Board Committee meetings is normally restricted to those members of the Executive Board with the information and expertise required for the relevant Committee to perform its duties. The Head of Group Internal Audit and two senior representatives of the external auditor regularly participate in Audit Committee meetings.
Definition of areas of responsibility Swiss Re’s Board of Directors has delegated the conduct of business operations to an Executive Board made up of 16 senior executive officers. Members of the Executive Board are appointed by the Board of Directors upon recommendation of the Chief Executive Officer and after consultation with the Compensation and Appointments Committee. The Executive Board is headed by the Chief Executive Officer and comprises his deputy, the heads of the three business groups with the respective division and business sector heads, and the heads of the four Corporate Centre divisions. The Executive
Group Internal Audit Within the Swiss Re Group, Group Internal Audit provides the Chairman, Board of Directors and Executive Board of Swiss Re with an independent, objective assurance and consulting activity designed to assess the adequacy and effectiveness of its system of internal control, adding value through improving the Group’s operations.
To further protect the independence of the external auditor, the Chief Financial Officer is required to review annually the external auditor’s non-audit services and fees and discuss the results with the Audit Committee. In addition, proposals to employ former senior executives of the external auditor, previously involved in the external audit, must be reviewed and approved in advance by the Audit Committee.
Mr Coomber started his career with the Phoenix Insurance Company. He joined Swiss Re in 1973. Having qualified as an actuary in 1974, he first specialised in the company’s life reinsurance. He was Swiss Re (UK)’s appointed actuary from 1983 to 1990. In 1987 he assumed responsibility for the life division, and, in 1993, was made head of the company’s UK operations. Mr Coomber was appointed Member of the Executive Board in April 1995, responsible for the Group’s Life & Health Division. In June 2000, he became a member of the Executive Board Committee. In November 2002, the Board of Directors appointed him CEO with effect from 1 January 2003. He also serves as a member of the Supervisory Board of Euler Hermes.
Mr Aigrain joined Swiss Re in June 2001 to assume his current position. Previously, Mr Aigrain worked for JP Morgan in various positions and locations, predominantly in investment banking, capital markets, and mergers and acquisitions. Immediately prior to joining Swiss Re, he was a managing director and a member of JP Morgan’s investment banking management committee, where he was co-head of client coverage, responsible for the financial institutions and classical economy sectors.
Mr Anderau joined Swiss Re in 1998 as head of Group Human Resources. Prior to that, he worked for ten years at Kraft Jacobs Suchard, where he was chairman of the board of Swiss operations, director on the company’s European board and, as vice president of corporate affairs, member of Kraft’s executive board (Europe). From 1985 to 1988, Mr Anderau headed Switzerland’s “700th anniversary celebration” (CH 91). He was appointed to the Executive Board in July 1999 to take on his present position.
Jacques Aigrain Head of the Financial Services Business Group, Member of the Executive Board Committee
John R. Coomber Chief Executive Officer, Member of the Executive Board Committee
Mr Colebatch, an Australian citizen born in 1944, received a master of science degree from the Massachusetts Institute of Technology in 1969 and a doctorate in business administration from Harvard Business School in 1973.
Mr Colebatch joined Swiss Re in September 2002 to assume his current position, which includes responsibility for Fox-Pitt, Kelton (FPK) and Swiss Re Financial Products. Before joining, Mr Colebatch was with Credit Suisse Group, where he most recently served as a member of the group executive board and CEO of Credit Suisse Asset Management. Mr Colebatch began his career with Citicorp in New York and held a number of senior investment banking positions in Hong Kong and London.
Mr Dubois, a US citizen born in 1949, graduated from the College of the Holy Cross in Worcester, Massachusetts in 1970 with a degree in mathematics. He also received a master’s degree in business administration in 1972 from the Amos Tuck School at Dartmouth College, Hanover, New Hampshire.
Mr Dubois began his business career at Philo Smith & Co., a securities firm specialising in insurance stock research and the merger and acquisition of insurance companies. In 1979, he joined Insurance Investment Associates, an investment banking partnership focused exclusively on mergers and acquisitions of life insurance companies. In 1988, Jacques Dubois co-founded Life Re Corporation, which was established to purchase the General Reassurance Company from General Reinsurance Corporation in a leveraged buy-out. He served as president and chief operating officer of Life Re Corporation from 1988 to 1998. He continued as a partner of Insurance Investment Associates until December 1998, when he resigned upon the acquisition of Life Re Corporation by Swiss Re.
From 1996 to 1998 he was a senior managing director at Zurich Centre Resources Ltd., where he focused on startups of new insurance companies. From 1990 to 1996 he was CFO and a member of the board of directors of Kemper Corporation. He started with Kemper as a financial analyst in 1978, holding several positions in corporate finance until 1990.
Mr Kellenberger is a member of the board of the Swiss Insurance Association and of the supervisory board of Wüstenrot & Württembergische AG, Stuttgart, as well as chairman of the supervisory board of Atradius, Amsterdam (formerly Gerling NCM Credit and Finance AG, Cologne). In addition, he is a member of the board of directors of Swiss Life Group and a member of the international advisory council of FORTIS, Brussels.
Mr Liès joined Swiss Re’s life department in 1978. Based in Zurich, he first covered the Latin American market. From 1983 to 1993, he was responsible for France and the countries of the Iberian Peninsula. In 1994 he moved to the property & casualty department in charge of Southern Europe and Latin America, which he headed from 1997. Mr Liès became a member of the Executive Board and Head of the Latin America Divi-
Mr Liès is also a non-executive director of CNP Assurances, Paris, and Special Risk Insurance and Reinsurance Luxembourg S.A.
Mr Lippe joined Bavarian Re in 1983. In 1986 he became head of the non-proportional underwriting department. He was appointed deputy member of the board of management in 1988 and a full member in 1991, when he assumed general responsibility for the company’s operations in the German-speaking area. In 1993 he became chairman of the board of management of Bavarian Re. In 1995 he was appointed a Member of Swiss Re’s Executive Board, responsible for the Bavarian Re Group. He was appointed to his current position in April 2001.
Mr Ozendo serves as a vice chairman of the Evian Group.
Mr Porro, a Swiss citizen born in 1945, graduated from the Swiss Federal Institute of Technology (ETH) in Zurich in 1969 as a civil engineer. While in employment, he obtained a doctorate in economics in 1978.
Mr Porro joined Swiss Re in 1978, where he established a group involved with the assessment of natural hazards. In 1987 he became head of the development and capacity utilisation section and assumed responsibility for the 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. 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. He also holds a BA in political science from the University of Alabama in Huntsville, Alabama.
W. Weldon Wilson Head of Swiss Re’s North American life and health operations
John H. Fitzpatrick, the former Chief Financial Officer, became Head of the Life & Health Business Group with effect from 1 April 2003. He was succeeded as CFO by Ann F. Godbehere.
Giuseppe Benelli, who was Chief Investment Officer until 30 April 2003, decided to pursue a professional opportunity outside the Group. Jacques Aigrain, Head of the Financial Services Business Group, assumed his responsibilities.
W. Weldon Wilson was appointed a member of the Executive Board with responsibility for Swiss Re’s North American life and health operations from 1 September 2003.
Changes since 31 December 2003 Benjamin Meuli was appointed Chief Investment Officer and Member of the Executive Board on 19 February 2004 with effect from 19 April 2004.
Mr Meuli, a British citizen born in 1956, was educated at Oxford University where he graduated with an MSc in Economics in 1978. He then 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.
Compensation of the Chairman of the Board of Directors, the Executive Vice Chairman, the CEO and other members of the Executive Board is set by the Board of Directors’ Compensation and Appointments Committee. The Committee convenes three to four times a year and presents its proposals to the full Board for approval. The Committee’s remit also includes responsibility for the compensation philosophy and approving compensation plans.
The Executive Board’s performance assessment is based on annual objectives involving financial and qualitative elements. The bonuses distributed for a year’s service are paid in April of the following year. All amounts disclosed relate to the performance year 2003 with some elements to be credited in April 2004.
Share allocation Share allocation (deferred) Share allocation (unrestricted) Executive members (17) 231 682 none
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 70% which is in line with experience from previous years. Such shares have a discounted taxable value of CHF 73.65.
In addition to those shares held by the person in question on the reporting date, shareholdings consist of any shares held by his/her spouse, minors, and of directly controlled companies.
All options have a four year vesting period, during which there is a risk of forfeiture, and an exercise period of six years. Each option entitles the beneficiary to purchase one share at an unadjustable strike price.
At grant, option recipients can elect to take the options granted in the form of restricted shares, exchanging four options for one restricted share. The value of the restricted share vesting after four years is CHF 93. The election period runs until April 2004.
Based on the value of the restricted shares, the option has a value of CHF 23.25 at grant date.
Under the SWX directive, Swiss Re is required to disclose the sum of the honorariums (eg consultancy fees) and other remunerations billed to Swiss Re or any of its Group companies by a member of a governing body or parties closely linked to such persons for additional services performed during the year under review in the case of sums exceeding half of the ordinary remuneration of the member in question. No such additional payments were made.
All credit is secured against real estate or pledged shares. The terms and conditions of loans and mortgages are the same as those available to all Swiss Re employees in the respective locations. The interest rates are either variable or correspond to the five year Swiss franc swap rate plus a margin of 10 basis points and, to the extent that they are preferential, have been factored into the compensation sums given to the governing body members under “Compensation for acting members of governing bodies” on page 68.
Reasons for making exceptions in the year under review No exceptions were made.
The statutory rules on the convocation of the General Meeting of shareholders correspond with the legal provisions. Accordingly, the General Meeting of shareholders is summoned at least 20 days before the date of the meeting by notice published in the “Schweizerisches Handelsamtsblatt”.
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.
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 statutory rules on “opting up” or “opting out”. Should a shareholder reach the threshold of 331⁄3% of all voting rights, then, pursuant to the Stock Exchange Act, he/she would be required to submit a general take-over offer. (“Opting up” is a statutory rule based on which the triggering threshold would be lifted to a higher percentage, while “opting out” is a statutory rule waiving the legal duty to submit an offer.)
Corporate governance the Board of Directors appropriate action in response to the aforementioned statement; it obtains from them and reviews, at least annually, a report describing the external auditors ’ 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 external auditors in respect of non-audit services.
Jürg Busenhart Lawyer and underwriting expert on environmental liability insurance, on a visit to the Hardhof Waterworks in Zurich.
Water is a basic necessity of life. And yet the quality of freshwater resources is increasingly under threat from industrial and biological pollutants. As part of its commitment to sustainability, Swiss Re strives to develop new insurance and financial solutions which factor in concerns relating to endangered natural resources. Recent developments in European environmental liability legislation have prompted the insurance industry to take a closer look at the insurability of ecological damage.
Do you think the insurance industry is prepared for this new development? The industry already offers a fairly comprehensive range of products to cover accidental and gradual environmental pollution that might lead to groundwater damage, for example. But these products are limited to liability for personal injury or property claims resulting from environmental damage, and to clean-up activities for privately owned land. European insurers have yet to develop a standard solution that will cover liability for pure ecological damage caused to the “free goods” of nature that do not “belong” to anyone. If such a solution does become a reality, it could have a significant impact on other insurance markets where the insurability of ecological damage has not even appeared on the radar screen yet.
Trout are used to gauge water quality, as they are highly sensitive and react much faster to toxins or other unwanted substances than manmade measuring instruments.
Swiss Re is a member of many indices, including the Swiss Market Index, the Dow Jones STOXX 50 and the Financial Times Stock Exchange Eurotop 100. The composition of these indices is mostly based on free float market capitalisation which favours Swiss Re having a full 100% free float. Swiss Re is also a member of various sustainability indices, including the Dow Jones Sustainability World Index and the Financial Times Stock Exchange for Good indices.
Swiss Re’s shareholder base is well diversified, both geographically and in terms of the ratio of private to institutional investors. Approximately 90% of Swiss Re’s more than 50 000 shareholders are private persons, of which more than 90% hold less than 2 000 shares.
Key share statistics 1997–20041 of which reserved for of which reserved to
Swiss Re’s corporate disclosure and all relevant information on its shares, including real time quotes, historic share price download, chart drawing tools, an investment calculator and much more can be found in the Investor Relations section of Swiss Re’s homepage at: www.swissre.com/investorrelations
Swiss Re offers its shareholders the opportunity to deposit shares in their name with the Share Register in Zurich. The application form for opening a deposit can be downloaded from Swiss Re’s homepage. The safe custody of shares is free of charge.
Engineering insurance Insurance covering the construction and erection of objects, and the insurance of machinery in operating plants.
Non-life insurance All classes of insurance business with the exception of life insurance.
Operating revenues Premiums earned plus net investment income plus other revenues.
Premium The payment, or one of the periodical payments, a policyholder agrees to make for an insurance policy.
Securitisation The process of aggregating similar instruments, such as credit portfolios or catastrophe risks, and marketing them to investors as a negotiable security.
Treaty reinsurance Participation of the reinsurer in certain sections of the insurer’s business as agreed by treaty, as opposed to single risks.
Certain statements contained herein are forward-looking. These statements 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. 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: ■ cyclicality of the reinsurance industry; ■ changes in general economic conditions, particularly in our core markets; ■ uncertainties in estimating reserves; ■ risks and uncertainties relating to our estimates of the losses arising from the 11 September 2001 terrorist attack in the United States; ■ the performance of financial markets; ■ expected changes in our investment results as a result of the changed composition of our investment assets or changes in our investment policy; ■ the frequency, severity and development of insured claim events; ■ acts of terrorism and acts of war; ■ changes in rating agency policies or practices; ■ mortality and morbidity experience; ■ policy renewal and lapse rates; ■ the change in or loss of one or more of the financial or claims-paying ratings of one or more of our subsidiaries; ■ changes in levels of interest rates; ■ political risks in the countries in which we operate or in which we insure risks; ■ extraordinary events affecting our clients, such as bankruptcies and liquidations; ■ risks associated with implementing our business strategies; ■ changes in currency exchange rates; ■ changes in laws and regulations, including changes in accounting standards and taxation requirements; and
These factors are not exhaustive. We operate in a continually changing environment and new risks emerge continually.
The Annual Report 2003 summary is available in English, German and French.