Who we are Swiss Re is a leading and highly diversified global reinsurer. We combine outstanding financial strength and unparalleled insurance expertise with a committed client focus.
Cover: Swiss Re offices in Zurich. From left: Martin Steiner, Client Markets Europe Adrian Kärle, Globals & Large Risks Christina Salvetti, Property & Specialty
Financial strength ratings as of 22 February 2008 S&P Moody’s A.M. Best
  Property & Casualty   Life & Health 1 2005 – 2007 figures are based on US GAAP, and previous years on Swiss GAAP FER
Financial highlights CHF millions unless otherwise stated 2006 2007 Change in %
Return on equity in % 16.3 13.5 Number of employees2 10 891 11 702 7
¹ Subject to approval at the Annual General Meeting on 18 April 2008 ² Permanent staff
Advancing performance 31 Advancing performance – The CEO’s view 34 Performance for Swiss Re 36 Performance for our clients 38 Performance for partnerships 40 Performance for the future
Financial year 42 Economic environment and industry trends 47 Group results 50 Summary of fi nancial statements 52 Property & Casualty 57 Life & Health 61 Financial Markets 64 Business outlook
Governance 66 Risk and capital management 80 Corporate governance and compensation report
Outstanding results across the business Our Property & Casualty segment had its best performance ever, achieving a combined ratio of 90.2%. This resulted in an outstanding operating income of CHF 5.9 billion. We would like to underline that this success reflects the quality of our underwriting and is not simply the result of good luck. In 2007, the level of weather events was higher than in the previous year, despite the low intensity of natural catastrophes in the US. Winter storm Kyrill in Germany, a series of floods in the UK, storms in Australia, and Cyclone Gonu in the Middle East, among others, caused industry-wide claims of USD 23 billion. While there is no room for complacency, our underwriting and client teams can be very proud of their contribution to our success.
Life & Health also improved on an already very strong prior year result. The return on operating revenues increased from 9.2% to 14.7% as we leveraged our position as the leading reinsurer in this segment. We also benefited from our geographic diversity, as well as greater diversification by lines of business following the integration of the portfolio acquired from General Electric. Operating income grew to CHF 2.7 billion, a 76% increase over 2006. New mortality and critical illness business was slightly lower as a result of increased competition, but this was more than offset by growth in our Admin Re® segment and the excellent development of our variable annuity and longevity businesses.
The Financial Markets segment developed positively, despite a generally difficult market environment. In 2007, we generated operating income of CHF 7.3 billion and a solid return on investments of 4.9%. The quality of this result is demonstrated by the fact that it does not rely on capital gains: net realised losses in 2007 were CHF 1.2 billion, compared to net realised gains of CHF 0.8 billion in 2006. The investment portfolio quality is strong and impairments were modest at 37 basis points of assets under management. New business written, in particular in the Admin Re® and longevity areas, led to a sharp increase in managed assets to CHF 176.0 billion, a rise of 9% since the end of 2006. In addition, we benefited from the credit market dislocation, reinvesting our cash flow in higher-yielding but very high quality assets, thus ensuring enhanced returns for the future.
Our insurance-related capital market capabilities enabled us to respond to clients’ needs with broader, more comprehensive products. We leveraged our established strengths in this area by extending our Successor programme, issuing the first-ever securitisations of Mediterranean and Central American earthquake risks, and acting as an underwriter of catastrophe and life securitisations for clients such as Allianz, Groupama and the Savings Bank Life Insurance Company of Massachusetts (SBLI).
In addition, we extended our capabilities by establishing the first catastrophe bond indices in association with Standard & Poor’s, and by developing solutions for variable annuity, longevity and environmental risks. Our capital market capabilities are a key part of our business, allowing us to assign more capacity to natural catastrophe risks and improving our asset performance with a wide range of hedging and equity overlay techniques, without increasing the volatility of our earnings.
The strong performance across almost all business segments clearly demonstrates the underlying strength of your company. In 2007, we delivered a return on equity of 13.5% and increased your shareholders’ equity by CHF 1.0 billion to CHF 31.9 billion. Book value per share also rose to CHF 92.00, a 7% increase over the end of 2006, despite the return of CHF 3.7 billion to you in 2007, in the form of dividends and through our share buy-back programme. Based on the Group’s strong capital position, the Board of Directors will propose an increased dividend of CHF 4.00 per share.
Regrettably, we remain exposed to continued fluctuation in the market value of the underlying securities. We are working hard to mitigate the resulting risks. As of 31 December 2007, the mark-to-market loss had not changed materially. Based on market movements as of 20 February 2008, we estimate a further mark-to-market impact of CHF 240 million. This change in value is currently offset by positive developments in Swiss Re’s investment portfolio.
The structured credit activities of our Credit Solutions business had been successful for more than a decade. While guidelines were respected, in this underwriting case, the business model was pushed beyond its limit. In retrospect, the decision to underwrite this risk was unfortunate. The wider impact of this event was far greater than the actual size of the write-down, and the resulting loss of confidence has been plain to see. The responsibility for this ultimately lies with the leadership of the firm.
We took immediate action to strengthen the risk taking and supervision processes by introducing a more rigorous product approval process, and further enhancing our risk monitoring and stress testing. We are focused on restoring trust in Swiss Re through decisive actions and transparency.
Talent is at the centre of our performance. Swiss Re can only deliver on its earnings ambition through the skills and innovation of the professionals in its midst. In 2007, we launched graduates@swissre, our new global training programme, attracting 49 outstanding university graduates from Asia, the Americas and Europe. In 2008, we are targeting an influx of 150 graduates. This is the future of your company. Swiss Re could not have succeeded over its 144-year history without constantly nurturing fresh talent and ideas. Graduates@swissre advances this proud tradition and extends it to a global level. Together with a strong intake of new employees in 2007, our focus on talent will ensure the success of your firm over the decades to come.
In the context of attracting talent, we are pleased to welcome Raj Singh, our new Chief Risk Officer, to our Executive Committee. Raj joins us from Allianz, where he held the position of Chief Risk Officer for more than five years. He takes over from Christian Mumenthaler, who has moved to the frontline of our business and assumed worldwide responsibility for our Life & Health segment.
Finally, we would like to thank our more than 11 000 employees around the world. The strong result for 2007 would not have been possible without their hard work, dedication and expertise. We are confident that their commitment to performance will continue to deliver strong, sustainable value to our clients and, ultimately, to you, our shareholders in the year ahead.
Peter Forstmoser Jacques Aigrain Chairman of the Board of Directors Chief Executive Officer
4 January CO2 reduction programme COyou2 programme launched worldwide to support private emission reduction measures by employees 16 January Securitisation of extreme mortality risk USD 705 million of extreme mortality risk securitised and transferred to capital markets via Vita Capital programme 13 February 2007 renewals Successful renewals grow non-life reinsurance portfolio by CHF 1.3 billion 22 February Sale of 30 St Mary Axe London building sold for GBP 600 million 1 March 2006 annual results Record earnings for 2006, with net income up 98% to CHF 4.6 billion, earnings per share (EPS) of CHF 13.49 and return on equity of 16.3%
27 September Weather risk protection Climate Adaptation Development Programme launched to establish a weather risk transfer market for emerging countries 28 September Admin Re® transaction with Conseco Total assets of USD 3 billion acquired under transaction with Conseco Insurance Group 6 November Third quarter 2007 results Net income of CHF 1.5 billion for the third quarter (EPS: CHF 4.20)
7 January Strategic partnership in Vietnam Acquisition of 25% stake in Vietnam’s leading reinsurance provider, Vietnam National Reinsurance Corporation 11 January “Regulation XXX” transaction with SBLI Agreement announced to fund up to USD 175 million of peak “Regulation XXX” reserve requirements for the Savings Bank Life Insurance Company of Massachusetts (SBLI) through a private securitisation 22 January First Central American earthquake bond USD 85 million issued in multi-peril securitisation covering windstorm events in the US as well as earthquakes in California and Central America 23 January P & C quota share arrangement Five-year quota share agreement with Berkshire Hathaway covering 20% of the Group’s new and renewed P&C business; the capital released by the contract will be used to increase the share buy-back by CHF 1.75 billion
Swiss Re is a leading and highly diversified global reinsurer. We combine outstand ing financial strength and unparalleled insurance expertise with a committed client focus.
We aim to be the port of call for all insurable risks by offering our clients: Security – based on financial strength, diversification and resilience Ability – based on established market capability, proven experience and innovation Dedication – based on tailored solutions, personal service and a passion for responding to the needs of clients Trust – based on openness, integrity and respect
We offer a comprehensive range of reinsurance and financial solutions to manage risk and capital. Our aim is to create sustainable value for both clients and shareholders.
Our core business activities are: risk transfer, risk finance and proprietary asset management.
Reinsurance is an indispensable part of the insurance system. Our clients benefit from the expertise, coverage and capital relief that Swiss Re provides.
We diversify risk portfolios through our global reach, allowing exposures to be covered more efficiently and securely.
We work closely with clients to understand their needs and develop effective solutions that grow their business.
Swiss Re’s success is built on a powerful, trusted brand, as well as a strong global client franchise. Over the past 144 years, we have built a reputation that stands for strength, expertise, innovation, leadership and, most of all, reliability. Our leadership in managing risk and our strong client-focused approach are the foundation of our clients’ trust.
We combine the broad expertise of a global leader with a deep understanding of local needs.
Expertise in anticipating and understanding risk Our experts analyse a broad range of trends and apply the expertise of an industry leader to understand risks, identify opportunities and deliver powerful solutions for clients.
Together, we develop integrated solutions that deploy Swiss Re’s expertise in risk and capital management to help clients achieve their business goals.
We never forget that our clients’ success is the key to our success.
Swiss Re offers a range of products and solutions that is second to none. We support clients across their entire risk landscape: Traditional reinsurance for property, liability, motor, accident, agriculture, engineering, marine, aviation Life and health products, as well as Admin Re® for closed life books Multi-line, multi-year solutions Risk securitisation and capital market solutions Carbon emissions trading Asset management and advisory services Risk financing services
Over 144 years, we have built comprehensive expertise in managing risk and capital. Our specialists combine their experience with Swiss Re’s wealth of data, powerful modelling tools and market insights to deliver innovative solutions for clients.
We have a decade of experience in risk securitisation and Admin Re® transactions. This allows Swiss Re to offer new sources of capacity and enables clients to optimise the capital they require for their business.
Diversification is at the core of Swiss Re’s value proposition. As a leading global reinsurer, we are able to benefit from the diversification of business and investment risks across all geographical regions and lines of business. This ensures a more efficient use of capital and offers greater security and reliability for clients.
Swiss Re is focused on delivering powerful solutions to clients, responding boldly to changing market needs and ensuring profitable growth for shareholders.
In 2007, the Group realigned its Financial Services activities, integrating them into the Group’s Client Markets and Products functions.
Chief Executive Officer Members of the Executive Committee Members of the Executive Board
Financial Services Products Credit & Rates Equities Alternative Investments Third-party Asset Management
(Re)Insurance Products Property & Specialty Casualty Life & Health Claims & Liability Management
Swiss Re’s strategy defines the building blocks for advancing the Group’s performance to the advantage of clients and shareholders, and sets out Swiss Re’s long-term vision for benefiting from the changing risk transfer landscape.
Strategic direction Swiss Re’s ability to provide best-in-class customer service and higher sustainable returns for shareholders rests on the four building blocks of the Group’s strategic direction: Building blocks Deliverables
Enlarge market scope The changing risk landscape requires Swiss Re to grow new markets, work with new clients and develop new products. Solvency II requirements, insurance risk trading, the demographic shift and climate change are some of the most prominent developments that will create opportunities for the Group to implement its expertise through innovative solutions.
Swiss Re is extending its leading position in the risk transfer industry by enhancing its ability to seize profitable opportunities across the risk landscape.
Talent, culture and organisational excellence Swiss Re aspires to be the preferred employer in its industry by offering an exciting, international environment for employees to develop their careers, as well as by providing attractive rewards for personal achievement, innovation and teamwork. The Group strengthens its performance culture by continuously developing employee talent in an efficient cross-functional organisation.
The following table highlights examples of how Swiss Re advanced its strategic direction in 2007: Generate economic profit growth  Admin Re® transactions  Accelerated growth in large corporate and commercial business  Large-line underwriting utilising capital market solutions
Enlarge market scope  Broadened longevity and variable annuity transactions  Healthcare partnership in Asia  New product offerings for governments and NGOs
Talent, culture and organisational  Launch of graduates@swissre programme excellence  Organisational realignment to further strengthen focus on clients and integrated solutions  Higher synergies and lower restructuring costs from
The resulting business model advances the Group’s two fundamental objectives: providing best-in-class service to insurance clients, and delivering higher sustainable returns to shareholders. This is achieved by increasing the speed with which risks move onto the Group’s balance sheet and are either held by Swiss Re, transformed or transferred to professional counterparties, to increase capacity, reduce net exposure and enhance profitable growth.
Four key elements drive this model and work together to achieve Swiss Re’s vision: Be the port of call for managing all insurable risks, irrespective of origination channel
Port of call for all insurable risks Swiss Re aims to be the partner of choice for clients and brokers, providing a reliable and inte grated resource for their insurance needs. Being the port of call also means creating new opportunities for managing insurable risks. Based on its long-standing experience in a broad range of (re)insurance and specialised capital market solutions, Swiss Re is ideally positioned to deliver solutions across the entire risk landscape and expand its successful partnerships with clients.
Bolder principal The Group will extend its focus on seeking attractive opportunities and generating profitable business. As a leading and highly diversified reinsurer, Swiss Re is in a unique position to create value and pursue innovation through new products and business opportunities for insurable risks. Technical expertise and financial strength allow the Group to operate proactively through all channels, according to the needs of clients and local markets.
Talent and culture Employees are the central force that drives Swiss Re’s vision. The Group’s culture promotes creativity and a strong focus on delivering solutions. Bringing together expertise from all areas of insurance and financial services enables Swiss Re to act as one team to deliver integrated client solutions.
Swiss Re’s people are exceptional in their expertise, performance and commitment to clients. In 2007, net income generated per employee was close to CHF 0.4 million. This strong result clearly reflects the expertise and value of the company’s employees, and confirms the performance of the previous four years, in which the Group’s workforce consistently ranked among the top 10% of all Fortune Global 500 companies.
Attracting and recruiting talent Swiss Re’s future performance is based on its ability to employ the best minds in the financial services industry. Attracting talented graduates and skilled specialists is a vital priority, and the Group’s senior management dedicates significant efforts to expanding Swiss Re’s pool of experts and potential leaders from a broad range of regions, experiences and educational backgrounds.
Swiss Re also recruits experienced professionals and experts from outside the company to reinforce its strong knowledge base and performance-driven culture. This combination of new talent and established industry expertise helps to create an excellently qualified, innovative and diverse workforce.
Developing talent Swiss Re fosters a learning culture that is based on a partnership between the individual and the company. Employees at all levels are encouraged to develop the skills that advance the Group’s strategy. By aligning business needs and personal goals, Swiss Re aims to enable both employee and company to realise their full potential.
Swiss Re attracts, develops and rewards the best talent in a culture that promotes performance, innovation and teamwork.
¹ Excluding 463 employees transferred from GE Life UK in the fourth quarter of 2006
Courses are held at five state-of-the-art training centres across the world: Zurich, Munich, Hong Kong, Kansas City and Armonk. This regional training focus reflects the Group’s commitment to developing local talent for local market needs. All locations are staffed by dedicated training specialists and courses are given by experts from Swiss Re’s business units as well as external specialists. A virtual campus extends this expertise beyond the five physical locations, delivering web-based seminars to participants across the world.
The Group’s performance management process systematically defines team and individual objectives, and provides employees with regular feedback on their progress. Individual objectives are aligned to the overall objectives of the business unit, and ultimately of the Group (for more information, see section 5 of the corporate governance and compensation report, on pages 110–115). This ensures that employee efforts contribute directly to the success of Swiss Re’s business strategy. Systematic performance management helps employees focus and develop their career, and also provides the basis for performance-related compensation.
Rewarding and retaining talent To recruit, reward and retain the best talent in the financial services industry, Swiss Re offers attractive financial compensation and benefits. The Group provides exceptional performers with potential overall compensation that matches or exceeds the top tier of the industry. All compensation includes a significant incentive component to reward innovation, and foster a strong performance-based and team-focused culture.
A major portion of senior management compensation is tied to the organisation’s long-term performance and is designed to correspond with the multi-year dynamics of Swiss Re’s business. This ensures that compensation reflects sustainable achievements rather than shortterm results.
Swiss Re’s reputation is based on its ability to extend its knowledge and apply its expertise for the benefit of clients.
Success in the risk transfer business depends on strong know-how in risk management and underwriting. Swiss Re has accumulated unique knowledge in all markets and lines of business during its long experience as an industry leader. By applying and sharing that knowledge, the Group creates innovative solutions for clients and value for shareholders.
Building knowledge Swiss Re’s most valuable resource, its employees, includes experts from a broad range of scientific and financial backgrounds. They pursue individual research and also work together in Group-wide Knowledge Networks, such as DRIVE, a multi-disciplinary network studying motor markets across the world.
Sharing knowledge Swiss Re shares its knowledge through events, publications and tools, helping clients to manage their risks and grow their business. In 2007, Swiss Re held various client events tailored to specific industries and regions. These included the second Nordic Risk and Insurance Summit (NORIS) in Stockholm, where over 150 participants discussed the impacts of climate change on Northern Europe and the transformation of social security systems. In Canada, a Swiss Re roundtable brought together more than 20 chief financial officers of the Group’s largest clients to share insights on financial market solutions and discuss new challenges for insurance CFOs. A Product and Knowledge fair in Beijing presented Swiss Re’s region-specific product development capabilities to 400 clients.
Swiss Re also shares knowledge through training workshops at the Swiss Re Academy centres in Zurich, Munich, Hong Kong, Kansas City and Armonk (see box on page 20), as well as events at the Swiss Re Centre for Global Dialogue in Rüschlikon, Switzerland. Both organisations provide an open forum for exchanging views and ideas, fostering collaboration and disseminating expertise.
In addition to applying its knowledge to create new products and solutions, Swiss Re offers its clients a range of tools to help develop and expand their business. One example is Ricasso®, a proprietary software that lets insurers model different reinsurance strategies and calculate the amount of risk capital required for their portfolios. Another is Life Guide, an online underwriting manual that represents the industry’s most comprehensive and up-to-date life underwriting reference. This has now been translated and adapted for use in eight languages including, most recently, Chinese.
Swiss Re launches Chinese version of Life Guide In July 2007, Swiss Re launched the Chinese version of Life Guide, a comprehensive online reference for life and health underwriting. More than 90 clients attended presentations in Shanghai and Beijing, where Swiss Re experts introduced the key features and benefits of the Chinese version.
Produced by Swiss Re’s global team of medical directors, researchers, statisticians and underwriters, Life Guide has become an invaluable reference and decision-making tool for life and health insurers. It includes the latest research results as well as rating calculators. More than 10 000 users from clients around the world currently use it in one of its eight available languages: English, German, French, Spanish, Italian, Dutch, Japanese and Chinese.
Swiss Re has been a leading voice in the climate debate for almost 20 years Swiss Re has developed innovative solutions related to climate change, such as risk securitisation, weather derivatives and carbon insurance
Nanotechnology has become a major engine for economic growth; as an enabling technology it encompasses many disciplines and industries The challenge is to master an increasing variety of nano-enabled products, and identify potentially harmful properties that are currently neither well analysed, described or understood, nor regulated and differentiated from safe properties
Terrorism risk is only privately insurable to the extent that it can be assessed and controlled, and liabilities are limited and adequately priced Transparency is key for risk management and pricing Public-private partnership is needed to provide meaningful coverage The challenge is to find the most efficient way to achieve such a partnership
Based on its large know-how and expertise, Swiss Re promotes the development of tailored risk management principles and actively steers its business accordingly Swiss Re supports regulatory efforts to prevent increased nanotechnology exposure and ensure a balanced public dialogue on possible new risks
As a leading reinsurer, Swiss Re diversifies the yearon -year loss variability inherent in natural catastrophe business Swiss Re’s strong capital base and know-how enable tailor-made solutions for our clients Swiss Re regularly adapts its pricing models to reflect changes in risk assessment and economic development
Swiss Re is committed to creating sustainable value for its stakeholders. In 2007, the Group continued to launch innovative products and initiatives that address key environmental and social challenges.
Corporate sustainability Many environmental and social risks currently threaten sustainable economic progress. Swiss Re deploys its expertise in risk and capital management to prevent these risks from weakening its own financial position, as well as to develop effective business solutions for private and public sector clients.
The Group has been an acknowledged leader in recognising and tackling the challenges of climate change for almost 20 years. In 2007, Swiss Re launched two major initiatives: the COYou2 Reduce and Gain Programme and the Climate Adaptation Development Programme. Both were announced in the context of the Clinton Global Initiative, which Swiss Re was invited to join in 2005, and which aims to address the world’s most pressing problems by bringing together leading minds and problem-solvers in a shared commitment to concrete action.
Swiss Re Group CO2 emissions per employee (FTE)¹ 2003 2007 Change from kg/FTE Share in % kg/FTE Share in % base year 1 Employee numbers are based on full-time equivalents (FTE). 2 The significant rise in emissions relating to business travel is partly due to increased travel activity following the acquisition of GE Insurance Solutions.
In 2007, Swiss Re reviewed and refined its CO2 reporting methodology to reflect the impact of recent acquisitions, an increase in the number of non-permanent employees and new, more accurate conversion factors recommended by the 2004 Greenhouse Gas Protocol for the calculation of emissions. The review was independently assured by the auditors PricewaterhouseCoopers, whose Assurance Report will be published as part of Swiss Re’s 2007 Corporate Responsibility Report. As a result of this review, all previously reported emissions have been restated. Based on the refined methodology, the CO2 baseline for 2003 was readjusted to 6 903 kilograms per full-time equivalent employee (FTE), while revised emissions for 2006 were 5 702 kilograms per FTE, a reduction of 17.4% since 2003. The effect of the Group’s large-scale switch to renewable energy and of its various energy-saving measures, including the consolidation of office locations, has thus been significantly larger than previously calculated. In 2007, emissions were reduced by a further 543 kilograms per FTE, to 25.3% against the 2003 baseline.
Having achieved its 15% reduction earlier than expected, Swiss Re has decided to double its 2013 target to 30%. In addition, the Group has bought and retired high-quality voluntary emissions reduction certificates (VERs) for 230 000 tonnes of CO2 to compensate all emissions caused since the start of the reduction programme. This effectively makes Swiss Re greenhouse neutral from October 2003.
Swiss Re strives to benefit from the opportunities offered by these new markets and has built up a dedicated team. In 2007, it closed several CDM transactions in the end-user business, which included project origination, distribution and the sale of structured insurance products to guarantee carbon credits. The Group was also active in the trading of CERs, EU allowances and VERs.
Investments (at market value) 49 69 122 286 Closed but unfunded commitments 5 81 254 330
Swiss Re has increasingly used environmental, social and governance-related (ESG) information to guide investment decisions in its main equity portfolio. In 2007, a framework was established to formally integrate ESG information into the equity analysis process. Underlining Swiss Re’s commitment to incorporate ESG in its asset management, the Group signed the United Nations Principles for Responsible Investment, which was developed by a group of major institutional investors in cooperation with stakeholders from civil society and academia.
First year of the COYou2 Programme The COYou2 Reduce and Gain Programme was announced in autumn 2006 as Swiss Re’s annual commitment to the Clinton Global Initiative and is the first global corporate initiative to support carbon-reducing investments by employees. Swiss Re employees are eligible for a 50% subsidy up to a maximum of CHF 5 000, or the equivalent adjusted to the local cost of living, for projects such as buying a hybrid car, installing solar panels or heat pumps, or paid days off for participating in climate-related volunteer activities.
The programme was launched at the beginning of 2007 and has gained highly positive reactions from Swiss Re staff. As of 22 February 2008, more than 530 employees had been granted payouts, with subsidies for hybrid cars and public transport the most popular measures. The COYou2 Programme also attracted strong interest from external audiences, including extensive media coverage in Europe, North America and Australia, as well as enquiries from a number of major corporations and other organisations interested in establishing similar schemes.
Corporate citizenship Swiss Re has recently tightened the focus of its corporate citizenship programme, structuring its activities in two categories: solution building and community building.
Solution building Swiss Re strives to promote workable solutions to major social and environmental challenges by contributing risk management expertise as well as financial aid to key partnerships with highly respected organisations. The target areas of the programme include natural catastrophes, water and climate change, with a view both to providing relief and improving prevention.
After the devastating earthquakes in North-East Pakistan in 2005, Swiss Re entered into a partnership with Caritas Switzerland to provide effective practical assistance. The building of earthquake-proof schools was identified as a key target and substantial progress was made in 2007. A new project was launched in the Atitlán region of Guatemala, in cooperation with the Vivamos Mejor foundation. The initiative aims to empower local communities to cope with natural catastrophes, by providing education on risk awareness, supporting mitigation strategies and helping to develop emergency plans.
In 2007, Swiss Re presented its fifth annual ReSource Award for Sustainable Watershed Management. The first prize went to a project in Ethiopia that will set up rainwater harvesting to secure local water supplies. The runner-up award went to a project in Jamaica to eliminate harmful river poisoning from local fishing practices. The ReSource awards are now firmly established and draw a large number of innovative entries from across the world. On International Water Day, Swiss Re donated CHF 1 million from the corporate bonus pool to the International Committee of the Red Cross for a project in North-Western Nepal to restore clean water supplies to the rural population.
Community building With its community building initiatives, Swiss Re strives to support local institutions and foster employee-initiated charity projects in the communities where it operates. One highlight in 2007 was an auction of art works to Swiss Re staff in Munich, Germany. The proceeds were donated to the “Anna” association, a charity founded in 2003 by a Swiss Re employee to improve conditions in Russian orphanages. 580 people, including 120 Swiss Re employees, have since joined the association.
Employees in Switzerland donated more than CHF 140 000 during their annual Christmas collection. This represents the largest amount since the collection was launched in 1933. The proceeds collected are matched by an equivalent company contribution and used for various charitable causes across Switzerland.
How are you advancing performance on the life and health side? I’d like to highlight the example of our Admin Re® business, which buys closed life insurance portfolios. This area continues to offer great opportunities for economic profit growth. In 2007 alone, we signed three large transactions adding almost CHF 17 billion to our balance sheet, including one of the largest-ever longevity deals with Zurich Financial Services. Another success is the development of new risk transfer solutions for our clients in the field of variable annuities, a fast-growing market segment.
Jacques Aigrain shares his views on Swiss Re’s strategic direction and explains how the new vision will position the company for future success.
Is risk trading still a viable strategy given the current market turmoil? Yes, the recent financial market turbulences confirmed that insurance-linked securities, of which Swiss Re is the leading underwriter, have only limited correlation to broader credit and liquidity risks. This makes them a particularly effective tool for diversifying risks and reducing volatility. Catastrophe bonds are now widely accepted as an integral part of risk transfer programmes and have a strong growth potential as the trend to securitise insurance risks accelerates.
We are enlarging our market scope with new products for – and partnerships with – governments and non-governmental organisations. In 2007, we concluded a transaction where we used our weather risk transfer expertise to pioneer parametric crop coverage for rural communities in Kenya, Ethiopia and Mali.
What are the key drivers for change? On the regulatory side, the European Solvency II initiative is developing a new risk-based regime founded on economic principles. This will affect the whole insurance industry and offer new opportunities for Swiss Re, as clients optimise their reinsurance to meet changed capital requirements. We also expect a greater need for our expertise and risk services. Solvency II will also increase demand for capital market risk transfer, such as hedging and securitisation.
“ Catastrophe bonds are an integral part of risk transfer programmes and have strong growth potential.”
How is Swiss Re responding to these challenges? Over the last year we have been developing a vision to support Swiss Re’s earnings growth over the medium term. We aim to become the leading company in sourcing, taking, transforming and trading insurable risks. To achieve this, we are combining all our expertise and skills in an integrated approach that will help us seize attractive opportunities in the market.
And what does the vision mean for your employees? Great opportunities! Our strategic vision relies on outstanding talent, creativity and a culture of teamwork. Through our new training centres in Switzerland, the US and China, we are investing in the future of our company. As a global leader, Swiss Re offers exciting prospects for employees to develop their careers across regions and functions.
Our results show that our strategy is firmly on track and delivering sustainable benefits for clients and shareholders. With our new vision we are building a powerful foundation to benefit from the changing dynamics of the risk transfer business – and accelerate our performance in the years ahead.
“ We aim to become the leading company in sourcing, taking, transforming and trading insurable risks.”
Swiss Re is a leading player in offering solutions for closed life and health books, having completed over 50 Admin Re® transactions in the US and UK over the past 10 years. Since 1998, these deals have added more than CHF 75 billion in assets to the Group’s balance sheet.
On 4 June 2007, Swiss Re signed an agreement with Zurich Financial Services to acquire a closed book of 220 000 annuity policies in return for assets worth CHF 9.1 billion. As one of the largest-ever longevity transactions, this transfer demonstrates Swiss Re’s ability to respond to strong market demand and provide solutions for clients in this area.
The deal offered a win-win outcome for both companies, as it optimised their respective capital and risk structures. Zurich was able to reduce its longevity exposure and free up regulatory capital. At the same time, Swiss Re gained substantial embedded value, captured a significant pool of assets, and boosted the scale and profitability of its Admin Re® operations.
From left: Stuart Brown (London), Adrian Ricketts (London), Richard Ellis (Telford), Man Chung Li (Armonk), Michael Mitchell (London) Swiss Re 2007 Annual Report 35
The Allstate Corporation is the largest publicly held personal lines insurer in the US. A Fortune 100 company, it provides insurance products to more than 17 million households. Since 2005, Allstate has increased its reinsurance in order to reduce exposure to natural catastrophe risk while maintaining coverage for policyholders.
In early 2007, Allstate awarded Swiss Re an exceptionally large USD 400 million share in its two-year property catastrophe programme. The transaction was placed through Benfield, a global risk broker. Swiss Re won the largest part of the USD 2 billion layer due to its superior financial strength and capital market capabilities, as well as the trust it has earned through previous transactions with Allstate.
The coverage enables Allstate to grow its business while reducing earthquake and windstorm exposures in a single transaction.
Swiss Re is expanding its market reach by partnering with governments and NGOs to deliver innovative solutions for weather risks in emerging markets.
Weather volatility poses a serious risk for the economies of emerging markets, which are strongly dependent on agriculture. Although these countries produce 70% of the global food supply, they only account for 20% of total agricultural premiums. Swiss Re is leveraging its expertise in weather risk transfer by pioneering climate risk solutions for low-income markets.
In 2007, Swiss Re and Millennium Promise, a non-governmental organisation (NGO), agreed to provide weather risk protection for rural communities in Kenya, Mali and Ethiopia. The cover is based on a climate index developed by the Earth Institute at Columbia University. This uses a blend of satellite and weather data as an objective measure of crop production.
By protecting smallholders and communities against drought-related crop failure, such transactions facilitate access to credit and support businesses along the agricultural value chain. This can only be achieved through effective public-private partnerships. Swiss Re is working on a series of related solutions in other parts of Africa, Asia and Latin America.
Our graduate programme attracts the brightest talent worldwide, offering young professionals a unique opportunity to shape the future of a global leader in reinsurance.
As Swiss Re’s business grows in size, speed and scope, we are seeking the best graduates from a broad range of educational backgrounds to shape the future of our industry and seize the opportunities that lie ahead.
In 2007, 49 young talents from Europe, Asia and the Americas joined graduates@swissre, our global training programme. In 2008, we are extending the programme to attract 150 graduates, offering them a unique opportunity to realise their potential and develop a career in one of the broadest, most exciting companies in the financial services industry. Over 18 months, participants undergo intense training, combining business skills with personal development. They are inspired by a culture that rewards innovation and teamwork, and encourages dynamic, bold and integrated thinking to move Swiss Re forward.
As a major growth area for Swiss Re’s business, Asia plays a key role in our efforts to attract and foster outstanding talent. We actively seek people who understand the region and can connect Swiss Re’s global expertise to the changing needs of local clients.
The market turmoil, combined with a weakening housing market, slowed down the US economy from an inflation-adjusted growth of 2.9% in 2006 to 2.1% in 2007. Outside the US, economies continued to grow at solid rates in 2007, although growth in the Eurozone and Japan eased slightly. Emerging markets grew at around 8%, led by the Chinese and Indian economies. In China, rapid growth continued for most of 2007, while price pressure also intensified: towards the end of the year consumer inflation exceeded 6%. In the other major markets, inflation was stable during 2007.
Figure 2: Interest rates for ten-year government bonds 2003 – 2007
 United States  United Kingdom  Eurozone  Japan  Switzerland in %
Interest rates and stocks both rose initially but declined in the second half of the year. Except for US government bond yields, year-end figures for equities and fixed interest were close to the levels of 12 months earlier.
The US dollar continued to weaken against the major European currencies during 2007, declining 10% against the Euro, 7% against the Swiss franc and 1% against the British pound.
¹ Yearly average. Source: Swiss Re ² As of 31 December 2007. Per 100 units of foreign currency. Source: Datastream
The reinsurance sector enjoyed a comparably quiet year, with an industry-wide combined ratio below 90%, similar to the low level of 2006. Full-year results are leading to lower ROE levels than in 2006, due to a slight decrease in rate adequacy, strong capital growth, and the impact of the credit crisis on investment results. Thanks to the sustained underwriting discipline of recent years, the quality of current non-life profits is far superior to those seen in the second half of the 1990s, when excellent results were driven by a booming stock market rather than sound technical pricing.
Most mature markets experienced sluggish growth at lower rates than GDP, due to a gradual weakening of premium rates. Premiums in the US, UK, and Continental Europe grew in the low single-digit range. This contrasts with growth in emerging markets, where rising wealth and incomes are leading consumers and corporations to discover the value of insurance. Premium growth was especially firm in China, mainly reflecting robust consumer demand and capital investment. In India, growth slowed to 6% on an inflation adjusted basis because of detariffication in the non-life sector, implemented on 1 January 2007. Most Southeast Asian markets also reported strong growth in premiums, as did Central and Eastern European countries. Latin America’s non-life insurance markets continued to grow at a rapid pace in 2007, up almost 10% on an inflation-adjusted basis. While premium volumes in Mexico and Chile soared, the Brazil market lagged behind GDP growth.
The strong 2007 operating results further increased non-life capacity. Primary insurance companies were able to release loss reserves, supporting earnings and adding to equity capital. In 2007, insurers in the six largest markets increased their shareholders’ equity by about 7%, while the major reinsurers saw an increase of 9%. Many companies accelerated their capital management plans with share repurchases and special dividends. This will slow, but not prevent, a further increase in capitalisation, bringing solvency ratios (capital funds as a percentage of net premiums) up to levels last seen in the late 1990s.
In the US, new business saw high single-digit growth, supported by strong sales of combined savings-protection products with secondary guarantees and moderate demand for term life. Sales of annuity products increased at a healthy pace, as robust demand for variable annuities with guarantees more than offset the decline in fixed annuities. Guarantee products are expected to be especially attractive due to capital-market uncertainty.
All the sigma studies can be downloaded electronically or ordered as a print copy in English, German, French, Spanish, Italian, Japanese and Chinese from Swiss Re’s homepage at www.swissre.com.
Life premium growth remained weak in Japan, where a volatile financial market undercut demand for investment-linked products.
Growth of life insurance business in emerging Asian markets and Latin America continued to be robust. In 2007, premiums are estimated to have risen by around 15%. The booming equity markets in the first half of 2007 helped sustain life insurance demand in most markets.
Life and health reinsurance experienced robust growth in 2007. The market for the management of closed blocks of business benefited from the continuing restructuring of the primary life industry, particularly in the UK. There is also a developing market in reinsurance and capital market solutions for longevity risk, variable annuity secondary guarantees, and various health covers. On the other hand, premium growth in traditional mortality reinsurance was weak in 2007. In the US, cession rates declined slightly, as insurers continued to shift from quota share to excess of loss covers and increased their use of alternative solutions, such as securitisation.
Swiss Re reported annual net income of CHF 4.2 billion in 2007, down 9% compared to a record result in the previous year. Earnings per share were CHF 11.95, 11% lower than 2006.
In the fourth quarter, net income was CHF 170 million, compared to CHF 1.3 billion in the prior year period. The decrease was due to a significant mark-to-market loss in the credit underwriting business. Earnings per share for the quarter were CHF 0.49.
In 2007, premiums earned increased 7% to CHF 31.7 billion. Property & Casualty premiums grew 2% to CHF 19.0 billion, largely due to the inclusion of the acquired GE Insurance Solutions business for the full year², partially offset by a reduction in new business as a result of unsatisfactory price levels, mainly in certain US casualty lines, as well as higher client retentions. The Property & Casualty result for 2006 and 2007 also includes credit reinsurance activities, which were formerly part of the Financial Services segment. In the Life & Health business, premiums and fee income from policyholders increased 15% to CHF 13.6 billion, also as a result of the inclusion of GE Insurance Solutions for the full year, combined with the acquisition of GE Life UK and a rise in new business written in North America.
Net income of CHF 4.2 billion and earnings per share of CHF 11.95 were supported by an outstanding performance in the Property & Casualty and Life & Health businesses, as well as a solid investment result. The fourth quarter was impacted by a significant mark-to-market loss in credit underwriting activities.
Net realised investment losses for 2007 were CHF 1.3 billion, driven by the mark-to-market loss on two related credit default swap transactions announced on 19 November, as well as by losses from the effect of selling lower yielding investments and reinvesting in higher yielding assets in order to increase future net income. These effects were partly offset by realised gains from the sale of equities.
Claims and claim adjustment expenses increased marginally by 2% to CHF 12.1 billion, despite the first full-year inclusion of GE Insurance Solutions in 2007. This is the result of strict underwriting and favourable claims experience. Losses from natural catastrophes were slightly lower compared to 2006, with a very low claims burden from weather events. Including recovery, claims from natural catastrophes amounted to CHF 0.6 billion, or 3.1% of premiums, compared to CHF 0.7 billion or 3.8% of premiums in the prior year.
Interest credited to policyholders decreased 25% to CHF 2.1 billion. This reflects lower realised gains on the unit-linked assets, mainly in the second half of 2007.
Acquisition costs increased 7% to CHF 6.5 billion. The acquisition cost ratio was 20.5% in 2007 compared to 20.6% in 2006.
The tax expense in 2007 was CHF 1.0 billion. This represents an effective tax rate of 19.8%, compared to 22.1% in the prior year. The decrease in the tax rate in 2007 was primarily due to a reduction in the legislated tax rates in both Germany and the UK, as well as the impact of foreign exchange movements offset by the change in unrecognised tax benefits.
The Group’s operational activities resulted in a net operational cash outflow of 3.8 billion in 2007 compared to a net operational cash inflow of 1.5 billion in 2006. Increased funding of discrete pools of operational leverage and financial intermediation assets resulted in an outflow in the operating cash flow for purchased assets, as well as an inflow in the financing cash flow from debts issued to match the acquired assets.
Corporate centre expenses –324 –377 16 Items excluded from the segments: Net investment income 184 236 28 Net realised investment gains/losses 299 –202 –168 Foreign exchange gains/losses –196 –7 –96
Return on equity decreased to 13.5% from 16.3% in 2006, resulting from lower earnings compared to the record result in 2006.
Income reconciliation The above table reconciles the income from Swiss Re’s segments and the operations of its Corporate centre with the Group’s consolidated net income before tax. Net realised gains or losses on certain financial instruments, certain currency exchange gains and losses and other income and expenses – such as indirect taxes, capital taxes and interest charges – have been excluded from the assessment of each segment’s performance.
Expenses Claims and claim adjustment expenses –11 799 –12 065 2 Life and health benefits –9 594 –11 112 16 Interest credited to policyholders –2 827 –2 120 –25
Income before income tax expense 5 856 5 187 –11 Income tax expense –1 296 –1 025 –21
Changes in shareholders’ equity CHF millions 2006 2007 Change in %
Change in unrealised gains/losses on securities, net 322 889 176 Change in foreign currency translation –1 176 –2 349 100
Purchase/sale of treasury shares and shares issued under employee plans –63
Liabilities Unpaid claims and claim adjustment expenses 95 011 88 528 –7 Liabilities for life and health policy benefits 44 899 50 026 11 Provisions for linked liabilities 42 834 41 340 –3
Income taxes payable 866 679 –22 Deferred and other non-current taxes 2 685 3 817 42
Operating income increased to CHF 5.9 billion, representing the best-ever result for Swiss Re’s P&C segment. This reflects an excellent underwriting performance as well as the full-year inclusion of the Insurance Solutions acquisition.
Business developments 2007 was a strong year for the property and specialty lines of business, despite a higher level of natural catastrophes than 2006. Significant events included winter storm Kyrill in Germany, a series of floods in the United Kingdom, storms in Australia in both June and December, flooding in Indonesia, and a category five cyclone in the Middle East which affected Oman and the United Arab Emirates. Swiss Re continued to manage its natural catastrophe exposure using various hedging instruments to reduce earnings volatility.
All specialty lines of business produced strong results, based on disciplined underwriting in recent years and modest claims activity. However, downward price pressure was evident in all three lines.
In the casualty segment, pressure on both primary and reinsurance rates increased throughout the year as competition continued to intensify. In addition to Bermudan carriers and start-up companies diversifying into casualty lines, established players are also adopting an increasingly aggressive stance. Competition was most intense in emerging markets and large treaty business. So far, the focus has primarily been on prices, whereas terms and conditions have remained generally stable. The softening cycle requires strong negotiating and underwriting skills, and Swiss Re maintains a disciplined and active cycle management focus, leveraging the Group’s capacity and risk appetite where economics remain attractive.
Although US tort cost developments showed favourable signs from 2006 on, they remained under close scrutiny, as no clear trend was established. Factors relating to the subprime and credit crisis, issues such as the backdating of options and potential liability effects stemming from global warming are expected to influence future developments. In the Americas and European markets, medical costs continued to rise. In Asia, the liability culture is still developing in various directions and at different speeds. Swiss Re actively seized opportunities in emerging markets and adapted products to accommodate liability trends, in order to establish an advantageous position when demand picks up.
Swiss Re applied its active cycle management across all property, specialty and casualty segments, in order to tackle the insurance price cycle and create result differentiation from market inefficiency and the “naive” capacity it generates. The Group maintained a disciplined approach to costing accuracy, and business origination was characterised by a clear view on the selling price in relation to the cost of production. Swiss Re took advantage of a trend towards differential terms for individual reinsurers and adjusted capacity where target prices could not be achieved.
Business results The figures for 2006 and 2007 are presented according to the new organisational structure. The specialty sub-segment now includes certain parts of the former Credit Solutions business, such as credit reinsurance, financial guaranty business, bank trade finance and credit securitisations.
Operating income increased from CHF 5.6 billion in 2006 to CHF 5.9 billion in 2007. The main drivers for the improvement were a strong performance, mainly in the property and specialty lines of business, as well as the full-year inclusion of GE Insurance Solutions in 2007.
Despite an abundance of capacity in the market, Swiss Re was able to renew its book profitably. All markets reflected the trend towards higher client retentions due to better capital positions and strong profitability levels. The Group’s renewals were marked by overproportional growth in the most profitable lines of business, particularly in the property and specialty areas.
Expenses Claims and claim adjustment expenses –2 779 –6 220 –2 290 –11 289 –510 –11 799
Other operating costs and expenses –487 –620 –282 –1 389 –107 –1 496
Expenses Claims and claim adjustment expenses –2 800 –6 634 –2 063 –11 497 –568 –12 065
Lines of business Active cycle management and a diversified business mix contributed to excellent results in 2007. Most lines of business, except for liability and accident, contributed to the combined ratio improvement.
Property Premium growth was mainly due to the full-year contribution of GE Insurance Solutions in 2007. Higher retentions by ceding companies in Europe and the US as well as softer market conditions in the US partially offset this increase in volume.
An excellent underwriting performance and favourable claims experience in the US were the main drivers of the improved combined ratio.
Casualty Premium volume decreased, mainly driven by higher client retentions and softening market conditions. This was mostly offset by the full-year inclusion of Insurance Solutions in 2007.
Specialty lines Premium volume for the specialty lines of business increased 9% to CHF 4.6 billion, reflecting the full-year contribution of GE Insurance Solutions in 2007.
Overall, operating income grew significantly to CHF 1.6 billion compared to CHF 1.3 billion in the previous year, also benefiting from the performance of the credit reinsurance business. In 2007, underwriting results for the credit reinsurance business were CHF 93 million higher than in the previous year, due to a low claims ratio. Continued strong underwriting and positive reserve development led to an improved combined ratio for traditional speciality business of 75.1%, compared to 84.9% in the prior-year period. Adverse development related to prior underwriting years in the US negatively impacted the performance of the marine business. Aviation volumes benefited from the inclusion of GE Insurance Solutions for the full year 2007.
In Europe, Swiss Re has maintained its strong market position. Specific areas of growth were focused on life protection products linked to loans and mortgages, products sold through banks and other financial institutions, and leading the market towards enhancing the segmentation of insured lives. Throughout 2007, strong progress was achieved on these initiatives in Italy, Germany and France. In the UK, the traditional reinsurance market is closely aligned with the primary market as a result of high cession rates. Primary market protection sales were relatively flat, due to a depressed mortgage market, uncertainty regarding the impact of regulatory changes on the distribution of products and reduced confidence in equity markets returns.
The Canadian market maintained stable cession rates; however, Swiss Re continued its strong show ing in this competitive environment, achieving growth in both volume and profitability.
In February 2007, the Group finalised the purchase of a 26% share in TTK Healthcare Services Pvt Ltd, a regulated third-party administrator in India. Swiss Re also acquired Prestige Healthcare Services Pvt Ltd, which subsequently became Swiss Re Healthcare Services (India) Pvt Ltd, a healthcare services advisory company. This infrastructure enabled Swiss Re to successfully write new medical insurance business in the Indian market.
In addition, Swiss Re concluded its first Admin Re® agreements to manage substantial longevity risk. The transactions were carried out in the UK, where assets and risks for large blocks of annuity business were transferred to Swiss Re from primary insurers who had accumulated significant longevity exposure. Transactions with Friends Provident, Zurich Financial Services and Co-operative Financial Services resulted in the transfer of UK annuity portfolios with a total value of CHF 17 billion.
Business results The figures for 2006 and 2007 are presented according to the new organisational structure. The Life & Health segment now includes part of the insurance-linked securities (ILS) business as well as the variable annuity business. Together with the new organisational structure, the allocation of the investment return to the segments has changed and is now based on the technical reserves and other information including duration of the underlying liabilities.
Operating income rose to CHF 2.7 billion in 2007, an increase of 76%. The overall Life & Health return on operating revenues of 14.7% exceeded the previous year’s return by 5.5 percentage points, reflecting the successful integration of the GE Insurance Solutions and GE Life UK business.
Operating income from the traditional health business improved by CHF 267 million, or 74%, to CHF 626 million. This was partially due to the successful integration of GE Insurance Solutions, as well as better-than-expected morbidity levels and improved termination rates. In addition, the result was positively impacted by a favourable one-off change in claims assumptions in the UK, which relates to the refined reserving practice in the Life & Health segment.
Net realised investment gains/losses 1 667 863 –48 Fees, commissions and other revenues 5 –
Net investment income – unit-linked 670 749 12 Net realised investment gains/losses – unit-linked 1 319 512 –61 Net realised investment gains/losses – non-participating 165 –25 –115
The return on operating revenues for Admin Re® decreased from 10.6% in 2006 to 9.0% in 2007, mainly due to funding costs directly attributable to Admin Re® transactions, as well as less favourable mortality in the first half of the year.
Premiums earned and fee income by region Total CHF 13.6 billion
Solid Financial Markets performance resulted in a return on investments of 4.9%.
The investment portfolio grew 9% over the year, from CHF 160.9 billion to CHF 176.0 billion, mainly due to Admin Re® transactions. At the end of 2007, Swiss Re’s overall gross asset allocation was 87% in credit and rates, and 13% in equities and alternative investments.
Net realised gains/losses –182 904 43 765 Fees, commissions and other revenues 201 201
Equities and alternative investments In 2007, Swiss Re increased its gross exposure from CHF 19.1 billion at the end of 2006 to CHF 23.2 billion at the end of 2007, mainly in private equity investments and a diversified portfolio of hedge funds. The net exposure was substantially lower as a result of active use of equity derivative instruments.
Expenses increased CHF 21 million, in line with the growth in assets under management. Net unrealised gains on the balance sheet were CHF 3.1 billion at the end of 2006, compared to CHF 3.0 billion at the end of 2007.
Other Net realised losses relate to the mark-to-market loss on two related credit default swap transactions which was announced in November 2007 and is discussed in more detail in the letter to shareholders on pages 3 – 4.
Asset-liability management at Swiss Re Asset-liability management (ALM) is an integral part of how Swiss Re monitors and manages financial market risk. It involves splitting Swiss Re’s economic balance sheet into two virtual balance sheets: one exposed to insurance risk and the other to financial market risk.
In particular, the Group monitors the potential impact from interest rate changes on its investment and minimum risk portfolios. Interest rate exposure is measured in terms of the change in value of interest rate-sensitive instruments from an upward shift of key interest rates by 1 basis point. In addition, interest rate risk is assessed by scenario analysis, and quantified in terms of Value at Risk (VaR) and Tail VaR (expected shortfall) for various confidence levels and holding periods.
The Group manages its interest rate risk relative to the minimum risk portfolio. As of 31 December 2007, assets and liabilities were closely matched, resulting in moderate interest rate risk for the Group.
Asset-liability match of Swiss Re Group as of 31 December 2007 Price value of 1 basis point
The January 2008 renewals of Swiss Re’s traditional non-life portfolio showed signs of price softening in most sectors; however, margins in general are still at satisfactory levels. Overall, prices on our renewed portfolio decreased 3%, but remained above the technical reference price for both proportional and non-proportional business. Swiss Re’s disciplined underwriting and careful risk selection is reflected in a reduction in volume of 12%.
Active cycle management and a strong focus on new business opportunities and innovation, coupled with an efficient capital management approach, are expected to result in attractive and sustainable total shareholder returns.
In life and health, Swiss Re anticipates a slowdown in sales of mortgage-linked protection products in developed markets. The Group continues to expect lower reinsurance cession rates in the US and UK, partly due to changes to regulatory capital requirements for primary insurers. However, in some markets, notably the UK, the anticipated move to Solvency II is expected to significantly increase demand for life and health reinsurance. The changing dynamic should favour reinsurers with strong financial strength ratings, the ability to offer a variety of reinsurance structures and strong services across the primary insurance value chain. Swiss Re’s strength in these areas makes the Group ideally placed to offer effective solutions and respond to the needs of clients in the changing marketplace.
The greatest threat to global growth stems from a US recession, but this is already mostly priced into the market. Other potential risks – a hard landing of the Chinese economy, an oil supply disruption, a housing market collapse in some European countries, and a possible surge in inflation – may also affect markets this year.
Financial targets Swiss Re’s focus on generating higher sustainable shareholder returns is reflected in an increase of the Group’s return on equity target to 14% over the cycle. The target for earnings per share growth remains at 10% over the cycle.
Swiss Re’s risk and capital management ensures controlled risk taking and adequate capitalisation, maintaining the financial flexibility to benefit from attractive business opportunities.
Risk management principles At Swiss Re, risk management is based on four guiding principles that are applied throughout the Group: Controlled risk taking: financial strength and sustainable value creation are an integral part of Swiss Re’s value proposition. As a result, the Group operates within a clearly defined risk policy and risk control framework. Clear accountability: Swiss Re operates on the principle of delegated and clearly defined authority. Individuals are accountable for the risks they take on, and their incentives are aligned with Swiss Re’s overall business objectives. Independent risk controlling: to avoid conflicts of interest, dedicated specialised units monitor risk-taking activities. Open risk culture: risk transparency and responsiveness to change are integral to Swiss Re’s risk control process. Swiss Re has institutionalised knowledge-sharing processes at all levels.
Risk management organisation The Board of Directors is ultimately responsible for the Group’s risk management principles and policies, as well as for approving Swiss Re’s overall risk tolerance. The Board committees dealing with risk management issues include the Finance and Risk Committee as well as the Audit Committee.
None of the Risk Management departments executes business. They oversee risk-taking activities and set the risk management guidelines and best practice standards that the business units implement.
In addition, the unprecedented credit market deterioration and the resulting mark-to-market loss from two credit default swap transactions highlighted the importance of proactive risk management. As a consequence, a review of the risk control and governance framework was conducted. This led to the implementation of a more rigorous product approval process, as well as enhanced risk monitoring and stress testing, which will further strengthen the risk management in the financial services area.
Funding and liquidity risk may result from larger-than-expected cash outflows or smaller than expected cash inflows and a restricted ability to raise short-term funds. In addition, sudden liquidity requirements may arise if covenants are triggered under specific adverse circumstances, requiring the collateralisation of debt obligations and third-party guarantees with assets of a specified quality.
The model generates a probability distribution for the Group’s annual economic profit and loss, specifying the likelihood that the profit or loss will fall within any given range. From this distribution a base capital requirement is derived that captures the potential for severe, but rare, aggregate losses over a one-year time horizon. Swiss Re monitors its capital adequacy by comparing the ratio of available capital to required capital with the target ratio set by the Board of Directors.
Based on exposure data for the end of 2007, the Group’s 99% VaR amounted to CHF 11.5 billion, a 5% decrease compared to the end of 2006, while the 99.5% VaR amounted to CHF 13.8 billion, a 6% decrease, and the 99% Tail VaR amounted to CHF 16.6 billion, also a 6% decrease.
Property and casualty 10.0 8.6 Life and health 6.5 5.9 Financial market 7.7 7.7
Funding and liquidity 0.3 – Simple sum 26.6 25.1 Diversification effect –8.9 –8.5 Swiss Re Group base capital requirement 17.7 16.6
Swiss Re’s overall risk exposure based on 99% Tail VaR declined from CHF 17.7 billion at the end of 2006 to CHF 16.6 billion at the end of 2007, as a result of lower insurance risk. The decline in the property and casualty risk was mainly driven by changes in the exposure to natural catastrophes. In addition to the increased hedging activities, the inward retrocession portfolio of GE Insurance Solutions was discontinued and part of the traditional business was not renewed. Also, the rather conservative estimation of the risk resulting from the natural catastrophe book of GE Insurance Solutions was revised downwards. Finally, improvements in the data quality revealed that the risk of normal volatility in Swiss Re’s property and casualty business was overestimated in 2006, leading to an additional reduction of the property and casualty risk estimate. These downward developments were partially offset by an upward correction of the generic liability exposure data and increased terrorism risk due to changes in the US terrorism risk insurance act (TRIA).
The decline in life and health risk is mainly due to the new lethal pandemic model introduced in 2007, which explicitly takes the medical, social and demographic environment into account, allowing the effect of changes in these areas to be traced (for more information on the new model, see box on page 71).
Swiss Re’s overall financial market risk at the end of 2007 did not change compared to the prior year. Lower real estate risk was offset by higher credit spread risk related to the closing of several Admin Re® transactions. These transactions were also the main driver of the increase in credit risk, which measures the risks relating to default and migration events.
In July 2007, a further Swiss Re publication, “Pandemic influenza: A 21st century model for mortality shocks”, provided a comprehensive description for the model and its results, along with an in-depth review of the overall pandemic landscape. This work and the associated publications formed the basis for discussions with regulators, clients and professional associations.
Swiss Re’s model works by simulating thousands of pandemic scenarios and producing an estimate of the resulting excess mortality. The simulations take into account the different features of the three pandemics that took place in the last century and also allow for advances in pharmaceutical and behavioural interventions.
Based on its model, Swiss Re estimates that, in most developed countries, a 1-in-200 year pandemic would produce an excess mortality of between 1 and 1.5 deaths per 1000 lives within an insurance-aged portfolio. This is in line with the 1.5 per mille figure assumed for mortality catastrophe risk in the third Quantitative Impact Study (QIS3), a consultation exercise conducted by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) to prepare for the proposed Solvency II Directive.
The model also shows that the influenza pandemic of 1918, the largest event in the past 420 years, would have a much lower impact on mortality today than it did in 1918. A key difference is the present-day availability of antibiotics, vaccines and antivirals. Other factors that would also reduce mortality include older populations, advances in medical knowledge and treatment and greater capacity to implement non-pharmaceutical interventions. The higher volume and speed of modern travel only affects the speed of spread, not the overall level of mortality.
Property & Casualty Risk Management is responsible for Group-wide monitoring and reporting of property and casualty risks. Underwriting systems across the Group provide timely reporting on risks assumed and capacity used. The global Products function plays a major role in managing property and casualty risks by proposing the annual renewal strategy and closely monitoring renewal business. Where appropriate, Swiss Re also uses insurance-linked securities, industry loss warranties, retrocession and risk swaps to balance its portfolio.
Table 2 reports the expected pre-tax claims of Swiss Re for major natural catastrophe loss events, allowing for insurance-linked securities, industry loss warranties, retrocession and risk swaps. The figures take into account the fact that an event can trigger claims in various lines of business. For instance, the European windstorm scenario includes, among others, claims from the motor line, and the California earthquake scenario also reflects – but is not limited to – additional claims arising from workers’ compensation and general liability.
Estimated economic impact of each single loss event in CHF billions as of 31 December 2006 2007
Atlantic hurricane (200-year return period) –5.7 –3.7 European windstorm (200-year return period) –5.2 –2.2 California earthquake (200-year return period) –4.0 –2.8 Japanese earthquake (200-year return period) –2.4 –2.0
Estimated economic impact of each single loss event in CHF billions as of 31 December 2006 2007 30% fall in global equity markets –3.7 –3.8 100 basis point parallel increase in global yield curves –0.1 0.2 15% fall in global real estate markets –0.7 –0.6
The guidelines mandate the assignment of aggregate credit limits by business unit, limits for corporate counterparties and limits by country. Limits are based on a variety of factors including the prevailing economic environment, the nature of the underlying credit exposures and, in the case of corporate counterparties, a detailed assessment of the counterparty’s financial strength, industry position and qualitative factors. The counterparty assessment generates an internal counterparty-specific rating in one of 20 categories. Swiss Re constantly monitors counterparty credit quality and exposures, compiling “watch lists” of those cases that merit close attention.
Estimated economic impact in CHF billions as of 31 December 2007
Longevity risk Swiss Re has exposure to longevity risk through its Admin Re® transactions and its own pension funds. Based on its business analysis, industry data and in-house research, the Group has begun to take a more active role in the reinsurance of longevity risk. The acceptance of this risk requires detailed analysis of the characteristics of the incoming business and also of future mortality development.
The Group’s in-depth knowledge of mortality risk and future trends, together with its sophisticated expertise in asset management, enables it to offer both pure longevity protection as well as annuity reinsurance including asset transfer. Swiss Re’s Admin Re® platform completes the solution offering by providing cost-effective life book administration services to clients.
Swiss Re gauges longevity risk using the same analytical technique as for all other life and health risks: by separately assessing its parameter, trend, shock and volatility components. Analysis of older age mortality shows that the main risk for longevity is misestimating future improvement trends. Swiss Re has developed a capital calculation and allocation methodology that models future improvements stochastically and is calibrated by under lying cause of death, including the possibility of extreme reduction in deaths from cardiovascular disease and cancer. The resulting associated capital requirement is used to determine Swiss Re’s aggregate risk appetite for longevity business.
Dividing the available capital of CHF 47.7 billion by the capital requirements based on 99% Tail VaR of CHF 16.6 billion results in a capital adequacy ratio (CAR) of 287% as of 31 December 2007, compared to 264% as of 31 December 2006 (see figure 4).
Swiss Re’s financial strength is central to its value proposition. Therefore, the Group aims to hold sufficient capital to ensure that it is financially strong, even after an extreme loss event.
Other initiatives to optimise the use of capital include the use of surplus notes, guarantees as a substitute for locally held capital, intra-Group retrocession to concentrate risk in the parent company and life embedded value securitisations.
Swiss Re’s very strong capitalisation, business position, financial flexibility, as well as its outstanding franchise, and prudent capital and risk management are reflected in superior insurance financial strength ratings which are among the highest in the industry.
On 7 November 2007, Moody’s affirmed Swiss Re’s Aa2 financial strength rating and revised the outlook to stable from negative. In Moody’s view, Swiss Re’s business and financial characteristics fully meet the expectations for a Aa2 rating, justifying the revision of the outlook to stable.
In the wake of major corporate failures and breakdowns, corporate governance, as well as legislative and regulatory developments have been in the spotlight worldwide in recent years. Swiss Re takes a proactive approach to aligning investors’ expectations and interests with its own, and continues to conduct benchmarking against best practice standards.
Corporate governance is increasingly linked to corporate sustainability and corporate citizenship. The integration of sustainability principles in core business activities strengthens a company ’s ability to protect its assets and create value. The expertise of private sector companies is becoming more important in society’s efforts to tackle sustainability and other key issues. Assuming an active role in society reinforces the effectiveness of internal responses and creates goodwill among various stakeholders. Corporate sustainability and corporate citizenship are therefore important drivers of continued business success, and are firmly embedded in Swiss Re’s corporate responsibility framework, along with corporate governance (for more information, see the corporate responsibility chapter on pages 26 – 30).
As a Swiss publicly listed company, Swiss Re’s governance is measured primarily against the Swiss Code of Best Practice for Corporate Governance, issued by economiesuisse in July 2002, and its Appendix 1 from 2007 with updated recommendations on compensation for Board of Directors and Executive Board. Swiss Re is also subject to the Directive on Information relating to Corporate Governance and its Annex and Commentary, issued by SWX Swiss Exchange, effective since 1 July 2002 and amended on 1 January 2007 (also referred to as the “SWX Directive”).
Governance Corporate governance and compensation report 1 Group structure and shareholders
a. Swiss Reinsurance Company, Mythenquai 50/60, P.O. Box, 8022 Zurich, Switzerland, held a total of 23 964 732 Swiss Re shares or 6.47% of the share capital. Of these shares, 6 280 930 shares were fully paid in shares held for general corporate purposes, 11 678 802 shares were paid in only at nominal value and reserved for general corporate purposes, and 6 005 000 shares were acquired under the share buy-back programme and subject to cancellation.
c. Credit Suisse Group, Paradeplatz 8, 8070 Zurich, Switzerland, notified Swiss Re on 21 February 2008 that, as per 15 February 2008, it held, through acquisitions by a number of its group companies, registered shares, conversion rights, share purchase rights and written share sale rights conferring a total of 3.40% of the voting rights of Swiss Re.
In accordance with the SWX Directive, the following information about Swiss Re’s capital structure is provided for the listed parent company, Swiss Reinsurance Company, Zurich.
Please refer to note 9 on shareholders’ equity of the financial statements of Swiss Reinsurance Company, Zurich, page 161.
With regard to the conditional capital created for bonds or similar financial instruments with a conversion right, shareholders’ pre-emptive 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 Group, or to issue convertible bonds and warrants. If pre-emptive rights are excluded, then (1) the bonds are to be placed at market conditions, (2) the exercise period is not to exceed ten years from the date of issue for options and twenty years for conversion rights, and (3) the conversion or 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.
The Annual General Meeting in 2004 approved an increase of conditional capital from CHF 900 000 to CHF 2 000 000, representing a maximum of 20 million registered shares, payable in full, each with a nominal value of CHF 0.10, for the exercise of conversion rights and warrants granted in connection with bonds or similar instruments issued by the Group.
At an Extraordinary General Meeting held on 27 February 2006, shareholders approved the creation of CHF 9 000 000 of authorised capital as well as an increase of conditional capital by CHF 2 000 000, relating to the acquisition of GE Insurance Solutions Corporation and for general corporate purposes.
The Annual General Meeting in 2007 approved a reduction of the conditional capital as per art. 3a of the Articles of Association reserved for bonds or similar instruments in the maximum nominal amount of CHF 3 100 000 by a nominal amount of CHF 496 072.50, corresponding to 4 960 725 registered shares, each with a nominal value of CHF 0.10, to CHF 2 603 927.50. Furthermore, the Annual General Meeting 2007 approved the cancellation of the conditional capital as per art. 3c of the Articles of Association created in favour of General Electric Company in the maximum nominal amount of CHF 900 000, which corresponds to 9 000 000 registered shares, each with a nominal value of CHF 0.10.
In 2004, the company’s share capital remained at CHF 32 million. Total reserves increased CHF 795 million to CHF 10.7 billion. The higher profit for the financial year of CHF 1.4 billion (compared to CHF 1.2 billion in 2003) led to an increase of disposable profit from CHF 1.2 billion to CHF 1.5 billion. Total shareholders’ equity before allocation of profit increased from CHF 11.2 billion to CHF 12.2 billion. At the Annual General Meeting, shareholders approved a dividend payment of CHF 497 million, compared to CHF 341 million in the previous year. From 2002 to 2004, the company issued 198 054 shares from conditional capital for employee participation purposes.
In 2005, the company’s share capital remained at CHF 32 million. Total reserves increased CHF 952 million to CHF 11.7 billion. The lower profit for the 2005 financial year of CHF 1.1 billion (compared to CHF 1.4 billion in 2004) led to a decrease of disposable profit from CHF 1.5 billion to CHF 1.1 billion. Total shareholders’ equity before allocation of profit increased from CHF 12.2 billion to CHF 12.8 billion. At the Annual General Meeting, shareholders approved a dividend payment of CHF 776 million, compared to CHF 497 million in the previous year. In 2005, the company issued 26 568 shares from conditional capital for employee participation purposes.
In addition, the 2007 Annual General Meeting authorised the Board of Directors to buy back the company’s own shares up to a total value of CHF 4.2 billion within a three-year period. As of 31 December 2007, the Company had repurchased a total of 6 005 000 shares since the inception of the second trading line in August 2007, at a volume weighted average price of CHF 94.22. The Board of Directors will propose to the Annual General Meeting of 18 April 2008 the cancellation of the shares repurchased and the corresponding amendment of the Articles of Association (reduction of share capital).
As of 31 December 2007, the share capital of Swiss Reinsurance Company, including shares reserved for corporate purposes, amounted to CHF 37 038 675 or 370 386 755 fully paid-in registered shares (each with a nominal value of CHF 0.10), of which 346 665 966 are entitled to dividend. Other than the shares reserved for corporate purposes, which have no voting power and are not entitled to dividend, there are no additional types of shares with a higher or limited voting power, privileged dividend entitlement or any other preferential rights; nor are there any other securities representing a part of the company’s share capital. Swiss Re’s capital structure ensures equal treatment of all shareholders in accordance with the principle of “one share, one vote”.
Profit-sharing 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.
Admissibility of nominee registrations Trustees or nominees who act as fiduciaries of shareholders are entered without further inquiry in Swiss Reinsurance Company’s share register as shareholders with voting rights up to a maximum of 2% of the outstanding share capital available at the time. Additional shares held by such nominees, which exceed the limit of 2% of the outstanding share capital, are entered in the share register with voting rights only if such nominees disclose the names, addresses and shareholdings of the beneficial owners of the holdings amounting to or exceeding 0.5% of the outstanding share capital. In addition, such nominees must comply with the disclosure requirements of the Stock Exchange Act.
2.4 Shares2.4 Shares 2.5 Profit-sharing certificates2.5 Profit-sharing certificates 2.6 Limitations on transferability and nominee registrations 2.6 Limitations on transferability and nominee registrations
(ii) The mandatory convertible bond (MCS), issued as a private offering to institutional investors only, may, at the option of each holder, be converted into registered shares of Swiss Reinsurance Company at any time from 24 January 2006 until 4.00 pm CET on the business day before the 20th trading day prior to the maturity date on 15 December 2008. Holders exercising such early conversion right will be entitled initially to receive 87 168 759 shares, subject to adjustment, for each MCS of CHF 100 000 nominal value. Unless previously converted, each MCS will be mandatorily converted on the maturity date into the number of registered shares of Swiss Reinsurance Company that equals the maturity conversion ratio. The maturity con version ratio equals the arithmetic average of the 15 conversion ratios calculated on the basis of the CHF closing prices of the shares on the virt-x (“closing price”) on each of the 15 consecutive trading days ending on the third trading day prior to the maturity date. For the purposes of calculating the arithmetic average, the conversion ratio for a given trading day is determined as follows: (a) if the closing price is less than or equal to the minimum conversion price of CHF 95.60, the conversion ratio shall be equal to the maximum conversion ratio of initially 10 460 251 shares per MCS; (b) if the closing price is greater than or equal to the maximum conversion price of CHF 114.72, the conversion ratio shall be equal to the minimum conversion ratio of initially 87 168 759 shares per MCS; and (c) if the closing price is greater than the minimum conversion price, but less than the maximum conversion price, the conversion ratio shall be equal to CHF 100 000 divided by the closing price. Based on the closing price, Swiss Re will be required to deliver between 8.7 million and 10.5 million shares created from conditional capital, shares reserved for corporate purposes or other existing shares.
(iii) Upon closing the acquisition of GE Insurance Solutions, Swiss Re issued CHF 610 million of three-year mandatory convertible instruments to General Electric. The mandatory convertible bond (MCS) issued as a private offering, may, at the option of each holder, be converted into registered shares of Swiss Reinsurance Company at any time from 18 July 2006 until 4.00 pm CET on the business day before the 20th trading day prior to the maturity date on 8 June 2009. Holders exercising such early conversion right will be entitled initially to receive 102 414 923 shares, subject to adjustment, for each MCS of CHF 100 000 nominal value. Unless previously converted, each MCS will be mandatorily converted on the maturity date into the number of registered shares of Swiss Reinsurance Company that equals the maturity conversion ratio. The maturity conversion ratio equals the arithmetic average of the 15 conversion ratios calculated on the basis of the CHF closing prices of the shares on the virt-x (“closing price”) on each of the 15 consecutive trading days ending on the third trading day prior to the maturity date. For the purposes of calculating such arithmetic average, the conversion ratio for a given trading day is determined as follows: (a) if the closing price is less than or equal to the minimum conversion price of CHF 84.90610, the conversion ratio shall be equal to the maximum conversion ratio of initially 117 777 168 shares per MCS of CHF 100 000 nominal value; (b) if the closing price is greater than or equal to the maximum conversion price of CHF 97.64202, the conversion ratio shall be equal to the minimum conversion ratio of initially 102 414 923 shares per MCS of CHF 100 000 nominal value; and (c) if the closing price is greater than the minimum conversion price, but less than the maximum conversion price, the conversion ratio shall be equal to CHF 100 000 divided by the closing price. Based on the closing price, Swiss Re will be required to deliver between 6.25 million and 7.18 million shares created from conditional capital, shares reserved for corporate purposes or other existing shares.
Options For details on stock options granted to Swiss Re employees, see note 12 on share-based payments, pages 169 –171, and note 9 on shareholders’ equity, page 161 of the Group financial statements.
Peter Forstmoser Swiss 64 Chairman of the Board 1990 2010 Chairman of the GC Walter B. Kielholz Swiss 56 Vice Chairman of the Board 1998 2010 Member of the FRC and the GC Jakob Baer Swiss 63 Chairman of the AC 2005 2009 Member of the FRC Thomas W. Bechtler Swiss 58 Member of the CC 1993 2009 Raymund Breu Swiss 62 Member of the AC and the CC 2003 2011 John R. Coomber British 58 Chairman of the FRC 2006 2009 Rajna Gibson Brandon Swiss 45 Member of the AC and the FRC 2000 2008 Bénédict G.F. Hentsch Swiss 59 Member of the GC 1993 2009 Hans Ulrich Maerki Swiss 61 Member of the CC and the FRC 2007 2011 Robert A. Scott British / 65 Chairman of the CC 2002 2010 Australian Member of the AC and FRC John F. Smith, Jr. US / Swiss 69 Member of the AC and the GC 2003 2008 Kaspar Villiger Swiss 66 Member of the FRC and the GC 2004 2008
Independence Swiss Re requires a majority of the Board of Directors to be independent. To be considered independent, a director may not be, and may not have been in the past three years, employed as an executive officer of the Group. In addition, he or she must not have a material relationship with any part of the Group – either directly or as a partner, director or shareholder of an organisation that has a material relationship with the Group. Based on Swiss Re’s independence criteria, a strong majority of eleven of Swiss Re’s twelve directors qualify as independent.
Since John R. Coomber was Chief Executive Officer until 31 December 2005, he may not be considered independent under the applicable criteria, although he no longer has an executive status.
3.1 Members of the Board of Directors as of 31 December 2007 3.1 Members of the Board of Directors as of 31 December 2007
Mr Kielholz, a Swiss citizen born in 1951, studied business administration at the University of St. Gallen and graduated in 1976 with a master’s degree in business finance and accounting.
Mr Kielholz’s career began at the General Reinsurance Corporation, Zurich. After working in the US, the UK and Italy, he assumed responsibility for the company’s European marketing. In 1986 he joined Credit Suisse, Zurich, where he was responsible for client relations with large insurance groups in the multinational services department.
Mr Baer began his career in the legal department of the Federal Finance Administration. In 1975, he joined Fides Trust Company. Following the successful planning and execution of a management buyout of Fides’ advisory business, he became a member of the management board of KPMG Switzerland in 1992. He was appointed CEO of KPMG Switzerland in 1994 and a member of KPMG’s European and international management boards. He retired from KPMG in September 2004, having reached the statutory retirement age.
Mr Bechtler has been chief executive officer of Hesta AG as well as Hesta Tex AG, Zug, since 1982.
Mr Breu is Chief Financial Officer of the Novartis Group and a member of that company’s executive committee, 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 a member of the Sandoz executive board.
Mr Breu was elected to Swiss Re’s Board of Directors in 2003. He was re-elected in 2007 for a further four-year term of office. In addition, Mr Breu serves on the Swiss Takeover Board.
Jakob Baer Non-executive and independent director Jakob Baer Non-executive and independent director
Raymund Breu Non-executive and independent director Raymund Breu Non-executive and independent director
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 area. 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 as a member of the Executive Board in April 1995, responsible for the Group’s Life & Health Division. In June 2000, he became a member of the Executive Committee. He was Swiss Re’s Chief Executive Officer from 1 January 2003 until 31 December 2005, when he retired after 33 years of employment with Swiss Re.
Ms Gibson has been a professor of financial economics at the Swiss Banking Institute of the University of Zurich since March 2000 and was previously a professor of finance at the University of Lausanne. She is also a director of the National Centre of Competence in Research (NCCR) “Financial Valuation and Risk Management” research network, Director of Research of the Swiss Finance Institute (SFI) and an adviser to scientific councils of various educational institutions. She was a member of the Swiss Federal Banking Commission until the end of 2004. Ms Gibson was elected to Swiss Re’s Board of Directors in June 2000. Her mandate was renewed in 2004 for a further four-year term.
Mr Scott is a retired group chief executive of CGNU plc, now Aviva. In the 1990s, he was group chief executive of General Accident and, following the merger with Commercial Union in 1998, was appointed group chief executive of CGU plc. Following the merger in 2000 with Norwich Union, Mr Scott became group chief executive of CGNU plc, retiring in May 2001. Mr Scott was also chairman of the Association of British Insurers in 2000 – 2001, and a board member in the previous four years.
Mr Scott joined Swiss Re’s Board of Directors in 2002 for a four-year term. He was re-elected for a further four-year term in 2006. Mr Scott is also chairman of the board of directors of Yell Group plc, a non-executive director of the Royal Bank of Scotland Group plc and Jardine Lloyd Thompson Group plc. In addition, he is an adviser to Duke Street Capital and Pension Insurance Corporation Holdings LLP.
Mr Smith joined Swiss Re’s Board of Directors in 2003. He was re-elected in 2007 for an additional one-year term ending at the Annual General Meeting in 2008, when he will have reached the statutory retirement age.
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 the canton of 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 in 1995 as Head of the Federal Department of Finance until the end of 2003. Mr Villiger was President of the Swiss Confederation in 1995 and 2002.
Mr Villiger joined Swiss Re’s Board of Directors in 2004 for a four-year term. He also serves as non-executive director on the boards of Nestlé SA, and the newspaper “Neue Zürcher Zeitung”.
The Board of Directors has further decided to nominate the following candidates for first-time election to the Board: Raymond K. F. Ch’ien Mathis Cabiallavetta
Mr Ch’ien also serves as chairman of the boards of directors of MTR Corporation Limited, Hang Seng Bank Limited and HSBC Private Equity (Asia) Limited. He is also a member of the board of directors of Inchcape plc, the Hongkong and Shanghai Banking Corporation Limited, VTech Holdings Limited, Convenience Retail Asia Limited and The Wharf (Holdings) Limited. In addition, Mr Ch’ien holds positions in several public service institutions: he is chairman of the Hong Kong / European Union Business Cooperation Committee, a member of the APEC Business Advisory Council, Hong Kong, and honorary president of the Federation of Hong Kong Industries. Mr Ch’ien has recently been appointed to the Standing Committee of the Tianjin Municipal Committee of the Chinese People’s Political Consultative Conference.
Prior to joining MMC in 1999, Mr Cabiallavetta was chairman of the board of UBS AG, after having held several executive positions at the company since 1971. He became president of the group executive board in 1996 and was elected chairman of UBS AG in 1998.
The SWX Directive no longer requires cross-involvements to be listed separately. Please, refer to the information provided in each director’s biography on pages 89 – 92.
3.2 Other activities and functions3.2 Other activities and functions 3.3 Cross-involvement3.3 Cross-involvement
The Governance Committee evaluates candidates for Board membership and makes recommendations to the Board with regard to their nomination for election or re-election. The Board submits nominations for new directors for election at the General Meeting that ensure an adequate size and a well-balanced composition of the Board and comply with the requirement that a majority of the Board is independent. At the General Meeting, each proposed election or re-election is presented by the Chairman and voted upon separately.
The Chairman and Vice Chairman of the Board, as well as the chairpersons and members of the Board Committees are elected by the Board of Directors.
Term The regular term of office of a directorship is four years. It usually begins with the date of election by a General Meeting of shareholders and ends on the fourth subsequent Annual General Meeting. Members whose term has expired are immediately eligible for re-election.
The organisation of the Board of Directors is laid down in the Corporate Bylaws, which define the responsibilities of the Board of Directors, its committees and the executive management, as well as the reporting procedures. The Corporate Bylaws are reviewed periodically by both the Governance Committee and the full Board with regard to expediency as well as to compliance with domestic and applicable international laws, regulations and best practice standards.
Chairman of the Board of Directors The Chairman of the Board of Directors exercises ultimate supervision of the executive management on behalf of the Board. He usually attends the meetings of the Executive Committee and Executive Board and receives the documentation and minutes of all the meetings. He ensures adequate reporting to the Board by the Board Committees, Executive Committee and Executive Board. He is also responsible, with the Chairman of the Audit Committee, for Group Internal Audit. He appoints the Head of Group Internal Audit, subject to confirmation by the Audit Committee, and determines his or her compensation.
Committees of the Board of Directors The Board has delegated certain responsibilities, including the preparation and execution of its resolutions, to four committees: Audit Committee, Compensation Committee, Finance and Risk Committee, and Governance Committee. Any such committee must keep the Board apprised on a timely basis of actions and determinations.
The committees may conduct or authorise special investigations, at any time and at their full discretion, into any matters within their respective scope of responsibilities, as laid down in their respective charters of duties, thereby taking into consideration relevant peer group practice and general best practice. They are empowered to retain independent counsel, accountants or other experts if deemed necessary, including for purposes of benchmarking best practice, and shall receive appropriate funding for payment of compensation to such outside advisers.
The Committee serves as an independent and objective monitor of the Group’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 Group’s financial situation and course of business. The Audit Committee reviews its own performance annually.
In fulfilling its responsibilities, the committee, among others, reviews major changes to the Group’s accounting principles and practices; reviews with the external auditor and the Head of Group Internal Audit the adequacy and efficacy of the financial reporting process as well as the Group’s system of internal controls over financial reporting and quality control procedures; reviews, at least annually, the Group’s policies regarding publication of earnings and the policies regarding communication of financial information provided to analysts and rating agencies;  
3.5.2 Committees of the Board of Directors: responsibilities and members 3.5.2 Committees of the Board of Directors: responsibilities and members
Governance Corporate governance and compensation report reviews and discusses with management the quarterly and annual financial accounts of the parent company and the Group, and approves quarterly accounts and reports of the Group; exercises supervision of compliance-related matters by reviewing management’s reports on legal, regulatory and compliance risks, including management’s identification of potential fraud risks and implemented anti-fraud controls; approves the appointment of the Head of Group Internal Audit, approves planned audit services by Group Internal Audit and reviews annually the performance of Group Internal Audit; evaluates external auditors and recommends a firm to the Board of Directors for election at the General Meeting, reviews annually the independence and the performance of the external auditor as well as its quality control procedures, and approves the compensation for external audit services; periodically meets with Group Internal Audit and the external auditor to discuss their findings and management’s responses.
Independence and other qualifications All members of the Audit Committee are non-executive and independent. In addition to the independence criteria applicable for the Board members, members of the Audit Committee may not accept any consulting, advisory, or other compensatory fee from the company. All members must be financially literate. At least one member must have the attributes qualifying him/her as an Audit Committee Financial Expert (as defined in the Corporate Bylaws and determined by the Board). Furthermore, the Corporate Bylaws require that Audit Committee members should not serve on audit committees of more than two other listed companies. They shall advise the Chairman in advance of accepting any further invitation to serve on the audit committee of another listed company. No Board member held more than two additional audit committee mandates in 2007.
Members of the Finance and Risk Committee John R. Coomber, Chair Jakob Baer Dennis D. Dammerman (until 20 April 2007) Rajna Gibson Brandon Walter B. Kielholz Hans Ulrich Maerki (as of 20 April 2007) Robert A. Scott Kaspar Villiger
Members of the Governance Committee Peter Forstmoser, Chair Dennis D. Dammerman (until 20 April 2007) Bénédict G. F. Hentsch Walter B. Kielholz John F. Smith, Jr.
The regular Board meetings are normally held in early and late February, April, June, September and December. Each regular Board meeting has a special focus, which is basically related to Swiss Re’s reporting schedule. These areas of focus consist of strategic issues, financial statements, analysis of internal results, the medium-term business plan and corporate governance.
In addition to the regular and extraordinary meetings, the Board and its committees can make decisions in writing. These resolutions by written agreement have equal validity to decisions made in regular or extraordinary meetings. Resolutions by written agreement of the Board of Directors may be adopted if no Board member calls for discussion of the motion. A quorum is constituted when at least half of the members express their agreement or disagreement with the resolution. Written resolutions of Board committees may be adopted if all committee members express their agreement or disagreement with the resolution.
Minutes are kept of the discussions and the resolutions of each meeting and are approved usually at the next Board or Board committee meeting.
In 2007, there were eight regular and four extraordinary Board meetings, and the Board made eight decisions in writing. The Board meetings lasted 5.5 hours on average. Between one and 14 agenda items were discussed per meeting, with an average of seven items per meeting. The average attendance rate was 99.0% at the regular meetings throughout the year. Average attendance including extraordinary meetings, which were often called at short notice, was 90.3%. Whenever possible, Board members who are unable to attend an extraordinary meeting give their views on the agenda items to the Chairman before the meeting.
Besides the committee members and minutes taker, selected individuals are invited to attend Compensation Committee meetings in an advisory capacity. In 2007, the following people exercised an advisory role on the committee: Peter Forstmoser, Chairman of the Board of Directors Walter B. Kielholz, Vice Chairman of the Board of Directors Jacques Aigrain, Chief Executive Officer
The Compensation Committee enlisted the help of Mercer Human Resources Consulting to provide support and advice for compensation issues during the reporting year. Mercer supported the committee in organising benchmark studies and reviewing and amending the compensation philosophy.
In 2007, there were five regular meetings of the Compensation Committee. There were no extraordinary meetings and no resolutions by written agreement. The meetings lasted on average three hours. Between four and thirteen agenda items were discussed per meeting, with an average of eight items. Average attendance was 85.0% during the reporting year.
Besides the committee members and the company secretary, selected individuals are invited to attend Governance Committee meetings in an advisory capacity. In 2007, the following people exercised an advisory role on the committee: Jacques Aigrain, Chief Executive Officer Ann F. Godbehere, Chief Financial Officer (until 28 February 2007) George Quinn, Chief Financial Officer (as of 1 March 2007)
Governance Corporate governance and compensation report has overall responsibility for corporate governance matters; approves the compensation principles of the Group upon recommendation of the Compensation Committee; reviews the Group’s adherence to legal, regulatory and compliance standards, as well as the status of significant legal, regulatory or compliance matters, in conjunction with the Audit Committee; determines the structure of the Group, defines its business and corporate functions and divisions, and decides on structural changes to the Group, as well as the business and corporate functions; appoints and removes members of the Executive Committee and the Executive Board upon recommendation of the Governance Committee; assesses, on an annual basis, the performance of the Chief Executive Officer as well as the members of the Executive Committee and the Executive Board; assesses, on an annual basis, the performance of the Board, its committees, and each of its members; determines the remuneration of the members of the Board, the compensation of the Chief Executive Officer and the total amount available for compensation of the other members of the Executive Board, upon recommendation of the Compensation Committee; elects the Chairman of the Board, the Vice Chairman and the chairpersons and members of the Board committees; nominates Board member candidates for election or re-election by the General Meeting upon recommendation of the Governance Committee; establishes the methods and applicable standards for accounting, budgetary control and financial planning; reviews and approves annual reports of the parent company and the Group, subject to the authority of the General Meeting; makes preparations for and convenes General Meetings of shareholders and executes the resolutions of General Meetings.
The Executive Committee has, in addition to its overall responsibility for the operational management of the Group, the following key responsibilities: submits proposals to the Board of Directors relating to all matters within the Board’s responsibilities, for the Board’s consideration, such as the Group strategy, the business plan, risk tolerances and accounting principles; approves the strategies, structures and business plans of the business and corporate functions and divisions; establishes principles on financing through capital markets, the financing of Group companies and the allocation of financial resources within the Group; decides on transactions in alternative investments, Admin Re®, debt issuances and credit facilities or similar instruments, while submitting proposals on high-limit transactions to the Board of Directors; establishes the performance targets for the Group, the business and corporate functions and the divisions, monitors performance and takes any necessary action; forms Group Committees, delegates to them authorities and responsibilities, and issues binding Group guidelines; decides on the underwriting authority of the business functions and divisions, and on individual reinsurance transactions exceeding the underwriting authority limits; exercises oversight responsibilities in respect of the Group‘s internal control evaluation and certification process; oversees the implementation of Group compliance procedures, monitors remediation of identified regulatory and compliance deficiencies and ensures that appropriate risk management committees are constituted;  
Governance Corporate governance and compensation report assumes responsibility for personnel planning and management development of the Group, makes recommendations to the Chief Executive Officer on promotions for or removals of Managing Directors, and appoints the Responsible Actuary.
b. Involvement of executive management in meetings of the Board of Directors As a matter of principle, all members of the Executive Committee are invited to all meetings of the Board of Directors. The entire Executive Committee was present at all regular Board meetings in 2007, with the exception of one Executive Committee member being absent from one of the meetings.
c. Involvement of executive management in Board committee meetings At the meetings of the Board committees, executive management members participate in an advisory capacity. For a detailed listing of EC member participation in Board Committee meetings, as well as the number of meetings and the meeting cycle, see the relevant sections in 3.5.3.
d. Periodic reporting by executive management At each regular Board meeting, the “Executive Report” is a standard agenda item, comprising a comprehensive CEO report on the business development, including major business transactions, claims, corporate development issues and key projects. The CEO’s report is accompanied by detailed reports of the business function heads as well as the CFO and, if appropriate, the CRO.
In addition, specific written reports focussing on issues such as risk exposure and risk management activities of the Group, economic results, investment operations, compliance, legal aspects and economic outlook are provided to the members of the Board of Directors on a regular basis.
Governance Corporate governance and compensation report e. Management Information System Up to ten times per year, Board members receive a printed “Monthly Business Update”, which measures Swiss Re’s performance against its strategic and financial objectives. The content of this report is extracted from Swiss Re’s Management Information System (MIS), a web-based tool providing in-depth quantitative and qualitative analysis of the current performance of the Group as well as detailed business information for all fields of activity. The MIS covers, besides performance figures, a wide variety of aspects, such as capital adequacy, business renewals, deal pipeline, investment results, claims development, costs, workforce, strategic initiatives, project portfolio, findings of Group Internal Audit, compliance, competitors and shareholding structure.
Governance Corporate governance and compensation report k. Group Internal Audit Group Internal Audit (GIA) is an independent, objective assurance function, performing activities designed to assess the adequacy and effectiveness of the Group‘s internal control systems. GIA helps the Group accomplish its objectives by applying a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
Authority is granted for full, free and unrestricted access to any and all of the Group’s property and personnel relevant to any function under review. All employees are required to assist GIA in fulfilling their duty. Group Internal Audit has no direct operational responsibility or authority over any of the activities they review.
GIA applies a risk-based approach to auditing the Group’s control systems, performing its own risk assessment and leveraging the risk assessments performed by the risk management functions. GIA utilises the work done by the other assurance functions in the Group after reviewing the quality of the assurance work performed. The GIA Audit Plan is determined annually and updated on a quarterly basis. The results of the audits are reported to the Group’s Executive Board and Audit Committee. Formal quarterly updates are provided to the Audit Committee on the findings, resources and skills within GIA and on the changes in tools and methodologies utilised by GIA.
In June 2001, he joined Swiss Re as Head of the Financial Services business group and member of the Executive Committee. In August 2004, the Board of Directors appointed him Deputy CEO in addition to his Financial Services role, a task that included a number of coordination functions across the firm, in particular regulatory affairs. He was appointed CEO effective as of 1 January 2006.
4.1 Members of the Executive Committee 4.1 Members of the Executive Committee
Andreas Beerli Chief Operating Officer Head of Operations Member of the Executive Committee
Mr Ferguson joined Swiss Re in June 2006 from the US Federal Reserve Board as Chairman of Swiss Re America Holding. In October 2006, he was appointed Head of Financial Services and a member of Swiss Re’s Executive Committee. In November 2007, the Financial Services and Products business functions were aligned and Mr Ferguson assumed the title of Head of Financial Services Products.
In 1994, he transferred to the non-life sector of the Southern Europe / Latin America department, where he was initially responsible for the Spanish market. He was appointed head of the same department at the beginning of 1997. He became a member of the Executive Board and Head of Latin America Division in 1998. On 1 April 2000, he was named Head of Europe Division, and from 2002 to the end of 2004 he assumed the role of Chief Executive Officer of Swiss Re Germany. He was appointed to his current position in September 2005.
Michel M. Liès Head of Client Markets Member of the Executive Committee
Stefan Lippe Head of (Re)Insurance Products Member of the Executive Committee
Head of Risk & Knowledge Division effective as of 1 January 2005. At the same time, he became a member of the Executive Committee. In September 2005, he became Head of Global Risk Management. In September 2007, Mr Mumenthaler was appointed Head of Life & Health; he relinquished his duties as Chief Risk Officer at the end of 2007.
Mr Quinn joined Swiss Re in 1999 as Chief Accounting Officer, based in Zurich. In 2003, he was appointed Chief Financial Officer for the Financial Services business group. He moved to New York in 2005 as Regional Chief Financial Officer for Swiss Re Americas. On 1 March 2007, Mr Quinn became Chief Financial Officer of Swiss Re Group.
Mr Singh is a US citizen born in 1962 and holds a Bachelor of Science degree from the Winona State University, Minnesota, as well as an MBA from the Thunderbird American School for International Management, Arizona. He joins Swiss Re from Allianz SE, where he held the position of Group Chief Risk Officer from 2002. From 1989 to 2001, Mr Singh worked for Citigroup in the US and Europe, where he held a number of senior positions, mainly in the area of credit, structured finance, and mergers and acquisitions.
Mr Singh has played a key management role in various European banking and credit-related associations, and has served on the boards of various financial companies and professional associations. He was Chairman of the International Financial Risk Institute and founding Chairman of the Chief Risk Officers Forum.
George Quinn Chief Financial Officer Head of Finance Member of the Executive Committee
George Quinn Chief Financial Officer Head of Finance Member of the Executive Committee 4.2 Other activities and vested interests 4.2 Other activities and vested interests 4.3 Management contracts4.3 Management contracts
This section contains descriptive elements of the compensation paid to Swiss Re’s Board of Directors and Executive Committee. In compliance with articles 663bbis and 663c para. 3 of the Swiss Code of Obligations, all required financial information on compensation, shareholdings and loans of members of the Board and the Executive Committee can be found in note 13 to the Group financial statements, on pages 172 –177.
Furthermore, this section displays the overview on Swiss Re’s compensation philosophy, guiding principles and governance in order to provide the comprehensive picture of performance and reward practiced in Swiss Re across all operational and executive levels.
Swiss Re strives to provide exceptional performers with total earning opportunities approaching the top tier of the industry. Each compensation element is designed to encourage individual performance, company achievement and shareholder alignment. To that end, annual and long-term incentives are balanced to reflect the performance on Group, business or corporate function and personal level.
While the variable portion of the total compensation increases as an individual progresses in the organisation, virtually all employees have at least some of their compensation “at risk” to sharpen the focus on performance and reinforce teamwork and collaboration.
Swiss Re’s incentive programmes are designed to reflect the long-term dynamics of its business and are applied across all hierarchical levels. A significant portion of higher management’s compensation is tied to the organisation’s long-term performance, ensuring that compensation is given for solid, sustainable achievement as opposed to short-term annual results.
When the variable compensation level for an employee exceeds a pre-defined amount, the variable pay is split into two components: a cash payment and a Value Alignment Incentive (VAI). The VAI is intended to align behaviour and decision making to the longer-term nature of the reinsurance business. Each VAI cycle runs for three years, tracking the development of the business over that period. With the VAI, Swiss Re ensures that a significant portion of variable pay is tied to the longer-term financial results of the company.
The LTI plan is reviewed by the Compensation Committee on an annual basis to ensure that it remains market-competitive, and that the measures and performance targets are well-aligned with the goals of the company.
Focus on performance Swiss Re is a performance-oriented, global company. It achieves this through aligning the goals of each employee with Swiss Re Group targets derived from the strategic priorities. The compensation delivered to Swiss Re employees through base salary, annual performance incentives and other programmes is the tangible result of a performance management that provides a clear linkage between performance and rewards.
To create and maintain this high-performance culture, a globally consistent performance management process is in place to ensure that: individual goals with challenging performance benchmarks are aligned to the business strategy; transparent information is provided on an individual’s contribution to the business success, using clear qualitative and quantitative performance measurement criteria.
Employee rewards are driven by performance at all levels (Group, function/division, individual), supported by a robust performance management structure as a key factor in the decision making process.
Governance of the compensation process In 2007, the Compensation Committee recommended to the Board the remuneration of the members of the Board, other than the Chairman and the Vice Chairman, for whom it determined compensation based on their respective roles and contributions. The Compensation Committee determined the compensation for the CEO and the members of the Executive Board on the basis of overall company, business/function and individual performance. In 2008, the governance process has been slightly amended. From 2008 on, the Board of Directors determines the remuneration of its members (including the Chairman and Vice Chairman) and of the Chief Executive Officer upon recommendation of the Compensation Committee. The Board of Directors also determines the total amount available for compensation of the other members of the Executive Board based on a recommendation of the Compensation Committee. The individual compensation amounts of the members of the Executive Board (other than the Chief Executive Officer) are determined by the Compensation Committee.
The Chairman, Vice Chairman, Chief Executive Officer and the Executive Board member responsible for Human Resources are normally invited to attend the meetings, except when their own executive pay matters are being discussed and decided. Each meeting starts and ends with a private session, in which the committee members can raise and discuss questions among themselves. The Committee held five meetings during 2007, four quarterly meetings that coincide with the meetings of the full Board of Directors and a fifth meeting to approve the incentive compensation and spending related to the company’s Long-term Incentive plan. The Committee has a planned agenda to ensure that the important reviews take place at the appropriate time throughout the year. Furthermore, the Committee has established a periodic self-review procedure which ensures that a high level of effectiveness is maintained over time.
Summary of Swiss Re’s compensation at Board and Executive Committee level The members of the Board of Directors receive an honorarium of CHF 325 000 per annum. A minimum of 40% of the honorarium must be taken in Swiss Re shares with a four-year deferral period. The Chairman and Vice Chairman of the Board, as well as the chairpersons of the Audit Committee, the Compensation Committee and the Finance and Risk Committee receive a higher compensation to reflect their increased responsibilities and engagements.
The members of the Executive Committee are remunerated under the same scheme as all other Swiss Re employees. The members of the Executive Committee are paid a fixed base salary in cash. For 2007, this base salary (including miscellaneous allowances) amounted to CHF 8.87 million. Furthermore, Executive Committee members receive a variable Annual Performance Incentive (API) which was CHF 25.33 million for the 2007 performance year (compared to CHF 34.25 million in 2006). A material part of the API – 45% for Executive Committee members and 60% for the CEO – is deferred through the Value Alignment Incentive plan (VAI) for three years, while the remaining API can be taken either in cash or in bonus shares. All Executive Committee members also participate in the Long-term Incentive plan (LTI). For 2007, an overall LTI value of CHF 19.12 million was granted to members of the Executive Committee (compared to CHF 14.54 million in 2006).
The Chief Executive Officer and all Executive Committee members – with one exception – have standard employment contracts without incentive guarantees, resignation entitlements or priviledges such as company cars etc. The one contract where a minimum level of incentive compensation is guaranteed stretches only into 2009. There are no specific changes in control or retention agreements in place with members of the Executive Committee, other than those provisions applicable to all Swiss Re employees.
Executives employed in Switzerland are covered by the standard defined contribution pension plan of the company. The Swiss legal salary cap on insurable salaries of CHF 795 600 applies and no additional provisions have been made. Executives employed abroad are also covered through local standard plans.
Further details on the Board of Directors and Executive Committee compensation, shareholdings and loans can be found in note 13 to the Group financial statements.
Swiss Re does not grant employee stock options on a regular basis, but reserves the right to provide ad hoc grants based on events such as exceptional business cycles, significant acquisitions or the replacement of forfeited equity for new executive hires. No such grants were made in 2007.
This section is not applicable to Swiss Re as a Swiss domiciled company.5.2 Transparency of the compensations, shareholdings and loans pertaining to issuers domiciled abroad 5.2 Transparency of the compensations, shareholdings and loans pertaining to issuers domiciled abroad
There are no statutory rules on “opting up” or “opting out”. “Opting up” is a statutory rule based on which the triggering threshold would be lifted to a higher percentage than 33⅓ % of all voting rights, while “opting out” is a statutory rule waiving the legal duty to submit an offer when reaching the threshold of 33⅓ % of all voting rights. Should a shareholder reach the threshold of 33⅓ % of all voting rights, then, under the Swiss Stock Exchange Act, the shareholder would be required to submit a general take-over offer.
Unvested bonus shares, share options, and certain other employee benefit programmes would vest upon a change of control. Rights of members of the governing bodies are identical to those of employees.
PricewaterhouseCoopers AG (PwC), formerly known as Revisuisse Price Waterhouse AG, were elected as Swiss Re’s auditors at the Annual General Meeting of 25 November 1991 and, since then, have been re-elected annually. At the Annual General Meeting of shareholders on 20 April 2007, based on the proposal of the Audit Committee and recommended by the Board of Directors, PwC were re-elected as Swiss Re’s statutory auditors and auditors of the consolidated financial statements for a term of one year.
Mr David J.A. Law and Ms Dawn M. Kink took up office as lead auditors responsible for the existing auditing mandate as of 1 January 2004 and 1 September 2006, respectively.
The following summarises fees (including VAT) for professional services for the year ended 31 December 2007.
In addition to the fees described above, aggregate fees of CHF 6.0 million were billed by PricewaterhouseCoopers during the year ended 31 December 2007, primarily for the following: Income tax compliance and related tax services CHF 1.3 million Other fees CHF 4.7 million
The Investor Relations unit at Swiss Re is responsible for managing all contacts with investors and analysts. Meetings are held regularly with institutional investors and analysts to discuss important corporate news or specific topics. These meetings can also be followed by private shareholders via telephone conference or on the Swiss Re website. In 2007, Swiss Re held an investors’ day on capital management and its Financial Services business. Presentations and conference call recordings are made available to the public on the Group’s website.
Important dates for 2008 29 February 2007 annual results and analysts’ meeting 31 March EVM teach-in, conference call 18 April 144th Annual General Meeting 6 May First quarter 2008 results and 2007 EVM, conference call 5 August Second quarter 2008 results, conference call 25 September Investors’ Day 4 November Third quarter 2008 results, conference call
Swiss Re shares On 31 December 2007, Swiss Re’s market capitalisation was CHF 29.8 billion, with 370.4 million shares outstanding. Swiss Re’s shares are listed on the main board of the SWX Swiss Exchange (SWX) and traded on virt-x in its EU regulated segment under the ticker symbol ”RUKN”.
Table 1: General information on Swiss Re shares Identification numbers Share ADR level 11
Share price performance 2007 was a year of contrast for global equity markets in general and financial stocks in particular. Although markets developed well in the first half of the year, subprime mortgage defaults in the US led to a much more volatile environment in the second half. Swiss Re’s main benchmark indices – the Swiss Market Index and the Dow Jones EURO STOXX Insurance Index – decreased 3.4% and 12.1% respectively.
In the US, Swiss Re’s ADRs fell 16.7% year-on-year, reflecting the continued depreciation of the US dollar against the Swiss franc in 2007 (exchange rate adjusted: –22.1%).
The development of the Swiss Re share price and trading volume is shown in figure 1, together with selected key events for 2007.
Share buy-back programme On 1 March 2007, Swiss Re announced a share buy-back programme of up to CHF 6.0 billion within a three-year period. This was based on very strong results in 2006, continued commitment to underwriting discipline and anticipated benefits from streamlining the Group’s legal entity structure. In an update on its capital position at the Investors’ Day on 11 December 2007, Swiss Re indicated that it expects to complete the buy-back ahead of the original schedule.
On 23 January 2008, Swiss Re announced that it had entered into a proportional reinsurance contract with Berkshire Hathaway and that the capital released as a result of this contract would be used to buy back shares. This additional buy-back of up to CHF 1.75 billion is expected to be completed over the next 12–24 months as the capital relief resulting from the quota share arrangement is achieved. As a result, Swiss Re now targets a total buy-back of up to CHF 7.75 billion.
As a first step, Swiss Re repurchased 16.7 million of its shares from General Electric Corporation (GE) on 1 March 2007 for CHF 1.7 billion. The shares were held by GE as a result of the acquisition of GE Insurance Solutions in June 2006.
Swiss Re set up a second trading line on virt-x on 10 August 2007 to enable a tax-efficient buy-back (ticker symbol is “RUKNE”). The repurchased shares will be formally cancelled following an amendment of the company’s Articles of Association, subject to approval at the subsequent Annual General Meeting. As of 22 February 2008, 14.6 million shares have been repurchased for approximately CHF 1.2 billion via the second trading line.
Weekly updates on the progress of the share buy-back programme are provided on Swiss Re’s Investor Relations homepage. Figure 2 illustrates the daily trading flows on the second trading line since it was opened in August 2007.
On 31 December 2007, Swiss Re had 47 689 registered private shareholders; 91% of these hold fewer than 2 000 shares. The vast majority of Swiss Re’s private shareholders are domiciled in Switzerland.
Figure 2: Share buy-back programme Volume in millionsClosing price in CHF120
Additional shares held in nominee form (within Share Register) 45.8 12.4 Private shareholders registered (total) 59.6 16.1 Unassigned shares (including retail investors and trading positions) 41.9 11.3 Shares reserved 23.7 6.4 Total amount of shares outstanding 370.4 100.0
Swiss / blue chip indices SMI 3.00 SPI 2.51 FTSE Eurotop 100 0.37
Dividend policy and payment Dividend growth reflects progress in earnings: Swiss Re’s policy is to focus on sustainable dividend payout and active capital management while maintaining superior capital adequacy and credit ratings. Dividends are typically paid out of current earnings. Swiss Re pays its dividend annually, three working days after the Annual General Meeting; as of that day, the share price is ex-dividend.
Table 4: Key share statistics 2003 – 2007 of which reserved to underline convertible bonds and corporate purposes 11 678 802 11 678 802 11 678 802 16 184 149 17 715 789 of which repurchased via second trading line (subject to cancellation) 6 005 000
Notes to the Group financial 135 Note 1 Organisation and summary of significant accounting policies statements 143 Note 2 Investments 149 Note 3 Derivative financial instruments 151 Note 4 Acquisitions 152 Note 5 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
10 845 10 759 Trading 22 502 22 103 Policy loans, mortgages and other loans 8 074 7 414 Investment real estate 4 227 2 682 Short-term investments, at amortised cost which approximates fair value 9 757 8 786 Other invested assets 11 044 16 465 Total investments 204 238 227 812
Cash and cash equivalents 13 606 11 531 Accrued investment income 1 966 2 139 Premiums and other receivables 14 771 14 341 Reinsurance recoverable on unpaid claims and policy benefits 8 18 699 14 232 Funds held by ceding companies 14 211 14 205 Deferred acquisition costs 5,8 5 270 5 152 Acquired present value of future profits 5 7 550 6 769 Goodwill 4 838 4 897 Income taxes recoverable 714 1 049 Other assets 5 437 5 160
Liabilities Unpaid claims and claim adjustment expenses 7,8 95 011 88 528 Liabilities for life and health policy benefits 8 44 899 50 026 Provisions for linked liabilities 8 42 834 41 340 Unearned premiums 8 025 7 722 Funds held under reinsurance treaties 10 531 8 377 Reinsurance balances payable 6 832 5 384 Income taxes payable 866 679 Deferred and other non-current taxes 10 2 685 3 817 Short-term debt 6 9 118 12 658 Accrued expenses and other liabilities 24 877 33 552 Long-term debt 6 14 738 23 337 Total liabilities 260 416 275 420
Shareholders‘ equity Common stock, CHF 0.10 par value 37 37 2006: 374 440 378; 2007: 370 386 755 shares authorised and issued Additional paid-in capital 11 136 11 208 Treasury shares –272 –1 540 Accumulated other comprehensive income: Net unrealised investment gains, net of deferred taxes 2 230 3 119 Cumulative translation adjustments –205 –2 554 Accumulated adjustment for pension and post-retirement benefits –724 –115 Total accumulated other comprehensive income 1 301 450 Retained earnings 18 682 21 712 Total shareholders’ equity 30 884 31 867
Common shares Balance as of 1 January 32 37 Issue of common shares 5 Balance as of period end 37 37
Treasury shares Balance as of 1 January –209 –272 Purchase of treasury shares –284 –2 574 Sale of treasury shares 221 1 306 Balance as of period end –272 –1 540
Foreign currency translation Balance as of 1 January 971 –205 Change during the year –1 176 –2 349 Balance as of period end –205 –2 554
Retained earnings Balance as of 1 January 14 898 18 682
Cash flows from financing activities Issuance of long-term debt 3 925 4 342 Issuance/repayment of short-term debt –1 042 2 057 Equity issued 1 323 38 Purchase/sale of treasury shares –63 –2 303 Dividends paid to shareholders –776 –1 162 Net cash provided/used by financing activities 3 367 2 972
Interest paid during 2007 was CHF 2 018 million. The Group has reclassified CHF 2 451 million from cash to short-term investments related to the assumption of matched funding business of Insurance Solutions in 2006. The Group settled a mandatory convertible bond totalling CHF 1 024 million with equity, reducing treasury shares by the same amount.
The Swiss Re Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company (the parent company, referred to as “Swiss Re Zurich”) and its subsidiaries (collectively, the “Swiss Re Group” or the “Group”). The Group provides reinsurance and other related products and services to insurance companies, clients and others worldwide, through a network of offices in over 25 countries as well as through reinsurance brokers.
Transactions denominated in foreign currencies are remeasured to the respective subsidiary’s functional currency at average quarterly exchange rates. Monetary assets and liabilities are remeasured to the functional currency at closing exchange rates, whereas non-monetary assets and liabilities are remeasured to the functional currency at historical rates. Remeasurement gains and losses on monetary assets and liabilities and trading securities are reported in earnings. Remeasurement gains and losses on available-for-sale securities, investments in
The fair value of the majority of the Group’s financial instruments is based on quoted prices in active markets or observable inputs. These instruments include government and agency securities, commercial paper, most investment-grade corporate debt, most high-yield debt securities, exchange traded derivative instruments, most mortgage-backed and asset-backed securities and listed equity securities.
In markets with reduced or no liquidity, spreads between bid and offer prices are normally wider compared to spreads in highly liquid markets. There can also be differences between the market values implied by collateral requested by counterparties and the prices observed in the markets. Such market conditions affect the valuation of certain asset classes of the Group, such as some asset-backed securities as well as certain derivative structures referencing such asset classes. For these assets or derivative structures, the Group uses market prices or inputs derived from market prices. A separate internal price verification process, independent of the trading function provides an additional control over the market prices or market input used to determine the fair values of such assets. Whilst management consider appropriate values have been ascribed to such assets, current market conditions increase the level of uncertainty and judgment over these valuations. Subsequent valuations could differ significantly from the results of the process described above.
Other invested assets include affiliated companies, equity accounted companies, derivative financial instruments and investments without readily determinable fair value (including limited partnership investments). Investments in limited partnerships where the Group’s interest equals or exceeds 3% are accounted for using the equity method. Investments in limited partnerships where the Group’s interest is below 3% and equity investments in corporate entities which are not publicly traded are accounted for at estimated fair value with changes in fair value recognised as unrealised gains/losses in shareholders’ equity.
Derivative financial instruments and hedge accounting Derivative financial instruments and hedge accounting
The Group applies the purchase method of accounting for business combinations. This method allocates the cost of the acquired entity to the assets and liabilities assumed based on their estimated fair values at the date of acquisition.
The underlying liabilities and assets acquired are subsequently accounted for according to the relevant GAAP guidance, including specific guidance applicable to subsequent accounting for assets and liabilities recognised as part of purchase method of accounting, including present value of future profit, goodwill and other intangible assets.
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.
Other assets include deferred expenses on retroactive reinsurance, separate account assets, prepaid reinsurance premiums, real estate for own use, property, plant and equipment, accrued income, certain intangible assets and prepaid assets.
Liabilities for life and health policy benefits Liabilities for life and health policy benefits
Investment contracts are long-duration contracts that do not incorporate significant insurance risk. This means that there is no mortality and morbidity risk, or the mortality and morbidity risk associated with the insurance benefit features offered in the contract is of insignificant amount or remote probability. Amounts received as payment for investment contracts are reported as policyholder account balances. Related assets are included in general account assets.
The Group uses retrocession arrangements to increase its aggregate underwriting capacity, to diversify its risk and to reduce the risk of catastrophic loss on reinsurance assumed. The ceding of risks to retrocessionaires does not relieve the Group of its obligations to its ceding companies. The Group regularly evaluates the financial condition of its retrocessionaires and monitors the concentration of credit risk to minimise its exposure to financial loss from retrocessionaires ’ insolvency. Premiums and losses ceded under retrocession contracts are reported as reductions of premiums earned and claims and claim adjustment expenses. Amounts recoverable for ceded short- and long-duration contracts, including universal life-type and investment contracts, are reported as assets in the accompanying consolidated balance sheet.
The Group accounts for its pension and other post-retirement benefit costs using the accrual method of accounting. Amounts charged to expenses are based on periodic actuarial determinations.
In September 2005, the AICPA released SOP 05-1 “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts ” (SOP 05-1). The adoption of SOP 05-1 from 1 January 2007 did not have a material impact on the Group’s financial statements.
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157 “Fair Value Measurements” (SFAS 157). SFAS 157 establishes a new definition and framework for determining fair value and expands the required disclosures for assets and liabilities recorded at fair value. This statement applies to all assets and liabilities measured at fair value which are required or allowed by other standards with limited exceptions. The Group will adopt SFAS 157 in the first quarter of 2008.
Net investment income by source was as follows: CHF millions 2006 2007
Dividends received from investments accounted for using the equity method were CHF 14 million and CHF 3 million in 2006 and 2007, respectively.
Amortised cost or cost and estimated fair values of investments in fixed income and equity securities classified as available-for-sale were as follows: As of 31 December 2006 CHF millions
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 29 555 190 –598 29 147
States of the United States and political subdivisions of the states 676 34 –2 708
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 22 743 678 –96 23 325 States of the United States and political subdivisions of the states 1 417 46 –11 1 452 United Kingdom 11 096 261 –65 11 292 Canada 3 708 1 040 –4 4 744 Germany 2 228 50 –22 2 256 France 1 196 11 –24 1 183 Other 7 293 281 –41 7 533 Total 49 681 2 367 –263 51 785 Corporate debt securities 25 117 650 –747 25 020 Mortgage-backed and asset-backed securities 31 197 246 –438 31 005 Fixed income securities available-for-sale 105 995 3 263 –1 448 107 810 Equity securities available-for-sale 9 039 2 205 –485 10 759
After the balance sheet date, the Group took a decision to sell and has sold a substantial part of its proprietary equity securities available-for-sale portfolio in response to recent market developments.
Debt securities issued by governments and government agencies 14 609 14 738 Corporate debt securities 17 911 18 894 Mortgage-backed and asset-backed securities 12 142 18 161 Fixed income securities trading 44 662 51 793 Equity securities trading 22 502 22 103
Mortgage-backed and asset-backed securities with no fixed maturity 15 280 15 192
The Group has adjusted the classification of investments placed on deposit or repledged to secure certain reinsurance liabilities for 2006. The revision has no impact on reported balance sheet items, shareholders’ equity or net income.
Collateral accepted which the Group has the right to sell or repledge Collateral accepted which the Group has the right to sell or repledge
An assessment of whether an other-than-temporary decline in the value of equity and fixed income securities available-for-sale has occurred as of the balance sheet date is based on a case-by-case evaluation of the reasons behind the decline in value. This evaluation includes: (a) an assessment of the duration and extent of the decline in value; (b) review of the financial performance and outlook for the economic environment and industry in which the issuer operates; (c) review of the financial performance and outlook for the issuer compared to industry peers; and (d) analysis of any other factors, including credit rating, that may adversely affect the Group’s intent and ability to hold the investment long enough to allow for any anticipated recovery. Other-than-temporary declines in the value of equity and fixed income securities available-for-sale are recognised as net realised investment gains/losses in the income statement.
Unrealised losses on fixed income securities available-for-sale Unrealised losses on fixed income securities available-for-sale
As of 31 December 2006 and 2007, investments in mortgages and other loans and real estate comprised the following: CHF millions Carrying value
As of 31 December 2006 and 2007, the Group’s investment in mortgages and other loans included CHF 231 million and CHF 216 million, respectively, of loans due from employees and CHF 388 million and CHF 415 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
Depreciation expense related to income-producing properties was CHF 34 million and CHF 57 million for 2006 and 2007, respectively. Accumulated depreciation on investment real estate totalled CHF 444 million and CHF 508 million as of 31 December 2006 and 2007, respectively.
Interest rate contracts Forwards and futures 24 –71 –47 88 –396 –308 Swaps 2 863 –3 062 –199 5 330 –5 483 –153 Other 101 –101 Total 2 887 –3 133 –246 5 519 –5 980 –461
Equity and index contracts Forwards and futures 260 –343 –83 670 –672 –2 Options 1 999 –2 146 –147 2 763 –1 997 766 Swaps 202 –148 54 290 –131 159 Other –11 –11 57 –11 46
Foreign currency Options 279 –284 –5 407 –359 48 Swaps 1 286 –1 496 –210 2 034 –2 821 –787 Total 1 565 –1 780 –215 2 441 –3 180 –739
Other derivatives Credit derivatives 1 427 –1 041 386 4 011 –4 071 –60 Catastrophe derivatives 1 –11 –10 Weather derivatives 95 –124 –29 3 –12 –9 Other 133 –205 –72 40 –97 –57
As of 31 December 2006 and 2007, other invested assets included derivative financial instruments with a fair value of CHF 2 804 million and CHF 6 168 million, respectively.
For the years ended 31 December 2006 and 2007, the Group recorded net unrealised foreign currency remeasurement losses in shareholders’ equity of CHF 96 million and CHF 668 million, respectively. This offsets translation gains and losses on the hedged net investment.
On 9 June 2006, Swiss Re completed the acquisition of 100% of the outstanding common shares of GE Insurance Solutions Corporation, excluding its US life and health operation and certain other assets and liabilities, from General Electric Company.
Property and casualty reserves, both assumed and ceded, have been adjusted based on an estimate of their fair value as of the date of the acquisition. Such estimates include the best estimate of the ultimate claims payments and receipts and the timing of those payments. The estimated payments have been discounted and adjusted for the expected cost of holding capital to support the reinsurance assets and liabilities.
5 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
The percentage of PVFP which is expected to be amortised in each of the next five years is 6%, 6%, 5%, 5% and 5%, respectively.
Due in 2009 1 818 2 381 Due in 2010 1 201 1 245 Due in 2011 917 1 730 Due in 2012 56 1 167 Due after 2012 8 811 16 814 Total carrying value 14 738 23 337 Total fair value 15 081 23 266
Total senior debt as of 31 December 2007 9 441 Total senior debt as of 31 December 2006 9 247
Swiss Re uses debt for general corporate purposes and to fund discrete pools of operational leverage and financial intermediation assets. Operational leverage and financial intermediation are subject to strong asset and liability matching resulting in little to no risk that the assets will be insufficient to service and settle the liabilities. Debt used for operational leverage and financial intermediation is treated as operational debt and excluded by the rating agencies from financial leverage calculations. As of 31 December 2006 and 2007, operational leverage and financial intermediation liabilities amounted to CHF 32.4 billion (thereof CHF 2.5 billion non-recourse) and CHF 52.4 billion (thereof CHF 9.8 billion non-recourse), respectively.
Interest expense on long-term debt for the years ended 31 December 2006 and 2007, respectively, was as follows: CHF millions 2006 2007
Senior financial debt 121 83 Senior operational debt 216 424 Subordinated financial debt 221 327 Subordinated operational debt 163
In January 2007, the Group issued insurance-linked securities of EUR 110 million, bearing interest at the rate of 3.83% and due in four years.
In March 2007, the Group issued GBP 500 million subordinated step-up loan notes with a perpetual term bearing interest at the rate of 6.30%.
In April 2007, the Group issued AUD 750 million subordinated step-up loan notes with a perpetual term, AUD 300 million bearing interest at the rate of 7.64% and AUD 450 million bearing interest at the rate of six-month Australian bank bill short-term rate plus 117 basis points. In order to achieve favourable capital treatment from regulators and rating agencies, both instruments require Swiss Re, in specified circumstances (which relate to changes in the financial condition of Swiss Re) either to defer interest otherwise payable or to settle such interest through the issue of its shares or certain other types of securities.
In October 2007, the Group issued a principal protected structured note of USD 35 million, due in 2032, with zero percent coupon.
In November 2007, the Group issued a subordinated private placement of GBP 1 770 million, bearing interest at the rate of 4.79% with a fifty years maturity.
In December 2007, the Group issued a structured EMTN of USD 30 million, due in 2009, bearing interest of three-month USD Libor less 15 basis points.
A reconciliation of the beginning and ending reserve balances for non-life unpaid claims and claim adjustment expenses for the periods is presented as follows: CHF millions 2006 2007
Balance as of 1 January 59 104 80 391 Reinsurance recoverable –2 555 –7 622 Deferred expense on retroactive reinsurance –1 057 –875 Net 55 492 71 894
Incurred related to: Current year 12 292 11 945 Prior year –593 –205 Amortisation of deferred expense on retroactive reinsurance and impact of commutations 100 92 Total incurred 11 799 11 832
Due to the inherent uncertainties and assumptions on which these estimates are based, the Group cannot exclude the need to make further additions to these provisions in the future.
At the end of 2007 the Group carried net reserves for US asbestos, environmental and other long-latent health hazards equal to CHF 2 560 million. During 2007, the group incurred net losses of CHF 439 million and paid net against these liabilities CHF 204 million.
Ceded –139 –139 –136 –136 Total fee income from policyholders 879 879
The Group has revised the classification of premiums written, premiums earned and fees assessed against policyholders between direct and assumed for 2006. The revision has no impact on total revenues, net income or net equity.
Change in unpaid claims and claim adjustment expenses; life and health benefits, gross 3 720 –1 922 1 798 4 846 –1 810 3 036
CHF millions Non-life Life & Health Total Non-life Life & Health Total
Liabilities Unpaid claims and claim adjustment expenses 80 391 14 620 95 011 73 171 15 357 88 528 Life and health policy benefits 44 899 44 899 50 026 50 026
All of the Group‘s companies prepare statutory financial statements based on local laws and regulations. Most jurisdictions require reinsurers to maintain a minimum amount of capital in excess of a statutory definition of net assets or maintain certain minimum capital and surplus levels. In addition, some jurisdictions place certain restrictions on amounts that may be loaned or transferred to the parent company. The Group‘s ability to pay dividends may be restricted by these requirements.
Dividends are declared in Swiss francs. For the years ended 31 December 2006 and 2007 the Group‘s dividends per share were CHF 2.50 and CHF 3.40, respectively.
Years ended 31 December CHF millions (except share data) 2006 2007
Basic earnings per share Income available to common shares 4 560 4 162 Weighted average common shares outstanding 337 961 019 348 214 512 Net income per share in CHF 13.49 11.95
Effect of dilutive securities Change in income available to common shares due to convertible bonds 140 143 Change in average number of shares due to convertible bonds and employee options 37 275 628 35 261 146
Financial statements Notes to the Group financial statements 10 Income taxes
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 2006 2007
The components of deferred and other non-current taxes were as follows: CHF millions 2006 2007
Deferred taxes have not been recognised on the undistributed earnings of certain foreign subsidiaries to the extent the Company considers such earnings as being indefinitely reinvested abroad and does not expect to repatriate these earnings in the foreseeable future. The amount of such earnings included in consolidated retained earnings as of 31 December 2007 was approximately 6 430 million CHF. It is not practicable to estimate the amount of additional tax that might be payable if such earnings were not reinvested indefinitely.
Income taxes paid in 2006 and 2007 were CHF 742 million and CHF 570 million, respectively.
The amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately CHF 1 400 million and CHF 1 535 million at 1 January 2007 and 31 December 2007, respectively. Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such expense for the year ending 31 December 2007 was CHF 131 million. As at 1 January 2007 and 31 December 2007, CHF 150 million and CHF 240 million, respectively, has been accrued for the payment of interest (net of tax benefits) and penalties. The 31 December 2007 accrued interest balance is included within the deferred and other non-current taxes section reflected above and in the statement of financial position.
The Group continually evaluates proposed adjustments by taxing authorities. The Group believes that it is reasonably possible (more than remote and less than likely) that the balance of unrecognised tax benefits could decrease over the next 12 months due to settlements or expiration of statutes. However, quantification of an estimated range cannot be made at this time.
The following table summarises tax years that remain subject to examination in jurisdictions of significance to the Group: United States 2002 – 2007 United Kingdom 2005 – 2007
Benefit obligation as of 1 January 2 803 2 893 1 712 2 349 620 670 Service cost 115 98 63 70 38 28 Interest cost 83 88 92 122 23 20 Amendments 50 Actuarial gains/losses –81 –209 106 –183 –12 –231 Benefits paid –80 –158 –52 –73 –13 –13 Employee contribution 16 1 Acquisitions/disposals 416 8 28 Effect of curtailment and termination benefits 3 15 –7 –2 Effect of foreign currency translation 19 –80 –14 –12 Benefit obligation as of 31 December 2 893 2 743 2 349 2 212 670 462
Actuarial gains arising from experience adjustments as well as changes in actuarial assumptions for the benefit obligation resulted in an unrealised gain in 2007 of CHF 623 million net of deferred tax impact.
Non current assets 426 101 527 Current liabilities –4 –13 –17 Non current liabilities –339 –449 –788 Net amount recognised 426 –242 –462 –278
Amounts recognised in accumulated other comprehensive income, gross of tax, in 2007 consists of: Net gain/loss 98 125 –162 61 Prior service cost/credit 71 1 –37 35
Other changes in plan assets and benefit obligations recognised in other comprehensive income consist of: CHF millions Swiss plan Foreign plans
Total recognised in net periodic benefit cost and other comprehensive income, gross of tax
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was CHF 4 882 million and CHF 4 642 million as of 31 December 2006 and 2007, respectively.
Pension plans with an accumulated benefit obligation in excess of plan assets consist of: CHF millions 2006 2007
Medical trend – initial rate 7.1% 7.1% Medical trend – ultimate rate 4.4% 4.6% Year that the rate reaches the ultimate trend rate
Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one percentage point change in assumed health-care cost trend rates would have had the following effects for 2007: CHF millions point increase point decrease
Effect on total of service and interest cost components 8 –6 Effect on post-retirement benefit obligation 69 –54
The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2006 and 2007, are as follows: Swiss plans actual allocation
Equity securities include Swiss Re common stock of CHF 20 million (0.4% of total plan assets) and CHF 11 million (0.2% of total plan assets) as of 31 December 2006 and 2007, respectively.
As of 31 December 2006 and 2007, the Group had the share-based compensation plans described below.
The long-term equity award programme was provided to members of the Executive Board and certain members of management. Under the scheme, the beneficiary was allowed to choose between the fixed-option plan or a restricted-share plan.
Weighted average remaining contractual life in years Weighted average exercise price in CHF
The fair value of each option grant is estimated on the date of grant using a binomial optionpricing model, with the following weighted average assumptions used for grants in 2006: dividend yield of 3.8%; expected volatility of 20.0%; risk-free interest rate of 2.4%; expected life of 6.0 years. No new stock options were granted in 2007.
A summary of shares relating to outstanding awards granted under the above mentioned plans as of December 2007 is presented below: Number of shares Weighted average grant date fair value
Stock option plans 7 1.0 Restricted shares 21 2.5 Long-term incentive plan 61 1.8 Stock appreciation rights 3 0.5 Total 92 1.9
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 over the period of the scheme.
In 2006 and 2007, 519 991 and 980 711 options, respectively, were issued to employees and the Group contributed CHF 14 million and CHF 19 million, respectively, to the plan.
The section below follows articles 663bbis and 663c para. 3 of the Swiss Code of Obligations, which require disclosure of the elements of compensation paid to Swiss Re’s Board of Directors and Executive Committee, as well their shareholdings and loans.
Honorarium and cash allowances 5 761 Honorarium shares 4 248 Funding of pension benefits 223 Total 10 232
Peter Forstmoser, Chairman 2 600 667 3 267 Walter B. Kielholz, Vice Chairman 1 288 1 382 223 2 893 Jakob Baer, Chairman of the Audit Committee 392 393 785 Thomas W. Bechtler, Member 195 130 325 Raymund Breu, Member 325 325 John R. Coomber, Chairman of the Finance and Risk Committee 354 233 587 Dennis D. Dammerman, Member1 59 39 98 Rajna Gibson Brandon, Member 163 162 325 Bénédict G. F. Hentsch, Member 195 130 325 Hans Ulrich Maerki, Member2 227 227 Robert A. Scott, Chairman of the Compensation Committee 255 170 425 John F. Smith, Jr., Member 97 228 325 Kaspar Villiger, Member 163 162 325 Total 5 761 4 248 223 10 232
Members of the Board of Directors, except for the Chairman and Vice Chairman, received an honorarium, a mandatory 40% of which is in the form of shares; the remainder may be taken either in the form of cash or shares with a four-year deferral period. The share price on 2 March 2007 of CHF 107.90 has been used for calculating the number of shares awarded based upon the amount of the honorarium received in shares. For the Chairman and the Vice Chairman, the same approach as for the Executive Committee applies.
The Compensation Committee of the Board of Directors decided to remunerate the Chairman and Vice Chairman going forward through a fixed honorarium rather than a variable bonus.
Base salary and allowances 8 868 Variable pay for performance year 2007 25 334 Cash bonus 10 229 Bonus shares 2 862 Value Alignment Incentive 2007 grant1 12 243 Compensation due to member leaving 2 280
Long-term Incentive plan 2007 grant2 19 115 Funding of pension benefits 1 494 Total 57 091 Change in 2007 fair value of plans vesting over several years 1 556 1 Includes 25% uplift on nominal value, which will be paid out at vesting after three years, adjusted for change in fair value. 2 The Long-term Incentive will be paid out after the three-year vesting period. For further details on the Value Alignment
Base salary and allowances 1 475 Variable pay for 2007 performance year 7 475 Cash bonus 2 600 Value Alignment Incentive 2007 grant1 4 875 Subtotal 8 950 Long-term Incentive plan 2007 – grant2 5 966 Funding of pension benefits 223 Total 15 139 Change in 2007 fair value of plans vesting over several years 591
In this annual report, the fair value of the Value Alignment Incentive (VAI) is based on the nominal amount of the grant and the uplift of 25% on nominal value. The fair value of VAI granted in 2006 is updated based on actual results in 2007. The fair values will change based upon the actual results in 2008 and 2009. The amounts included in respect of the VAI are the fair value of awards during the year plus the change in fair value of prior-year awards. For a description of the Value Alignment Incentive plan, see page 111 of the corporate governance and compensation report.
As of 31 December 2007, the fair value of the Long-term Incentive (LTI) plans that were granted in 2006 and 2007 was based on the actual results for 2006 and 2007and the forecast results for 2008 and 2009. It will change based upon the actual results in 2008 and 2009. The amounts included in respect of the LTI are the fair value of awards during the year as well the change in fair value of prior years’ awards. For a description of the Long-term Incentive plan, see page 112 of the corporate governance and compensation report.
For US GAAP reporting purposes, the cost of the bonus shares, VAI and LTI awards are accrued over the period during which they are earned. For the current compensation disclosure purposes the full fair value of awards granted is included as compensation in the year of grant together with the change in fair value of prior-year awards.
As of 1 January 2007, Swiss Re converted the employee pension fund in Switzerland from a defined benefit plan to a defined contribution plan (as defined under Swiss Law) requiring actuarially determined one-off contributions to the plan which did not give rise to higher pension entitlement. The remuneration for 2007 disclosed above excludes these one-off contributions arising from the conversion. The actuarially determined contribution amounts were approximately CHF 4.8 million in total for the Board of Directors and Executive Committee. Therefore, certain members of the Executive Committee and the Board of Directors are now in a defined contribution scheme and their pension funding compensation in the remuneration tables above reflects the actual employer contributions. Where defined benefit arrangements persist the funding is determined on an actuarial basis which can vary substantially from year to year depending on age and years of service of the benefiting Executive Committee members.
Peter Forstmoser Chairman 98 775 Walter B. Kielholz Vice Chairman 123 775 Jakob Baer Chairman of the Audit Committee 10 336 Thomas W. Bechtler Member 17 673 Raymund Breu Member 12 208 John R. Coomber Chairman of the Finance and Risk Committee 113 541 Rajna Gibson Brandon Member 11 440 Bénédict G. F. Hentsch Member 9 755 Hans Ulrich Maerki Member 3 819 Robert A. Scott Chairman of the Compensation Committee 9 249 John F. Smith, Jr. Member 9 878 Kaspar Villiger Member 4 833 Total 425 282
Jacques Aigrain Chief Executive Officer 236 275 Andreas Beerli Chief Operating Officer 30 828 Roger W. Ferguson Head of Financial Services Products – Michel M. Liès Head of Client Markets 48 093 Stefan Lippe Head of (Re)Insurance Products 39 100 Christian Mumenthaler Chief Risk Officer 2 419 George Quinn Chief Financial Officer 14 929 Total 371 644
Share ownership, options and related instruments Share ownership, options and related instruments
In 2004 and 2005, the beneficiaries of the long-term equity award programme received, as an alternative to the stock options, the right to opt for restricted shares. The applicable ratio of stock options to restricted shares was four to one. The restricted shares vest after four years. During the vesting period, there is a risk of forfeiture.
Members of the Board of Directors Number of options Average strike price in CHF Exercise years
Options have a four-year vesting period, during which there is a risk of forfeiture, and an exercise period of six years. The exchange ratio is 1:1, meaning each option entitles the beneficiary to purchase one share at a non-adjustable strike price.
Jacques Aigrain 90 000 101.7 2012 – 2013 Andreas Beerli 103 600 130.8 2008 – 2013 Michel M. Liès 104 000 136.4 2008 – 2013 Stefan Lippe 86 400 118.4 2008 – 2013 Christian Mumenthaler 2 000 144.3 2012
To the extent that fixed or adjustable interest rates are preferential, such values have been factored into the compensation sums given to the governing body members in accordance with section 5.1 of the corporate governance and compensation report for acting members of governing bodies.
Less minimum non-cancellable sublease rentals –94 Total net future minimum lease commitments 1 022
The Group enters into a number of contracts in the ordinary course of reinsurance and financial market business which, if the Group’s credit rating and/or defined statutory measures decline to certain levels, would require the Group to post collateral or obtain guarantees. The contracts typically provide alternatives for recapture of the associated business.
The Group provides reinsurance, insurance and financial services throughout the world through three business segments. The business segments are determined by the organisational structure and by the way in which management reviews the operating result of the Group. The busi ness segments in place are Property & Casualty, Life & Health and Financial Markets. Group items include items which are not allocated to operating segments including foreign exchange remeasurement, the mark to market of trading portfolios designated to match foreign currency reinsurance net liabilities, financing costs for operational and financial debt and corporate entre expenses. The comparative business segment information is represented accordingly.
Expenses Claims and claim adjustment expenses; life and health benefits –11 799 –9 594 –21 393 Interest credited to policyholders –2 827 –2 827 Acquisition costs –3 823 –2 256 –6 079 Other expenses –1 496 –983 –605 –506 –3 590 Interest expenses –1 026 –1 026 Total expenses –17 118 –15 660 0 –1 631 –506 –34 915
Revenues Premiums earned Net investment income 7 999 413 –24 8 388 Net realised investment gains/losses –1 518 1 631 –1 294 –1 181 Other revenues 125 125
Expenses Claims and claim adjustment expenses 0 Acquisition costs 0 Other expenses 0 Total expenses 0 0 0 0
United States 12 320 13 387 United Kingdom 3 513 4 788 Germany 2 560 1 983 Canada 1 235 1 314 France 1 137 1 220 Australia 979 997 Italy 804 994 Switzerland 705 832 Spain 626 704 Other 6 515 6 400 Total 30 394 32 619
Denmark Swiss Re Denmark Holding ApS2 54 100 f Swiss Re Denmark Reinsurance A/S2 43 100 f
Luxembourg Swiss Re Europe S.A. 114 100 f Swiss Re Finance (Luxembourg) S.A. 0 100 f Swiss Re Funds (LUX) I 3 505 100 f Swiss Re Management (Luxembourg) S.A. 329 100 f Swiss Re Treasury (Luxembourg) S.A. 174 100 f
United Kingdom Admin Re UK Limited 12 100 f Banian Investments UK Ltd. 1 100 f Calico Leasing (GB) Ltd. 79 100 f Cyrenaic Investments (UK) Ltd. 1 352 100 f Dex Name Ltd. 26 100 f European Credit and Guarantee Insurance PCC Ltd. 10 100 f Life Assurance Holding Corporation Ltd. 165 100 f NM Insurance Holdings Limited 296 100 f NM Life Group Limited 337 100 f NM Life Limited 214 100 f NM Pensions Limited 304 100 f Reassure UK Life Assurance Company Ltd. 870 100 f SR Delta Investments (UK) Ltd. 16 100 f SR International Business Insurance Company Ltd. 288 100 f SRNY Limited 75 100 f Swiss Re BHI Limited 0 100 f Swiss Re Capital Markets Ltd. 68 100 f Swiss Re Financial Services Ltd. 16 100 f Swiss Re Frankona LM Limited2 16 100 e Swiss Re Frankona Reinsurance Ltd.2 0 100 f Swiss Re GB Plc 1 439 100 f Swiss Re Life & Health Limited 428 100 f Swiss Re Properties Ltd. 0 100 f Swiss Re Services Ltd. 5 100 f Swiss Re Specialised Investments Holdings (UK) Ltd. 2 100 f Swiss Re Specialty Insurance (UK) Ltd.2 41 100 f Swiss Reinsurance Company UK Ltd. 1 068 100 f The Mercantile & General Reinsurance Company Ltd. 0 100 f The Palatine Insurance Company Limited 17 100 f Windsor Life Assurance Company Ltd. 7 100 f XSMA Ltd. 34 100 f
Bermuda CORE Reinsurance Company Limited 0 100 f Englewood Ltd. 0 100 f Life Re International, Ltd. 0 100 f Old Fort Insurance Company Ltd. 0 100 f Swiss Re Global Markets Limited 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
Cayman Islands Ampersand Investments (UK) Ltd. 0 100 f Cobham Funding Ltd. 23 100 f Dunstanburgh Finance (Cayman) Ltd. 0 100 f Farnham Funding Ltd. 5 100 f Kilgallon Finance Ltd. 23 100 f SR Alternative Financing I SPC 0 100 f SR Alternative Financing II SPC 0 100 f SR Cayman Holdings Ltd. 0 100 f SR York Limited 113 100 f Swiss Re Dorus Investment Ltd. 0 100 f Swiss Re Funding (UK) Ltd. 0 100 f Swiss Re Hedge Funds SPC 0 100 f Swiss Re Strategic Investments (UK) Ltd. 0 100 f SV Corinthian Investments Ltd. 0 100 f
Australia Swiss Re Australia Ltd. 20 100 f Swiss Re Life & Health Australia Ltd. 154 100 f The Mercantile and General Reinsurance Company of Australia Ltd.
Swiss Re Africa Ltd. 2 100 f Swiss Re Life & Health Africa Ltd. 0 100 f
The Group holds a variable interest in various entities due to a modified coinsurance agreement, certain insurance-linked and credit-linked securitisations, private equity limited partnerships, hedge funds, debt financing and other entities, which meet the definition of a variable interest entity (VIE).
The securitisation vehicle generally retains the issuance proceeds as collateral. The Group’s variable interests arise through ownership of insurance-linked and credit-linked securities, or through protection provided for the value of the collateral held. The Group’s maximum exposure to loss equals the higher of the carrying amount of the collateral protected or the carrying amount of the insurance-linked or credit-linked securities held. The collateral held usually consists of investment grade securities.
Investment vehicles include private equity limited partnerships and hedge funds. The Group’s variable interests arise through an ownership interest in the vehicle or a guarantee of the value of the assets held by the vehicle. The maximum exposure to loss equals the carrying amount of the ownership interest or the maximum amount payable under the guarantee.
Debt financing vehicles issue loan notes to provide Swiss Re with funding. The maximum potential loss is limited to the lower of the total assets excluding the funding provided to Swiss Re and the carrying amount of Swiss Re’s ownership interest.
As of 31 December 2007, the consolidation of the VIEs resulted in a minority interest in the balance sheet of CHF 435 million (31 December 2006: CHF 702 million). The minority interest is included in accrued expenses and other liabilities. The net minority interest in income was CHF 39 million and CHF 37 million net of tax in years ended 31 December 2006 and 2007, respectively. The income statement impacts are generally included in the relevant segment with the underlying movement in income or expenses.
Insurance-linked/credit-linked securitisations 7 861 7 786 10 874 10 874 Commercial paper conduit vehicles 3 699 3 699 Investment vehicles 3 487 1 952 17 684 2 089 Debt financing 2 683 250 7 753 526 Other 795 777 1 690 1 137 Total 18 525 14 464 38 001 14 626
Increase in provision 5 1 1 7 Release of provision –3 –6 –1 –10 Costs incurred –55 –14 –8 –77 Effect of foreign currency translation –3 –1 –2 –6 Balance as of 31 December 43 10 28 81
The Property & Casualty segment consists of the following sub-segments: Property traditional, Casualty traditional, Specialty traditional and non-traditional business. The Specialty traditional sub-segment includes certain parts of the former Credit Solutions business; Credit Reinsurance, Financial Guaranty business, Bank Trade Finance and Credit securitisations.
The Life & Health segment continues to consist of the following sub-segments: Life traditional, Health traditional and Admin Re.
Certain parts of the former Capital Management and Advisory business are now included in the Life & Health business segment, including variable annuity business.
The Financial Markets business segment consists of the following sub-segments: Credit and Rates, Equities and Alternative Investments and Other.
The Financial Markets business segment includes proprietary returns on the Group’s invested fixed income securities, equity securities and alternative investments. Third-party asset management is included in Credit and Rates.
With the new segment structure, the allocation of investment results has been revised. Certain investment results, including investment income and realised gains on unit-linked business, with-profit business and reinsurance derivatives are excluded from the performance of the Financial Markets business segment and directly allocated to the Property & Casualty and Life & Health business segments.
Proprietary return reported in Financial Markets is allocated to the Property & Casualty or Life & Health business segments. The allocation is now based on technical reserves and other information, including duration of the underlying liabilities.
The investment result of the Other sub-segment in Financial Markets is not allocated to the Property & Casualty or Life & Health segments.
The “Allocation” column eliminates Financial Markets investment result as well as other revenues and/or expenses directly allocated to either the Property & Casualty or the Life & Health business segments.
Policy loans, mortgages and other loans 7 058 1 016 8 074
¹ Other assets and other liabilities in this overview include all assets and liabilities that are not subject to reclassifications.
Amounts allocated to other invested assets include securities purchased under agreement to resell, derivative financial instruments according to FAS 133, and other investments. Amounts allocated to accrued expenses and other liabilities include repurchase agreements, derivative financial instruments according to FAS 133, securities sold short, and other creditors.
Trading revenues were generated by the trading activities of the Financial Services business segment. Trading revenues have been allocated to the respective line items in the Group’s income statement to be consistent with the change in the Group’s organisational structure and to reflect the new balance sheet structure.
Income before income tax expenses 5 856 0 5 856 Income tax expenses –1 296 0 –1 296
² These categories summarise revenues and expenses in the Groups’ income statement not affected by the reclassifications.
In accordance with the changes in the balance sheet and the income statement, the cash flow line items changed. Cash flows originated from financial service assets and liabilities are reallocated according to the origin of the cash flow (operating/investing/financing).
On 27 February 2008 a putative securities class action complaint was filed in the US District Court for the Southern District of New York against Swiss Re Zurich and various of its executive officers alleging false and misleading statements in connection with the mark-to-market loss, announced on 19 November 2007. The Company intends to vigorously defend against the action.
Report of the Group Auditors to the General Meeting of Swiss Reinsurance Company Zurich
The following commentary on the 2007 financial year of the parent company thus complements the review of the financial year of the Swiss Re Group.
The after-tax profit for the financial year, based on Swiss Company Law, amounted to CHF 1.7 billion, compared to CHF 2.1 billion in the previous year.
Claims and claim adjustment expenses increased, reflecting the extended business volume in general and the losses incurred in Europe and Asia in the first half of the year.
The investment return allocated to reinsurance operations increased due to higher technical provisions and a slight increase in interest rates.
The increase in interest income and expenses is due to financing transactions within Swiss Re Group. Furthermore, higher interest expenses reflect the issuance of perpetual subordinated step-up loans in 2007.
Total assets rose by 14% to CHF 105.1 billion. This increase is mainly reflected in higher invested assets, loans to subsidiaries and affiliated companies and fixed income securities. Within current assets, reinsurance related items increased mainly due to extended business and new contracts on a funds withheld basis.
The equalisation provision for future claims fluctuations and for large and catastrophe losses increased by CHF 300 million to CHF 550 million.
Investment expenses –2 634 –4 175 Allocated investment return –1 095 –1 326 Investment result 1 702 –64
Income before tax expense 2 214 1 945 Tax expense –70 –248
Current assets Premiums and other receivables from reinsurance 3 7 295 9 615 Funds held by ceding companies 3 17 698 20 115
Shareholders’ equity 5 Share capital 37 37 Reserve for own shares 31 1 297 Other legal reserves 650 650
Retained earnings brought forward 8 65 Profit for the financial year 2 144 1 697
The 2007 financial year comprises the accounting period from 1 January to 31 December 2007.
Assets and liabilities denominated in foreign currencies are translated into Swiss francs at year-end exchange rates. Participations are maintained in Swiss francs at historical exchange rates. Revenues and expenses are translated into Swiss francs at average exchange rates of the year under report.
All exchange rate differences arising from the revaluation of the opening balance sheet, the adjustments from application of year-end or average rates and foreign-exchange transactions are booked via a corresponding provision.
Loans to subsidiaries and affiliated companies, mortgages and other loans are carried at nominal value. Value adjustments are recorded where the recovery value is lower than the nominal value.
Intangible assets, consisting of capitalised development costs for software for internal use, are stated at cost less straight-line amortisation over the estimated useful lives.
Liabilities for life and health policy benefits are determined on the basis of actuarially calculated present values taking experience into account. For external business, liabilities are the greater of cedent-reported information and estimates of own experience drawn from internal studies. With respect to the business ceded by the Company’s life and health subsidiaries, a prospective gross premium valuation is applied taking into account expected future cash flows inherent in the reinsurance contract from the valuation date until expiry of the contract obligations. Cash flows include premiums, claims, commissions, investment income and expenses, with a margin added for prudence to reflect the uncertainties of the underlying best estimates. The gross premium valuation approach could result in a negative liability provision, which is typically set to zero.
Liabilities from derivative financial instruments are generally maintained at the highest commitment amount as per a balance sheet date during the life of the underlying contracts. Premiums received in respect of derivative financial instruments are not realised until expiration or settlement of the contract.
Change in unearned premiums –632 403 –229 –1 160 361 –799
Claims paid and claim adjustment expenses –8 181 1 796 –6 385 –8 276 1 684 –6 592
Investment management expenses –195 –235 Valuation adjustments on investments –695 –2 432 Realised losses on sale of investments –1 744 –1 508 Investment expenses –2 634 –4 175
Premiums and other receivables from reinsurance 7 039 256 7 295 9 464 151 9 615 Funds held by ceding companies 17 698 – 17 698 20 115 – 20 115
Liabilities for life and health policy benefits 12 449 –990 11 459 12 189 –1 136 11 053
Shareholders’ equity as of 1 January 12 802 18 409 Dividend paid for the previous year –776 –1 162 Capital increase including premium 4 239 37 Profit for the financial year 2 144 1 697 Shareholders’ equity on 31 December before allocation of profit 18 409 18 981 Dividend payment –1 218 –1 3871 Shareholders’ equity on 31 December after allocation of profit 17 191 17 594
¹ Board of Directors’ proposal to the Annual General Meeting of 18 April 2008, subject to the actual number of shares outstanding and eligible for dividend.
The difference between the proposed dividend payment in the previous year and the actual dividend payment in the year under report is described on page 214.
From other allocations 299 299 Shareholders’ equity on 31 December after allocation of profit 17 191 17 594
These commitments pertain to the non-cancellable contract periods and refer primarily to office and apartment space rented by the company.
In addition, a financial lease of IT hardware is recognised on the balance sheet. The corresponding asset and liability of CHF 13 million (2006: CHF 19 million) are included in tangible assets and other liabilities, respectively.
As of 31 December 2007, securities of CHF 5 845 million (2006: CHF 5 503 million) were lent under securities lending agreements, with the right to be sold or pledged by the borrowing entity. CHF 4 154 million (2006: CHF 3 362 million) of these was lent to Group companies. The securities which were held and lent by the Swiss Re Institutional Fund, a separate legal entity, are excluded.
Other liabilities include CHF 7 million (2006: CHF 6 million) payable to the employee pension funds.
As of 31 December 2007, the following debentures were outstanding: Instrument Issued in Currency Nominal in millions Interest rate First call in Book value
Details on the Swiss Re Group‘s subsidiaries are disclosed on pages 186 to 191.
Deposit arrangements generated the following balances, which are included in: CHF millions 2006 2007
Reinsurance result 31 –76 Premiums and other receivables from reinsurance 287 677 Funds held by ceding companies 182 162 Funds held under reinsurance treaties – 403 Reinsurance balances payable 566 644
As of 31 December 2007, there were two shareholders with a participation exceeding the 3% threshold of Swiss Reinsurance Company’s share capital.
a. Swiss Reinsurance Company, Mythenquai 50/60, 8022 Zurich, Switzerland, held a total of 23 964 732 Swiss Re shares or 6.47% of the share capital. Of these shares, 6 280 930 shares were fully paid in shares held for general corporate purposes, 11 678 802 shares were paid in only at nominal value and reserved for general corporate purposes, and 6 005 000 shares were acquired under the share buy-back programme and subject to cancellation.
b. The Capital Group Companies, Inc., 333 South Hope Street, Los Angeles, CA, USA (Capital Group), announced on 4 December 2007 that they held, through acquisitions by some of their Group companies, in the capacity of investment manager for mutual funds and clients, 19 364 301 registered Swiss Re shares. Capital Group thus has 5.23% of Swiss Reinsurance Company’s voting rights, which can be exercised autonomously of the beneficial owners.
After 31 December 2007, and as of 22 February 2008, two additional shareholders held more than 3% of Swiss Reinsurance Company’s share capital each.
c. Credit Suisse Group, Paradeplatz 8, 8070 Zurich, Switzerland, notified Swiss Reinsurance Company on 21 February 2008 that, as per 15 February 2008, it held, through acquisitions by a number of its group companies, registered shares, conversion rights, share purchase rights and written share sale rights conferring a total of 3.40% of the voting rights of Swiss Reinsurance Company.
d. Berkshire Hathaway Inc., 3555 Farnam Street, Omaha, NE 68131, USA, notified Swiss Reinsurance Company on 22 January 2008 that, as of the same day, it held through its subsidiary Columbia Insurance Company, 3024 Harney Street, Omaha, NE 68131, USA, 11 250 000 registered shares or 3.03% of the voting rights of Swiss Reinsurance Company.
Swiss Reinsurance Company, Zurich, employed a worldwide staff of 3 802 on the balance sheet date (2006: 3 745). Personnel expenses for the 2007 financial year amounted to CHF 1 009 million (2006: CHF 1 187 million).
The Annual General Meeting, to be held in Zurich on 18 April 2008, has at its disposal the following profit: in CHF 2006 2007
Retained earnings brought forward from the previous year 7 895 490 64 760 537 Profit for the financial year 2 144 273 601 1 697 024 261
The Board of Directors proposes to the Annual General Meeting to allocate this profit as follows: in CHF 2006 2007
Net realised investment gains/losses 2 509 3 588 4 275 2 665 –730 376 1 116 3 474 2106 –739
Expenses Claims and claim adjustment expenses –8 514 –9 333 –12 153 –16 266 –14 485 –14 898 –13 853 –14 758 –11 799 –12 065
Liabilities Unpaid claims and claim adjustment expenses 45 866 54 072 59 600 68 618 62 652 63 474 61 619 71 759 95 011 88 528 Liabilities for life and health policy benefits 15 143 23 279 29 300 41 370 37 269 37 244 43 239 31 081 44 899 50 026
Long-term debt 5 049 4 947 5 058 7 045 5 663 4 807 5 296 5 852 14 738 23 337 Total liabilities 88 374 105 368 119 853 147 632 145 171 151 187 165 263 196 906 260 416 275 420
Insurance of individuals or groups against economic risks in the event of death or temporary or permanent disability by accident. A branch of casualty insurance.
Transaction in which policyholders or insurers surrender all rights and are relieved from all obligations under an insurance or reinsurance contract in exchange for a single current payment.
Insurance that provides for the payment of a sum of money upon the death of the insured. In addition, life insurance can be used as a means of investment or saving.
Form of proportional reinsurance in which risks are reinsured above a specified amount.
B Badanes, Alan Bächler, Beat Bassi, David Baxter, David Jonathan Baxter, John Beacock, Alan Bebié, Marcel Beck, Nikolaj Bernegger, Stefan Besdziek, Norbert Besner, Rejean Bieri, Christian Bisping, Martin Bitzer, Christoph Blasberg, Walter Bousfield, Clare Bovair, Vesta Brohm, Axel Buckingham, Brenda Buckle, Tony Buff, Herbert Burgess, Nicola Burns, Gay Bütikofer, Peter
C Cameron, David Thomas Carroll, Timothy J. Chatagny, Jean-Michel Choka, Theresa Cliff, John Cobben, Jos Connolly, Llewellyn Conti, Benedetto Correnti, Salvatore
E Eckert, Raymond Emblin, Peter Engler, Walter Eudy, Dan Eugster, Markus A. Eves, Michael
G Ganzoni, Gian Paul Gavlin, James Geiger, Hermann Gentile, Giovanni Giambo, Robert Gisin, Sandra Gocksch, Andreas Goda, Takashi Gomez, David Gott, David W. Gujer, Peter E.
The following persons were Managing Directors of Swiss Re as of 26 February 2008.
M Mailloux, Patrick Mann, Judy Marley, Trevor Martinsohn, Udo Maureder, Kurt McKechnie, Christopher Mckie, Alison Meeusen, Paul Mehn, Hans A. Menn, Christoph Menzinger, Ivo Meyer, Seth Mitchell, Michael J. Moore, William Muldoon, Ann Mary Müller, Martin Murphy, William Murray, Paul Murray, Richard
N Neubert, Manfred Newall, Peter N. Nicholls, Hazel Nidds, Gary Niederer, Alan Nordquist, Randy Nussbaum, Urs
R Raaflaub, Patrick Ratcliffe, Robert Regazzoni, Philippe Reichelt, Frank Remy, Uwe Eberhard Richards, Jason Marc David Richardson, David Romano, James Ronan, Frank Rotman, Jason Rushton-Turner, Martin
S Sakai, Atsuhito Schaad, Werner Scherer, Tom Schläpfer, Werner Schmid, Edouard Schmid, Markus Schmidt, Peter Schnidrig, Thomas Schraft, Andreas Schurdak, John Scott, Gordon Waddell Scott, Keith Sega, Richard Skinner, James Solari, Antonio Solitro, Robert Sonlin, Stephen Spieler, Adrian Splitt, Andrea Starbuck, Robert Steele, Gregory Steiger, Jürg Steilen, William Steinmann, Sylvia Stellwagen, Donald Sterneck, Robin Stewart, Kenneth Strebel, Beat Markus Stutz, Felix Swallow, Mark Sydenham, Peter Barrie
Best global reinsurance company Best global reinsurance company for casualty/liability Best global reinsurance company for life Reinsurance CEO of the year (Jacques Aigrain)
“The Reactions Awards are designed to recognise and reward the corporate and individual achievers of the insurance and reinsurance markets. Each year we poll our readers to hear from them which firms, deals and initiatives as well as industry figures are performing a cut above the rest.” (Reactions magazine, July / August 2007)
”Praise was heaped on Switzerland’s finest … with readers commenting on the company’s innovation, wide-ranging products and professional, market-leading approach. (…) Swiss Re’s sheer size and focus on clients’ needs were taken into account by our readers.” (reinsurance, December 2007 / January 2008)
“The fact that Swiss Re has carried off two of the major accolades at this year’s Worldwide Reinsurance Awards is testimony to its excellent performance during the past 12 months. (…) Swiss Re has contributed more than anyone else in product development.”
“For the second year running the world’s largest reinsurer has been awarded the accolade of being the best life player in the secondary market. (…) Swiss Re continues to think completely differently about life reinsurance business compared to everyone else. (…) They are simply streets ahead when it comes to innovation.” (The Review, September 2007)
“The environmental and commodity markets arm of global reinsurer Swiss Re is the deserving recipient of the 2007 award for weather house of the year. (…) Swiss Re has consistently delivered innovative, client-focused solutions. Swiss Re’s team claims a 30% share of the weather derivatives over-the-counter business, based on PricewaterhouseCoopers’ annual weather market survey, but it was the scope of the firm’s product offering that convinced the panel.” (Energy Risk magazine, May 2007)
Swiss Re was recognised for its inaugural hybrid issue due to “a measured build-up to a debut deal involving roadshowing ... and a willingness to listen and respond to investor input.”
Lipper commended the Swiss Re Capital Fund with its “Best Fund over the past Five Years” award in the category “Mixed Asset CHF Balanced” for its consistently good performance.
“Swiss Re views global warming as a fiduciary risk. It has been very instrumental in raising public awareness through the Swiss Re Centre for Global Dialogue in Rüschlikon, and through the global TV documentary The Great Warming. The brand’s image has benefited.” (CNBC, January 2007)
Bogotá Carrera 7 No. 71-21, Torre B, Piso 15 Bogotá, D.C.
São Paulo Alameda Santos, 1940 - 10° andar CEP 01418-200 São Paulo SP
Photographs: Marc Wetli (cover, inside cover, pp 2, 14, 15, 31, 34 – 41, 88) David Ausserhofer (p 6) Swiss Re (p 6) Stefan Baumgartner (p 6) Markus Bühler (p 15) Willy Spiller (p 15) Stefan Walter (p 15)
The 2007 Annual Report is also available in German and French.