Reinsurance is an indispensable part of the insurance system and therefore an important contributor to economic growth and social welfare. Insurers benefit from risk transfer and capital relief, as well as the product development and risk expertise, that reinsurers provide. Through their global reach, reinsurers diversify risk portfolios, enabling corporations, individuals and public sector risks to be covered more efficiently, cheaply and securely. Ultimately, policyholders benefit from more protection at a lower price.
The insurance industry plays an important role in supporting the growth of the Chinese economy. Swiss Re has been active in sharing its product expertise to develop a sound and state-of-the-art market.
Reinsurance provides long-term financial security to insurers. Swiss Re’s life reinsurance solutions, including the sale of mortality margin structures (SMM), offer efficient and flexible capital management solutions to life insurers.
The transfer of natural catastrophe exposures or extreme mortality risks to the capital markets allows insurers and reinsurers to free up capital, ultimately increasing capacity in the industry. Swiss Re is a pioneer and leader in the insurance -linked security market.
Reinsurers play an important role in providing solutions to mitigate the variability and unpredictability of weather events. Swiss Re develops innovative solutions for climate change, particularly in emerging countries.
Cover page Millau viaduct, France – Reinsurance is a key contributor to the realisation of large infrastructure projects. Swiss Re was one of the reinsurers in the engineering project policy enabling the completion of the world’s tallest bridge. As a vital link in the French motorway system, the viaduct towers 343 m high and spans 2.5 km over the Tarn River valley northwest of Montpellier.
The 1996 figures represent the previously applied accounting policy and the former Group structure.
 Property & Casualty  Life & Health  Financial Services
¹ Risk Solutions business sector, formerly part of Financial Services, is incorporated into Property & Casualty for the years 2004 and 2005.
Key figures CHF millions unless otherwise stated 2004 2005 Change in %
¹ Including Property & Casualty, Risk Solutions and Credit Solutions ² Subject to approval at the Annual General Meeting on 21 April 2006 ³ Including PRO Insurance Solutions
Property and specialty claims from natural perils reached a record CHF 3.1 billion. As a result, the combined ratio deteriorated by 11.7 percentage points compared to 2004. Life & Health saw strong underlying results and posted a 9.6% return on operating revenues, exceeding our target and contributing substantially to Group earnings. Financial Services earned CHF 366 million in operating income, with Credit Solutions a significant contributor reflecting rigorous credit risk management. Our return on investments was an excellent 5.7%, thanks to active management of durations, credit spreads and equity exposure. We extended our securitisation strategy, structuring and selling capital market instruments based on pools of future life insurance cash flows, extreme mortality risks and, more recently, indemnity-based credit reinsurance. The total value of insurancelinked securities issued by Swiss Re in 2005 and early 2006 amounted to USD 1.4 billion.
Natural catastrophes are not just loss events: they are terrible human tragedies. Our industry plays a critical role in enabling communities to rebuild and economies to grow. We encourage governments to seek ways to mitigate losses, including land use planning and building codes, in order to expand the capacity of the private sector to manage natural disaster risks.
The realignment of the Group’s management structure announced in June was completed ahead of schedule. The new structure brings us closer to our clients and sharpens our focus on underwriting quality, product development and risk transformation. Clients have reacted positively to this change and the benefits, in terms of operational efficiencies and product innovation, are already being felt.
After successfully leading Swiss Re for three years and strengthening the Group’s balance sheet, John Coomber was succeeded as Chief Executive Officer by Jacques Aigrain on 1 January 2006. We are delighted that John was also elected to our Board of Directors at the EGM. His wealth of experience and profound knowledge of Swiss Re make him an excellent addition to the Board. Jacques Aigrain joined Swiss Re as Head of Financial Services in June 2001 and was appointed Deputy Chief Executive Officer at the beginning of 2005. His achievements while leading Financial Services and his extensive experience in capital markets and corporate finance are essential credentials for leading the Group into a new phase of its development.
Phillip Colebatch retired as Head of Capital Management and Advisory on 31 January 2006. We thank Phillip for his exceptional contribution to making Swiss Re a prominent player in risk financing and securitisation.
As we announced on 25 August 2005, the Board of Directors will recommend increasing the dividend from CHF 1.60 per share in 2005 to CHF 2.50 per share in 2006. This reflects the Group’s restored financial strength and the Board’s confidence in future earnings.
Going forward, we will expand Swiss Re’s franchise as a global leader in wholesale financial services, capturing the full potential of the market. As a leadership team, we have greatly enjoyed our close cooperation and look forward to the coming months during which we will implement our integration plan with the GEIS management and build on our successes to deliver strong and sustainable earnings.
Peter Forstmoser Jacques Aigrain Chairman Chief Executive Officer as of 1 January 2006
Walter B. Kielholz John R. Coomber Executive Vice Chairman Chief Executive Officer until 31 December 2005
* Member of the Executive Committee – see picture on page 6
W. Weldon Wilson Americas Life & Health & Global Admin ReSM
Swiss Re’s global reach Founded in Zurich, Switzerland in 1863, the Group employs a staff of some 8 800 at more than 70 offices in over 30 countries. This global reach enables Swiss Re to offer its expertise and to service its clients throughout the world.
Swiss Re’s business Swiss Re’s reinsurance products and services are complemented by activities in financial services where it leverages capabilities in capital management and leadership in insurance -linked securitisation. Swiss Re’s success is based on high-quality risk assessment, a business which is highly diversified both by line of business and by geography, as well as very strong capitalisation.
Swiss Re’s value creation Swiss Re endeavours to be recognised as the industry leader for its broad knowledge of risk transfer, risk financing and asset management, generating economic benefits for its clients. At the same time, the Group strives to create value and produce attractive financial returns for its shareholders.
What are the trends shaping your business environment, and how is Swiss Re responding? In recent years the risk landscape has been changing quite dramatically. Two particular trends stand out: event-driven risks are increasing in size, and liability exposure is demanding continuous and close attention. Size and diversification of portfolios are of growing importance. Clients are seeking strong players who are able to provide reliable capacity and security. In a world of ever increasing financial size and complexity – a description which of course includes our clients – our strong balance sheet, risk-taking capacity, and innovative solutions continue to be critical success factors.
We have further developed – and continue to develop – our own internal integrated risk model, used to determine the capital required to support the risks on Swiss Re’s books and to allocate risk-taking capacity to lines of business. In parallel, the regulatory landscape is changing. Through the Solvency II project, the European Union is signalling a shift from rule-based to risk-based economic capital requirements for our industry. The introduction of Solvency II has the potential to impact the insurance industry to the same degree as the Basel capital framework revolutionised the banking industry in the ’90s. We welcome this change and actively share our expertise in capital management and risk modelling with regulators and clients to improve risk management practices in the industry.
Which factors do you see driving your business going forward? Insurance is a growth business. It has grown and will continue to grow at a steady pace above GDP over the long term. Asia, particularly China and India, will continue to experience strong growth over the next decade, and, as their underlying economies mature, demand for reinsurance will likewise increase.
cost of risk for the end customers, whether retail or commercial. So, although we will continue to optimise our balance sheet, we will not shrink our ability to absorb uncertainty.
How do you assess Swiss Re’s performance and how do you see it developing? We cannot escape the hard fact that our performance has been disappointing in recent years. This results from an excess of enthusiasm in underwriting US liabilities in the late ’90s, a sad and unforeseen disaster in 2001, a random and extreme weather event in 2004, and a worse one in 2005.
During such a difficult period, Swiss Re demonstrated its real strength by rebuilding capital to a superior level, ensuring a better absorption of volatility and thus taking a decisive path towards more resilient earnings patterns. An interesting indicator is actually our operating cash flow, which far exceeded net income – even during years of major one-off events, such as 2001 when we generated CHF 3 billion operating cash flow and furthermore reached CHF 4.5 billion in 2005 despite all the hurricane activity. I would suggest this is one important indicator for quality of earnings.
Swiss Re has been a strong advocate of securitisation. How do you see it progressing?
It is my firm belief that reinsurance will continue to expand into wider forms of capital market solutions. In some ways insurance is comparable to a derivative product: the provider receives a premium upfront for the promise to fulfil a contingent obligation in the future. This is structurally similar to interest rate, credit, or currency derivatives, where a payment of a premium or spread upfront or over time is made against the promise of a future value that is uncertain and dependent upon time and financial market factors. Conceptually, there is no reason why insurance exposure could not be traded between financial market participants.
Practically, however, insurance products may need to be further standardised before they can be traded: consistent documentation and contracts, common definitions of events for specific pools of business, uniform claims payment criteria are some of the areas that will probably need to be tackled. This will be a lengthy process and will certainly not apply equally to all lines of business and types of cover.
What is the rationale behind the new management structure introduced in 2005? The goal was to align our management structure to reflect our strategic priorities, bringing the organisation closer to our clients. By separating underwriting and client-facing functions, we have enhanced the role of client managers and improved checks and balances between sales and pricing. The new alignment allows us to optimise capital allocation and establish uniform methods for measuring return on risk for both life and non-life businesses. The global functions will help us drive simplification, efficiency
gains and operational quality improvements. One firm worldwide, matched by one set of pro cesses.
A business driver Risk management and underwriting know-how are critical success factors and core competencies in the reinsurance value chain. Swiss Re’s success is based on its ability to develop knowledge and deploy expertise to the ultimate benefit of its clients and stakeholders.
The Group’s expertise is further enhanced through knowledge management initiatives such as the Group-wide Knowledge
In August 2005, the first Nordic Risk and Insurance Summit (NORIS) in Copenhagen brought together key Swiss Re staff and clients active in the Nordic markets. The summit’s purposes included sharing Swiss Re’s expertise in managing risk and capital, strengthening business contacts, and defining broader themes in the Nordic insurance industry. Attendees particularly valued the chance to discuss insurance-relevant issues, explore the interplay between local and global industry topics, and meet other stakeholders.
Highlights for 2005 included the China Sustainability Summit, the Chief Risk Officer (CRO) Assembly, as well as the conferences on Pervasive Computing and Critical Information Infrastructure Protection.
Swiss Insurance Training Centre Swiss Re offers courses through the Swiss Insurance Training Centre (SITC), which serves insurance professionals at different career levels. Since its founding in 1960, the SITC has attracted participants from more than 135 countries. Today, the SITC offers a modern, skills-based agenda covering both general and specialised insurance courses – 25 seminars in 2005, for almost 400 insurance professionals.
The SITC’s On Wings programme provides customised, on-site courses to Swiss Re clients abroad. In 2005, On Wings conducted eight seminars in locations as diverse as Bahrain, Trinidad, Bosnia and Herzegovina and Poland.
Client seminars and workshops Each year, Swiss Re holds client seminars and other events tailored to specific industries or regions. Key events in 2005 included the Nordic Risk and Insurance Summit (NORIS), in Copenhagen, and the Product and Knowledge Fair in Sydney.
Publication series Swiss Re’s technical publications and sigma series cover key market topics, providing in-depth reinsurance knowledge to clients and the broader public. Swiss Re produced six technical publications in 2005, including “Special risks and contingency cover insurance”, which examines the complex task of underwriting major sporting events, as well as “Tsunami in South Asia: building financial protection”, which explains how developing countries can mitigate financial losses from a natural catastrophe. Swiss Re also produced five sigma publications, including “Insurance in emerging markets: focus on liability developments”: a concise analysis of the recent growth trends in emerging markets and the opportunities and threats they pose for insurers. A sigma study on cost of capital was also published. Comprehensive information on Swiss Re’s publications is available on its website.
www.swissre.com Swiss Re’s public website provides business information on topics relating to the Group and the insurance industry. Swiss Re Portal, dedicated to clients, offers targeted, market-specific knowledge and information to over 10 000 registered users. In 2005, Life Guide, the Web version of Swiss Re’s established life and health underwriting guidelines and an invaluable reference for clients in their day-to-day underwriting decisions, was extended to several major markets, including Australia and the UK.
The sigma study further assesses an insurer’s cost of capital by examining separately its insurance and financial market risk exposure using the asset-liability management techniques Swiss Re applies to its own business. It reveals that different investment strategies have a neutral overall effect on the price-to-book ratio. This makes it difficult for insurers to earn higher returns through investment strategies that simply involve taking on more market risk (although there remain powerful tax and liquidity reasons for insurers to invest in corporate bonds and shares). The conclusion is that insurers should remain focused on profitable underwriting and growth.
Swiss Re’s business opportunities come from the world’s changing risk landscape. Identi fying emerging risks and industry trends and sharing Swiss Re’s knowledge are all essential to the Group’s success. The table below lists a selection of Swiss Re’s Top Topics for 2005 and beyond, with the Group’s related activities.
 Climate change represents an opportunity as well as a risk for the insurance industry and capital markets alike
 Swiss Re has been addressing the challenges of climate change for more than ten years
 ILS helps reduce capital requirements and increase capital efficiency. It lowers earnings volatility and, in the case of life insurance, monetises intangibles
 Swiss Re is a leading structurer and underwriter of bonds for clients and has introduced numerous innovations such as embedded value life securitisations
Nanotechnology  Nanotechnology is expected to generate a range of new products and applications in many industry sectors
 Swiss Re has dedicated resources to assess the potential risks of nanotechnology and promote the development of tailored risk management principles
 The insurance industry is experiencing higher claims due largely to greater insurance cover and growing value concentrations
 A viable market for catastrophe risk depends on ensuring adequate pricing models that reflect climate variability and climate change
 As a leading reinsurer, Swiss Re diversifies the year-onyear variability inherent in natural catastrophe business
 Swiss Re continuously refines its modelling tools to reflect changes in risk assessment and economic developments
 Solvency requirements must recognise the global nature of reinsurance, particularly diversification effects, and ensure optimal capital efficiency
 Swiss Re welcomes the extension of the Terrorism Risk Insurance Act (TRIA) in the US and continues to work with the US government, as well as other countries, to find a permanent solution based on risk partnership
 United States (S & P 500)  United Kingdom (FTSE 100)  DJ Euro STOXX 50  Japan (TOPIX)  Switzerland (SMI)
The fundamentals of the global insurance industry remained strong in 2005. Record catastrophe losses in the US affected the results of the property and casualty industry. The capital base of global life insurers strengthened further.
Capital markets stable, yields moderate, dollar rising The global economy saw solid GDP growth in 2005, despite soaring energy prices: the US grew about 3.6%, Western Europe about 1.5% and Japan 2.5%. Emerging markets grew by more than 6%: the 9% growth of the Chinese economy in particular contributed to global expansion, although it sparked shortages and price increases in many commodity markets.
The rise in oil prices also resulted from supply-side concerns in several oilexporting countries, as well as speculative activity.
A three-year slide in the value of the US dollar reversed at the beginning of 2005. It rose against all major currencies during the first six months of the year.
Property and casualty insurance industry: record high catastrophe losses led to negative underwriting results 2005 was an uneven underwriting year for both insurers and reinsurers. Natural catastrophes led to total insured losses of about USD 78 billion – almost double the previous year’s record – of which reinsurers will pay roughly half. USD 45 billion of the losses stem from Hurricane Katrina, which devastated the New Orleans area as well as oil production facilities in the Gulf of Mexico.
Property and casualty premium growth slowed further in 2005, for both insurers and reinsurers. Although the increase in general economic activity triggered a rise in insurance demand, there was no repeat of the substantial rate increases of 2002 and 2003.
Swiss Re has a team of 20 economists based in Zurich, New York and Hong Kong. Together, they are the Group’s centre of competence for economic analysis of risk transfer and risk financing solutions, global business cycles and financial markets. Swiss Re shares its economic research results in the sigma studies, a recognised source of market information for more than thirty years.
All sigma studies may be downloaded electronically or ordered as a free print copy from Swiss Re’s homepage at www.swissre.com. They are available in English, German, French, Spanish, Italian, Japanese and Chinese.
17 March Swiss Re’s 2004 results Swiss Re’s 2004 results showed net income increasing to CHF 2.5 billion or CHF 8.00 per share. All three business groups contributed to the strong performance and an excellent return on investments further enhanced Swiss Re’s 2004 earnings.
14 April Swiss Re closes second life catastrophe bond Swiss Re successfully transferred USD 362 million of mortality risk to the capital markets through the Vita Capital II programme. Swiss Re Capital Markets Corporation, acting as sole bookrunner, privately placed the securities with institutional investors.
1 Swiss Re continues to advance its leadership in the securitisation of insurance risks.
25 August Swiss Re appoints Jacques Aigrain as CEO Swiss Re’s Board of Directors appointed Jacques Aigrain Chief Executive Officer, effective 1 January 2006. Jacques Aigrain, former Deputy CEO of Swiss Re, succeeded John R. Coomber, who retired as of 31 December 2005.
12 September Hurricane Katrina claims Swiss Re announced that it expects the total insured loss from Hurricane Katrina for the insurance industry to be in the range of USD 45 billion. Accordingly, Swiss Re estimated its own claims to be in the range of USD 1.2 billion.
2 November Hurricanes Rita and Wilma claims Swiss Re announced that it expected its aggregate claims for Hurricanes Rita and Wilma to be approximately USD 750 million.
18 November Swiss Re to acquire GE Insurance Solutions Swiss Re agreed to acquire GE Insurance Solutions, the fifth largest reinsurer worldwide, from General Electric Company (GE) in a USD 6.8 billion transaction. This financially attractive acquisition adds a strong franchise to Swiss Re, complementing its own strengths.
8 December Swiss Re places CHF 1.0 billion mandatory convertible securities Swiss Re successfully completed the bookbuilding process for a CHF 1.0 billion offering of mandatory convertible securities due 2008.
28 December Swiss Re completes second securitisation of in-force life insurance policies Following its first transaction in January 2005, Swiss Re completed another securitisation of future profits from a portfolio of US life insurance policies. The ALPS transaction is a USD 370 million issue and benefits Swiss Re by transferring insurance risk to the capital markets, thereby increasing capital efficiency.
2 Aerial and ground views of Hurricane Katrina, which made landfall in Louisiana, US. 3 Swiss Re headquarters in Zurich, Switzerland.
Premiums earned decreased by 6% to CHF 27.8 billion compared to 2004.
The Property & Casualty business reported premiums earned of CHF 16.4 billion, down 11% from 2004. The decrease was mainly due to disciplined underwriting, especially in liability business, leading to cancelled business, as well as lower demand for non-traditional products as clients’ balance sheets improved.
Premiums for the Credit Solutions unit of the Financial Services business remained stable at CHF 0.9 billion.
Net realised investment gains were CHF 1.2 billion in 2005, driven by active management of duration and credit exposure on fixed income securities and a solid stream of capital gains on equities. This represents an increase of 12% compared to 2004.
Claims and claim adjustment expenses and life and health benefits increased from CHF 23.2 billion to CHF 23.7 billion, reflecting the impact of substantial natural catastrophe claims in the property and offshore marine portfolios in 2005. The increase in life and health benefits was mainly due to the full-year inclusion of the Admin ReSM acquisitions completed during 2004.
Net income of CHF 1.5 billion impacted by the magnitude of natural catastrophe losses during the year.
The tax expense in 2005 was CHF 522 million. This represents an effective tax rate in 2005 of 26.5%, largely unchanged from 2004.
Net income was CHF 1.5 billion, compared to net income of CHF 2.5 billion in 2004, reflecting the impact of the large natural catastrophes during the year. Earnings per share decreased to CHF 4.68 from CHF 8.00 in 2004.
Net cash flows from operating activities remained strong at CHF 4.5 billion, although down from CHF 6.6 billion in 2005, attributable to lower premium volumes and increased claim payments due to the large natural catastrophe events.
Shareholders’ equity increased from CHF 19.2 billion to CHF 22.9 billion. The increase was principally due to earnings over the year, unrealised gains on equity securities and the positive currency exchange effect generated by the recovery of the US dollar year-end rate versus the Swiss franc. Return on equity declined to 6.7% from 13.6% in 2004.
Net realised gains or losses on certain financial instruments, amortisation of goodwill and other income and expenses – such as indirect taxes, capital taxes and interest charges – have been excluded in the assessment of each segment’s performance.
Items excluded from the segments: Net realised investment gains 26 18 –31
Asset management strategy Swiss Re’s investment strategy is a combination of meeting the Group’s insurance obligations and achieving an attractive risk-adjusted return. Swiss Re principally matches its insurance obligations with fixed income securities, actively managing the duration and credit exposure taking into account the differing requirements of the liabilities. Funds not used to support insurance obligations are managed to generate a positive absolute risk-adjusted return through a variety of investment vehicles. Swiss Re measures and monitors investment risk in relation to the minimum risk portfolio, which represents the liability profile of the business, and also as a function of the Group’s overall capital adequacy.
Investment performance The overall investment result, including net realised gains, rose 11% in 2005 to
The investment portfolio grew by 20%, from CHF 95.4 billion to CHF 114.9 billion; this was mostly due to currency movements and strong cash flows from operations and investments. The share of the portfolio in fixed income investments de-
Fixed income The Federal Reserve Bank in the US continued to tighten monetary policy during 2005 by raising short-term interest rates in regular incremental steps. In the fourth quarter, the European Central Bank made a first step in the same direction, whereas the Bank of England lowered its base rate slightly. At the same time, yield curves continued to flatten in all major currencies. Swiss Re successfully navigated this environment, actively managing yield curve and interest rate risks to earn attractive returns while taking care to protect the portfolio against the risk of rapid rate rises.
The Group extended durations for most of its non-life fixed income accounts and the aggregate portfolio duration increased from 4.7 years at the end of 2004 to 5.7 years at the end of 2005, as mid-term yields in the US rose from 3.6% to 4.4% over the same period. Swiss Re successfully adjusted duration throughout the year as interest rates moved within their trading range.
Swiss Re’s fixed income portfolio rose to CHF 102 billion in 2005 from CHF 86 billion in 2004, due to the same factors that produced overall portfolio growth. Net investment income on the fixed income portfolio grew by 11% at constant exchange rates. Net realised gains were CHF 481 million, up from CHF 227 million in 2004.
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.
The insurance risk balance sheet shows the market-consistent value of insurance liabilities and capital on the liability side and a “minimum risk portfolio” on the asset side. This notional portfolio represents investments – typically cash and fixed income instruments replicating the risk characteristics of future liability cash flows – that minimise financial market risk relative to the liabilities.
The market risk balance sheet shows the Group’s actual investments on the asset side and the minimum risk portfolio as a liability, which is then used as the basis for setting Swiss Re asset management’s benchmark. Combining both balance sheets reproduces the full Group balance sheet.
Swiss Re’s ALM team regularly monitors the net impact on the market risk balance sheet from changes in interest rates, credit spreads, equity markets, real estate prices and currencies. Financial market risk is assessed by sensitivity and scenario analysis and quantified in terms of Value at Risk (VaR) and expected shortfall at various confidence levels.
ance sheet were CHF 1.1 billion, up from CHF 0.4 billion at the end of 2004.
The following information is a summary of the audited 2004 and 2005 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.
Purchase/sale of treasury shares and shares issued under employee plans –119 –62 –48
Deferred acquisition costs and other intangible assets 11 611 12 175 5
Unpaid claims and claim adjustment expenses 61 619 71 272 16
Liabilities for life and health policy benefits 43 239 49 579 15
Key business topics Swiss Re’s property and casualty business was impacted by a number of significant insurance events and market developments in 2005.
Aside from natural perils, the market experienced a number of significant manmade property losses, including a fire at an oil-sands plant in Canada and an explosion at a UK fuel storage tank facility. These events accelerated price rises in the energy sector.
Terrorism remains an important issue, although the attack in London in July was not a significant insurance event. Swiss Re supports permanent market solutions based on a partnership between insured parties, insurers, capital markets and governments. In France, such a partnership was enhanced when state participation was extended to include mid-sized and small risks, in addition to large industrial risks. In the US, legislators extended the Terrorism Risk Insurance Act (TRIA) for another two years.
Global casualty premium rates came under pressure but remained at attractive levels during 2005 except in a few liability lines where Swiss Re considered rate reductions to be unjustified.
Swiss Re welcomes recent developments in the US legal landscape following positive legislative changes and court rulings in general third-party liability, product
In Europe, compensation levels for bodily injury claims are still rising and European class action legislation is emerging – although not to the same extent as in the US. Profitable underwriting depends on closely monitoring these trends. Swiss Re is particularly active in emerging Asian markets where legal and social changes have increased liability awareness, creating greater demand for liability insurance products.
Business results Operating income declined to CHF 1.0 billion from CHF 2.7 billion in the previous year. The key factor in this decline was the impact of extraordinary claims arising from natural catastrophes, which increased by CHF 1.6 billion to CHF 2.5 billion in 2005, after release from equalisation reserves of CHF 613 million. This represented 15% of premiums earned, compared with 5% in the previous year.
Net investment income increased by CHF 345 million, to CHF 1.9 billion, reflecting strong cash flows, rising interest rates and the extension of durations during the year. Realised gains reduced by CHF 117 million to CHF 810 million.
Premiums earned Premiums earned declined by 11%, reflecting reductions of 5% in traditional business and 43% in non-traditional business. Traditional volumes were affected by a 12% decrease in facultative and direct corporate business and a 3% reduction in treaty business, in line with indications at the time of the 2005 renewals. The treaty renewals during the year were characterised by Swiss Re’s actions to reduce liability business and by stable volume in property.
Combined ratio The combined ratio for traditional business increased from 97.2% in 2004 to 110.3% in 2005. This increase is largely due to the exceptional level of natural catastrophe claims compared to last year, which, net of equalisation reserves releases, reduced traditional income by CHF 1.4 billion, or 10 percentage points of traditional premiums earned.
Property premiums remained unchanged, with a reduction in facultative premiums being offset by a shift from liability to property in the 2005 treaty renewals.
Large North Atlantic hurricane claims, totalling CHF 1.1 billion, overwhelmed strong underlying performance for the year, and an excellent result from Asia. After a relatively heavy year for natural catastrophes in 2004, Asia benefited from a lighter burden of large natural catastrophe claims in 2005.
The hurricane losses led to an industrywide re-evaluation of North Atlantic exposure and prices for affected areas moved sharply upward in the second half of the year. To a somewhat lesser extent this upward price pressure carried through to other peak natural catastrophe exposures, including windstorm Europe. Unaffected catastrophe risks in non-peak exposures remained stable.
Liability rates overall were lower, with downward pressure being exerted in
those lines which have experienced substantial increases over the past three years. Swiss Re maintained its disciplined underwriting, and accordingly discontinued significant volumes of business for the more uncertain and volatile long-tail lines, such as directors’ and officers’ and US professional covers in general. Swiss Re’s strong stand on pharmaceutical terms and conditions also caused significant loss of premium volume.
Consistent with industry-wide experience, adverse development continued to drag down the performance of liability business. The effect of the negative development, primarily for years 1999 to 2001, was strongly reflected in the poor combined ratio and further magnified by the 11% reduction in premiums.
Conditions in the US primary workers’ compensation market have improved and the premium growth of 20% is entirely due to one large workers’ compensation contract. Stricter case management and legislative reform led to reduced overall claims costs in the market. The combined ratio increased, reflecting the writing of the large and profitable long-tail treaty. Pricing and coverage remained relatively unchanged for catastrophe workers’ compensation products, which again produced satisfactory results.
Engineering showed positive results, due to a lack of major claims and continuing strong premium levels. Marine benefited from small increases in original rates, while overall premiums fell because of selective underwriting.
Swiss Re’s marine results were severely affected by the CHF 299 million impact of
the Atlantic hurricanes, particularly to the offshore energy portfolio, which had a 14 percentage point impact on the combined ratio.
Premiums fell by 8% reflecting softer rates in the first half of the year, which led to less business meeting Swiss Re’s pricing requirements.
In property, Swiss Re benefited from far better terms in the second half of the year, following the hurricanes. The resulting opportunities, which also arose in non-directly exposed markets, were actively pursued.
In casualty, competitive pressures pushed rates down but a strict underwriting approach helped secure sound economic terms for the portfolio. Aviation and space rates were under pressure in the main airline and space markets, after a few years with low frequency of major events. Rates were more stable in the product manufacturers’ and general aviation segments.
China’s steady economic liberalisation has spurred major growth in its insurance market since 2001, when the country joined the World Trade Organization (WTO). As the industry continues to evolve, Swiss Re is actively helping to develop a sophisticated risk management culture and stimulate pro d uct development.
So, although liability insurance currently only constitutes 3% of China’s property and casualty insurance market, it will clearly be crucial to the economy’s sustainable growth.
Swiss Re has been advising Chinese insurers to steer their liability regime away from some western examples, particularly the US, which have become expensive welfare transfer mechanisms. In 2005, Swiss Re discussed global and local trends and the future of Chinese liability insurance with stakeholders at two conferences in Beijing and Shanghai, which attracted almost 400 industry players. Led by Ruediger Otto, Head of Casualty Underwriting in Swiss Re’s Asia Division, and Eric Gan, Manager of Facultative Casualty business for Greater China, and supported by Swiss Re’s Chief Claims Strategist, Rick Murray, these seminars have triggered a product development surge in China’s liability market.
“Our success lies in knowing and listening to our clients, and bringing the best of international product knowledge and technology to help Chinese insurers create a stateof -the-art risk management framework in the shortest time possible.”
Franz Josef Hahn, Head of Property & Casualty Greater China, Asia Division
Swiss Re is pursuing new product development in China and investigating e-business tools that add convenience for policy buyers, enhance distributor efficiency and speed up backoffice processing. To this end, the Group has been working with a key multi-branch national client and local direct distribution specialists to create a motor excess of loss reinsurance policy that goes well beyond compulsory cover limits to meet the more sophisticated needs of China’s increasingly affluent vehicle owners.
Claims and claim adjustment expenses; life and health benefits –9 331 –9 521 2
Admin ReSM 387 381 –2 tional health business improved from 9.3% in 2004 to 9.6% in 2005, as reserve strengthening for discontinued lines in the US was more than offset by positive claims experience from the income protection lines in Europe.
Growth in the traditional life operating revenues was low due to the reduction in cession rates in the US combined with the impact of Swiss Re’s 2004 repricing initiative. This was partially offset by strong underlying growth in Asia, particularly in Japan and Australia.
In addition, the traditional life business continued to benefit from good mortality experience in all markets.
The return on operating revenues increased to 9.6% following positive claims experience largely on continuing income protection lines in Europe. This was somewhat offset by reserve strengthening in discontinued lines in the US.
The growth in operating revenues of 6% is due to the first full year of the 2004 acquistions offset by the impact of the Queensgate retrocession. Excluding the impact of this retrocession, the growth would have been 14%.
Primary life insurance places considerable demands on capital: initial statutory reserves, solvency capital and commission can total several times the first year’s premium. Reinsurance can help to ease this capital strain and, with progressively more sophisticated structures, has the increasing potential to enable life insurers to further enhance their profitability.
Life insurance is a long-term business: the profits for a portfolio of in-force life risks typically take many years to emerge. Yet tomorrow’s mortality margins can be given a value today. Under a reinsurance arrangement called “sale of mortality margins” (SMM), a life insurer can sell this in-force value to a reinsurer. In return, the life insurer receives capital management benefits on both sides of its balance sheet.
On the asset side, a sum falls due from the reinsurer in the form of a commission; this can count towards the capital the life insurer must hold for regulatory purposes. The effect is that the insurer can immediately use the corresponding increase in free assets to write new business, improve its rating or increase returns to shareholders.
To ensure that claims can be paid, insurers estimate the future experience of their
An SMM arrangement can be structured to reinsure 100% of the mortality risk retained within blocks of business prior to the transaction. However, to ensure an alignment of interest in claims management between the two parties, the insurer should ideally keep part of the risk. Subject to this, insurers have a high degree of flexibility as to the business comprised within the reinsured portfolio and could choose, for example, to reinsure a block of short duration term assurance business with a 50% quota share, or a longer-term block with a higher proportion reinsured.
Key business topics In 2005, Swiss Re benefited from a favourable credit environment and from its active monitoring of counterparty credit quality. The structured products and credit derivatives markets continued to grow in size and complexity. Financial Services further expanded its capabilities in these areas, investing in people and technical resources to offer structuring, trading and risk underwriting capabilities to third-party clients and to Swiss Re.
Swiss Re is the market leader in trade credit reinsurance and a successful player in the field of structured credit and financial guarantee transactions. 2005 was another excellent year for Swiss Re’s Credit Solutions, producing strong revenues and above average operating income. While further consolidating its position in the reinsurance area, Credit Solutions successfully expanded in the structured credit and capital markets arena.
With revenues over CHF 1.0 billion, highly diversified in terms of geography and underlying risk, the Credit Solutions business sector is well positioned to leverage its expertise in the growing credit market and will benefit from the ongoing convergence between insurance, reinsurance, banking and capital markets.
The global insurance industry requires new sources of risk capital as the size and frequency of insured events grow. Concurrently, the industry is striving to increase capital efficiency through alternative sources of finance. Insurance-linked securitisation achieves both of these aims.
The global insurance industry has substantial risk-taking capacity, but the global capital markets’ capacity is much larger. By developing techniques to transfer risk from the insurance to the capital markets, reinsurers are opening a vast pool of risk underwriting capacity that will enable greater risk transfer and improve capital efficiency.
The fundamental basis of insurance is risk diversification: the premiums of the many pay for the losses of the few. Transferring risk from the individual policyholder to an insurance company both diversifies risk and gives individual security for further economic risk taking. By the same token, transferring risk from the insurer to the reinsurer provides a second order of risk diversification, increasing the economic efficiency of the process and enabling insurers themselves to take on more risk. By transferring risks once again to the financial markets, reinsurers can further improve capital efficiency, reduce insurance costs and provide greater capa city to their customers – the insurance com panies.
Securitisation is an efficient way to transfer insurance risks to the capital markets: a reinsurer can bundle together a particular class of risk – California earthquake, for
Institutional investors now dominate the insurance-linked securities investor base, which includes some of the largest global fixed-income money managers and multi-strategy hedge funds.
Insurance-linked securities (ILS) offer an attractive risk/return profile – one that does not generally correlate with other investments, thus helping to diversify the investor’s own portfolio. For the insurance industry, investors’ capital provides a secure source of funding, should a specific event occur.
Since the inception of the market in 1997, over USD 22.4 billion of ILS have been issued. There are currently approximately
USD 16.9 billion of ILS outstanding, about USD 5.1 billion in the non-life sector and USD 11.8 billion in the life sector. Swiss Re issued its first securitisations in 1997, after two major catastrophic events, Hurricane Andrew in Florida and the Northridge earthquake in California, put significant strain on the capacity of the global insurance and reinsurance industries.
Most Swiss Re securitisations have been for low-frequency, high-severity risks, otherwise known as catastrophe risks. Increasingly, however, the Group is applying this method to the monetisation of future insurance profits, including embedded value life securitisation. Transferring risk to the capital markets to increase capacity, diversification and efficiency is becoming a core part of reinsurance practice.
New solutions for improved capital efficiency are being sought since natural catastrophes continue to grow in dimension and frequency. Through its leadership in securitisation, Swiss Re con tinues to create attractive solutions for transferring risks to the global capital markets.
One such scenario would be a global pandemic on the scale of the 1918 “Spanish” influenza. The SARS outbreak of 2003 in Asia threatened to develop in this way; and experts are currently worried that avian influenza might mutate into a contagious and virulent human strain, spreading quickly around the world.
The new organisation places strong emphasis on underwriting quality, product development and knowledge. The separation of Products and Client Markets, and the resulting product focus, ensure that underwriting quality standards are continually improved. New products are being developed which will further enhance the services the Group offers its clients. Swiss Re’s Underwriting Development Programme continues to hire and train underwriters in order to reinforce these vital resources and meet growing demand in the emerging markets.
Business developments The January 2006 renewals of Swiss Re’s non-life reinsurance portfolio showed improvement in economic profit of approximately 7% and a premium volume increase of 1%. These results were achieved despite higher claims expectancy in natural catastrophes and casualty, higher client retentions and a shift towards higher layers.
In general, underwriting conditions were very attractive for most of the European business renewed in January. Property rates reflected the impact of natural catastrophe losses and rose from already high levels. Liability rates, while generally stable, did not rise as expected and Swiss Re was highly selective in underwriting profitable business. The renewal for credit and surety business was strong and Swiss Re further strengthened its leading position with key clients and market segments.
Offshore gulf energy and US hurricane accounts will renew later in the year, and Swiss Re anticipates pricing for these catexposed risks to be very favourable. Other property and specialty markets are likely to remain generally stable with local market -specific variations. For example, January renewals in Asia achieved excellent 23% growth with about half the treaty book renewing in January from predominantly emerging Asian markets. As the balance of business to be renewed is from more mature markets, Asian growth in the remainder of the year is expected to be lower.
The outlook for Financial Services remains positive. Swiss Re expects fee business to return to growth and increase its profitability in 2006. Swiss Re’s third-party asset management business should continue to expand its client base and provide increased fee-based earnings for Swiss Re under the Conning Asset Management brand. With the expansion to new markets and product lines in early 2006, the insurance -linked securities market is expected to continue its positive development with increased liquidity, new issuers and a more diversified investor base.
Financial targets Swiss Re maintains its targets of earnings per share growth of 10% and return on equity of 13% over the cycle, reflecting the Group’s commitment to grow returns for shareholders.
Risk management Controlled risk taking requires a strong risk management organisation and comprehensive risk management processes to identify, assess and control the Group’s risk exposures.
Clear accountability: Swiss Re operates on the principle of delegated authority. Business units are accountable for the risks they take and their incentives are aligned with Swiss Re’s overall business objectives.
Independent risk management function: to avoid conflicts of interest, dedicated specialised units monitor risktaking 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.
The Executive Committee is responsible for implementing the risk management framework through the following committees: The Group Capital and Capacity Allocation Committee is responsible for allocating capital and capacity (including individual credit counterparty limits), approving the risk limits for individual investment asset classes and any changes to the internal risk and capital methodology. The Group Products and Limits Committee determines the Group’s product policy and standards, grants reinsurance limits and decides on large or non-standard transactions.
The global risk management function is organised by risk categories with dedicated departments for credit and financial market risk, property and casualty risk, life and health risk and operational risk. Each of these departments is entrusted with Group-wide responsibility for identifying, assessing and controlling their allocated risks. The Corporate Integrated Risk Management Department is responsible for establishing overall risk transparency and assessing the combined impact of all risks. The Sustainability and Emerging Risks Unit scans the environment for emerging risks that may become significant for Swiss Re and coordinates Swiss Re’s efforts regarding sustainability. Finally, the Corporate Actuarial Department assesses life and non-life insurance liabilities from the accounting, statutory and economic perspectives.
Core risks are split into three broad categories: Insurance risk is the risk of incurring a financial loss as a result of a property, casualty, life or health insurance event. Financial market risk is the risk of assets and/or liabilities being negatively impacted by movements in the financial
Reputational risk is the risk that a particular event or behaviour has the potential to affect Swiss Re and negatively impact stakeholders’ perception of the Group, thus impairing its ability to operate effectively.
Maintaining its reputation is key to Swiss Re’s business. Reputational risk is mitigated by adhering to clear values described by the Group’s Code of Conduct. These values are supported by processes that facilitate early identification of risks and problem areas.
Integrated risk modelling Swiss Re has developed its own internal integrated risk model, which is used to determine the capital required to support the risks on Swiss Re’s books and allocate risk-taking capacity to lines of business. The model is continuously updated to reflect prevailing best practice.
In Switzerland, a similar approach to risk-based solvency control – the Swiss Solvency Test – is being implemented. Swiss Re welcomes these developments as they will establish risk-based solvency frameworks based on an economic valuation of both assets and liabilities and encourage sound risk management as well as proper governance structures. The use of internal models – validated by the supervisor – for calculating solvency capital requirements will support a better understanding of insurers’ risk landscapes. An important aspect of riskbased approaches is the recognition of the fundamental economic principle of diversification. For more than a decade, Swiss Re has adopted these principles in its internal view. It is therefore well prepared to meet the challenges of the emerging requirements and to actively contribute to the development of standards in various regulatory and professional bodies such as the Solvency IIrelated expert groups within the Comité Européen des Assurances (CEA) and the Chief Risk Officer (CRO) Forum.
dred. In addition to the overall Group 99% VaR, Table 1 gives the standalone 99% VaR for property and casualty, life and health, financial market, credit, and funding and liquidity risks. This clearly shows the diversification effect: the base capital requirement for the entire portfolio is smaller than the sum of the base capital requirements for the individual sub-portfolios.
Swiss Re’s overall risk exposure remained broadly stable between mid-2004 and mid-2005. The increase in life and health risk was mainly due to currency movements. This increase also includes the acquisition of Life Assurance Holding Corporation Ltd in the UK in August 2004, and was moderated by the effect of the issue of the second mortality index-linked Vita security completed in April 2005, providing coverage of USD 362 million for extreme mortality events.
In addition to the 99% VaR, Swiss Re uses other statistical measures, including a 99% expected shortfall. This measures the average of losses that occur with a frequency of less than once in one hundred years. The 99% expected shortfall is a more conservative risk capital measure than 99% VaR. Based on mid-2005 exposure data, the Group’s 99% expected shortfall amounted to CHF 15.6 billion and remained essentially unchanged compared to mid-2004 (CHF 15.5 billion).
Insurance risk management Property and casualty risk arises predominantly from the property, casualty (including motor), marine and aviation lines. Limits to prevent excessive exposure to any individual risk, or to the same underly-
¹ As disclosed in the Annual Report 2004 ² Between mid-2004 and mid-2005 there have been a few model improvements and data enhancements. They include enhanced models for natural catastrophes, improved modelling of the specific characteristics of securitisations and an improved simulation methodology for credit spread and credit migration risk.
ing risk, are monitored Group-wide and supported by a clearing and reporting system. In addition, each underwriter is given a defined limit per treaty programme and single risk. For exceptions there are well defined escalation procedures at various levels up to the Group Product and Limits Committee.
In 2004 and 2005 the insurance industry saw above average hurricane activity. There is mounting evidence that there is
There were three influenza pandemics in the 20th century, with greatly varying mortality rates. A typical pandemic affects approximately 30% of the global population, causing a high level of sickness together with a modest increase in mortality. Additional deaths are usually among the vulnerable population and concentrated in the very young and very old age groups. The great Spanish flu of 1918-19 was the worst pandemic in over 400 years, causing an estimated 20 to 50 million fatalities. Although death rates were generally highest in the developing countries, Europe and the US experienced an increase of 30% in population mortality.
It is the fear of a new pandemic on a similar scale that drives much of the recent speculation about the likelihood and severity of a new influenza pandemic arising from the H5N1 virus. The risk is that a completely new subtype of this virus could emerge against which there would be no, or little, immunity and which could be transmitted between humans. This would trigger a new influenza pandemic.
However, there has been a significant improvement in global health conditions since 1918 and population mortality has reduced significantly. In addition, the World Health Organisation (WHO) has effective surveillance and intervention programmes in place to identify any clusters of unusual deaths and to recommend travel and other restrictions. Such measures were effective during the SARS outbreak. While it is difficult to predict the impact of a new pandemic, it is likely that these factors, complemented by anti-viral drugs and improved vaccine developments, would cause significantly fewer mortalities than in 1918 –19, even if a virus of similar virulence did emerge.
Table 2 reports the expected claims of Swiss Re for each natural catastrophe loss event on a pre-tax basis, after allowing for retrocessions, risk swaps and securitisations. The figures take into account the fact that an event can trigger claims in various lines of business. For instance, the windstorm Europe scenario includes,
among others, claims from the motor line; the California earthquake scenario also reflects – but is not limited to – additional claims arising from workers’ compensation and general liability. The changes that have been made to the pricing models for Atlantic hurricane to include storm surge and to reflect frequency increases are currently being implemented in Swiss Re’s integrated risk model. The model already includes offshore exposures in the Gulf of Mexico.
The main procedures and limits are laid out in the Group Life & Health Reinsurance Guidelines that also include Pricing Framework Guidelines and Product Best Practice Guidance Notes. These give detailed guidance on pricing methodology and minimum return targets; they also provide critical success factors for product design carried out at business unit level.
The chart above compares market risk related revenues to the one-day VaR (calculated by scaling back the 10-day VaR). It shows that there was one back- testing exception in 2005 due to positions within the Credit Trading desk. The large positive profit at year end relates to positions within the Credit Structuring desk, the Asset-Backed Securities / Insurance-Linked Securities desk and the Treasury desk.
The estimated pre-tax claims for Swiss Re in the life and health scenario (Table 3) are based on the average sum at risk. For the US, the number of 300 000 excess deaths is greater than the upper end of the World Health Organisation’s (WHO) scenarios quoted in the text box on influenza pandemic (see page 51). Assuming that excess mortality is evenly spread across the population, which does not allow for the typically lower mortality experienced among the insured population, the test produces an estimate that is considered conservative (ie high). Changes in expected losses for Swiss Re to last year’s estimates are mainly due to changes in foreign exchange rates as highlighted in the comments related to Table 1 on page 50.
The equity scenario includes traded equities, private equities, equity derivatives, Guaranteed Minimum Death Benefit products and funding obligations arising from equity holdings in Swiss Re pension funds. The interest rate scenario shows the net impact on assets and liabilities from a rise in interest rates. Real estate exposure includes investments in real estate and own-use property.
Credit risk management Credit risk exposure within the Group arises directly from Swiss Re’s investment activities and its portfolio of assets and
Estimated economic impact of each single scenario in CHF billions as of 31 December 2005 30% fall in global equity markets –2.5 100 bp increase in global yield curves 0.4 15% fall in global real estate markets –0.7
The guidelines include a framework of limits based on the nature of the exposure and a detailed assessment of the counterparty ’s financial strength, the prevailing economic environment, industry position and qualitative factors. This 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 particularly close attention.
The management of operational risks is performed as close to their source as possible. Hence risk management is embedded in local operations and day-to-day business processes. Swiss Re’s operational risk management framework is consistent across the whole Group and comprises best-practice elements, including risk and control self-assessments (both topdown and bottom-up), loss and incident reporting, and key risk indicators. A number of enhancements to the operational risk management methodology, which is derived from the framework and supported by a Group-wide management information system, are being implemented during 2006.
Capital Management seeks to maintain an optimal capital structure, giving Swiss Re financial flexibility at optimal funding costs. Swiss Re operates according to a “one Group, one capital base” principle when allocating funds.
Dividing the available capital of CHF 32.6 billion by the base capital requirement of CHF 9.9 billion based on 99% VaR (see Available and required capital graph, page 54) gives a capital ade-
Rating agencies’ models differ in a number of areas from Swiss Re’s economic balance sheet: for instance, they do not give quantitative credit for diversification or full credit for life and health embedded value. Nevertheless, the trend of their specific capital adequacy ratios is similar to Swiss Re’s internal model.
Swiss Re’s very strong capitalisation, outstanding business position, excellent diversification and prudent capital and risk management are reflected in superior insurance financial strength ratings which are among the highest in the industry.
The acquisition of GE Insurance Solutions requires regulatory approval or notification in different jurisdictions. Swiss Re has been discussing details of the transaction and providing requested information to the main regulators in this context. Full approval from the various regulatory authorities has not yet been received.
Group Treasury activities in 2005 During 2005 Swiss Re repaid USD 180 million and GBP 150 million of senior financial leverage.
Swiss Re successfully renewed its USD 5 billion European Medium Term Note (EMTN) programme with dual registration on the Euro MTF in Luxembourg and on the SWX Swiss Exchange. The latter, a market innovation, allowed Swiss Re to access funding opportunities in the Swiss market most efficiently. As of the end of December 2005, outstanding EMTN issues amounted to an aggregate book value of USD 2.0 billion.
Swiss Re also has access to the US commercial paper market to meet liquidity requirements, currently having a USD 1.5 billion programme in place, as well as back-up credit lines and letter of credit facilities from several major banks.
In December 2005, Swiss Re launched a CHF 1.0 billion mandatory convertible security. Similar to the 2004 mandatory convertible, the issue receives 100% equity credit from the rating agencies. Net proceeds of the private offering are available to fund the acquisition of GE Insurance Solutions and for general corporate purposes. The shares underlying the mandatory convertible security are sourced from conditional share capital and shares reserved for corporate purposes.
In recognition of the Group’s overall achieve ments, the Dow Jones Sustainability Indexes named Swiss Re “industry leader” in 2005 for the fifth year running.
Climate change and hurricane activity 2005 saw an unprecedented number of hurricanes, just as 2004 was a record year for typhoons. Hurricane Wilma had the lowest central pressure ever recorded; Hurricane Katrina was the costliest in history, with estimated insured losses of USD 45 billion. These facts are worrying, although not in themselves proof of climate change. In fact there are three separate factors jointly at work: socio-economic changes that increase loss potential; natural climate variability; and man-made climate change. Much of the observed increase in hurricane-related losses since the late 1980s stems from higher value concentrations in coastal areas, such as Florida or Louisiana. The climate is also subject to natural variability: higher recent hurricane activity follows a phase of relatively low activity between 1965 and 1995. Yet extreme weather – floods and droughts as well as windstorms – is also likely to be influenced by man-made climate change. CO₂ concentrations in the atmosphere are at their highest level in 650 000 years and are contributing to rising air and sea surface temperatures. The average sea surface temperature rose by 0.6 °C in the 20th century; while it is not clear at present whether this will increase the frequency of hurricanes, it may well increase their severity.
Swiss Re’s approach Swiss Re addresses the implications of climate change for its business in four ways: Furthering risk knowledge Swiss Re cooperates with academic and other renowned institutions to study aspects of climate change relevant to its risk assessment. It carried out major projects in 2005 with the National Centre of Competence in Research on Climate in Switzerland, the Center for Health and the Global Environment at Harvard Medical School and the United Nations Development Programme (see page 58).
Developing products and solutions Swiss Re is a leader in developing insurance -linked securities and weather derivatives, which offer alternative ways of insuring against the effects of climate variability, both natural and man-made (see business case on page 59).
Reducing the carbon footprint In 2003, Swiss Re launched a programme to become greenhouse neutral within ten years, by reducing its per capita greenhouse gas emissions by 15% and offsetting the remainder through investments in the World Bank Carbon Community De-
In 2005, four locations began using renewable energy (Zurich: 30%, Munich, Paris and Rome: 100%), which helped to achieve further cuts in CO₂ emissions from power consumption. CO₂ emissions from business travel, however, continued to rise. The principal reasons for the increase registered in 2005 were the continuing growth of the Asian market and the special coordination efforts required for the Group’s realignment.
Swiss Re’s CO₂ figures have been independently verified by PricewaterhouseCoopers whose assurance statement will be published in the Sustainability Report 2005. The CO₂ figures for 2003 have been recalculated on the basis of improved data quality, explaining the slight variance from the 2003 figures published in last year’s report.
velopment Fund. The chart on page 57 shows the results achieved so far.
Swiss Re’s senior managers also make regular contributions to high-level meetings and conferences. In 2005, John Coomber took part in the inaugural Clinton Global Initiative roundtable and Jacques Aigrain attended the G8 climate change roundtable chaired by British Prime Minister Tony Blair.
Emerging risks New or changing risks that are hard to quantify are defined as emerging risks. Many of these risks are linked to environmental or social challenges. It is crucial for a reinsurer to identify, assess and integrate such risks early to secure its longterm success. In 2005, Swiss Re augmented its emerging risks capability, creating a dedicated unit at Group level and expanding its active role in the Chief Risk Officer Emerging Risk Initiative of the Geneva Association, the International Risk Governance Council and the World Economic Forum Global Risk Project.
watersheds. Out of almost 200 applications, an independent jury picked as joint winners projects in China and Ecuador, both of which focused on effective sanitation systems.
Support for tsunami victims: immediately after the catastrophic Indian Ocean tsunami, Swiss Re launched a donation campaign among its employees, matching their contributions to a total of USD 1.65 million. USD 300 000 was swiftly passed on to Caritas, Aid India and Habitat for Humanity; the remainder is being used for specific reconstruction projects. ICRC Corporate Support Group: in 2005, Swiss Re became a founding member of the International Committee of the Red Cross (ICRC) Corporate Support Group. As well as providing direct support for people affected by disaster, Swiss Re believes that long-term institutional expertise is essential for managing and preventing catastrophes.
“Weather risk derivatives give our clients a predictable way to manage unpredictability – and us an opportunity to diversify risk.”
For Swiss Re, weather derivatives represent more than simply an attractive growth market: they provide a practical method of advancing the corporate objective of sustainability. As well as structuring these products for companies in developed countries, Swiss Re works with global institutions, applying weather risk management techniques to solve problems faced by emerging countries.
In India, Swiss Re, direct insurance companies and banks jointly provide protection for Indian farmers against the risk of below-average monsoon rainfalls. Weather insurance policies, structured and priced by Swiss Re and distributed by local partners, have given thousands of Indian farmers an effective method for reducing the impact of uncertain weather on their livelihoods – just one way that Swiss Re’s expertise in risk management helps create sustainable solutions for global problems.
Corporate governance is the framework comprising a company’s organisation, structure, management and assurance functions. It is designed to ensure a corporation’s transparency, protecting the interests of shareholders and creating value for all stakeholders. Fostered against a background of major corporate failures and breakdowns, corporate governance, as well as legislative and regulatory developments, have been in the spotlight in recent years. Swiss Re takes a proactive approach to aligning investors’ expectations and interests with its own, and continues to conduct benchmarking with best practice standards.
As a Swiss publicly listed company, Swiss Re’s governance is measured against the Swiss Code of Best Practice governance recommendations. Swiss Re is also subject to the Directive on Information relating to Corporate Governance and its Annex and Commentary, issued by SWX Swiss Exchange and effective since 1 July 2002 (also referred to as the “SWX Directive“). Additionally, Swiss Re complies with the applicable local rules and regulations of all the countries in which it does business. As the SWX Directive has not changed since its inception, the information provided in this section of the Annual Report remains similar to preceding years, adhering strictly to the structure of the SWX Directive.
1 Group structure and shareholders, page 63 2 Capital structure, page 64 3 Board of Directors, page 69 4 Executive management, page 82 5 Compensation, shareholdings and loans, page 89 6 Shareholders’ participation rights, page 93 7 Changes of control and defence measures, page 94 8 Auditors, page 94 9 Information policy, page 96
As of 31 December 2005, there were two shareholders with a participation exceeding the 5% threshold of Swiss Re’s share capital.
b. The Capital Group Companies, Inc., domiciled in Los Angeles, informed SWX Swiss Exchange on 22 November 2005 that its holdings increased to 5.1% of Swiss Re’s voting rights.
No additional conditional capital and no authorised capital was created or approved in 2005.
As of 31 December 2005, Swiss Re’s total conditional capital outstanding amounted to CHF 2 659 564.80 consisting of 26 595 648 registered shares. Of these 26 595 648 shares, 20 000 000 shares were reserved for the exercise of conversion rights and warrants granted in connection with bonds or similar instruments and 6 595 648 shares for employee participation purposes. As of 31 December 2005 Swiss Reinsurance Company had no authorised share capital in place.
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 on the international capital markets. If preemptive 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.
With regard to the conditional capital for employee participation purposes, shareholders’ subscription rights are excluded. Such shares may be issued at a price below the current market price. The Board of Directors shall specify the precise conditions of issue. Swiss Re issued shares reserved for corporate purposes (“Vorratsaktien”) prior to the 2.1 Capital2.1 Capital 2.2 Authorised and conditional capital 2.2 Authorised and conditional capital
Conditional capital not needed in connection with the closing of GEIS acquisition will lapse
Authorised capital Up to 60 million shares in favour of GE: Share component of purchase price for GEIS¹
Up to 30 million shares for capital increase with share holders’
subscription rights: Possible funding of cash component of purchase price for
In 2004, the company’s share capital remained at CHF 32 million. Total reserves increased by 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.
As of 31 December 2005, Swiss Reinsurance Company’s share capital, including shares reserved for corporate purposes, amounted to CHF 32 209 274. It is fully paid-in and divided into 322 092 742 registered shares (each with a nominal value of CHF 0.10), of which 310 413 940 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 a limited voting power, privileged dividend entitlement or any other preferential rights; nor are there any other securities represent-
Status 31.12.2005 EGM decisions Status post EGM Number Share capital Number Share capital Number Share capital Form of share capital of shares in CHF millions of shares in CHF millions of shares in CHF millions of which reserved for corporate purposes 7 942 280 0.8 7 942 280 0.8 of which reserved to underlie convertible bonds 3 736 522 0.4 3 736 522 0.4
For convertible bonds or similar instruments 20 000 000 2.0 11 000 000 1.1 31 000 000 3.1
Total conditional capital to underlie convertible bonds 20 000 000 2.0 20 000 000 2.0 40 000 000 4.0 2.3 Changes in capital2.3 Changes in capital 2.4 Shares2.4 Shares
ing a part of the company’s share capital. Swiss Re’s capital structure ensures equal treatment of all shareholders in accordance with the principle “one share, one vote”.
(i) Holders may convert the bonds, due 2021 and issued in denominations of USD 10 000 principal amount and integral multiples thereof, into registered shares of Swiss Reinsurance Company (nominal value CHF 0.10 per share) at any time on and after 22 November 2001, and prior to the close of business on 21 November 2011, at a conversion price of CHF 207.19 per share and a fixed exchange rate of USD 1= CHF 1.6641. The exercise of this convertible bond will not affect Swiss Re’s conditional capital as Swiss Reinsurance Company purchased a call option to hedge the underlying shares. If bondholders exercise this convertible bond, Swiss Re will exercise the hedge option purchased to obtain the necessary shares without accessing Swiss Re’s conditional capital.
(ii) The Mandatory Convertible Bond (MCS) may, at the option of each holder, be converted into registered shares of Swiss Reinsurance Company at any time from 2 September 2004 until 4.00 pm CET on the business day (as defined in the prospectus) before 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 2.7 Convertible bonds and options2.7 Convertible bonds and options
the 20th trading day (as defined in the prospectus) prior to the maturity date. Holders exercising such early conversion right will be entitled initially to receive 15.796 shares, subject to adjustment as described in the prospectus, for each MCS. Unless previously converted, each MCS will be mandatorily converted on the maturity date into such number of registered shares of Swiss Re as is equal to the maturity conversion ratio. The maturity conversion ratio equals the arithmetic average of the 15 conversion ratios (calculated to five decimal places) calculated on the basis of the CHF closing prices of the shares on the virt-x (“closing price”) on each of the 15 consecutive trading days ending on the third trading day prior to the maturity date. For the purposes of calculating such arithmetic average, the conversion ratio for a given trading day is determined as follows: (i) if the closing price is less than or equal to the minimum conversion price of CHF 80.4140, the conversion ratio shall be equal to the maximum conversion ratio of initially 18.956 shares per MCS; (ii) if the closing price is greater than or equal to the maximum conversion price, of CHF 96.4968, the conversion ratio shall be equal to the minimum conversion ratio of initially 15.796 shares per MCS; and (iii) if the closing price is greater than the minimum conversion price, but less than the maximum conversion price, the conversion ratio shall be equal to EUR 1 000 multiplied by the fixed exchange rate (EUR 1 = CHF 1.5243) and divided by the closing price. Based on the closing price Swiss Re will be required to deliver between 10.6 million and 12.7 million shares created from conditional capital or shares reserved for corporate purposes.
Unless previously converted, each MCS will be mandatorily converted on the maturity date into such number of registered shares of Swiss Re as is equal to the maturity conversion ratio. The maturity conversion ratio equals the arithmetic average of the 15 conversion ratios calculated on the basis of the CHF closing prices of the shares on the virt-x (“closing price”) on each of the 15 consecutive trading days ending on the third trading day prior to the maturity date. For the purposes of calculating such arithmetic average, the conversion ratio for a given trading day is determined as follows: (i) if the closing price is less than or equal to the minimum conversion price of CHF 95.60, the conversion ratio shall be equal to the maximum conversion ratio of initially 1 046.0251 shares per MCS; (ii) 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 871.68759 shares per MCS; and (iii) if the closing price is greater than the minimum conversion price, but less than the maximum conversion price, the conversion ratio shall be equal to 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 or shares reserved for corporate purposes.
Options For details on stock options granted to Swiss Re employees, please refer to note 12 on “Stock compensation plans” on page 35–37 and to note 9 on “Shareholders’ equity”, page 29–30 of the Financial Statements and section 5.6 on page 91 of the Business Report.
With the exception of Walter Kielholz and John Coomber, who are both former CEOs, no member of the Board of Directors has ever held a management position in the Group.
Mr Forstmoser has been a law professor at the University of Zurich since 1974 and a partner of Niederer Kraft & Frey, Attorneys, in Zurich, since 1975. He is also chairman of the board of directors of Hesta AG and Hesta Tex AG, Zug, and a member of the boards of Mikron Holding AG, Biel, Bank Hofmann AG, Zurich, Ernst Basler AG, Zollikon, Remer Holding AG, Ennetbaden, and Hyos Invest Holding AG, Zurich.
At the beginning of 1989, Mr Kielholz joined Swiss Re, Zurich. He became a Member of the Executive Board in January 1993 and was Swiss Re’s Chief Executive Officer from 1 January 1997 to 31 December 2002. In June 1998 he was elected to Swiss Re’s Board of Directors, which at the same time appointed him Managing Director. His mandate was renewed for a further four year period in 2002. Mr Kielholz was appointed Executive Vice Chairman with effect from 1 January 2003. He will stand for re-election at the Annual General Meeting on 21 April 2006.
Mr Kielholz has been a member of the Board of Directors of Credit Suisse Group since 1999. He served as Chairman of the Audit Committee from 1999 to 2002 and as ViceChairman of the Board of Directors from 31 May 2002 to 31 December 2002. He has been Chairman of the Board of Directors and the chairman’s and governance committee since 1 January 2003.
In addition, Mr Kielholz is treasurer and a member of the Board of the International Association for the Study of Insurance Economics (“The Geneva Association”) in Geneva, Vice President of the International Monetary Conference, President of the “Avenir Suisse” Foundation and President of the Zurich Art Society.
Thomas W. Bechtler Non-executive and independent director Thomas W. Bechtler Non-executive and independent director
Mr Breu, a Swiss citizen born in 1945, graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a doctorate in mathematics.
Mr Coomber, a British citizen born in 1949, graduated in theoretical mechanics from Nottingham University in 1970.
Mr Dammerman, a US citizen born in 1945, graduated with a Bachelor of Science from the University of Dubuque, Iowa, US in 1967.
all General Electric positions. He also serves as a non-executive director of BlackRock Inc., New York. In addition, he is a member of the board of trustees of Skidmore College, Saratoga Springs, New York.
Mr Farr also serves as a director of Misys plc, London.
Ms Gibson Brandon, a Swiss citizen born in 1962, studied business and economics at the University of Geneva, graduating with a BA in 1982 and a PhD in economics and social sciences in 1987.
Mr Scott joined Swiss Re’s Board of Directors in 2002 for a four year term. He will stand for re-election at the Annual General Meeting on 21 April 2006. He 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
George L. Farr Non-executive and independent director George L. Farr Non-executive and independent director
Bénédict G.F. Hentsch Non-executive and independent director Bénédict G.F. Hentsch Non-executive and independent director
Mr Smith is chairman of Delta Air Lines and a director of The Procter & Gamble Company. He is also chairman of the Alix Partners LLC/Questor Partner advisory board. In addition, he is a member of the chancellor’s executive committee of the University of Massachusetts and of the board of trustees at Boston University.
Changes in the course of the business year 2005 At the Annual General Meeting of 9 May 2005, the shareholders elected Mr Jakob Baer to be a member of the Board of Directors, with a four year term.
Please refer to the information provided in each director’s biography on page 69–73.
Cross-involvement refers to interlocking memberships between the boards of directors of two or more listed companies. According to the relevant SWX commentary, the mere fact that a given person holds a seat on the boards of two listed companies is alone sufficient to invoke the obligation to disclose such an interlocking directorate. Pursuant to such definition, the following cross-involvements existed on 31 December 2005: Peter Forstmoser, Chairman, is also a director of Mikron Holding AG.
John F. Smith, Jr., Director, is also chairman of the board of directors of Delta Air Lines and a director of The Procter & Gamble Company.
Principles of the election procedure and term limits The term of office of a directorship is four years. It usually begins with the date of election by an Annual General Meeting (exceptionally by an Extraordinary General Meeting) and ends on the fourth subsequent Annual General Meeting. Members whose term has expired are immediately eligible for re-election. Each proposed election and re-election is substantiated by the Chairman at the General Meeting and is separately voted upon.
3.2 Other activities and functions3.2 Other activities and functions 3.3 Cross-involvement3.3 Cross-involvement 3.4 Elections and term of office3.4 Elections and term of office
First election and remaining term of each director Please refer to the information provided in each director’s biography on page 69 –73.
b. Committees of the Board of Directors: members, tasks and responsibilities General provisions for all Committees The Board may delegate certain responsibilities, including the preparation and execution of its resolutions, to committees or the Executive Vice Chairman. Any such Committee or the Executive Vice Chairman must keep the Board apprised on a timely basis of actions and determinations.
All members of the Audit Committee must be non-executive, independent and financially literate. At least one member must have the attributes qualifying such member as an Audit Committee Financial Expert as determined by the Board. Members may not accept any consulting, advisory, or other compensatory fee from the company. They should not serve on the audit committee of more than two other listed companies. Members of the Executive Board are not eligible for membership until three years after the termination of their executive employment.
Compensation and Appointments Committee Members George L. Farr, Chair Thomas W. Bechtler Robert A. Scott
Finance and Risk Committee Members Rajna Gibson Brandon, Chair Jakob Baer (from 9 May 2005) Walter B. Kielholz Robert A. Scott Kaspar Villiger
Tasks and responsibilities The Committee keeps itself informed of corporate governance developments; it measures the Group’s governance against relevant best practice standards and informs the Board of its findings and emerging trends; it ensures compliance with corporate governance disclosure requirements; it annually reviews the company’s Articles of Association and the Corporate Bylaws and informs the Board of its findings and proposals; it reviews the Group’s communication policy; it monitors the corporate philosophy, the corporate culture, the corporate social responsibility and the Group’s orientation towards sustainability; it monitors investor relations activities; it monitors the relationship with rating agencies; it examines how public reports are perceived, especially with regard to whether they fulfil the needs and expectations of international investors; it monitors the shareholder structure; it has initial responsibility for assessing any merger and take-over proposals submitted to the Group; it has initial responsibility for reviewing material transactions with any of the Group’s significant shareholders; and it establishes a procedure for the directors to comment on the Board’s performance. The Governance and Shareholder Relations Committee reviews its own performance annually.
At its meeting of 3 February 2006, the Board decided to dissolve the Investments Committee effective as of 1 March 2006 and to reallocate its previous responsibilities to either the Board or the Finance and Risk Committee.
Meeting invitations and agendas are delivered to the directors about 10 days before the meeting together with written materials, including recent financial information, to permit meaningful review.
In 2005, the following meetings were held: Dates BoD¹ AC² CAC³ FRC⁴ IC⁵ GSRC⁶
24 January regular 16/17 February regular regular regular regular 15/16 March regular regular regular regular 10/11 May regular regular extra regular 31 May extra 29/30 June regular regular regular 22–24 August regular regular extra regular 26/30 September extra 24 October extra 15 November extra 8/9 December regular regular regular regular regular
For every meeting it is contemplated that an executive session be held for discussions between the Board of Directors and the Chief Executive Officer, discussions involving all members of the Board, or discussions among the independent members of the Board, as the case may be.
Swiss Re’s Board of Directors has delegated the responsibility for managing the Group’s operations to the Executive Committee. In 2005, it comprised seven members. The Executive Committee has, as a rule, two meetings per month, except when the Executive Board meets and in holiday seasons. In 2005, the Executive Committee met 15 times.
The Executive Committee is supported by the larger Executive Board made up of 20 senior executive officers, including the members of the Executive Committee (see section 4 below). Members of the Executive Board are appointed by the Board of Directors upon recommendation of the Chief Executive Officer and after consultation with the Compensation and Appointments Committee. The Executive Board held 12 meetings in 2005, often on two or more consecutive days. One of those meetings stretched over a period of four days to consider strategic issues.
Swiss Re’s governing bodies recognise the value of a high-quality corporate assurance framework. As governance and accounting standards continue to evolve, it is essential that Swiss Re’s governing bodies strive to have a best-in-class system of coordinated assurance functions to rely on. Therefore, the corresponding framework is subject to periodic reviews and improvements as required.
Assurance functions in Swiss Re comprise an internal audit organisation, a dedicated organisation that ensures compliance with legal and regulatory requirements as well as ethical standards, a risk management system designed for the size, complexity and risk profile of the company, an actuarial reserves group and a specially qualified external auditor. The assurance framework has recently been updated to reflect among other things the changes in the organisation.
Group Internal Audit Within the Swiss Re Group, Group Internal Audit provides the Chairman, Board of Directors and Executive Committee of Swiss Re with an independent, objective assurance and consulting activity designed to assess the adequacy and effectiveness of its system of internal control, adding value through improving the Group’s operations. Group Internal Audit is part of the Swiss Re integrated assurance framework.
External auditor The external auditor is accountable to the Audit Committee, the Board of Directors and ultimately to the shareholders. PricewaterhouseCoopers has executed this function since 1991 (formerly as Revisuisse Price Waterhouse AG). The Audit Committee and Board place great emphasis on the objectivity of the Group’s auditor, PricewaterhouseCoopers AG, in their reporting to shareholders.
Actuarial review The Board of Directors has appointed Mr Freddy Delbaen as an external actuary to conduct a review of the balance sheet provisions for the life and health reinsurance business of Swiss Reinsurance Company and European Reinsurance Company. His review focuses on the appropriateness of the reserving assumptions that, combined with the margins in the reserves, provide a reasonable level of prudence over the company’s best-estimate assumptions. Mr Delbaen is a professor and has held the position of Chair of Financial Mathematics at the Swiss Federal Institute of Technology (ETH) in Zurich since 1995.
4.1 Members of the executive management 4.1 Members of the executive management
John R. Coomber Chief Executive Officer and Member of the Executive Committee (until 31 December 2005)
Mr Beerli joined Swiss Re in 1979, serving in various marketing functions until 1984. He then worked for Credit Suisse in private banking and the Baloise Insurance Group, where he served in the company’s foreign operations. He rejoined Swiss Re in 1993. In 1997, he restructured and integrated the newly acquired Italian reinsurance company Uniorias. In 1998, he assumed an additional position as Head of the Global Clients unit. He was appointed Head of the Americas Division in January 2000.
Ann Godbehere is also a board member of IMD, the Swiss based international business school.
Mr Mumenthaler, a Swiss citizen born in 1969, received a PhD from the Institute of Molecular Biology and Biophysics at the Swiss Federal Institute of Technology (ETH) in Zurich.
Andreas Beerli Chief Operating Officer and Member of the Executive Committee (from 1 January 2006); Head of the Americas Division (until 31 December 2005)
Ann F. Godbehere Chief Financial Officer and Member of the Executive Committee; Head of Global Finance
Christian Mumenthaler Chief Risk Officer and Member of the Executive Committee; Head of Global Risk Management
Mr Liès joined Swiss Re’s life department in 1978. Based in Zurich, he first was responsible for the Latin American market. From 1983 to 1993, he was responsible for France and the countries of the Iberian Peninsula. In 1994 he moved to the Property & Casualty department in charge of Southern Europe and Latin America, which he headed from 1997. Mr Liès became a member of the Executive Board and Head of 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 for Swiss Re Germany. He was appointed to his current position in September 2005.
Mr Lippe joined Bavarian Re in 1983. In 1986 he became head of the non-proportional underwriting department. He was appointed deputy member of the board of management in 1988 and a full member in 1991, when he assumed general responsibility for the company’s operations in the German-speaking area. In 1993 he became chairman of the board of management of Bavarian Re. In 1995 he was appointed a Member of Swiss Re’s Executive Board, responsible for the Bavarian Re Group. He was appointed Head of the Property & Casualty Business Group in April 2001 and became Head of Products Business Function in September 2005.
Mr Fitzpatrick started with Kemper Corporation as a financial analyst in 1978, holding several positions in corporate finance until 1990. From 1990 to 1996 he was CFO and a member of the board of directors of Kemper. From 1996 to 1998 he worked in private equity focused on the insurance industry.
John H. Fitzpatrick Head of Financial Services Business Function and Member of the Executive Committee (from September 2005), Head of the Life & Health Business Group (until September 2005)
Andreas Beerli Swiss 54 Head of Americas Property & Casualty –
Agostino Galvagni Italian 45 Head of Globals & Large Risks – Client Markets
Charlotte A. Gubler Swiss 53 Head of Communications & Human Resources
Pierre L. Ozendo US and French 55 Head of Asia – Client Markets
Martyn Parker British 48 Head of Life & Health – Products
Mr Albers joined Swiss Re as head of Product Controlling in 1994, after having worked for over three years with Boston Consulting Group. In 1996 he became head of property and casualty business in Canada and, in 1999, in the UK. Mr Albers was appointed to the Executive Board in January 2002. In June 2002, he became Head of Risk Solutions in the Financial Services Business Group. He assumed his current position as Head of Europe in the Client Markets Business Function in September 2005.
Mr Gray is a Canadian citizen, born in 1962. He has a degree in economics from Wilfrid Laurier University and an MBA from the University of Toronto, and is a Fellow of the Insurance Institute of Canada.
He joined Swiss Re in 1985 and worked in a variety of underwriting and marketing roles in Toronto. In 1994, he moved to Zurich where he held positions in the former Asia-
Pacific/Africa Division, as well as corporate integrated risk management functions. In 1997, he returned to Canada where he assumed responsibility for Underwriting, Claims and Special Lines activities. He was appointed President and Chief Executive Officer of Swiss Re Canada in March 2001. He joined Swiss Re’s Executive Board in September 2005 as Head of Property & Specialty within the Products Business Function.
Ms Gubler joined Swiss Re in 1993 as Senior Credit Risk Manager in the company’s Credit & Surety Department. Two years later, she was appointed to establish a global Credit Risk Management Function for the Swiss Re Group. In 2000, Ms Gubler became a member of the Executive Team of the Financial Services Business Group and Head of Credit Solutions, the division which encompasses the global credit risk underwriting business of the company. On 1 January 2005, Ms Gubler assumed her current position as a member of the Executive Board.
Mr Oesterreicher, a Swiss citizen born in 1954, started his career in the steel industry.
Benjamin Meuli Chief Investment Officer and Head of Asset Management, Financial Services Business Function
Mr Parker is a British citizen, born in 1957 and is a Chartered Insurer.
Mr Wilson, a US citizen born in 1961, graduated from the Vanderbilt University School of Law in Nashville, Tennessee, in 1986 with a doctorate in jurisprudence. He also holds a BA in political science from the University of Alabama in Huntsville, Alabama.
Swiss Re has a “pay for performance” philosophy. The Executive Board is paid a base salary and variable bonus. The fixed salary consists of a cash payment, while the bonus can be either in cash or shares that are deferred for four years.
Swiss Re has stopped granting employee stock options on a regular basis. Instead a new long-term incentive (LTI) plan will be introduced in 2006 for certain senior executives. The plan will be based on a performance matrix of average return on equity and earnings per share compound growth over a three year period, thereby aligning the plan with shareholder interests. The LTI final payout can vary between 0% and 200% of the original grant number.
The disclosure follows the SWX Directive, which requires differentiation between the executive members of the Board of Directors and the Executive Board in total and the non-executive members of the Board of Directors in total. This applies to the tables shown on page 89–92.
The 2005 disclosure relates to 21 executive members as opposed to 18 members in 2004. The total shown includes all the remuneration components except for restricted shares and options, which are shown separately. Cash payments, allowances, variable pay, value of preferential rates on loans, other financial benefits, as well as the amount of actuarial funding needed for pensions, are included in this figure. Swiss Re does not have a separate pension plan for members of the governing bodies. Please note that the actuarial funding can vary substantially from year to year depending on age and years of service of the benefiting Executive Board members.
Share allocation (deferred shares) 2004 2005 21 executive members (as shown in 5.2) 338 079 160 603 10 non-executive members (as shown in 5.2) 22 415 26 252¹
Number of shares held on 31 December 2005 21 executive members (as defined in 5.2) 1 119 501 10 non-executive members (as defined in 5.2) 165 912 5.3 Compensation for former members of governing bodies 5.3 Compensation for former members of governing bodies 5.4 Share allotment in the year under review 5.4 Share allotment in the year under review 5.5 Share ownership5.5 Share ownership
Restricted shares In 2004 and 2005, the beneficiaries of the long-term incentive award programme received, as an alternative to the stock options, the right to opt for restricted shares. The applicable ratio was four to one, ie four stock options equalled one restricted share. The restricted shares vest after four years. During the vesting period, there is a risk of forfeiture.
Overview of the restricted shares held Executive members Share price in CHF as of date of grant
Under the SWX Directive, Swiss Re is required to disclose the sum of the honorariums (eg consultancy fees) and other remunerations billed to Swiss Re or any of its Group companies by a member of a governing body, or parties closely linked to such persons for additional services performed during the year under review, in the case of sums exceeding half of the ordinary remuneration of the member in question. No such additional payments were made.
6.1 Voting right restrictions and representation 6.1 Voting right restrictions and representation 6.2 Statutory quorums6.2 Statutory quorums 6.3 Convocation of the General Meeting of shareholders 6.3 Convocation of the General Meeting of shareholders 6.4 Agenda6.4 Agenda 6.5 Registrations in the share register6.5 Registrations in the share register
Mr David Law and Mr Ray J. Kunz took up office as head auditors responsible for the existing auditing mandate as of 1 January 2004 and 1 July 2001, respectively.
Audit-related fees comprise, among other things, amounts for due diligences, comfort letters, accounting advice, information systems reviews and reviews on internal controls.
In addition to the fees described above, aggregate fees of CHF 7.8 million were billed by PricewaterhouseCoopers during the year ended 31 December 2005, primarily for the following: Income tax compliance and related tax services CHF 0.8 million Other fees CHF 7.0 million
Other fees includes advisory work related to a range of projects. In 2005, these included the restructuring of certain reinsurance entities, including the Mercantile & General Solvent scheme of arrangement in the UK, and review of selected reporting processes.
One of the guiding principles in Swiss Re’s Corporate Philosophy is “clear and open communication”. As a result, the Group’s information policy goes beyond legal requirements, aiming to meet best practice standards.
Swiss Re prevents selective disclosure by observing ad-hoc publicity rules, and a policy of restrictions for the so-called “close period” during which financial information is finalised. The close period commences on a given date preceding the official publication of the financial information and lasts until such publication has been made. No meetings are held with analysts or investors during this close period. In addition, members of the governing bodies, their secretariats and employees preparing or communicating material non-public financial information are subject to close period communication and trading prohibitions.
In 2005 the SWX Swiss Exchange adjusted requirements regarding the dissemination of corporate news. In addition to minimum requirements, Swiss Re makes available all news releases as well as periodical newsletters on insurance industry developments and publications.
In addition to analysts’ meetings on regular corporate disclosure Swiss Re held two Investors’ days – one in New York and one in Zurich – in 2005. Furthermore, the announcement of the acquisition of GE Insurance Solutions on 18 November 2005 was accompanied by several activities. On the day of the announcement presentations to the media and to investors were held in Zurich and in the subsequent two weeks Swiss Re visited investors in Europe and North America in order to explain the rationale of the transaction and to answer questions.
Corporate news in 2005 and method of dissemination Date News Method of dissemination 21 January Completion of USD 245 million securitisation of in-force life insurance policies
News release, press conference and analysts’ meeting in Zurich (including telephone conferences and webcast)
News release 28 December Completion of second securitisation of in-force policies of USD 370 million
Monthly high, low and close of Swiss Re share in 2005
Swiss Re share price performance Global equity markets had a good year in 2005. Swiss Re’s main benchmark indices – the Swiss Market Index (SMI) and the Dow Jones Europe STOXX Insurance Index (STOXX Ins. Index) – rose by 33.2% and 30.5% respectively. In the same period, Swiss Re’s share price rose by 18.6%, reaching a high for the year of CHF 103.40 on 5 December after a low of CHF 75.10 on 12 May. The share price recovered by 28.1% from its low point at the end of 2005. The year end price per share of CHF 96.20 represented a market capitalisation of CHF 29 862 million.
First quarter: Swiss Re’s shares performed in line with its benchmark indices, exceeding the SMI by 0.9% and trailing the STOXX Ins. Index by 0.7%. The quarter also saw the publication of Swiss Re’s non-life January 2005 renewals and the announcement of its 2004 annual results.
and the STOXX Ins. Index by 12.9% and 8.4% respectively. The Group announced its embedded value results for 2004, along with its organisational realignment, and held its Investors’ day in New York. Third quarter: Swiss Re shares rose 7.9%, almost in line with the rise in the STOXX Ins. Index (8.0%), but 2.6% lower than the SMI. The quarter saw a terrorist attack in London, floods in Switzerland, Austria and Germany and, more prominently, Hurricane Katrina. Fourth quarter: Swiss Re shares rose 13.2% against 14.4% for the STOXX Ins. Index and 9.9% for the SMI. Swiss Re held its second Investors’ day and announced the acquisition of GE Insurance Solutions.
Shareholder base Swiss Re’s shareholder base is highly diversified, both geographically and in the ratio of private to institutional investors. On 31 December 2005, Swiss Re had 48 811 registered private shareholders, representing 21% of the shares registered; 90% of these hold fewer than 2 000 shares. The vast majority of Swiss Re’s private shareholders are domiciled in Switzerland.
Institutional shareholders, including nominee accounts, represent roughly twothirds of Swiss Re’s share capital. These shareholders are geographically diverse: 33% are based in Switzerland, 32% in Europe (excluding Switzerland), 32% in North America and 3% throughout the
Free float As of 31 December 2005 Holdings in % in %
ADR price at year-end (USD) 101.50 119.75 101.00 65.50 67.40 71.80 73.25 71.60
¹ The 1999–2000 figures have been adjusted by the 20-for-1 share split in 2001 ² Nominal value of CHF 0.10 per share ³ Dividend divided by year-end share price of corresponding year ⁴ Based on shares entitled to dividend ⁵ All data as of 24 February 2006 ⁶ Subject to approval at the Annual General Meeting on 21 April 2006 rest of the world. The top ten institutional shareholders hold 27% of Swiss Re’s shares, down two percentage points from the previous year; the top 100 hold 52% of total outstanding shares.
Dividend policy and payment Dividend growth reflects earnings growth: Swiss Re’s dividend policy is to maintain a payout ratio of 25% to 35% of annual net income. Dividends are typically paid out of current earnings.
Share custody Swiss Re offers its shareholders the opportunity to deposit shares in their own names with the Share Register in Zurich. Share custody is free of charge. The application form can be downloaded from Swiss Re’s homepage.
Investor Relations homepage More information on Swiss Re’s shares is available at www.swissre.com/ investorrelations.
Aviation insurance Insurance of accident and liability risks, as well as hull damage, connected with the operation of aircraft.
Catastrophe bonds (cat bonds) Risk-based securities that allow (re)insurance companies to transfer peak insurance risks, including natural catastrophes, to institutional investors in the form of bonds. Cat bonds help to spread peak exposures (see insurance-linked securities).
Claims incurred and claim adjustment expenses Claims incurred and claim adjustment expenses
Expense ratio Sum of acquisition costs and other operating costs and expenses in relation to premiums earned.
A feature of variable annuity business. The benefit is a predetermined minimum amount that the beneficiary will receive upon death.
Health insurance A generic term applying to all types of insurance indemnifying or reimbursing for losses caused by bodily injury or sickness or for expenses of medical treatment necessitated by sickness or accidental bodily injury.
Marine insurance Line of insurance which includes coverage for property in transit (cargo), means of transportation (except aircraft and motor vehicles), offshore installations and valuables, as well as liabilities associated with marine risks and professions.
Mandatory convertible bond A type of convertible bond that has a required conversion or redemption feature. Either on or before a contractual conversion date, the holder must convert the mandatory convertible into the underlying stock.
Motor insurance Line of insurance which offers coverage for property, accident and liability losses involving motor vehicles.
Non-proportional reinsurance Form of reinsurance in which coverage is not in direct proportion to the original insurer’s loss; instead the reinsurer is liable for a specified amount which exceeds the insurer’s retention; also known as “excess of loss reinsurance”.
Operational risk The risk arising from failure of systems, internal procedures and controls leading to financial loss.
Premiums written Premiums for all policies sold during a specific accounting period.
Professional indemnity insurance Liability insurance cover which protects professional specialists such as physicians, architects, engineers, lawyers, accountants and others against third-party claims arising from activities in their professional field; policies and conditions vary according to profession.
Return on equity Net income as a percentage of time-weighted shareholders’ equity.
Return on operating revenues The life & health operating result (operating income excluding non-participating realised gains and losses) as a percentage of operating revenue (premiums earned, net investment income and participating realised gains and losses) plus other revenues.
Return on total revenues The financial services operating result (operating revenues less the sum of acquisition costs, claims and claim adjustment expenses and operating costs) as a percentage of operating revenues (premiums earned and net investment income plus trading revenues and fees and commissions).
Solvency II A prudential regulatory framework launched by the European Commission designed to align insurers’ solvency requirements more closely with the risks actually assumed.
Certain statements and illustrations contained herein are forward-looking. These statements and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact. Forward-looking statements typically are identified by words or phrases such as “anticipate”, “assume”, “believe”, “continue”, “estimate”, “expect”, “foresee”, “intend”, “may increase” and “may fluctuate” and similar expressions or by future or conditional verbs such as “will”, “should”, “would” and “could”. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others: the impact of future investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transaction, including the ability to efficiently and effectively integrate the GE Insurance Solutions operations into our own; cyclicality of the reinsurance industry; changes in general economic conditions, particularly in our core markets; uncertainties in estimating reserves; the performance of financial markets; expected changes in our investment results as a result of the changed composition of our investment assets or changes in our investment policy; the frequency, severity and development of insured claim events; acts of terrorism and acts of war; mortality and morbidity experience; policy renewal and lapse rates; changes in rating agency policies or practices; the lowering or withdrawal of one or more of the financial strength or credit ratings of one or more of our subsidiaries; changes in levels of interest rates; political risks in the countries in which we operate or in which we insure risks; extraordinary events affecting our clients, such as bankruptcies and liquidations; risks associated with implementing our business strategies; changes in currency exchange rates; changes in laws and regulations, including changes in accounting standards and taxation requirements; and changes in competitive pressures.
The Annual Report 2005 is also available in German and French.
Notes to the Group financial statements 1. Organisation and summary of significant accounting policies 9 3. Derivative financial instruments 21 4. Acquisitions and dispositions 23 5. Deferred acquisition costs and acquired present value of future profits 23 7. Unpaid claims and claim adjustment expenses 28 8. Personnel expenses 29 9. Shareholders’ equity 29 10. Income taxes 30 11. Benefit plans 31 12. Stock compensation plans 35 13. Commitments and contingent liabilities 37 14. Assets under management 39 15. Information on business segments 40 16. Subsidiaries, equity investees and variable interest entities 50 17. Restructuring provision 55
Swiss Reinsurance Company, Zurich, financial statements Swiss Reinsurance Company, Zurich, financial statements 142nd Annual Report Financial Statements 2005
Claims and claim adjustment expenses 7, 15 –13 853 –14 178
Fixed income securities: Available-for-sale, at amortised cost (fair value: 2004: 77 376; 2005: 90 120) 75 273 88 207
Reinsurance recoverable on unpaid claims and policy benefits 15 6 315 12 099
Acquired present value of future profits 5 6 736 6 797
Liabilities for life and health policy benefits 15 43 239 49 579
Common stock, CHF 0.10 par value; Additional paid-in capital 5 833 5 843
Accumulated other comprehensive income: Net unrealised investment gains, net of deferred tax 377 1 031
Purchase/sale of treasury shares and shares issued under employee plans 10 –72 –62
Change in funds held by ceding companies and other reinsurance balances 2 393 –545
Cash and cash equivalents as of 1 January 12 251 9 504
The Group has revised the allocation between cash and cash equivalents and short-term investments as described in Note 1, and adjusted the comparative balance sheet positions.
The cost of fixed income and equity securities is reduced to fair value, with a corresponding charge to realised investment losses if the decline in value is other than temporary. Subsequent recoveries that are deemed to be a reversal of previously recognised impairment are credited to realised investment gains.
Interest on fixed income securities is recorded in net investment income when earned and is adjusted for the amortisation of any purchase premium or discount. Dividends on equity securities are recorded on the basis of the ex-dividend date. Realised gains and losses on sales are included in earnings and are calculated using the specific identification method.
The Group uses a variety of derivative financial instruments including swaps, options, forwards, credit derivatives and exchange-traded financial futures as part of an overall risk management strategy. Derivative financial instruments are primarily used as a means of managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities and to lock in attractive investment conditions for funds which become available in the future. The Group recognises all of its derivative instruments on the balance sheet at fair value. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings. If the derivative is designated as a hedge of the fair value of assets or liabilities, changes in the fair value of the derivative are recognised in earnings, together with changes in the fair value of the related hedged item. If the derivative is designated as a hedge of the variability in expected future cash flows related to a particular risk, changes in the fair value of the derivative are reported in other comprehensive income until the hedged item is recognised in earnings. The ineffective portion of the hedge is recognised in earnings. Derivative financial instrument assets are generally included in other invested assets or financial services assets. Derivative financial instrument liabilities are generally included in accrued expenses and other liabilities or financial services liabilities.
Cash and cash equivalents include cash on hand, short-term deposits, certain short-term investments in money market funds, and highly liquid debt instruments with a remaining maturity at the date of acquisition of three months or less.
Acquired present value of future profitsAcquired present value of future profits
The carrying value of goodwill is reviewed periodically for indicators of impairment in value. Adjustments to reflect an impairment in value are recognised in earnings in the period in which the determination of impairment is made.
The Group uses debt for general corporate purposes and also to fund “Financial services assets and liabilities“ (funded business). “Financial services assets and liabilities“ are structured with the intention of creating assets and liabilities that generate offsetting market risks (foreign exchange, interest rate, equity, credit). Debt that is strictly used for funded business is classified as operational debt. Operational debt is generally excluded from financial leverage calculations. “Financial services assets and liabilities“ are valued according to the relevant principles for the underlying instruments.
Unpaid property and casualty claims provisions may only be discounted if the payment pattern and ultimate cost are fixed and reasonably determinable, including provisions that are allowed to be discounted under US statutory accounting principles.
Liabilities for life and health policy benefits from reinsurance business are generally calculated using the net level premium method, based on assumptions as to investment yields, mortality, withdrawals and policyholder dividends. Assumptions are set at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. The assumptions are based on projections from past experience, making allowance for possible adverse deviation. Interest assumptions for life and health reinsurance benefits liabilities range from 2.25% to 14%. Assumed mortality rates are generally based on experience multiples applied to the actuarial select and ultimate tables commonly used in the industry. Withdrawal assumptions for individual life reinsurance contracts issued by the Group range from 1% to 20% and are based on historical experience.
Funds held assets and liabilities include deposits with/from ceding companies and deposit accounted contracts. Contracts which do not meet risk transfer requirements, defined as transferring a reasonable possibility of a significant loss to the reinsurer, are accounted for as deposit contracts. Deposit amounts are adjusted for payments received and made, as well as for amortisation or accretion of interest.
Property and casualty reinsurance premiums are recorded when written and include an estimate for written premiums receivable at period end. Premiums earned are generally recognised in income over the contract period in proportion to the amount of reinsurance provided. Unearned premiums consist of the unexpired portion of reinsurance provided. Life reinsurance premiums are earned when due. Related policy benefits are recorded in relation to the associated premium or gross profits so that profits are recognised over the expected lives of the contracts. For investment-type contracts, charges assessed against policyholders’ funds for the costs of insurance, surrender charges, actuarial margin and other fees are recorded as income.
Treasury shares are reported at cost in shareholders’ equity. Treasury shares also include standalone derivative instruments indexed to the Group’s shares as well as embedded derivative instruments indexed to the Group’s shares, which are bifurcated from the host contract for accounting purposes.
Assets and liabilities denominated in foreign currencies are translated at the rates of exchange on the balance sheet date. Revenues and expenses are translated at average exchange rates. Unrealised gains or losses resulting from translation of functional currencies to the reporting currency are included as a separate component of shareholders’ equity. Realised currency gains and losses resulting from foreign currency transactions are included in earnings.
The Group has revised the classification of amounts between unpaid claims and claim adjustment expenses, funds held under reinsurance treaties, funds held by ceding companies and reinsurance balances payable.
Net investment income by source was as follows: CHF millions 2004 2005
Dividends from investments accounted for using the equity method were CHF 41 million and CHF 13 million in 2004 and 2005, respectively. The Group has refined the classification of expenses related to deposits with ceding companies. The figures for the year ended 31 December 2004 were adjusted accordingly. The Group has revised the classification between cash and cash equivalents and short-term investments. The figures for the year ended 31 December 2004 were adjusted accordingly. The changes do not affect net investment income.
Realised gains and losses do not include the change in market value of trading activities of the Financial Services business segment and the change in market value of derivative financial instruments classified as cash flow hedges.
Trading revenues generated by the trading activities of the Financial Services business segment were as follows: CHF millions 2004 2005
As of 31 December 2005 Amortised Gross un- Gross un- Estimated CHF millions cost or cost realised gains realised losses fair value
Debt securities issued by governments and government agencies: Mortgage and asset-backed securities 12 864 88 –175 12 777
As of 31 December 2004 and 2005, fixed income securities available-for-sale with a carrying value of CHF 8 522 million and of CHF 13 917 million, respectively, were lent to third parties that have the right to sell or repledge the borrowed securities. In addition, as of 31 December 2004 and 2005, fixed income securities available-for-sale with a carrying value of CHF 184 million and CHF 115 million, respectively, were lent to third parties that do not have the right to sell or repledge the borrowed securities.
Mortgage and asset-backed securities 3 336 31 171 8 3 507 39
The Group’s investment portfolio at carrying value is comprised of concentrations in the following major currencies: As of 31 December 2004 CHF millions USD EUR GBP CAD CHF Other Total
The Group has revised the classification between cash and cash equivalents and shortterm investments. As of 31 December 2004 the figures for the category “other” were adjusted accordingly.
Due in one year or less 3 187 3 199 6 503 6 495
Due after five years through ten years 12 614 13 066 19 165 19 339
As of 31 December 2004 and 2005, the Group’s investment in mortgages and other loans included CHF 192 million and CHF 206 million, respectively, of loans due from employees and CHF 404 million and CHF 396 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
The Group’s investment in mortgages and other loans included CHF 1 119 million and CHF 1 200 million of mortgage participations associated with investment contracts as of 31 December 2004 and 2005, respectively. Contract holders bear the investment risk related to mortgage participations. Fair value for other loans is considered to be equal to carrying value.
As of 31 December 2004 and 2005, investments in real estate included nil and CHF 9 million, respectively, of real estate held for sale.
Depreciation expense related to income-producing properties was CHF 36 million and CHF 36 million for 2004 and 2005, respectively. Accumulated depreciation on investment real estate totalled CHF 566 million and CHF 577 million as of 31 December 2004 and 2005, respectively.
Assets held for linked liabilities by asset category were as follows: As of 31 December CHF millions 2004 2005
The Group has refined the definition of contract value, previously referred to as notional or contractual amounts. The amounts as per 31 December 2004 have been adjusted accordingly, increasing the contract values for other derivatives by CHF 28 665 million and leaving the remaining categories unchanged. The contract values of derivatives represent the total amounts of the underlying transactions and are not a quantification of market risk or credit risk. Contract amounts are used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps. These amounts are the sum of all outstanding positions, therefore inflating the contract values, in particular in the trading books containing a considerable proportion of offsetting positions. The contract amounts of derivatives at 31 December 2004 and 2005 are CHF 664 003 million and CHF 942 985 million, respectively. Of these amounts CHF 461 074 million and CHF 637 413 million are interest instruments, CHF 37 068 million and CHF 92 418 million are equity and index instruments, CHF 62 158 million and CHF 71 391 million are currency instruments and the remaining CHF 103 703 million and CHF 141 763 million are other derivatives.
On 18 November 2005, the Group announced the agreement to acquire General Electric Insurance Solutions from General Electric Company (GE) in a USD 6.8 billion transaction, subject to closing adjustments. The consideration to be paid to GE will consist of cash, Swiss Re shares, Mandatory Convertibles and Notes. As a result, GE is expected to hold in excess of 10% of Swiss Re shares. Closing of the transaction is subject to regulatory approvals and other customary contractual closing conditions.
+ 1bp 68 2008 Private Placement (step-up) 2001 CHF 100 3.60% 100
+ 5bp 204 2009 EMTN (Index-linked Notes) 2002 EUR 10 Index 16 2009 3 EMTN (Zero coupon Notes) 2004 USD 53 Various 69 2013 EMTN (Index-linked Notes) 2001 USD 10 Index 13 2017 Credit-linked Note 2000 USD 9 Various 11
– Subordinated Perpetual Loan 1998 DEM 110 6M Libor 2010 87
Total financial debt reported in the financial statements as long-term debt is comprised of the following components: 31 December 31 December CHF millions 2004 2005
Swiss Re uses debt to finance general corporate purposes but also to fund “Financial services assets and liabilities” (funded business). “Financial services assets and liabilities” are structured with the intention of creating assets and liabilities that generate offsetting market risks (foreign exchange, interest rate, equity, credit). Debt that is strictly used for funded business is classified as operational debt and is included in financial services liabilities. Operational debt is generally excluded from financial leverage calculations.
In 2000, the Group entered into three Payment Undertaking Agreements (PUAs), which are a form of financing transaction in which a counterparty deposits funds with the Group having fixed repayment terms and interest rates on the deposited funds. In 2001 and 2002, respectively, three and seventeen additional PUAs were taken out by the Group. In 2003, the Group entered into sixteen PUAs. In 2004, the Group issued two PUAs for a total amount of USD 43 million with fixed interest rates of 5.23% and 5.24%. Both have maturities of 20 years. All interest rate risk is hedged to a one or three-month Libor benchmark.
In the first half of 2004, the Group issued three zero coupon notes under the EMTN programme, totalling USD 56 million, with a five-year maturity.
In the second half of 2004, the Group issued a note under the EMTN programme, totalling EUR 10 million with an interest rate of 6.00% for the first two years, and two notes totalling EUR 10 million with an interest rate of 4.00% for the first three years, due in 2009.
In October 2004, the Group issued a note under the EMTN programme, totalling JPY 5 000 million with an interest rate of 0.81% due in 2009.
The Group recognised insurance-linked and credit-linked securities totalling USD 13 million because the Group was the primary beneficiary as of 1 January 2004.
In March 2005, the Group issued GBP 30 million under the EMTN programme, due in March 2007, bearing interest at a floating rate of three-month Libor plus 1 basis point and CZK (Czech Republic Crowns) 300 million, due in March 2010, with a fixed interest rate of 2.875%.
In June 2005, the Group issued GBP 90 million under the EMTN programme, with a three-year maturity and a coupon of three-month Libor plus 5 basis points and a further JPY 3 000 million with a four-year maturity and a coupon of 0.41%.
In December 2005, the Group issued a mandatory convertible bond totalling CHF 1 000 million with an interest rate of 6% due in 2008. The securities will automatically convert into Swiss Re shares in three years (see note 9).
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.
A reconciliation of the beginning and ending reserve balances for asbestos, environmental and other long-latent liability claims and claim adjustment expenses for the periods presented is as follows: CHF millions 2004 2005
Provisions for long-latent injury claims outstanding at 31 December 2005 reflect the estimated future trend of claims payments and claims settlement charges. Due to the inherent uncertainties and assumptions on which these estimates are based, however, the Group cannot exclude the need to make further additions to these provisions in the future.
The Group had 8 882 employees at 31 December 2005, compared to 8 359 at 31 December 2004. Employees as of 31 December 2005 include 295 employees relating to the first time inclusion of Pro Insurance Solutions.
Weighted average common shares outstanding 309 274 654 309 827 189
Income available to common shares assuming debt conversion and exercise of options 2 523 1 523
Weighted average common shares outstanding 324 553 678 332 852 897
As of 31 December 2004 and 2005, the Group held 933 128 and 206 449 treasury shares, respectively. These shares are available for stock-based compensation plans and other corporate purposes.
In 2005, 2 948 105 treasury shares were acquired at an average price of CHF 81.41 and 3 674 784 shares were sold at an average price of CHF 83.27, including 1 203 134 treasury shares delivered to employees in connection with stock-based compensation plans.
As of 31 December 2004, the Group was short 335 000 call options. In 2005, 2 880 000 call options were sold at an average price of CHF 0.95. As of 31 December 2005 the Group was not short any call options.
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 2004 2005
As of 31 December 2005, the Group had CHF 5 677 million foreign net operating tax loss carryforwards, expiring as follows: CHF 331 million in 2007, CHF 66 million in 2008, CHF 36 million in 2009, CHF 140 million in 2010 and CHF 5 104 million after 2010. The Group also had capital loss carryforwards of CHF 424 million, expiring as follows: CHF 2 million in 2006, CHF 21 million in 2007, CHF 5 million in 2008, CHF 384 million in 2009, CHF 3 million in 2010 and CHF 9 million after 2010.
Income taxes paid in 2004 and 2005 were CHF 421 million and CHF 282 million, respectively.
Defined benefit pension plans and post-retirement benefits Defined benefit pension plans and post-retirement benefits
Fair value of plan assets as of 1 January 2 240 2 362 734 944
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was CHF 3 350 million and CHF 3 973 million as of 31 December 2004 and 2005, respectively.
The Group’s pension plan investment strategy is based on a diversified mix of equities, debt securities, real estate and other investments. The strategic objective is to optimise the return on the plan assets, the pension expense and the funding status of the plans. Tactical allocation decisions that reflect this strategy are made on a quarterly basis.
As of 31 December 2005, the projected benefit payments, which reflect expected future service, not adjusted for transfers in and for employees’ voluntary contributions, are as follows: Swiss plans Foreign plans CHF millions pension benefits pension benefits Other benefits
The Group sponsors a number of defined contribution plans to which employees and the Group make contributions. The accumulated balances are paid as a lump sum at the earlier of retirement, termination, disability or death. The amount expensed in 2004 and in 2005 was CHF 16 million and CHF 19 million, respectively.
As of 31 December 2004 and 2005, the Group had the stock-based compensation plans described below.
Expected contributions and estimated future benefit payments Expected contributions and estimated future benefit payments
The fair value of each option grant is estimated on the date of the grant using a binomial option-pricing model, with the following weighted average assumptions used for grants in 2004 and 2005, respectively: dividend yield of 2.0% and 3.0%; expected volatility of 33.1% and 30.0%; risk-free interest rate of 1.7% and 1.9%; expected life of 6.0 and 6.0 years.
Less: total stock-based employee compensation expenses determined under the fair value method, net of related tax effects –34 –31
Under these plans, 301 251 and 361 929 restricted shares were granted in 2004 and 2005, respectively, at a price of CHF 93 and CHF 83 per share, which equals the market price of the shares on the date of grant. The shares issued vest at the end of the fourth year.
At maturity, the employee either receives shares or cash equal to the accumulated savings balance, or the employee may elect to exercise the options.
As part of its regular business, the Group makes capital (equity, debt) available to clients, contingent on the occurrence of a defined event.
As part of its normal business operations, the Group enters into a number of lease agreements. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: As of 31 December 2005 CHF millions
The corresponding lease expenses incurred in 2004 and 2005 were CHF 48 million and CHF 53 million, respectively.
The Group directly underwrote approximately 25% of the excess coverage for the USD 3.5 billion in first party insurance obtained by the lessees of the World Trade Center.
On 3 May 2004, a jury found that the Group had bound coverage on a policy form under which, according to a previous court decision, the insureds may recover from Swiss Re a maximum of Swiss Re’s 25% share of the USD 3.5 billion policy limit. As a result, the Group’s exposure for claims related to the attack on the World Trade Center remains consistent with the existing loss estimates. The court denied the defendants’ post-verdict motions seeking to set aside the verdict. The defendants then filed a notice of appeal, which is scheduled to be heard by the appellate court on 7 March 2006. A decision on the appeal will be rendered sometime after the 7 March 2006 hearing.
The insureds have also claimed entitlement to an immediate lump sum distribution of a full policy limit plus approximately USD 250 million in prejudgment interest. On 8 June 2005, the court denied the insureds’ motion for summary judgment that sought an order requiring Swiss Re to pay its full policy limit plus prejudgment interest. Swiss Re then moved for an order dismissing these claims. Swiss Re’s motion remains pending without a hearing date.
The Group provides reinsurance and financial services throughout the world through three business segments. These business segments are determined by the organisational structure. The business segments in place as at 31 December 2005 are Property & Casualty, Life & Health and Financial Services, which includes the Credit Solutions, Capital Management and Advisory and Asset Management business sectors. The Risk Solutions business sector is included in the Property & Casualty business segment. The comparative business segment information is re-presented accordingly. The Corporate Centre provides direction and Group-level support to the business segments.
The Financial Services and Property & Casualty business segments present certain income statement items in a different format to the Group. These items are reclassified to the Group income statement format in the reconciliation column. The main reclassifications are to allocate certain fee income from fees and commissions to net investment income, and certain investment expenses from other operating costs and expenses to net investment income. The reclassifications do not affect operating income.
a) Business segment results 2004 Property & Life & Financial Corporate ReconciliaCHF millions Casualty Health Services Centre Other tion Total
Premiums, claims and claim adjustment expenses and acquisition costs are reported net of retrocession in the Group’s income statement. Gross, retroceded and net amounts for these items were as follows: 2004 Property & Life & Financial CHF millions Casualty Health Services Total
Change in unpaid claims and claim adjustment expenses; life and health benefits, gross –1 587 –2 165 –29 –3 781
Change in unpaid claims and claim adjustment expenses; life and health benefits, net –3 152 –1 926 –55 –5 133
Change in unpaid claims and claim adjustment expenses; life and health benefits, gross –3 530 –1 412 –169 –5 111
Change in unpaid claims and claim adjustment expenses; life and health benefits, retro 407 –347 231 291
Reinsurance recoverable on life and health policy benefits 8 058 8 058
¹ These balances are included in other assets. ² These balances are included in reinsurance balances payable.
Claims and claim adjustment expenses –2 516 –3 612 –1 872 –355 –1 724 –10 079 –1 346 –11 425 –1 983 –13 408
Other operating costs and expenses –264 –176 –101 –36 –131 –708 –125 –833 –86 –919
Property & Casualty Specialty Traditional Risk 2005 Property Liability Motor Accident Lines excl Risk Solutions Total Non– CHF millions Traditional Traditional Traditional Traditional Traditional Solutions Traditional Traditional Traditional Total
Claims and claim adjustment expenses –3 350 –3 516 –1 532 –525 –1 615 –10 538 –2 117 –12 655 –1 196 –13 851
Other operating costs and expenses –256 –132 –119 –42 –125 –674 –127 –801 –119 –920
Capital 2004 Credit Management Asset CHF millions Solutions and Advisory Management Total
Capital 2005 Credit Management Asset CHF millions Solutions and Advisory Management Total
CHF millions 2004 2005 h) Gross premiums written by line of business
Aberdeen Far Eastern Emerging Economies Unit Trust¹ 1 998 32.8 e
Method of consolidation: f full e equity ¹ Net asset value instead of share capital
Share capital Affiliation in % Method of (CHF millions) as of 31.12.2005 consolidation
The insurance-linked and credit-linked securitisations transfer pre-existing insurance or credit risk to the capital markets through the issuance of insurance-linked or credit-linked securities. In insurance-linked securitisations, the securitisation vehicle initially assumes the insurance risk through insurance contracts. In credit-linked securitisations, the securitisation vehicle initially assumes the credit risk through credit default swaps.
The Group also invests in selected private equity limited partnerships to enhance the risk-adjusted overall investment result. The maximum exposure to loss relating to private equity limited partnerships is equal to the carrying amount of the Group’s investment.
VIEs – primary beneficiary As of 31 December 2005, the total assets of VIEs where the Group is the primary beneficiary amounted to CHF 6 109 million.
As auditors of the Group, we have audited the consolidated financial statements (income statement, balance sheet, statement of shareholders’ equity, statement of comprehensive income, statement of cash flow and notes to the Group financial statements/pages 3 to 55) of Swiss Re Group for the year ended 31 December 2005.
Swiss Reinsurance Company, Zurich, performs a dual role within the Swiss Re Group as both a reinsurance company and a holding company. The assessment of the market position, profitability and financial strength of Swiss Re’s worldwide organisation must focus primarily on the consolidated financial statements.
The after-tax profit for the financial year based on the Swiss legal accounting regulations amounted to CHF 1.1 billion, compared to CHF 1.4 billion in the previous year.
Net premiums earned were stable at CHF 17.7 billion (2004: CHF 17.8 billion). Gross premiums written increased from CHF 19.7 billion to CHF 23.1 billion reflecting a strong increase in premiums written by Swiss Re’s Life and Health subsidiaries. Retroceded premiums written increased from CHF 2.0 billion to CHF 5.3 billion reflecting the ALPS II securitisation.
Total assets increased by CHF 16.9 billion to CHF 84.2 billion. This increase results predominantly from the foreign currency revaluation impact, mainly due to the strengthening of the US dollar, increases in funds held by ceding companies related to the ALPS II transaction and an increase in reinsurance from Swiss Re’s subsidiaries.
Income statement Swiss Reinsurance Company, Zurich For the years ended 31 December
The company has revised the classification between certain balance sheet categories, as described in the notes on page 63, and adjusted the comparative balance sheet positions.
The financial statements are prepared in accordance with Swiss Company Law. Swiss Reinsurance Company, Zurich, modified the presentation of its financial information. The previously reported 2004 financial year figures have been adapted accordingly. Details on Balance sheet/Assets classification are shown on page 63.
Contracts which do not meet risk transfer requirements, defined as transferring a reasonable probability of a significant loss to the reinsurer, are accounted for as deposit arrangements. Deposit amounts are adjusted for payments received and made, as well as for amortisation or accretion of interest.
The following assets are carried at cost, less necessary and legally permissible depreciation: – Investment real estate/own-use property (purchase or construction cost) – Investments in subsidiaries and affiliated companies – Equity securities and fixed income securities – Investments in funds – Derivative financial instruments These assets are generally not subject to revaluation. The valuation rules prescribed by the Swiss insurance supervisory authority are observed.
Swiss Reinsurance Company, Zurich, has revised the classification between certain balance sheet categories. Specifically, short-term investments purchased with an original maturity of one year or less, but greater than three months, were reclassified from fixed income securities to short-term investments. Furthermore, the income and capital tax recoverables were reclassified from accrued income to other receivables. Therefore, the previously reported 2004 figures of fixed income securities (CHF –1.5 billion) and shortterm investments (CHF +1.5 billion) and the corresponding income statement positions, income from fixed income securities (CHF –4 million) and income from short-term investments (CHF +4 million), and of accrued income (CHF –6 million) and other receivables (CHF +6 million) have been changed accordingly.
Premiums written relating to future periods are stated as unearned premiums and are normally calculated by statistical methods. The accrual of commissions is determined correspondingly and is reported in the line item “Deferred acquisition costs”.
Claims and claim adjustment expenses –11 643 978 –10 665 –14 740 2 306 –12 434
Premiums and other receivables from reinsurance 5 593 190 5 783 7 274 137 7 411
Funds held by ceding companies 13 633 82 13 715 18 833 75 18 908
Liabilities for life and health policy benefits 8 412 284 8 696 14 981 –1 828 13 153
Shareholders’ equity on 31 December after allocation of profit 11 730 12 026
¹ Board of Directors’ proposal to the Annual General Meeting of 21 April 2006
Contingent liabilities, mainly towards Group companies, amounted on 31 December 2005 to CHF 3 027 million (2004: CHF 2 546 million). In addition, there were 29 unlimited guarantees; 25 of these are for obligations of Group companies. No payments are expected under these guarantees.
These off-balance sheet commitments for the non-cancellable contract periods pertain primarily to office and apartment space rented by the company.
To secure the technical provisions on the 2005 balance sheet date, securities of CHF 11 112 million (2004: CHF 6 438 million) were deposited in favour of ceding companies, of which CHF 6 758 million (2004: CHF 3 352 million) was to Group companies.
Equity securities of CHF 4 325 million (2004: CHF 4 155 million) and fixed income securities of CHF 5 199 million (2004: CHF 4 451 million) were held in investment funds, which are fully owned by Swiss Re Group companies and the Swiss Re Pension Fund. The securities in these funds and their revenues continue to be reported in the corresponding asset category.
The insurance value of tangible assets, comprising the real estate portfolio and other tangible assets, amounted on 31 December 2005 to CHF 2 453 million (2004: CHF 2 526 million).
Details on Swiss Re Group‘s subsidiaries are disclosed on pages 50 to 53.
Details on treasury shares held by Swiss Re Group companies are shown on page 30.
Deposit arrangements generated the following balances which are included in: CHF millions 2004 2005
The Annual General Meeting 2004 approved an increase of the conditional capital from CHF 900 000 to CHF 2 000 000.
As of 31 December 2005, Swiss Re‘s total conditional capital outstanding amounted to CHF 2 659 565 (2004: CHF 2 662 222). CHF 2 000 000 were reserved for the exercise of conversion rights and warrants granted in connection with bonds and similar instruments and CHF 659 565 were reserved for employee participation purposes.
In the year under report no net undisclosed reserves on investments in securities, participations, real estate and on other financial provisions were released (2004: net decrease of CHF 225 million).
As of 31 December 2005, there were two shareholders with a participation exceeding the 5% threshold of Swiss Re’ s share capital.
Franklin Resources, Inc., Ft. Lauderdale, Florida, known as Franklin Templeton Investments, announced that on 5 July 2004 it held, as investment manager for mutual funds and clients and through a number of its group companies, an aggregate voting right of 5.06 % which may be exercised autonomously of the beneficial owners.
As these shares have mostly not been registered under Franklin Resources or Capital Group Companies or any of their respective Group Companies, Swiss Re is unable to track, on its own, changes in these shareholders’ aggregate holdings.
Claims on and obligations towards Group companies Claims on and obligations towards Group companies
Swiss Reinsurance Company, Zurich, worldwide employed a staff of 3 696 on the balance sheet date (2004: 3 566). Personnel expenses for the 2005 financial year amounted to CHF 871 million (2004: CHF 870 million).
Retained earnings brought forward from the previous year 59 864 772 14 544 084 1
Profit for the financial year 1 401 304 692 1 069 525 771
The Board of Directors proposes to the Annual General Meeting to allocate this profit as follows: in CHF 2004 2005 1 The number of registered shares eligible for dividend at the dividend payment date has increased since the proposal for allocation of profit, dated 16 March 2005, due to the issuance of new registered shares from options being exercised. This resulted in an additional dividend of CHF 5 585 compared to the Board of Directors’ proposal and in lower retained earnings brought forward from the previous year by the same amount.
If the Board of Directors’ proposal for allocation of profit is accepted, a dividend of CHF 2.50 per share will be paid.
Claims and claim adjustment expenses –8 057 –8 514 –9 333 –12 153 –16 266 –14 485 –14 898 –13 853 –14 178
Income/loss before income tax expense 2 257 2 808 3 229 3 655 –104 36 2 336 3 367 1 973
Income tax expense –480 –647 –783 –689 –61 –127 –634 –892 –522
Unpaid claims and claim adjustment expenses 41 876 45 866 54 072 59 600 68 618 62 652 63 474 61 619 71 272
The Annual Report 2005 summary is available in English, German and French.