Key figures In CHF millions unless otherwise stated 2000 2001 Change in %
Group – Gross premiums written – Premiums earned – Net income / loss – Earnings per share in CHF – Dividend per share in CHF – Shareholders’ equity – Return on investments3
Number of employees – of which in Switzerland 1 Operating revenues = net premiums earned + net investment income 2 Adjusted by 20-for-1 share split 3 Investments including cash equivalents, deposits with cedants net of funds held under reinsurance treaties and net reinsurance assets accounted for as deposits 4 Subject to approval at the Annual General Meeting on 6 May 11.9% –26.6%
Performance of Swiss Re shares and Swiss Performance Index from 31 December 1991 to 28 March 2002
An investor who invested CHF 100 000 in Swiss Re shares at the end of 1991 and reinvested all subsequent dividends, share rights, and par value repayments, without investing any new funds, held a position with a market value of CHF 993 252 on 28 March 2002. The performance amounts to an average of 25.1% per year.
An investment of CHF 100 000 in the total Swiss market at the end of 1991 would have increased in value to CHF 433 270 on 28 March 2002 (basis: Swiss Performance Index). The performance amounts to an average of 15.4% per year.
■ Annual performance of Swiss Re share (left-hand scale) ■ Annual performance of Swiss Performance Index (left-hand scale)
Overview year 2001 14 11 September and the future of risk management 16
The tragedy of 11 September was Swiss Re’s largest financial loss in its 138-year history. Together with other large losses in 2001 and a reduction in realised capital gains, Swiss Re experienced a net loss of CHF 165 million for the year. It is important to note that this is the first net loss for Swiss Re since 1868, which is, in itself a testament to the financial strength of Swiss Re’s business model. Despite this loss, the solid outlook causes the Board of Directors to propose to the Annual General Meeting to pay an unchanged dividend of CHF 2.50 per share, continuing its track record of paying a dividend in every year since 1869.
The introduction of the business group structure in mid-year has successfully realigned the Swiss Re Group, achieving cost reductions and focusing management attention on clear targets in each of the three business segments and the Corporate Centre.
The year 2001 saw the completion of Swiss Re’s largest ever acquisition: Lincoln Re. It extends Swiss Re’s global leadership position in life and health reinsurance, enlarges our skill base, provides an additional source of stable earnings and offers further diversification for the Group. The results in life and health reinsurance continue, year on year, to surpass management’s targets.
It is for these reasons that Swiss Re looks back on the year with a sense of accomplishment and satisfaction at what it has achieved.
Swiss Re – a global financial services company Swiss Re is one of the world’s leading reinsurers and the world’s largest life and health reinsurer. The company operates through more than 70 offices in over 30 countries. Swiss Re has been in the reinsurance business since its foundation in Zurich, Switzerland, in 1863. Swiss Re enjoys the highest ratings for financial strength from major rating agencies.
Mission, core competencies and guiding principles Swiss Re’s mission is to be the leading authority in managing capital and risk for its clients. This means setting high standards in whatever the Group undertakes, from launching innovative products and services or disseminating specialist knowledge, to building ever closer partnerships with clients, business partners and other stakeholders. Its competitive advantage is the company ’s superior expertise in the integrated management of capital and risk and its financial strength.
Asset management This activity combines the analysis of insurance liabilities, reinsurance products and asset management skills to optimise the total return on financial assets.
Experts on capital and risk: we apply best practice and rigorous financial discipline in capital and corporate management to ensure optimal use of the shareholders ’ capital funds and to offer clients top credit quality.
Clear and open communication: we maintain an open dialogue with all stakeholders. We promote a strong brand and a distinctive corporate profile. Products and services are presented in a transparent and professional manner. Supporting social progress: we take responsibility for our actions with respect to the political, social and natural environment. As a worldwide leader in financial services, we initiate and sponsor activities whose goal is a positive contribution to society.
The strategic directions of the business groups are described in their respective sections.
Main products, services and activities Swiss Re offers a full range of products to manage capital and risk, including reinsurance, insurance-based corporate finance solutions and supplementary services for comprehensive risk management. The traditional reinsurance products include a wide range of property and casualty as well as life and health covers and related services. Insurance-based corporate finance solutions include finite risk reinsurance, securitisation of insurance risks, run-off services and contingent capital commitments. Integrated risk management solutions cover risks not traditionally covered by reinsurance. Asset management and financial services operations include proprietary investments in publicly traded securities, minority holdings, private equity investment and advisory activities, investment banking and third party asset management.
Rajna Gibson 2000–2004 Born 1962, Swiss citizen. Ms Gibson is professor of financial economics at the Swiss Banking Institute of Zurich University. She joined Swiss Re’s Board of Directors in June 2000. Professor Gibson is also a member of the Swiss Federal Banking Commission, sits on the scientific councils of several educational institutions and acts as an advisor for several academic financial journals.
Ernesto Jutzi 1995–2003 Born 1932, Swiss citizen. Mr Jutzi joined Swiss Re’s Board of Directors in November 1995 following his retirement from Swiss Re’s Executive Board.
Peter Forstmoser 1990–2002 Chairman Born 1943, Swiss citizen. Mr Forstmoser is a law professor at Zurich University. He is also a partner in the law firm of Niederer Kraft & Frey, Zurich. He joined Swiss Re’s Board of Directors in November 1990. The Board of Directors elected him Chairman on 30 June 2000. Mr Forstmoser also serves on the board of directors of Hesta AG, Zug, Mikron Holding AG, Biel, Bank Hofmann AG, Zurich and apr – AG für Public Relations, Zurich.
Lukas Mühlemann 1994–2002 Deputy Chairman until 6 May 2002. Born 1950, Swiss citizen. Mr Mühlemann joined Swiss Re on 1 September 1994 as Chief Executive Officer. He was elected to Swiss Re’s Board of Directors in November 1994 and, since November 1996, has been Deputy Chairman. Mr Mühlemann resigned as CEO on 31 December 1996 to become Chief Executive Officer of Credit Suisse Group. At this company’s Annual General Meeting of 26 May 2000 he was elected Chairman of the Board of Directors. He also serves on the Board of Directors of the Zurich Opera.
Governance and Peter Forstmoser, Chair Shareholder Relations Committee George L. Farr
Investments Committee George L. Farr, Chair Peter Forstmoser Bénédict G. F. Hentsch Walter B. Kielholz Jorge Paulo Lemann
Changes in composition, elections and re-elections The term of office of Mr Lukas Mühlemann expires at the Annual General Meeting of Shareholders of 6 May 2002. Mr Mühlemann decided not to stand for re-election. The Board thanks him for his enormous efforts, his outstanding contributions and his most valuable guidance.
The terms of office of Messrs Peter Forstmoser and Walter B. Kielholz likewise expire at the same Annual General Meeting. They are eligible for re-election, and the Board of Directors proposes that their mandates be renewed for a further four-year term of office.
Corporate Centre Bruno Porro* John H. Fitzpatrick* Walter Anderau Yury Zaytsev Chief Risk Officer Chief Financial Officer Communications & Information Risk & Knowledge Finance Human Resources Technology
Ever since I started working with space risks, I have wanted to experience a rocket launch at close range. I was filled with a sense of awe as the engines came to life and bathed the horizon in a burning red glow. I have analysed many rockets down to the last screw. But I would never have thought that the launch of one of these machines could inspire such a tremendous sensation. If I ever have the chance to fulfil one of my wishes again, I think I would like to witness a similar event. But next time there would be one small difference: I would like to be wearing an astronaut’s suit…
“When the rocket was taking off, my wish the limitless universe was overpowering.”
7 February Successful property and casualty renewals Swiss Re reported a successful non-life renewal period with markedly improved conditions and prices.
1 March Seattle earthquake information The economic damage from the strong earthquake near Seattle exceeded USD 1 billion. The insured loss for the industry was several hundred million dollars.
25 April Acquisition of Conning Corporation Swiss Re announced the acquisition of Conning Corporation, a MetLife affiliate and one of the United State’s leading companies in asset management for insurance company investment portfolios.
26 April Swiss Re’s 2000 after-tax profit up 21% In 2000, Swiss Re once again achieved a strong increase in profits, which rose by 21% to CHF 2 966 million. This excellent result was driven by a strong improvement in the property and casualty business and a record investment result.
23 May Grant for Harvard Law School Harvard Law School’s Program on International Financial Systems received a grant from Swiss Re to study worldwide capital adequacy regulation of financial institutions.
31 May Annual General Meeting At the 137th Ordinary General Meeting the shareholders approved a reduction of the nominal value of the shares from CHF 10 to CHF 2, a 20-for-1 stock split and the creation of up to CHF 900 000 in conditional capital for convertible bonds and CHF 700 000 for employee share and option plans. Thomas W. Bechtler and Bénédict G. F. Hentsch were re-elected as members of the Board of Directors.
7 June Swiss Re Investors wins Casualty Actuarial Society Best Paper Award The Casualty Actuarial Society (CAS) presented Swiss Re Investors with its 2001 Best Paper Award at the CAS Special Interest Seminar on Dynamic Financial Analysis in Boston. The award recognised a submission utilising its Dynamic Financial Analysis model (FIRM™) to determine appropriate capital levels.
17 July Strong growth of Life & Health embedded value in 2000 The embedded value of Swiss Re’s Life & Health Business Group grew 36%, to CHF 13.1 billion in 2000. Embedded value earnings for 2000 were a substantial CHF 1.8 billion.
7 September First half-year net income of CHF 1 345 million Swiss Re’s net income for the first half-year 2001 was CHF 1345 million, compared to CHF 3 008 million in the same period last year. Realised investment gains for the half year were CHF 884 million down, as expected, from the prior year’s exceptional amount of CHF 3 431 million. Excluding realised capital gains, operating income before tax of the three business groups, Non-Life, Life & Health and Financial Services, increased 43% in the first six months to CHF 1308 million from CHF 913 million last year.
12 November American Airlines airplane crash Swiss Re’s involvement in the American Airlines airplane crash near John F. Kennedy Airport N.Y. was its participation in the aviation cover of around 2%. Swiss Re’s loss was up to USD 35 million.
15/16 November Successful capital raising Swiss Re raised CHF 6 billion despite volatile market conditions. This represents the largest combined equity and equitylinked offering for a financial institution in the world in 2001and the largest ever capital increase in Switzerland to date.
14 December New appointments to Swiss Re’s Executive Board The Board of Directors appointed Chris C. Stroup and Martin Albers as members of the Executive Board. The Board also appointed Chief Investment Officer Giuseppe Benelli to the Executive Board Committee. All appointments were effective as of 1 January 2002.
19 December Loss estimates resulting from Enron bankruptcy Swiss Re reported its exposure to the failure of Enron Corp. The loss estimated for its exposure to Enron was USD 173 million before tax, equivalent to CHF 284 million, or CHF 184 million after tax.
Previous insurance industry experience suggested that, of the various lines of business, only one would be principally affected by a terrorist attack. The different lines could be considered to be relatively independent of each other. As large interline loss accumulation was the exception, underwriters and risk managers assumed that property, casualty, marine, aviation and life business – under normal circumstances – could be written on their own merits. Any dependency between these lines would only be in extreme event scenarios.
Secondly, there was an accumulation of property risks in the surrounding area. The impact of the total destruction of the WTC on the other nearby buildings went beyond historical experience. The collapse of the WTC created huge amounts of debris which affected many surrounding buildings, resulting in property damage ranging from small losses to complete destruction. This additional impact on the surrounding area will now need to be anticipated in underwriting.
even went out of business. The insured portion of these losses is smaller than first estimates assumed, as much less cover than anticipated was bought and many firms partially returned to normal within a short period.
Finally, there is unforeseen interline accumulation. Apart from the total loss of the complex, a number of other lines of business substantially added to the overall cost: insured property within the offices, computers, life cover, workers’ compensation, liability, fine arts and, of course, aviation. This is the first time in modern insurance history that a man-made event has resulted in interline accumulation on this scale.
This completely new risk environment requires insurers to consider how independent risks really are and how useful the diversification effect is as a risk management tool. If it is concluded that the diversification effect of writing a balanced portfolio of risks is no longer applicable, then underwriting capacity will have to shrink and the necessary risk capital increase dramatically, making risk transfer much more expensive.
The prospect of future substantial events similar to the 11 September poses a challenge for risk managers and underwriters alike. We will need to fully utilise our knowledge and expertise to incorporate the lessons learnt from 11 September into all our products. There is also the prospect that the frequency of smaller terrorist events will rise in the future.
At its most simplistic, terrorism could just be excluded from covers, as was the insurance industry’s first reaction. Since then, a more differentiated approach has been proposed, and various solutions are under discussion. However, in return for insuring acts of terrorism, the insurance industry needs compensation commensurate with risk, the financial consequences of any one terrorist act have to be limited and the advantages of diversification must be maintained.
New rules and underwriting techniques are being developed and private/public partnerships are beginning to evolve to share the threat of a re-occurrence of losses on the scale of 11 September. On the accumulation side, the industry’s handling of natural perils insurance can provide guidance. In the building of sufficient funds to cover acts of international terrorism, the involvement of the state as an “insurer of last resort” is being explored and workable models have already been developed in the UK and France. So far, solutions have focused on providing property or casualty insurance against similar attack. The future challenge is to provide protection across all lines of business.
In the past Swiss Re and the reinsurance industry have been tested by many unpredicted and catastrophic events. These events have demonstrated our resilience and highlighted the fundamental benefits of our product. Our underwriting and risk management expertise, coupled with our financial strength and Triple A rating, mean we are uniquely placed to take up the challenge of providing solutions to the new risk landscape revealed by the 11 September attack.
“For me the desire to experience cultural diversity forms the basis of mutual understanding.”
Net premiums earned increased by 14.2% to CHF 25.2 billion. The Property & Casualty Business Group reported net premiums earned of CHF 13.8 billion, up 20.1% due to growth in property and liability lines of business and the full-year inclusion of Underwriters Re. Premiums in the Life & Health Business Group increased by 7.1% to CHF 8.9 billion due to growth in traditional life business in North America and the completion of new Admin Re deals in the first half of 2001, which more than offset any impact from the run-off of certain discontinued health lines of business. The Financial Services Business Group increased premiums earned to CHF 2.5 billion, up 10.4% compared to the previous year. This was mainly due to premium rate increases in property, casualty and aviation and new structured risk finance transactions.
Net investment income, excluding realised gains, increased 20.1% from CHF 4.8 billion in 2000 to CHF 5.8 billion in 2001. The increase was mainly driven by a 21% growth in the size of the fixed-income portfolio in absolute terms due to Admin Re transactions. Current income still benefits from higher-yielding investments acquired
Swiss Re incurred a net loss of CHF 165 million in 2001, compared to net income in the prior year of CHF 2 966 million. This was primarily due to the loss arising from 11 September and a reduction in capital gains.
Claim expenses increased from CHF 19.6 billion to CHF 24.8 billion, a rise of 26.5%. The main reasons for this increase are losses related to 11 September, which amounted in total to CHF 4.2 billion. This was partially offset by a release of equalisation reserves. Of the total release of CHF 1.5 billion, CHF 1 billion related to the losses from 11 September. After this release the Group holds total equalisation reserves of CHF 1.4 billion. This amount will continue to protect the Group’s earnings from large losses. The significant rise in man-made losses also contributed to the increase. Another notable loss in 2001 was related to the bankruptcy of Enron in the fourth quarter. These increases in claim expenses were partially offset by changes in regulation in the United States that permit greater discounting in certain accident and health lines of business.
As a result of the losses, the Group has insignificant amounts of current taxes due for 2001, but expect refunds in some jurisdictions. Accordingly, its tax expense is driven by deferred taxes. These deferred taxes are caused by income in jurisdictions with tax rates higher than the average, where the applicable tax rules allow the deferral of tax payments to later years.
Net realised gains or losses on own shares; amortisation of goodwill; and other income or expenses – such as indirect taxes, capital taxes, interest charges, restructuring costs and certain other income and expense items – have been excluded when assessing the performance of each business group.
2001 as an investment year was strongly affected by the global economic slowdown and by the impact of the 11 September event.
The following information is a summary of the audited 2000 and 2001 consolidated financial statements of the Group that have been prepared in accordance with Swiss GAAP FER and the Swiss Company Law. For more details, please refer to the Group’s financial statements.
Assets Investments Fixed income securities Equity securities Mortgages and other loans Other invested assets Total investments
Other assets Cash and cash equivalents Reinsurance assets Deferred acquisition costs Goodwill and other intangible assets Other assets Total assets
Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Effect of foreign currency translation Change in cash and cash equivalents Cash and cash equivalents as of 1 January Cash and cash equivalents as of 31 December
During 2001, Swiss Re issued several senior debt instruments: ■ two private placements, one of
CHF 100 million with maturity in 2006 and a coupon of 3.25%, and one of CHF 200 million due between 2003 and 2008, with an initial coupon of 3.42% and a step-up in 2003; ■ a private placement by Swiss Re America Holding Corporation through Swiss Re’s EMTN programme totalling GBP 150 million, with a maturity of 4 years and a coupon of 5.625%; ■ a straight bond totalling CHF 150 million with a 14-year maturity and coupon of 4%, issued in June 2001. The bond was issued by Swiss Re America Holding Corporation under the EMTN programme.
In November 2001, Swiss Re concluded the largest capital market transaction in its history. Using equity and equity-linked issues, the Group successfully raised gross proceeds of CHF 6 billion in a challenging market environment.
approved the creation of authorised capital equivalent to approximately 10% of the outstanding share capital. This allowed Swiss Re to launch its capital increase.
Within two days after pricing, the bookrunners exercised their 15% over-allotment options for the global equity and convertible bond offering. Swiss Re raised a total amount of over CHF 6 billion. The funds were used both to finance the purchase of Lincoln Re – the largest acquisition in Swiss Re’s history – and for general corporate purposes.
Rating agencies Swiss Re has an interactive rating arrangement with Standard & Poor’s, Moody’s and A. M. Best. A number of important events during 2001 served to strengthen and even improve the rating agencies’ opinion of the Group. This was reflected in the fact that all three agencies confirmed Swiss Re’s highest possible financial strength rating during the course of the year, in addition to the annual rating affirmations which are a normal part of the rating process. Furthermore, Standard & Poor’s and Moody’s revised their rating outlook from negative to stable.
Apart from syndicated loans in the amount of CHF 458 million that matured on 25 March 2002, Swiss Re has no other maturities of senior debt or hybrid capital during this year.
The global trend towards higher insurance rates during the first eight months of 2001 gained significant momentum after the terrorist attack in September. In the US, commercial and industrial property rates increased by 10 to 15% and general liability covers by 15%. In Europe, the largest rate increases were in Germany,
e-business initiatives A number of specialised products and services for the property and casualty markets were launched successfully in 2001.
The Swiss Re Portal (www.swissre.com) offers applications such as risk placement services (eg on-line rating and placement tools for property, liability and marine covers), reinsurance business support (eg electronic reinsurance accounting) and other services. In addition, an innovative end-to-end e-tool for facultative commodity business was introduced in some selected European markets. The focus for 2002 continues to be on integrating e-business into daily business.
Business group strategy ■ Leverage superior research/underwriting skills to outperform the market’s underwriting result over the cycle; ■ Establish cost leadership through innovation of business processes and using web technology; ■ Focus on disciplined capital allocation to manage the underwriting cycle; ■ Build leading position in emerging property and casualty markets; ■ Create new sources of profits.
Claims ratio in % 88 95 Acquisition cost ratio in % 23 24 Administration expense ratio in % 6 5 Combined ratio in % 117 124
Premiums earned Premiums earned increased by 20% during 2001. Underwriters Re, acquired in May 2000 and included for eight months in the 2000 accounts, is now consolidated for the full year, contributing 3% to premium growth. Re-underwriting, with the determination to eliminate poorly performing business, led to significant cancellations. This was more than offset, however, by a number of large single transactions, new business, increased shares and higher prices.
Lines of business In addition to better pricing, the overall quality of the Property & Casualty Business Group’s book of business improved throughout 2001. Terms and conditions were tightened and deductibles increased; policy extensions previously free of charge were separately priced; capacity was closely monitored and allocated in accordance with sound profitability criteria.
The combined ratio for 2001 of 136% was severely affected by 11 September.
Earned premiums grew solidly by 19%, benefiting from increased original rates as well as improved reinsurance pricing and some new business. This growth stems primarily from Germany, the UK, the US and Australia. For the second year in a row, results improved significantly – by around 10 percentage points. This positive development was driven by the absence of large losses and the upward trend of original and reinsurance rates in a number of important markets. Overall improvement was dampened somewhat by the lowered discount rate in the UK, Ireland and Belgium, which necessitated bolstering the reserves. A further strengthening of rates is still required in some European markets (particularly Italy and, to a lesser degree, Germany) to return the motor business to profitability.
A 22% rise in earned premiums stemmed mainly from America and Asia. The inclusion of Underwriters Re for a full year contributed almost 2% to the growth. Despite significant premium increases in almost all liability lines of business across large parts of the globe, premiums for industrial liability and directors’ & officers’ coverage have not yet reached satisfactory levels.
Swiss Re therefore tightened its acceptance policy and is focusing on bringing these problem classes to profitable levels. The liability combined ratio deteriorated significantly to 125% due to 11 September. Excluding this event, the combined ratio would have been 115%, which is slightly above what Swiss Re would expect for liability business. Losses of unusually high frequency and severity were reported in 2001 in the European and US markets for pharmaceutical product liability, healthcare (nursing home and rehabilitation centres) and directors’ and officers’ liability; however, these losses were mostly absorbed by the reserves established for this line of business. The 2000 combined ratio of 106% benefited from positive contributions from successful commutations on asbestos and environmental exposures agreed in that year.
Managing natural catastrophe exposures Over the past 30 years, both the severity and the impact of natural catastrophes have increased markedly. The trend to higher losses is driven by socioeconomic factors, including concentration of values in exposed areas and increasing use of insurance. Global warming adds another layer of uncertainty to this process, since scientific evidence1 shows it is likely to affect weather patterns, with particular adverse impact on flooding. Nevertheless, while the underlying trends are clear, economic and insured losses for both 2000 and 2001 were below average. At the same time, Swiss Re estimates that worldwide prices for natural catastrophe excess-of-loss reinsurance increased by 25% in 2001, signalling a significant turnaround in market conditions. Swiss Re continues to expand its leadership role in managing and communicating natural perils issues.
Recent accomplishments include: ■ scientific advancements to modelling for important earthquake and tropical cyclone markets, such as the US and Japan; ■ incorporating loss analyses from the 1999 European winter storms into Swiss Re’s Eurowind model; ■ developing cutting-edge techniques to model flood hazard in anticipation of its growing importance to the insurance industry; ■ improvements in capital allocation and management models including implementation of a common Swiss Re pricing approach for major natural catastrophe exposures; ■ organisation of, or participation in, significant industry and academic conferences; ■ enhancing Swiss Re’s global consultation network of insurers, riskmodelling firms, international organisations (such as the World Bank), leading universities and non governmental organisations (NGOs).
While top-tier reinsurers retained their excellent rating position, many other reinsurance companies were downgraded by the independent ratings agencies. The flight to quality is expected to gain momentum in 2002; Swiss Re’s Property & Casualty Business Group is well equipped to offer excellent service and a solid capital base to clients. The focus, however, will continue to be on underwriting discipline; tightly controlled capacity and adherence to return-on-capital targets. Underperforming business will be either turned around or cancelled. The business group’s cost-management initiatives, which are already bearing fruit, will be carried forward and the optimisation of business processes will continue.
Many established life insurance companies have chosen to concentrate on distribution and asset management and are using reinsurance to reduce earnings volatility and capital requirements. Primary life insurers are also managing their cost base and capital requirements by selling blocks of in-force business. The decline in world stock markets has increased the strain on capital resources, which has raised demand for capital management products provided by reinsurers.
Reinsurance market Cost and capital pressure on primary companies continues to generate demand for reinsurance. In the US, cession of sums assured has grown from 15% in 1993 to 64% in 2000; the UK market has experienced similar trends. This has resulted in the growth rate for life reinsurance significantly outpacing growth in the primary market.
Total revenues increased by 13% to CHF 12 825 million and operating income increased by 16% to CHF 1682 million. 2001 was a successful year in which the Life & Health Business Group reached or exceeded its operating targets.
Continued development of the insurance market in Asia will provide underwriting and capital management opportunities for the major reinsurers. In particular, liberalisation of the insurance markets in China and India should provide new reinsurance opportunities.
Business group strategy ■ Leverage Swiss Re’s leadership position and economies of scale in traditional life reinsurance markets; ■ Grow Admin Re business; ■ Use web technology to reduce the cost ratio by innovating business processes and developing new sources of revenue; ■ Build a strong franchise in emerging life reinsurance markets, especially in Asia.
Development and implementation of Life & Health Business Group strategy Recognising these strong and sustained positive trends in the life reinsurance industry, Swiss Re embarked upon a programme of acquisition and business development to become the leading life and health reinsurer. Life & Health Business Group net premiums increased from CHF 2.1 billion in 1995 to CHF 8.9 billion in 2001, a compound annual growth rate of 28%. The acquisition of Lincoln Re in late 2001 will lead to further growth in 2002.
The creation of businesses, such as Administrative ReinsuranceSM (Admin Re), broadens our range of life and health products. By transferring the administration of the business together with 100% reinsurance, the client can release capital embedded in non-core businesses and remove the administrative burden and costs associated with maintaining outdated or inefficient systems. Swiss Re outsources the back-office administration of its Admin Re business to third-party administrators. Since acquiring Life Re, Swiss Re has expanded its Admin Re portfolio by investing CHF 2.8 billion in Admin Re transactions, increasing assets under management by CHF 20 billion.
e-business initiatives The Life & Health Business Group’s major e-business objectives are to streamline the internal business processes and implement a new technology architecture to support the reinsurance administration back office. This development enables
The operating result (excluding realised gains) improved from CHF 994 million in 2000 to CHF 1167 million, an increase of 17%. This represents a return on operating revenues of 9.5%, exceeding the business group’s target of 9%. The principal reasons for the increase in margins were continued growth in traditional life reinsurance and Admin Re, as well as the progressive elimination of underperforming health accounts. Excluding the 11 September loss of CHF 150 million, the Life & Health Business Group’s return on operating revenues (excluding realised gains) was 10.7%.
Expenses Claims and claim adjustment expenses; life and health benefits –7 448 –8 502 14
Operating result, excluding realised gains 994 1 167 17 Management expense ratio in % 4.7 4.6 Return on operating revenues in %1 9.2 9.5 1 Operating revenues include premiums earned and net investment income
The Life & Health Business Group’s management expense ratio declined from 4.7% to 4.6% in 2001, as it continued to improve operating efficiency and realise the benefits of increased scale.
Swiss Re therefore expects further positive development in its life and health business result for 2002. It will benefit in particular from the enlarged client base and other efficiences arising from the Lincoln Re acquisition.
Net premiums earned rose by more than 15% to CHF 2.45 billion, with Risk Solutions and NCM contributing to the increase. Fees and commissions were up 16%, primarily reflecting growth in Asset Management and Fox-Pitt, Kelton. Gross revenues were slightly up at CHF 3.8 billion despite weakness in the private equity and credit markets. Including the claims from the attack on the World Trade Center (WTC), but after equalisation of CHF 829 million, the business group saw an operating loss of CHF 932 million.
The Financial Services Business Group, which is absorbing a major part of the 11 September loss through its direct commitment to the WTC and to the aviation market, showed operating improvements excluding 11 September.
Financial Services Business Group results CHF millions 2000 2001 Change in %
The Asset Management segment includes both the Asset Management and Capital Partners product units. The Asset Management unit manages fixed income and traded equity investments for Swiss Re and third parties, primarily insurance companies. Capital Partners serves clients in the areas of private equity and merchant banking.
At the end of 2001, Swiss Re had CHF 60 billion third-party assets under management, of which over CHF 58 billion were in the Asset Management product unit. This represents a sharp increase from just over CHF 6 billion in the prior year, due primarily to the July 2001 acquisition of
Conning Corporation as well as from organic growth. Third-party asset management revenues reached CHF 73 million in total. With the Conning acquisition, Swiss Re Asset Management is now among the top five asset managers providing insurance -related investment services to clients in the US. Swiss Re has also expanded Conning’s products and services to a worldwide client base. The combined capabilities of Swiss Re and Conning include global investment management, asset and liability management services, mutual funds and investment accounting and reporting.
At the end of 2001, Capital Partners (including Conning Capital Partners, the private equity arm of Conning) had USD 3.9 billion in funds under management in its private equity, venture capital, buy-out and mezzanine businesses. Funds under management included Swiss Re’s equity-consolidated stake in Partner Re and Gerling NCM AG. Of the total funds under management, USD 1.7 billion were focused on the financial services industry. The total also includes USD 1.4 billion in commitments to other private equity funds managed by Capital Partners for Swiss Re. Swiss Re increased efforts to attract further third-party capital, including sponsoring new funds.
Capital Partners also manages Swiss Re’s minority direct investments in insurance and financial services companies. The market value of the portfolio as of 31 December 2001, amounted to CHF 2.8 billion.
While FPK reported positive operating income, planned start-up and build-up costs for Financial Products and CHF 90 million of write-offs under the single-name credit derivative portfolio (including CHF 47 million from Enron) led to a negative operating result for the Investment Banking segment of CHF 146 million.
The Investment Banking segment comprises Fox-Pitt, Kelton (FPK), and Swiss Re’s Financial Products unit. In 2001, FPK again showed solid top-line growth of 10% and a positive result despite difficult conditions in the world’s equity and advisory markets. Both FPK’s brokerage and corporate finance operations contributed to a creditable performance. In 2001, FPK increased its participation in major financial industry capital market transactions.
The Credit Solutions segment offers trade credit and surety reinsurance as well as structured credit solutions. It also includes asset reinsurance. To make best use of this business group’s structure and expertise in the area of credit, all credit and surety business from the Property & Casualty Business Group was transferred to the Financial Services Business Group in autumn 2001. Furthermore, NCM (gross revenues 2001 of CHF 618 million and operating result of CHF 52 million) will no longer be consolidated into Credit Solutions as a consequence of the previously described transaction.
As previously reported, the Enron collapse and some Asian exposures negatively affected credit reinsurance. However, given the European overweighting in Swiss Re’s trade credit reinsurance portfolio, together with low exposure to the technology, media and telecommunication industries, this business line experienced another positive result.
Structured Credit saw an accounting change in 2001 with credit default swaps now marked-to-market (hence the subsequent adjustment of premiums and claims). Subsequently, the widening of the relevant benchmark spreads on credit default swaps reduced the result by CHF 20 million. Furthermore, Structured Credit was negatively affected by two defaults (CHF 22 million) from a portfolio credit default swap that expired in July 2001 and from the write-off (CHF 37 million) for another portfolio which dated from 1997/98. All other credit default swap portfolios currently booked have first loss subordination available to absorb losses. A cautious approach in underwriting new portfolio credit default swaps improved the quality of the overall book.
The Risk Solutions business unit links Corporate Risk Underwriting and Structured Risk Finance with the Capital Solutions marketing team to deliver sophisticated, insurance-based corporate finance solutions to major corporations and insurance companies worldwide.
Corporate Risk Underwriting, which offers facultative property and casualty reinsurance products, saw strong premium growth of more than 24%.
This business unit had a much improved, positive operating result throughout the year, excluding the 11 September loss. Improved results reflected disciplined underwriting as well as more favourable pricing conditions. The significant loss of capacity in underwriting markets after 11 September had a large impact on pricing levels, especially in property and aviation lines. Much of the positive financial impact is expected to appear in 2002 results.
In property, Swiss Re was able to write tighter terms and conditions throughout 2001, with higher attachment points on new and renewal policies; this trend accelerated after the 11 September event.
The portfolio experienced no major natural catastrophe events and a reduced frequency of large man-made losses, excluding the WTC claim.
Gross revenues Premiums earned Net investment income Net realised gains Fees & commissions
Primarily due to the 11 September event, Risk Solutions reported an operating loss of CHF 905 million on gross revenues of CHF 2 263 million.
The transaction, completed in 2001, was composed of several components that fit together to provide the client with the economic protection it desired. The transaction was structured by Risk Solutions, who brought together financial engineering skills and insurance risk underwriting expertise. Hedging of financial markets risks drew on the capabilities of Financial Products. Swiss Re Asset Management provided the appropriate Asset and Liability Management (ALM) approach and service to the transaction. In addition, Fox-Pitt, Kelton’s considerable knowledge and understanding of the economic drivers of the client’s financial services business provided the research backdrop to evaluate the solution. Having these capabilities seamlessly available was critical in developing the best solution to address the multiple objectives that companies face in today’s business environment.
Outlook for Financial Services The business group’s positive 2002 outlook is driven by continued strong increases in premium rates for property, casualty and aviation business. Large man-made loss frequency, however, has slightly increased. Additionally, Structured Risk Finance anticipates sustained new business growth for both insurance and corporate clients. Third-party asset management, which includes Conning and Financial Products, expect to contribute improved financial results while also expanding Swiss Re’s overall business capabilities. The difficult credit environment could continue to constrain results, although measures have been taken to manage the business effectively through this phase of the cycle.
The Corporate Centre also provides those functions that create greater value when offered centrally, supporting Swiss Re’s strategy of being both global and local. These functions cover two key areas: relations with external stakeholders (including services such as compliance and corporate governance) and Group-wide management processes.
The first is Swiss Re Group’s relations with external stakeholders, including services such as compliance and corporate governance. The setting up of communications centres in New York/Armonk, London, Hong Kong and Zurich has strengthened Swiss Re’s world brand by ensuring the Group speaks with one voice, both to internal and external audiences. Rüschlikon, Swiss Re’s Centre for Global Dialogue, had a very successful first year of full operation. In addition, the new advertising campaign and sponsoring initiative support Swiss Re’s position as a leading brand in its industry. The Swiss Re Portal on the Internet offers clients direct access to Swiss Re’s extensive knowledge and a secure area for e-business transactions.
The second key area addresses internal functions where consistency and efficiency are paramount, such as corporate strategy and information technology (IT). In IT, for example, central provision of services allows the Group to reduce complexity and cost relative to premium volume, while increasing the return on information by creating new business opportunities through a reliable information backbone and new intranet capabilities.
Swiss Re’s Corporate Centre with its four divisions – Communications & Human Resources, Finance, Information Technology and Risk & Knowledge – is both an instrument for managing the Group and a provider of central services.
Operating expenses The increase in operating expenses is primarily due to the first full year of operation with Swiss Re’s new organisational setup. This involves new responsibilities and tasks transferred from the business groups which create greater value by being performed centrally through the four Corporate Centre divisions. As strategic architect, the Corporate Centre invests in future business models, like inreon, an independent Internet-based exchange for reinsurance products whose purpose is to create a collaborative environment for insurers, reinsurers and brokers. The Corporate Centre also supports Swiss Re’s goal of operating as a single global company, by developing standardised processes and systems, particularly in finance. Investing in streamlined global processes and systems will contribute to reducing Swiss Re’s overall expenses over the medium term.
Within hours of the 11 September attack, this process was up and running, providing central command and intelligence facilities with the information necessary to help steer the Swiss Re Group through this critical phase.
2001: passing the test This co-ordinated response at a Group level helped Swiss Re come through one of the most testing years in its history with its strength undiminished. The unified approach to managing the risk portfolio and capital base delivered excellent results. The independent rating agencies confirmed the Group’s “AAA” rating. At the same time, the Group was able to increase its capital by CHF 6 billion – the largest equity and equity-linked issue ever in Switzerland.
Integrated management of finance and risk; close co-operation between the Corporate Centre divisions; dependable, global IT services; excellent communication with all stakeholders; and strong support for the Swiss Re brand – all these helped to deliver a further increase in the Group’s global reputation, recognition and credibility.
Risks that arise from moving large quantities of earth are quantified by Swiss Re and reinsured in the appropriate way. It has long been a wish of mine to play with nature and feel the power of a bulldozer. When I got my chance the experience was more impressive than I had ever imagined.
It is a special feeling to experience how much sensitivity you need to drive a bulldozer: controlling the movements of the digger, judging the texture of the earth loads and deciding at the first touch how much power you can use. The power harnessed by this technology is often greater than we imagine.
The Centre for Global Dialogue will continue to serve as a platform for these and other topics with conferences, reports, papers and electronic discussions throughout 2002 and beyond.
Swiss Re anticipates that supply and demand dynamics will sustain sound property and casualty rates into the future and expects a further hardening of the market and strong renewals in 2002. The focus will remain on strategic management of the cycle with cautious growth, while keeping the book widely diversified with managed exposures.
The integration of Lincoln Re and the benefit of increased economies of scale will be the focus for life and health business. Lincoln Re is expected to be accretive to earnings in 2002.
The Board may, pursuant to its regulations, delegate the conduct of day-to-day business operations to management under its control.
Audit Committee The central task of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities as they relate to the company’s accounting policies, financial reporting, internal control and legal and regulatory compliance functions.
In fulfilling its responsibilities, the Committee shall review major changes to the company’s accounting principles and practices; review results of internal and external audit; review and discuss with management the interim and annual financial accounts; consult the Executive Board, the head of Group Internal Audit and the external auditor as to any significant risks or contingencies or other obligations, and assess the measures taken by the company to manage its exposure thereto; evaluate external auditors and recommend a firm to the Board; review and approve the plans of audit; review and approve the nomination of the head of Group Internal Audit; obtain from the external auditor, at least annually, a written statement delineating all relationships relevant to auditor independence; review the status of significant current and potential legal or compliance matters, the Group’s compliance procedures and significant inquiries received from regulators.
Finance and Risk Committee The Committee shall – in respect of risk management approve the basic reinsurance principles and guidelines; review the results of risk-adjusted capital calculations; review and evaluate the bases on which the Board of Directors determines the risk tolerance level in reinsurance and investment; receive and assess the risk reports; review the most important risk exposures and their corresponding limits; review the appropriateness of risk management techniques employed; review annually the methodology of determining the claims reserves, their development and adequacy; review the methodology for risk measurement; – in respect of balance sheet issues review capital adequacy; review the strategic asset allocation; review the structure of the balance sheet; review the management of equity capital and the appropriate risk management techniques; review the ratings received from the major rating agencies, take note of their considerations and review management’s reaction and recommendations thereto.
Governance and Shareholder The Committee shall Relations Committee measure the Group’s governance against best practice recommendations; ensure compliance with corporate governance disclosure requirements; review and evaluate the Group’s disclosure policy; review the Group’s external communications policy in the context of best practices in the markets deemed most relevant; monitor investor relations activities; examine how reports are made, especially with regard to whether they fulfil the needs and expectations of international investors; monitor the shareholder structure; have initial responsibility for assessing any merger and takeover proposals submitted to the Group; have initial responsibility for reviewing material transactions with any of the Group’s significant shareholders.
Investments Committee The Committee shall approve guidelines for investment policy in respect of investments of Group assets; review the tactical allocation of assets for the next financial reporting period; review the activities and performance of the investment managers; review the business relationships of the investment managers; approve guidelines for the use of derivative instruments; approve periodically the investment strategy in conformity with the risk tolerance level as determined by the Board of Directors; review cash management; review the relationships with banks; review open derivatives positions; comply with any formalities required of the Board of Directors by applicable laws, regulations or obligations to counterparties.
Internal control system The internal control system comprises a risk management system designed for the size, complexity and risk profile of the company; an internal auditing procedure; and a compliance organisation which actively promotes adherence to standards. Swiss Re is organised in these respects as follows: Group Risk Management The decentralisation of business activities and the increasing complexity of transactions, performed in various units and involving many different skills, has led to the creation of a stronger Group Risk Management in parallel with the formation of the business groups and the separation of tasks between the Corporate Centre and the business groups. Group Risk Management forms part of the Risk & Knowledge Division. It reports to the Chief Risk Officer and is responsible for creating transparency in the risks assumed by the business units, in the investment process and in strategic asset allocation. Group Risk Management is not involved in the acquisition and execution of business.
There is a clear separation of tasks between the business units (with their own risk management organisations) and Group Risk Management. Group Risk Management sets the guidelines and standards, based on best practice. It is also responsible for continuously developing risk measurement techniques, updating guidelines and managing the risk reporting process. The business units are responsible for implementing Group guidelines in their particular areas of activity, adhering to limits and procedures and managing data in the reporting process.
Prior to the commencement of the external audit, the external auditor presents its plan and estimated fees to the Audit Committee for approval. At the conclusion of the external audit, the external auditor presents and discusses its report on the financial statements with the Audit Committee, and highlights any significant internal control issues identified.
Group Internal Audit discusses the reports and issues arising from internal audits with the responsible Executive Board members and the Group Chief Executive Officer. Group Internal Audit also discusses the most important audit issues with the Audit Committee and provides it with an annual evaluation of the Group’s system of internal control. At the specific request of the Chairman, the Audit Committee or members of the Executive Board of Swiss Re, Group Internal Audit also carries out special analyses and reviews.
Compliance Compliance at Swiss Re means the upholding of legal and ethical standards by staff throughout the company. Swiss Re fulfils this task through a Group-wide Code of Conduct, which – in keeping with best practice – stipulates the basic values and behavioural requirements that apply throughout the company. A Group Compliance Programme defines the role and duties of Swiss Re’s compliance officers, who report to the Group Compliance Officer; these officers run local centres of competence whose remit is to maintain Group procedures and local or regional practices. The necessary training of Swiss Re’s staff and compliance officers in order to attain best practice in compliance matters is carried out regularly at a local and Group level. The Group Compliance Officer provides the Board of Directors’ Audit Committee with compliance reports on a regular basis, and also reports to Swiss Re’s Chief Risk Officer as part of Group Risk Management.
Insurance that is reinsured: the passing of the insurer’s risks to the reinsurer against payment of a premium. The insurer is referred to as the ceding company.
Payment made by the reinsurer to discharge liabilities under a treaty.
Professional and director’s and officers’ liability: Insurance of liabilities arising from the performance of professional or official company duties.
Property insurance: Collective term for fire and business interruption insurance as well as burglary, fidelity guarantee and allied lines.
Facultative reinsurance: Reinsurance of the insurer’s risks on an individual basis. The reinsurance company looks at each individual risk and determines whether to accept or decline coverage.
Financial reinsurance: Form of reinsurance that provides risk financing which may be combined with elements of traditional risk transfer.
Return on equity in % Earnings / losses per share in CHF * Adjusted by 20-for-1 share split
Certain statements contained herein are forward-looking. These statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact. Forwardlooking statements typically are identified by words or phrases such as “anticipate”, “assume”, “believe”, “continue”, “estimate”, “expect”, “foresee”, “intend”, “may increase” and “may fluctuate” and similar expressions or by future or conditional verbs such as “will”, “should”, “would” and “could”. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others: ■ risks and uncertainties relating to our estimates of the losses arising from the 11 September 2001 terrorist attack in the United States, and the possibility of future terrorist attacks; ■ changes in general economic conditions, particularly in our core markets; ■ uncertainties in estimating reserves; ■ the performance of financial markets; ■ the frequency, severity and development of insured claim events; ■ mortality and morbidity experience; ■ policy renewal and lapse rates; ■ changes in levels of interest rates; ■ changes in currency exchange rates; ■ changes in laws and regulations, including changes in accounting standards and taxation requirements; and
This Annual Report 2001 is also available in French, German, Italian and Spanish.
Annual Report 2001 Business Report Swiss Reinsurance Company Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland publications@swissre.com
Swiss Re Group financial statements Income statement 3 Balance sheet 4 Statement of shareholders‘ equity 6 Statement of comprehensive income 7 Statement of cash flow 8 Notes to the Group financial statements 1. Organisation and summary of significant accounting policies 9 3. Derivative financial instruments 20 4. Acquisitions and dispositions 22 5. Deferred acquisition costs and acquired present value of future profits 24 7. Unpaid claims and claim adjustment expenses 28 8. Personnel expenses 29 9. Shareholders’ equity 29 10. Income taxes 31 11. Compensation and remuneration of directors and executive officers 32 12. Benefit plans 33 13. Stock compensation plans 35 14. Commitments and contingent liabilities 36 15. Assets under management 38 16. Information on business segments 38 17. Subsidiaries and equity investees 48 18. Restructuring provision 51
Swiss Reinsurance Company, Zurich, financial statements Annual report 53 Income statement 55 Balance sheet 56 Notes 58 Proposal for allocation of profit 64 Report of the statutory auditors 65
Expenses Claims and claim adjustment expenses Life and health benefits Acquisition costs Amortisation of goodwill Other operating costs and expenses Total expenses
Earnings / losses per share in CHF Basic Diluted * Adjusted by 20-for-1 share split
Equity securities – Available for sale, at fair value (cost: 2000: 16 812; 2001: 16 788)
Shareholders’ equity Common stock, 2000: CHF .50* and 2001: CHF .10 par value 2000: 293 166 020* and 2001: 321 868 120 shares authorised and issued Additional paid-in capital Accumulated other comprehensive income: Net unrealised investment gains, net of deferred tax Cumulative translation adjustments
Cash flows provided / used by operating activities Net income / loss Adjustments to reconcile net income / loss to net cash provided / used by operations: Depreciation, amortisation and other non-cash items Net realised investment gains Change in technical provisions, net Change in reinsurance receivables and funds held by ceding companies Change in other assets and liabilities Change in income taxes payable / recoverable Income from equity accounted investees, net of dividends received
Cash flows provided / used by financing activities Issuance of long-term debt Issuance / repayment of other debt Equity offering Capital repayment Repurchase of common shares Dividends paid Net cash provided / used by financing activities
Effect of foreign currency translation Change in cash and cash equivalents Cash and cash equivalents as of 1 January Cash and cash equivalents as of 31 December
The accompanying consolidated financial statements have been prepared in accordance with Swiss GAAP FER and comply with the Swiss Company Law and include the financial statements of Swiss Re Zurich and its subsidiaries. The presentation requirements of FER 14 have been complied with except certain financial information has been disclosed in the notes and not in the primary financial statements. All intercompany transactions and balances have been eliminated on consolidation.
Mortgages and other loans are carried at amortised cost (effective yield method), net of any allowance for amounts estimated to be uncollectible. Other loans consist of mortgage participations associated with linked investment contracts where the contract holders bear all investment risk.
The Group enters into security lending arrangements under which it loans certain securities in exchange for collateral and receives securities lending fees. The Group’s policy is to require collateral, consisting of cash or securities, equal to at least 102% of the carrying value of the securities loaned. Cash received as collateral is recognised along with an obligation to return the cash. Securities received as collateral that can be sold or repledged are also recognised along with an obligation to return those securities. The loaned securities are reclassified as pledged if the transferee has the right to sell or repledge those securities. Security lending fees are recognised over the term of the related loans.
The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange traded financial futures as part of an overall risk management strategy. These instruments are included in other invested assets and are primarily used as a means of managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities and also to lock in attractive investment conditions for funds which become available in the future.
The Group recognises all of its derivative instruments on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is used to hedge the fair value of assets or liabilities, changes in the fair value of the derivative are recognised in earnings, together with changes in the fair value of the related hedged item. If the derivative is used to hedge the variability in expected future cash flow related to a particular risk, changes in the derivative’s fair value are reported in other comprehensive income until the hedged item is recognised in earnings. The ineffective portion of the hedge is recognised in earnings.
The acquired present value of future profits (‘‘PVFP’’) of business in-force is recorded in connection with the acquisition of life operations. The initial value is determined actuarially by discounting estimated future gross profits as a measure of the value of business acquired. The resulting asset is amortised on a constant yield basis over the expected revenue recognition period of the business acquired, generally over periods ranging up to 30 years, with the accrual of interest added to the unamortised balance at the earned rate.
The excess of the cost of acquired businesses over the fair value of net assets acquired is recorded as goodwill (purchase method). It is amortised using the straight-line method over periods that correspond with the benefits expected to be derived from the related acquisition. Goodwill is amortised over periods of between 5 and 20 years.
Other assets consist of investments for separate account business relating to certain types of insurance contracts where the contract holder bears the investment risk, deferred expenses on retroactive reinsurance, own use real estate, property, plant and equipment, accrued income and prepaid assets.
Liabilities for unpaid claims and claim adjustment expenses for property and casualty reinsurance contracts are accrued when insured events occur and are based on the estimated ultimate cost of settling the claims, using reports and individual case estimates received from ceding companies. A provision is also included for claims incurred but not reported, which is developed on the basis of past experience adjusted for current trends and other factors that modify past experience. The establishment of the appropriate level of reserves is an inherently uncertain process involving estimates and judgements made by management, and therefore there can be no assurance that ultimate claims and claim adjustment expenses will not exceed the loss reserves currently established. These estimates are continually reviewed, and adjustments for differences between estimates and actual payments for claims and for changes in estimates are reflected in income in the period in which the estimates are changed or payments are made.
The Group provides reserves for uncollectible amounts on reinsurance balances ceded and assumed, based on management’s assessment of the collectibility of the outstanding balances.
The Group has adopted the amendment to Swiss GAAP FER 14 (issued 22 November 2001), dealing with other than temporary decline in the valuation of equity securities AFS as of 1 January 2001. Equity investments AFS are carried at fair value, based on quoted market prices, with the difference between original cost and fair value included in shareholders’ equity. The cost of equity securities is reduced to fair value with a corresponding charge to realised loss on investments for declines in value that are other than temporary.
Subsequent recoveries for equity securities that are deemed to be a reversal of the impairment are recognised in income.
It is not possible to reliably determine the impact of the change on the balance sheet at 1 January 2001. To determine this amount, the Group would have needed to review the daily valuation history of all securities from acquisition date to 1 January 2001. Only then would it be possible to calculate whether any write down or subsequent write back, in full or in part, was necessary. Under Swiss GAAP FER 14 prior to the amendment, a decline in market value of an equity security AFS below cost was recognised as a charge in the income statement. If the Group had applied the previous Swiss GAAP accounting policy, the impact would have been to increase the net loss before taxation by CHF 927 million.
Amortised cost or cost and estimated fair values of investments in fixed income and equity securities classified as Available for sale were as follows: Gross Gross As of 31 December 2000 Amortised unrealised unrealised Estimated CHF millions cost or cost gains losses fair value
Debt securities issued by governments and government agencies: United States Switzerland Germany United Kingdom Canada Other
The Group has an investment concentration with Credit Suisse Group. As of 31 December 2000 and 2001, the Group’s investments in equity securities included CHF 2 469 million and CHF 1 766 million respectively, of Credit Suisse Group securities, at fair value and CHF 331 million and CHF 208 million, respectively, of other operating assets.
The Group also has an investment concentration with ING Groep N.V., a European-based financial institution. As of 31 December 2000 and 2001, the Group held CHF 1 239 million and CHF 848 million, respectively, of common stock at fair value and CHF 1 516 million and CHF 1 604 million, respectively, of invested assets.
The Group’s investment portfolio at carrying value is comprised of concentrations in the following major currencies: As of 31 December 2000 CHF millions USD EUR GBP CHF CAD Other Total
Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage and asset-backed securities with no fixed maturity Total fixed income securities
As of 31 December 2000 and 2001, securities with a carrying value of CHF 653 million and CHF 509 million, respectively, were on deposit with regulatory agencies in accordance with local requirements.
As of 31 December 2000 and 2001, investments in mortgage and other loans, real estate and investment for separate account business comprised the following: As of 31 December 2000 2001 CHF millions Carrying value Fair value Carrying value Fair value
As of 31 December 2000 and 2001, the Group’s investment in mortgages and other loans included CHF 204 million and CHF 204 million, respectively, of loans due from employees and CHF 322 million and CHF 342 million due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
As of 31 December 2000 and 2001, investments in real estate included CHF 11 million and CHF 10 million, respectively, of real estate held for sale.
Carrying value as of 1 January Foreign currency translation adjustments Depreciation Additions / sales / interest in equity Unrealised gains / losses Gains / losses on sales Carrying value as of 31 December
Net investment income by source was as follows: CHF millions 2000 2001
Fixed income securities Equity securities Mortgages and other loans Real estate Short-term investment Other current investment Income on investments in affiliated companies Equity in earnings of equity accounted investees Cash and cash equivalents Deposits with ceding companies
Net realised gains on other investments Value readjustments Value adjustments Net realised investment gains
The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange traded financial futures in its trading and hedging strategies, in line with the Group’s overall risk management strategy. The objectives include managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities as well as to lock in attractive investment conditions for future available funds.
The Group uses derivative financial instruments with the following characteristics: Contract/ Carrying As of 31 December 2000 notional Positive Negative value assets/ CHF millions amount fair value fair value liabilities
Contract/ Carrying As of 31 December 2001 notional Positive Negative value assets/ CHF millions amount fair value fair value liabilities
Goodwill by a 60 day period for resolution of any remaining disputes by an independent arbitrator. Any resulting adjustments arising from the resolution of the dispute may impact components of the balance sheet and therefore future amortisation of goodwill or acquired present value of future profits. These adjustments are not expected to have a material adverse impact on the Group’s net income or net equity.
On 2 July 2001, the Group acquired Conning Corporation, a company based in the United States specialising in asset management for insurance companies, for CHF 190 million.
During 2001, there were two administrative reinsurance (Admin Re) transactions. Admin Re is the purchase of closed blocks of in-force business and can be facilitated through either a stock purchase or reinsurance. The stock of Southwestern Life Holdings, Inc. was purchased on 21 June 2001 for CHF 484 million. On 30 June 2001, the Group entered into a reinsurance based deal with Aurora National Life Assurance Co. which had an effective date of 1 January 2001. The results of these deals have been included from the effective date of the transaction.
Swiss Re Annual Report 200124 5. Deferred acquisition costs and acquired present value of future profits
Balance as of 1 January Deferred Effect of acquisitions Amortisation Effect of change in unrealised gains/losses Effect of foreign currency translation Balance as of 31 December
Maturity Instrument in Currency in m rate CHF m 2007 Trust preferred Stock (TruPs)2 1997 USD 42 8.720% 88 2008 Private Placement (step-up) 2001 CHF 200 3.420% 200 2013 Payment Undertaking Agreement 2000 USD 24 Libor–15bp 43 2026 Payment Undertaking Agreement 2000 USD 57 Libor–15bp 93
Total senior debt 2001 3 260 Total senior debt 2000 3 013
Maturity Instrument in rency in m rate... reset in CHF m
Maturity Instrument in Currency in m rate CHF m 2013 Index Linked Notes 2001 USD 10 Libor+index 17 2017 Payment Undertaking Agreement 2000 USD 64 Libor–15bp 113 2029 Payment Undertaking Agreement 2001 USD 28 Libor–15bp 46 2029 Payment Undertaking Agreement 2001 USD 42 Libor–15bp 70
Total long-term operational debt 2001 273 Total long-term operational debt 2000 104
Interest expense on long-term debt as of 31 December 2000 and 2001, respectively, was as follows: CHF millions 2000 2001
In June 1998, the Group issued exchangeable bonds with a face value of NLG 925 million bearing interest at 1.25% payable annually and maturing on 23 June 2003. The bonds are exchangeable into depositary receipts in respect of ordinary shares of ING Groep N.V.
In June 1999, the Group also issued USD 530 million exchangeable notes with a five year term, bearing interest of 2.25% payable annually. The notes are exchangeable at the noteholders’ option for shares of Swiss Re, Credit Suisse Group or Novartis AG.
In 2000, the Group entered into three Payment Undertaking Agreements (PUA’s), which are a form of financing transactions in which a counterparty deposits funds with the Group having fixed repayment terms and interest rates on the deposited funds. In 2001, a further three PUA’s were taken out by the Group.
In June 2001, the Group issued under the European Medium Term Note (EMTN) programme a straight bond totalling CHF 150 million with a coupon of 4% and a 14 year maturity. In August 2001, an additional GBP 150 million was issued under the EMTN programme with a maturity of 4 years and a coupon of 5.625%.
In October 2001, the Group issued USD 10 million Index Linked Notes. The notes have a maturity of 12 years and interest payments based on the three-month LIBOR as well as an Index related component.
Swiss Re Annual Report 200128 7. Unpaid claims and claim adjustment expenses
The Group’s obligation for claims payments and claims settlement charges also includes obligations for long latent injury claims arising out of policies written prior to 1985, in particular in the area of US asbestos and environmental liability.
Net claims reserve Claims incurred Claims paid Effect of foreign currency translation Effect of acquisitions
The total number of employees in the Group was 9 585 as of 31 December 2000. During 2001 the Group acquired Conning in July adding 259 employees and Lincoln Re in December adding 735 employees. In January 2001, the Group sold IRMG which employed 423 employees, and in December 2001 NCM was sold. At the date of disposal, NCM employed 1590 people. The Group had 8 623 employees as of 31 December 2001.
Basic earnings / losses per share Income / loss available to common shares Weighted average common shares outstanding Net income / loss per share in CHF
Effect of dilutive securities Change in average number of shares due to: Employee options
Diluted earnings / losses per share Income / loss available to common shares assuming debt conversion and exercise of options Weighted average common shares outstanding Net income / loss per share in CHF
The Group holds 3 936 100* and 5 158 310 authorised and issued shares as of 31 December 2000 and 2001, respectively, which are kept in escrow for satisfying obligations arising from employee options.
Own shares held as of 1 January at cost Purchases Sales Capital reduction from share repurchase Realised gains Own shares held as of 31 December at cost Own shares held as of 31 December at market value
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 2000 2001
The components of deferred income taxes were as follows: CHF millions 2000 2001
Deferred tax liabilities Present value of future profits Deferred acquisition costs Technical provisions Bond amortisation Unrealised gains on investments Other Total
The Group sponsors various funded defined benefit pension plans covering the majority of its world-wide operations. Employer contributions to the plans are charged to income on a basis which recognises the costs of pensions over the expected service lives of employees covered by the plans. The Group’s funding policy for these plans is to contribute annually at a rate that is intended to maintain a level percentage of compensation for the employees covered. A full valuation is prepared at least every three years.
The Group also provides certain health-care and life insurance benefits for retired employees and their dependents. Employees become eligible for these benefits when they become eligible for pension benefits.
Benefit obligation as of 1 January Service cost Interest cost Amendments Actuarial gains / losses Benefits paid Acquisitions / disposals Foreign currency translation adjustments Benefit obligation as of 31 December
Prepaid benefit cost Accrued benefit liability Net amount recognised 42 –5 –35 –73 88 –20 –17 –81 –112 –8 –8
(net of participant contributions) Interest cost Expected return on assets Amortisation of: Net gain / loss Prior service cost Transition obligation / asset
Range of Weighted average Weighted average exercise remaining contrac- exercise price in CHF Number of options tual life in years price in CHF
Net income / loss 2 922 –248 Earnings / losses per share in CHF: Basic 10.23 –0.86 Diluted 10.21 –0.86 * Adjusted by 20-for-1 share split
As of 31 December 2000 and 2001, the Group had outstanding guarantees of CHF 2 815 million and CHF 5 792 million, respectively.
As a participant in limited investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnership for periods of up to 10 years. The total commitments remaining uncalled as of 31 December 2000 and 2001 were CHF 1 074 million and CHF 1 176 million, respectively.
As part of its normal business operations, the Group enters into a number of agreements for the leasing of premises. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: As of 31 December 2001 CHF millions
The corresponding lease expenses incurred in 2000 and 2001 were CHF 41 million and CHF 45 million, respectively.
Following the September 11 terrorist attack, the Group initiated litigation against the lessees, its lenders and the Port Authority of New York and New Jersey, in the United States District Court for the Southern District of New York to obtain a judicial declaration of its rights and obligations with respect to all parties in interest. That action is captioned SR International Business Insurance Ltd. v. World Trade Center Properties, LLC, Case No. 01 CV 9291 (JSM). The defendants have filed counterclaims and joined other insurers including Swiss Reinsurance Co. (UK) Ltd.
Operating income 2001 Property & Life & Financial Corporate ReconciliCHF millions Casualty Health Services1 Centre ation Total
Swiss Re Annual Report 2001 39 1 The Financial Services segment total above differs from the business unit presentation due to reclassifications. (see note 16f for further details)
Reinsurance recoverable on paid and unpaid claims Reinsurance recoverable on life and health policy benefits
Unearned premiums 1These balances are included in reinsurance payable. 2These balances are included in accruals and other liabilities.
Unearned premiums 1 These balances are included in reinsurance payable. 2 These balances are included in accruals and other liabilities.
–913 –485 –478 –230 –547 –2 653 –219 –154 –120 –72 –186 –751
Expenses Life and health benefits Acquisition costs Other operating costs and expenses Total expenses
Financial Financial Services Services 2000 Asset Investment Credit business segment CHF millions Management Banking Solutions Risk Solutions unit total total1
Financial Financial Services Services 2001 Asset Investment Credit business segment CHF millions Management Banking Solutions Risk Solutions unit total total2
Expenses Claims and claim adjustment expenses Acquisition cost Other operating costs and expenses Total expenses
Notes to the Group financial statements 16. Information on business segments (continued)
Switzerland Diax Holding 25.5 e European Reinsurance Company of Zurich 100 f Schweiz Allgemeine Versicherungsgesellschaft 100 f Swiss Re Investors Zurich 100 f Swiss Re Partnership Holding AG 100 f Xenum Finance AG 42.5 e
Germany Swiss Re Germany 100 f Swiss Re Germany Holding Aktiengesellschaft 100 f
United Kingdom European Credit and Guarantee Insurance PCC Limited 100 f Fox-Pitt, Kelton Group Limited 83.1 f Palatine Insurance Company Limited 100 f Princess Management & Insurance Ltd. 49.99 e SR International Business Insurance Company Ltd. 100 f Swiss Re (UK) House Ltd. 100 f Swiss Re Asset Management Ltd. 100 f Swiss Re Capital Markets Limited 100 f Swiss Re GB Limited 100 f Swiss Re Life & Health Limited 100 f Swiss Re New Markets Ltd. 100 f Swiss Reinsurance Company UK Limited 100 f The Mercantile & General Reinsurance Company 100 f
Ireland Swiss Re International Treasury Ltd. 100 f Swiss Re Ireland Ltd. 100 f
Netherlands Gerling NCM Credit and Finance AG 44.1 e Swiss Re Nederland Holding B.V. with 2 subsidiaries 100 f
Canada Swiss Re Holdings (Canada) Inc. 100 f Swiss Re Life & Health Canada 100 f Swiss Reinsurance Company Canada 100 f
Swiss Re Australia Ltd. 100 f Swiss Re Life & Health Australia Limited 100 f The Mercantile and General Reinsurance
South Africa Swiss Re Southern Africa Limited 100 f Swiss Re Life & Health Southern Africa Limited 100 f Swiss Re Investors Southern Africa 100 f
The Property & Casualty Business Group paid CHF 15 million in redundancy benefits to employees. These costs related to the termination of administrative and marketing functions in Zurich and the relocation of these functions to the US, Mexico, Germany and Hong Kong. Other charges of CHF 13 million were incurred in connection with these changes. Both amounts were charged against the liability established for this purpose as of 31 December 2000.
Restructuring provision established as of 31 December 2000 110 Property & Casualty Business Group – costs incurred –28 Life & Health Business Group – acquistion of Lincoln Re 70 Financial Services Business Group 75 Re-estimate of Property & Casualty Business Group requirements –46 Restructuring provision as of 31 December 2001 181
As auditors of the Group, we have audited the consolidated financial statements (income statement, balance sheet, statement of shareholders’ equity, statement of comprehensive income, statement of cash flow and notes to the Group financial statements / pages 3 to 51) of Swiss Re Group for the year ended 31 December 2001.
The business year was characterised by the largest claim ever, the terror attacks on 11 September in the United States and the subsequent turbulence in the capital markets. In addition, the largest capital increase in the history of Swiss Re, the acquisition of Lincoln Re, a US based life insurer, and other structural changes in the Swiss Re organisation had significant impacts on the 2001 financial statements.
After-tax profit for the financial year based on the Swiss legal accounting regulations amounted to CHF 930 million compared to CHF 1 146 million in 2000. The technical result deteriorated significantly due to the effect of the 11 September attack. This decrease was partly offset by the improvement of the non-technical result which was triggered by substantially lower depreciation on goodwill and securities.
The net premium volume recorded an increase of 34% to CHF 11 415 million. Mainly, this increase was caused by the extension of Group internal retrocessions. The Property & Casualty Business Group’s share was 63%, Life & Health Business Group’s 21% and 16% related to the Financial Services Business Group.
The technical result was marked by a considerable increase of CHF 2 729 million in claims incurred, due to the 11 September event. Equalisation reserves for catastrophe claims in the total amount of CHF 1262 million were released.
The investment result rose by CHF 489 million to CHF 4 162 million. Investment income, consisting of current income and realised gains, decreased by CHF 542 million to CHF 5 811 million. A substantial part of the realised gains was attributable to transfers of minority holdings within Swiss Re Group. Investment charges decreased by CHF 1 031 million to CHF 1 649 million since depreciation on goodwill and securities was substantially lower than in the previous year.
The balance sheet amount of investments increased by CHF 7.9 billion to CHF 45.6 billion. Most notably, this resulted from the cash inflow due to the capital increase and from the extension of Group internal business. These additional funds were mainly invested as capital contributions and loans to subsidiaries.
The technical provisions rose by 20% to CHF 28 125 million. This is the effect of both the increased business portfolio and the impact of large losses recorded in the financial year. The provision for catastrophe claims as of 31 December 2001 amounted to CHF 434 million after a release of CHF 1262 million in the year under report.
As of 31 December 2001, the company held four different perpetual subordinated liabilities totalling CHF 1 912 million. These liabilities combine elements of debt and equity, and may be included in solvency calculations.
In connection with the Lincoln Re acquisition a capital increase of CHF 4 006 million was approved at the Extraordinary General Meeting on 27 September 2001. The nominal share capital of the company amounted to CHF 32 million on 31 December 2001.
With the inclusion of the profit for the financial year 2001, shareholders’ equity equalled CHF 10 945 million at year-end 2001. In consideration of stock market trends the Swiss Re shares were split by a ratio of 20:1.
Total result Profit before tax Tax Profit for the financial year
Shareholders’ equity Share capital Legal reserve Reserve for own shares Other reserves Disposable profit
The allocated investment return includes the actual investment income which can be directly attributed to the reinsurance business. In addition, it contains the investment return generated on the investments covering the technical provisions. The interest rate reflects the currency-weighted five-year average yield on five-year government bonds.
The overall management charges are allocated to the reinsurance business and the investment business on an imputed basis.
The provisions for life reinsurance business are determined on the basis of actuarially calculated present values taking experience into account. They also include the provisions for unearned premiums of life reinsurance and the deduction of deferred charges.
Investment result Income from land and buildings Dividend and interest from subsidiaries and affiliated companies Dividend income Income from fixed income securities, loans and mortgages Income from time deposits Income from deposits with ceding companies Realised gains on sale of investments 6. Investment income
Change in shareholders’ equity Shareholders’ equity on 31 December (previous year)
Source of shareholders’ equity (after allocation of profit) From nominal capital From share premium, less share buyback / capital reduction From profit allocation From other allocations
1 Board of Directors’ proposal to the General Meeting of 6 May 2002
Contingent liabilities, mainly towards Group companies, amounted on 31 December 2001 to CHF 2 272 million (2000: CHF 1 672 million). In addition, there were 20 unlimited guarantees; 17 of these are for obligations towards Group companies. No payments are expected under these guarantees.
Remaining contract term up to 1 year 0 0 Remaining contract term up to 5 years 3 4 Remaining contract term more than 5 years 5 4
Own shares held by the Swiss Re Group are stated on page 30.
Other liabilities and accruals are long-term liabilities in the amount of CHF 2 692 million (2000: CHF 1 177 million) and short-term liabilities amounting to CHF 2 981 million (2000: CHF 3 439 million).
The Ordinary General Meeting on 31 May 2001 approved the creation of conditional capital as follows: An amount of CHF 900 000 for conversion rights and warrants granted in connection with bonds or similar financial instruments issued by the company or by Group companies. An amount of CHF 700 000 for employee participation purposes of which as per 31 December 2001 CHF 17 973 were issued.
Based on the information at our disposal, Credit Suisse Group owned 17 117 523 registered shares of Swiss Reinsurance Company on 28 March 2002, representing 5.32% of the total share capital.
The independent actuary, Paul Embrechts, Oberrohrdorf, has confirmed in his report that the balance sheet provisions for the life reinsurance business stated at year-end 2001 have been calculated in accordance with European Union guidelines.
The General Meeting to be held in Zurich on 6 May 2002 has at its disposal the following balance sheet profit (cf. income statement and balance sheet, pages 55 to 57): in CHF 2000 2001
The Board of Directors proposes to the General Meeting to allocate this profit as follows: in CHF 2000 2001
If the proposal of the Board of Directors is accepted, a dividend of CHF 2.50 per share will be paid.
Admin Re is the acceptance of closed blocks of in-force life and health insurance business either through acquisition or reinsurance, typically assuming the responsibility to administer the underlying policies. Admin Re can also extend to the acquisition of an entire life insurance company.
The interval between the retention or attachment point and the maximum limit of indemnity for which a reinsurer is responsible.
Insurance providing payment of a sum of money upon death of the insured.
Hail crop insurance: Insurance of crops in open fields, of greenhouses and their contents against hail, storm and other natural hazards.
Premiums earned: Refer to premiums an insurance company has recorded as revenues during a specific accounting period. For example, a one-year policy sold 1 January would produce just three months’ worth of “earned premium” in the first quarter of the year.
Non-proportional reinsurance (also excess of loss reinsurance): Form of reinsurance in which the reinsurer assumes that part of the insurers claims which exceed a certain amount.
Surplus reinsurance: Form of proportional reinsurance in which risks are reinsured above a specified amount.
The amount of risk which the insurer does not reinsure but keeps for own account.
Premiums earned less insurance losses and loss adjustment expenses and underwriting expenses.
Shareholder structure Number of registered shares as of 31 December 2001 Shareholders % Shares %
The Annual Report 2001 summary is available in: English, French, German, Italian and Spanish.
Editing and translation Group Communications, Investor Relations and Group Language Services
Annual Report 2001 Financial Statements Swiss Reinsurance Company Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland publications@swissre.com