Notes to the Group financial statements 1. Organisation and summary of significant accounting policies 9 3. Derivative financial instruments 22 4. Acquisitions and dispositions 24 5. Deferred acquisition costs and acquired present value of future profits 25 7. Unpaid claims and claim adjustment expenses 30 8. Personnel expenses 31 9. Shareholders’ equity 31 10. Income taxes 32 11. Benefit plans 33 12. Stock compensation plans 37 13. Commitments and contingent liabilities 38 14. Assets under management 40 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 141st Annual Report Financial Statements 2004
Reinsurance recoverable on unpaid claims and policy benefits 15 6 657 6 315
Acquired present value of future profits 5 5 952 6 736
Liabilities for life and health policy benefits 15 37 244 43 239
Common stock, CHF 0.10 par value; Accumulated other comprehensive income: Net unrealised investment gains, net of deferred tax 401 377
Other comprehensive income: Change in foreign currency translation –513 –1 224
Equity securities: Proceeds from sale of investments 13 905 7 206
Cash paid/received for acquisitions/disposals and reinsurance transactions, net –360 –1 300
Basis of presentation The accompanying consolidated financial statements have been prepared in accordance with Swiss GAAP FER and comply with Swiss corporate legislation. They include the financial statements of Swiss Re Zurich and its subsidiaries. The presentation requirements of FER 14 have been complied with except that certain financial information has been disclosed in the notes and not in the primary financial statements. All significant intercompany transactions and balances have been eliminated on consolidation.
Investments The Group’s investments in fixed income and equity securities are classified as availablefor -sale (“AFS”) or trading. Fixed income securities AFS are carried at amortised cost. Equity securities AFS are carried at fair value, based on quoted market prices, with the difference between original cost and fair value being recognised in shareholders’ equity. Trading fixed income and equity securities are carried at fair value with unrealised gains and losses being recognised in earnings.
Other invested assets include affiliated companies, derivative financial instruments and private equity investments.
The Group enters into security lending arrangements under which it loans certain securities in exchange for collateral and receives securities lending fees. The Group’s policy is to require collateral, consisting of cash or securities, equal to at least 102% of the carrying value of the securities loaned. In certain arrangements, the Group may accept collateral of less than 102%, if the structure of the overall transaction offers an equivalent level of security. Cash received as collateral is recognised along with an obligation to return the cash. Securities received as collateral that can be sold or repledged are also recognised along with an obligation to return those securities. Security lending fees are recognised over the term of the related loans.
Cash and cash equivalents Cash and cash equivalents include cash on hand, highly liquid debt instruments, and short-term deposits purchased with an original maturity of three months or less.
Acquired present value of future profits The acquired present value of future profits (“PVFP”) of business in force is recorded in connection with the acquisition of life and/or health operations. The initial value is determined actuarially by discounting estimated future gross profits as a measure of the value of business acquired. The resulting asset is amortised on a constant yield basis over the expected revenue recognition period of the business acquired, generally over periods ranging up to 30 years, with the accrual of interest added to the unamortised balance at the earned rate. The carrying value of PVFP is reviewed periodically for indicators of impairment in value. Adjustments to reflect impairment in value are recognised in earnings during the period in which the determination of impairment is made.
Goodwill The excess of the cost of acquired businesses over the fair value of net assets acquired is recorded as goodwill (purchase method). It is amortised using the straight-line method over periods that correspond to the benefits expected to be derived from the related acquisition. Goodwill is amortised over periods of between 5 and 20 years.
Equalisation reserves Reserves prescribed by local regulatory authorities for future claim fluctuations and for large and catastrophic losses are established and included in the unpaid claims and claim adjustment expenses liabilities.
Liabilities for policy benefits are increased if it is determined that future cash flows, including investment income, are insufficient to cover future benefits and expenses. The liability for accident and health policy benefits consists of active life reserves and the estimated present value of the remaining ultimate net costs of incurred claims. The active life reserves include unearned premiums and additional reserves. The additional reserves are computed on the net level premium method using assumptions for future investment yield, mortality and morbidity experience. The assumptions are based on projections of past experience and include provisions for possible adverse deviation.
Reinsurance ceded The Group uses retrocession arrangements to increase its aggregate underwriting capacity, to diversify its risk and to reduce the risk of catastrophic loss on reinsurance assumed. The ceding of risks to retrocessionaires does not relieve the Group of its obligations to its ceding companies. The Group regularly evaluates the financial condition of its retrocessionaires and monitors the concentration of credit risk to minimise its exposure to financial loss from retrocessionaires’ insolvency. Premiums and losses ceded under retrocession contracts are reported as reductions of premiums earned and claims and claim adjustment expenses. Amounts recoverable for ceded claims and claim adjust-
Pensions and other post-retirement The Group accounts for its pension and other post-retirement benefit costs using the benefits accrual method of accounting. Amounts charged to expense are based on periodic actuarial determinations.
The fixed option plan is accounted for using the intrinsic value method. In accordance with the intrinsic value method, the fair value of options is not reflected in earnings, and the pro-forma impact on net income is provided in note 12. The grant date fair value of the restricted shares in the restricted share plan is recognised in earnings.
Variable interest entities In January 2003, new international guidance was issued on the consolidation of variable interest entities (“VIEs”). This guidance was subsequently revised and replaced in December 2003. The guidance requires a company to consolidate a VIE if the company is defined as the primary beneficiary. The primary beneficiary absorbs a majority of the VIE’s expected losses, receives a majority of its expected residual returns, or both.
Separate account and non-traditional The Group has revised the accounting and presentation of separate accounts. Recent inlong -duration life contracts ternational guidance revises the conditions which must be met to classify business as separate account. The Group has certain business where policyholder funds are invested in defined assets, and policyholders bear the investment risk on the assets. A part of the business no longer meets the conditions for separate account classification, due principally to the legal structure of the asset funds involved.
At interim 2004, the Group reclassified CHF 2 290 million from separate account assets mainly to equity securities trading, and separate account liabilities of CHF 2 290 million to liabilities for life and health policy benefits. At 31 December 2004, following the acquisition of Life Assurance Holding Corporation, the Group has introduced separate balance sheet categories for assets held for linked liabilities and the corresponding provisions for linked liabilities. The above assets and liabilities have been reclassified to the new categories. The assets held for linked liabilities are measured according to the relevant principles for the underlying assets. The provisions for linked liabilities represent the current account value of the policyholder assets. Deferred assets and liabilities are recognised in the relevant balance sheet line items. The change in policyholder liability is debited or credited against the investment return of the assets.
The Group has implemented guidance on non-traditional long-duration life contracts effective from 1 January 2004. The non-traditional long-duration contract guidance clarifies the liability calculation for certain types of life business, which impacts the pattern of earnings recognition. The clarification affects the acquired present value of future profits, liabilities for life and health policy benefits and deferred taxes. The cumulative effect of initially complying with the guidance as of the effective date is reflected in a separate line in retained earnings in the statement of shareholders’ equity.
The Group refined the allocation of expenses mainly related to real estate in 2004 and adjusted 2003 accordingly. The change does not affect net investment income. Dividends received from investees accounted for using the equity method were CHF 50 million and CHF 41 million in 2003 and 2004, respectively.
Realised gains and losses do not include the change in market value of trading activities of the Financial Services Business Group and the change in market value of derivative financial instruments classified as cash flow hedges.
The following table shows the fair value and unrealised losses of the Group‘s fixed income securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealised loss position, as of 31 December 2003 and 2004. A continuous decline in the value of equity securities available-for-sale for longer than twelve months is considered other-than-temporary and recognised as net realised investment gains/losses in the income statement. Therefore, as of 31 December 2003 and 2004, the gross unrealised loss on equity securities available-for-sale of CHF 144 million and CHF 118 million shown in the above table relates to declines in value for less than 12 months.
Less than 12 months 12 months or more Total As of 31 December 2003 CHF millions
Debt securities issued by governments and government agencies 27 961 695 111
Mortgage and asset-backed securities 2 405 25 37 1 2 442 26
Due after five years through ten years 17 284 17 510 12 614 13 066
As of 31 December 2003 and 2004, investments with a carrying value of approximately CHF 5 862 million and CHF 7 839 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities.
Mortgages, loans and real estate As of 31 December 2003 and 2004 investments in mortgages and other loans and real estate comprised the following: As of 31 December CHF millions Carrying value
The Group’s investment in mortgages and other loans included CHF 1 064 million and CHF 1 119 million of mortgage participations associated with investment contracts as of 31 December 2003 and 2004, respectively. Contract holders bear the investment risk related to mortgage participations. Fair value for other loans is considered to be equal to carrying value.
Equity accounted participations in investment vehicles held for linked liabilities are included in assets held for linked liabilities.
The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange-traded financial futures in its trading and hedging strategies, in line with the Group’s overall risk management strategy. The objectives include managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities, as well as locking in attractive investment conditions for future available funds.
The maximum potential loss assuming non-performance by all counterparties, and based on the market replacement cost at 31 December 2003 and 2004 approximated CHF 1 933 million and CHF 2 479 million, respectively. These values are net of amounts offset pursuant to rights of set-off and qualifying master netting arrangements with various counterparties.
These acquisitions are administrative reinsurance (Admin ReSM) transactions. Admin ReSM is the purchase of closed blocks of in-force business and can be achieved through either a stock purchase or reinsurance.
As of 31 December 2003 and 2004, the balance of accumulated goodwill amortisation was CHF 1 378 million and CHF 1 570 million, respectively.
The Group systematically amortises goodwill over periods of up to 20 years depending on specific factors. The amount charged in any one year can vary due to foreign exchange and other factors. Despite this, goodwill is amortised within the originally determined periods.
+ 3bp 2006 Fixed Term Preferred Shares 2002 GBP 100 4.84% 218 2006 Insurance-linked Placements 2003 USD 37 Various 42 2007 Trust-preferred Stock (Trups)² 1997 USD 42 8.72% 57 2007 Insurance-linked Placements 2003 USD 14 Various 16 2008 Private Placement (step-up) 2001 CHF 100 3.60% 100 2009 EMTN (Index-linked Notes) 2002 EUR 10 Index 15 2009 Fixed Rate Preferred Shares 2004 GBP 170 4.92% 371 2013 EMTN (Index-linked Notes) 2001 USD 10 Index 11 2017 Credit-linked Note 2000 USD 12 Various 14
¹ Assumed in the acquisition of Underwriters Re Group ² Assumed in the acquisition of Life Re Corporation
Total financial debt reported in the financial statements as long-term debt is comprised of the following components: CHF millions
Swiss Re uses long-term debt to finance general corporate purposes but also to fund “Financial services assets and liabilities” (funded business). “Financial services assets and liabilities” are structured with the intention of creating assets and liabilities that generate offsetting foreign exchange and interest rate risks. Long-term 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.
Interest expense on long-term debt Interest expense on long-term debt for the years ended 31 December 2003 and 2004, respectively, was as follows: CHF millions 2003 2004
In May 1998, the Group issued CHF 1 010 million of multi-currency subordinated debt with a perpetual term, bearing interest at the rate of six month Libor plus 37.5 basis points for the first tranche of CHF 300 million, six month Libor plus 40 basis points for a tranche of DEM 340 million, six month Libor plus 45 basis points for a tranche of DEM 110 million, payable semi-annually, and 5.71% for a tranche of DEM 400 million, payable annually. The loan is subordinated in the event of liquidation to all senior creditors of Swiss Re Zurich, but will be paid in priority to all holders of its equity.
In June 1999, the Group issued CHF 600 million in subordinated perpetual debt, with an interest rate of 3.75% for 12 years, resetting to six month Libor plus 100–140 basis points thereafter, depending upon the rating of Swiss Re.
In June 2001, the Group issued under the European Medium Term Note (EMTN) programme a straight bond totalling CHF 150 million with a coupon of 4.00% and a 14-year maturity.
In October 2001, the Group issued under the EMTN programme USD 10 million of index-linked notes. The notes have a maturity of 12 years and interest payments based on the three month Libor as well as an index-related component.
In November 2001, concurrent with its global equity offering, the Group issued USD 1 150 million of subordinated convertible bonds. The bonds have a maturity of 20 years and a fixed coupon of 3.25% during the first 10 years, which will be reset to a floating six month Libor plus 180 basis points for the last 10 years. Up to and including 21 November 2011, the bonds can be converted into Swiss Re shares at a price of CHF 207.19 per share with a fixed USD exchange rate of 1.6641. The bonds have been issued by the Group and are unconditionally and irrevocably guaranteed on a subordinated level.
In June 2002, the Group issued under the EMTN programme index-linked notes, totalling EUR 10 million with a seven year maturity.
In the first half of 2004, the Group issued under the EMTN programme three zero coupon notes totalling USD 56 million with a five year maturity and a two year senior note totalling USD 50 million with an interest rate of 1.99%.
In August 2004, the Group privately placed GBP 170 million of subsidiary preference shares in the United Kingdom. These shares are redeemable, non-voting and were issued with a cumulative fixed rate dividend of 4.92% (payable quarterly) and have a final redemption date in 2009.
In October 2004, the Group issued under the EMTN programme a note totalling JPY 5 000 million with an interest rate of 0.81% due in 2009.
The Group derecognised three insurance-linked securities totalling USD 360 million because the Group was not the primary beneficiary as of 1 January 2004. The Group recognised insurance-linked and credit-linked securities totalling USD 70 million because the Group was the primary beneficiary as of 1 January 2004 (see notes 1 and 16).
Asbestos and environmental claims The Group‘s obligation for claims payments and claims settlement charges also includes exposure 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 2003 2004
The Group had 8 359 employees at 31 December 2004, compared to 7 949 at 31 De9. Shareholders’ equity
Weighted average common shares outstanding 319 776 487 324 553 678
As of 31 December 2003 and 2004, the Group was short 666 666 and 465 000 put options, respectively. In 2004, 1 360 000 put options were sold at an average price of CHF 7.30.
Income taxes paid in 2003 and 2004 were CHF 309 million and CHF 421 million, respectively.
Defined benefit pension plans and The Group sponsors various funded defined benefit pension plans covering the majority post-retirement benefits of its worldwide operations. Employer contributions to the plans are charged to income on a basis which recognises the costs of pensions over the expected service lives of employees covered by the plans. The Group’s funding policy for these plans is to contribute annually at a rate that is intended to maintain a level percentage of compensation for the employees covered. A full valuation is prepared at least every three years.
The measurement date of these plans is 30 September for each year presented.
Year that the rate reaches the ultimate trend rate 2015 2015
Effect on total of service and interest cost components 12 –9
Equity securities include Swiss Re common stock of CHF 17 million (0.6% of total plan assets) and CHF 10 million (0.3% of total plan assets) as of 31 December 2003 and 2004, respectively.
Defined contribution pension plans 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 2003 and in 2004 was CHF 15 million and CHF 16 million, respectively. 2003 was adjusted to reflect reclassifications.
As of 31 December 2003 and 2004, the Group had the stock-based compensation plans described below.
Fixed option plan Under the fixed option plan, the exercise price of each option equals the market price of the shares on the date of the grant. Options issued vest at the end of the fourth year and have a maximum life of ten years.
Weighted average fair value of options granted during the year per share 16
The following table summarises the status of fixed stock options outstanding as of 31 December 2004: Range of exercise price in CHF Number of options
The Group does not recognise compensation expense at fair value for the fixed option plan. If compensation expense had been recognised at fair value, the Group‘s net income and earnings per share would approximate the pro-forma amounts in the following table: CHF millions 2003 2004
Restricted shares The Group introduced a restricted share plan during 2004 to complement the fixed option plan. In addition, restricted bonus shares were issued during 2004.
In 2003 and 2004, 1 381 951 and 287 477 options, respectively, were issued to cover the duration of the schemes incepting in those years. The Group contributed CHF 14 million and 17 million, respectively, to the plan.
As of 31 December 2003 and 2004, the Group had outstanding guarantees of CHF 11 696 million and CHF 13 650 million, respectively.
of up to 10 years. The total commitments remaining uncalled as of 31 December 2003 and 2004 were CHF 835 million and CHF 586 million, respectively.
The Group had four guarantees as of 31 December 2003 and 2004, which primarily indemnify the purchasers of former Group entities for possible run-off losses or claims for pending litigation.
11 September 2001 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 defendants have filed various post-verdict motions and a notice of appeal.
The main expenses excluded from the measurement of segments are goodwill amortisation, interest expenses, indirect taxes and income taxes.
Net investment income and realised investment gains are allocated to the business groups based on the net investment income and realised investment gains of the legal entities that are operated by these business groups. Where one entity is utilised by two or more business groups, the net investment income and realised investment gains are allocated to these business groups using technical reserves and other information as a key for the allocation. The Financial Services Business Group provides investment management services to the other business groups, and includes the fees charged in net investment income. These fees are based on service contracts.
Other operating costs and expenses –699 –587 –926 –403 –504 177 –2 942
Other operating costs and expenses –735 –704 –850 –343 –453 145 –2 940
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: 2003 CHF millions
Change in unpaid claims and claim adjustment expenses; life and health benefits, net –2 823 –1 481 –393 –4 697
Claims and claim adjustment expenses; life and health benefits –12 660 –9 085 –2 238 –23 983
Change in unpaid claims and claim adjustment expenses; life and health benefits, net –2 689 –1 926 –518 –5 133
Unpaid claims and claim adjustment expenses, liabilities for life and health policy benefits and unearned premiums are reported gross in the Group‘s balance sheet. Gross and retroceded amounts for these and other items were as follows: 2003 CHF millions
Unpaid claims and claim adjustment expenses 40 943 11 280 8 735 60 958
Other operating costs and expenses –271 –187 –109 –38 –130 –735
¹ Net realised investment gains in which policyholders directly participate of nil and CHF 51 million for 2003 and 2004, respectively, are included in operating revenues and in the operating result.
The Capital Management and Advisory business sector provides marketing services to the Credit Solutions and Risk Solutions business sectors. Capital Management and Advisory fees and commissions include the fees charged. The Asset Management business sector provides investment management services to other business sectors. These management services fees are included in fees and commissions.
The securitisation vehicle generally retains the issuance proceeds as collateral. The va riable interests arise through ownership of insurance-linked or credit-linked securities, or through protection provided for the value of the collateral held. The Group’s maximum exposure to loss equals the higher of the carrying amount of the collateral protected or the carrying amount of the insurance-linked or credit-linked securities held. The collateral held usually consists of investment grade securities.
The Group recognised the impact of the revised guidance on VIEs created or acquired before 31 January 2003 by consolidating total assets of CHF 5 563 million as of 1 January 2004. The total assets include assets from the modified coinsurance agreement which the Group had recognised under the previously applicable accounting guidance. The assets have been revalued on consolidation according to the requirements of the new guidance. The modified coinsurance assets of CHF 4 106 million were recognised mainly in funds held by ceding companies. The consolidated assets were recognised in the respective asset categories, principally fixed income securities available for sale.
The consolidation of the VIEs results in a minority interest in the balance sheet of CHF 482 million mainly due to the modified coinsurance agreement. The minority interest is included in accrued expenses and other liabilities. The net minority interest in income related mainly to the modified coinsurance agreement is CHF 79 million, net of tax as of 31 December 2004. The income statement impacts are generally included in the relevant segment with the underlying movement in income or expenses.
As of 31 December 2004, the total assets and estimated maximum exposure to loss in
VIEs in which the Group holds a significant variable interest amounted to CHF 5 475 million and 5 037 million, respectively. These amounts include variable interests created or acquired before 31 January 2003.
The assets and liabilities arising from the Group’s variable interest in these VIEs are accounted for under applicable existing guidance. The implementation of the revised guidance on VIEs does not impact accounting for the assets and liabilities.
In 2004 the Property & Casualty Business Group paid out CHF 9 million for restructuring activities, principally in the form of employee redundancy benefits. The Life & Health Business Group utilised CHF 4 million in respect of lease abandonment. The Financial Services Business Group incurred and charged against the provision CHF 11 million for lease abandonment and rent, and CHF 15 million for severance, other personnel related costs and other expenses.
Swiss Re Group financial statements Notes to the Group financial statements
Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession and with the International Standards on Auditing, which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements. We have also assessed the accounting principles used, significant estimates made and the overall consolidated financial statement presentation.
Reinsurance and holding company 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.
Investments The investment result increased by CHF 1.2 billion to CHF 1.3 billion. Current income on investments remained fairly stable. Favourable market conditions led to a considerably improved result on sales of investments and lower valuation adjustments.
Shareholders’ equity Shareholders’ equity at 31 December 2003 amounted to CHF 11.2 billion before allocation of profit. After deduction of the dividend payment of CHF 341 million and the inclusion of the profit for the financial year 2004, shareholders’ equity increased to CHF 12.2 billion at year-end 2004.
Basis of presentation The financial statements and the notes are prepared in accordance with the regulations of the Swiss Company Law.
Swiss Reinsurance Company, Zurich, modified the presentation of its financial information. Previously reported 2003 financial statements were adapted accordingly.
These assets are generally not subject to revaluation. Discounted securities are valued at their amortised cost. The valuation rules prescribed by the Swiss insurance supervisory authority are observed.
The other assets are stated at nominal value in the balance sheet, after deduction of known credit risks if applicable.
Balance sheet/Liabilities The technical provisions are valued in accordance with the following principles: Unpaid claims are based on information provided by clients and own estimates of expected claims experience which are drawn from empirical statistics. These include provisions for claims incurred but not reported. Unpaid insurance obligations are set aside at the full expected amount of future payment.
Claims and claim adjustment expenses –10 703 407 –10 296 –11 643 978 –10 665
Funds held under reinsurance treaties – 329 329 49 1 406 1 455
Shareholders’ equity on 31 December before allocation of profit 11 167 12 227
Shareholders’ equity on 31 December after allocation of profit 10 826 11 730
Security deposits To secure the technical provisions on the 2004 balance sheet date, securities in the amount of CHF 6 438 million (2003: CHF 5 905 million) were deposited in favour of ceding companies, of which CHF 3 352 million (2003: CHF 4 410 million) was to Group companies.
Bonds The company has the following outstanding bonds: 3¾% interest, CHF 500 million, 2 July 1997–2007, 3¾% interest, CHF 600 million, perpetual from 15 June 1999 but no less than 12 years.
Deposit account Deposit arrangements generated balances which are included in the following items: CHF millions 2003 2004
Other provisions This item contains provisions for taxation in the amount of CHF 349 million (2003: CHF 344 million) and other provisions totalling CHF 422 million (2003: CHF 529 million ). Other provisions include a provision for currency fluctuations of CHF 171 million (2003: CHF 268 million).
(2003: CHF 2 361 million) which include accrued expenses of CHF 129 million (2003: CHF 129 million).
Conditional capital The Annual General Meeting on 14 May 2004 approved an increase of conditional capital in the amount of CHF 1 100 000.
As of 31 December 2004, Swiss Re’s total conditional capital outstanding amounted to 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 662 222 were reserved for employee participation purposes.
The conditional capital outstanding as of 31 December 2003 amounted to CHF 1 563 052.
Change in undisclosed reserves The undisclosed reserves on investments in securities, participations and real estate and on other financial provisions decreased by a net amount of CHF 225 million in the year under report (2003: decrease of CHF 199 million).
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.
The holdings of Capital Group Companies, Inc., Los Angeles, fell below 5% during 2004.
If the Board of Directors‘ proposal for allocation of profit is accepted, a dividend of CHF 1.60 per share will be paid.
After deduction of the Federal Withholding Tax of 35%, the dividend will be paid from 12 May 2005 by means of dividend order to shareholders recorded in the Share Register or to their deposit banks.
As statutory auditors, we have audited the accounting records and the financial statements (income statement, balance sheet and notes / pages 59 to 69) of Swiss Reinsurance Company for the year ended 31 December 2004.
Net realised investment gains/losses 1 281 2 509 3 588 4 275 2 665 –730 376 1 116
Amortisation of goodwill –75 –91 –211 –310 –368 –350 –315 –277
Other operating costs and expenses –1 940 –2 698 –2 785 –3 074 –3 384 –3 240 –2 942 –2 940
Income tax expense –480 –647 –783 –689 –61 –127 –634 –892
Liabilities for life and health policy benefits 9 963 15 143 23 279 29 300 41 370 37 269 37 244 43 239
Earnings/losses per share in CHF 5.90* 7.35* 8.55* 10.39* –0.57 –0.29 5.48 8.00 * Adjusted by 20-for-1 share split
The web version of the Annual Report 2004 is available in English at: www.swissre.com/annualreport
“Today’s business fundamentals are good, risk is soundly priced and offers attractive returns. Going forward, our strategies for Asia and risk securitisation will be key building blocks for earnings and improved returns for our shareholders.” John R. Coomber, Chief Executive Officer
The 1995 and 1996 figures represent the previously applied accounting policy and the former Group structure.
 Swiss Re  Swiss Performance Index  DJ Europe STOXX Insurance Index
 Property & Casualty Business Group: combined ratio of 98.4% unchanged from 2003 despite high claims activity from natural catastrophes
 Significant rise in dividend payment of 45% to CHF 1.60 per share
For detailed information on the financial statements and notes, please see Annual Report 2004 – Financial Statements.
Earnings were also affected by the weak dollar but good operating performance from all business lines and invested assets more than compensated for the currency impact. Notably, the return on investments of 5.8% was ahead of expectations at a time when financial markets are experiencing persistently low interest rates. The Property & Casualty Business Group‘s claims associated with the high level of windstorm activity and the tsunami were estimated to be CHF 1.1 billion, CHF 760 million higher than the natural catastrophe claims in 2003. Although part of this additional claims burden was offset by a release of CHF 241 million from equalisation reserves, the balance directly impacted results, worsening the combined ratio by 3.2 percentage points relative to 2003. The fact that the achieved combined ratio was unchanged year on year illustrates the continuing quality improvement in the total portfolio of risk. The Group‘s life and health business again met expectations and provided a stable contribution to earnings. Fee business earnings were in line with the prior year.
The tsunami is not subject to the same quality of statistical analysis and the devastation caused by a category 9 earthquake deep in the Indian Ocean shocked the world. This event will always be measured more by the irreparable human tragedy than its economic loss. Insurance payments will make some contribution to rebuilding communities which
Profile Chairman and CEO letter have suffered loss, as new construction creates jobs and helps to stimulate economic growth. Importantly, we hope that better defence mechanisms are in place before any recurrence.
During 2004 Swiss Re streamlined its strategic goals along four themes:  Actively manage the cycle for profits  Optimise organic and transactional growth  Extend our leadership position in Asia  Accelerate the balance sheet (through risk securitisation) Together these goals express our commitment to sustaining growth in earnings and to being a strategic leader in our industry.
Our industry has for too long been satisfied with an expensive business model which has two material shortcomings: a high level of frictional cost, which we believe can be significantly reduced through better use of technology; and an inefficient and therefore expensive approach to capital management. This is an area where we believe risk securitisation can greatly improve matters. Swiss Re has been a pioneer in this field adding investment banking capabilities to our already existing expertise in risk. Transferring insurance risks to the capital markets, as we did in January of 2005 for a segment of our life portfolio, accelerates and improves profitability and releases funds to generate future business growth. We are focused on extending this activity.
The earnings outlook for Swiss Re is positive. Uncertainties associated with some past underwriting years are dissipating and the quality improvements enjoyed in more recent business years will underpin operating results. The successful repricing of our US life portfolios and the 2005 non-life renewal serve to reinforce this message. Although we anticipate some softening of the pricing environment over time, we expect pricing in the near term to remain at levels which deliver attractive shareholder returns. We will use our ability to underwrite closed portfolios of risk such as in Admin ReSM to supplement organic growth. Our target is to deliver 10% growth in earnings per share over the business cycle.
We are pleased to report that Jakob Baer has made himself available to join our Board of Directors. His election will be proposed at the Annual General Meeting on 9 May 2005. Mr Baer served as CEO of KPMG Switzerland from 1994 until his retirement in 2004. His outstanding experience in finance and as a lawyer is an excellent addition to our Board.
Jorge Paulo Lemann has decided to step down from the Board to devote more time to his own businesses. We would like to express the Board’s appreciation for his valuable contribution over the last six years.
Ultimately, the success of Swiss Re depends on the skills, ideas and efforts of every employee; on behalf of the Board of Directors and the Executive Board, we want to thank them all for their commitment and invaluable contribution. We are grateful to our clients for the trust they place in us and to our shareholders for their continued support. We look forward to another year in which we will apply our strategic priorities to deliver strong, sustainable earnings to our shareholders and long-term value to all our stakeholders.
3 May World Trade Center verdict The jury in the World Trade Center case confirmed the contractual basis of Swiss Re’s coverage.
1 July Swiss Re places EUR 672 million of mandatory convertible securities Swiss Re completed its offering of threeyear mandatory convertible securities. Underlying shares previously committed to Swiss Re’s convertible bond issued in 2001 were reallocated to support the offering.
6 July Taiwan branch licence Swiss Re was granted a reinsurance branch licence in Taiwan. Swiss Re is the first international reinsurance company to operate a branch in Taiwan, providing comprehensive reinsurance services to clients throughout the country.
Swiss Re estimated its claims from these four hurricanes (Charley, Frances, Ivan and Jeanne), together with Typhoon Songda in Japan, to be in the range of USD 750 million.
30 December Tsunami claims A major earthquake in Asia, the strongest in 40 years, triggered a tsunami which caused widespread death and massive damage to coastal areas around the Indian Ocean. Swiss Re expected its claims related to the event to be below CHF 100 million.
Life & Health North America United Kingdom Continental Europe Asia and rest of the world
Christian Mumenthaler a Chief Risk Officer, Head of the Risk & Knowledge Divisionb
Deputy Chief Executive Officer b, Head of the Financial Services Business Group
Swiss Re is a highly diversified reinsurer with a comprehensive product range. As a leading provider of risk and capital management solutions, Swiss Re strives to deliver attractive returns for shareholders in all phases of the insurance cycle.
The top ten global insurance companies already account for about 20% of the world insurance market. Consolidation in both the insurance and reinsurance industry is expected to increase and the top ten insurers are likely to hold a 30% stake of global business within the next ten years. Companies will also concentrate on their core activities and look for business exit options in nonstrategic fields. Swiss Re sees attractive opportunities arising from all these developments and will use its transactional skills to complement its organic growth strategy.
Insurance is, and will remain, a cyclical business. Swiss Re expects a low investment return environment to prevail during the next cycle with technical underwriting skills therefore being the key ingredient of profit development. Swiss Re actively manages the cycle through dynamic capital allocation across all businesses to secure long-term profitability.
Extend leadership position in Asia Swiss Re has already built a leading position in Asia and now has branches in main- land China, Hong Kong, Japan, Korea, Malaysia, Singapore and Taiwan, as well as representation in India and other locations in the region. The Group is also a market leader in Australia. Swiss Re will build on this competitive advantage through further investment in the skills of local people while capitalising on its brand and product range to realise the potential for profitable growth in these insurance markets.
Mortality trends  Changes in mortality trends are a key driver of underwriting and pricing decisions in life insurance
 Improvements in mortality rates are likely to continue but insurers must be watchful for events which could slow or accelerate this trend
 Swiss Re conducts research to understand the causes and effects of mortality trends and shares its findings with its clients and other stakeholders
Nanotechnology  The impact of nanotechnology on humans and the environment is not yet known as long-term statistics are not available
 Swiss Re cooperates with international bodies to gain a better understanding of the impact of nanotechnology on insurance and shape appropriate solutions
 The impact of natural catastrophes has been increasing over the past 30 years
 Other countries, particularly in Asia Pacific but also the US, have been involved in the trend towards global convergence of accounting standards
 Swiss Re closely monitors these developments and interacts with accounting standard setters as well as private sector groups to advance the debate on appropriate international accounting standards
 Enhanced disclosure provisions and new risk-based capital adequacy requirements are being introduced
 Swiss Re is actively involved in monitoring the debate on reinsurance regulations and interacting with regulatory bodies at national and international levels
 Swiss Re supports cost efficient and appropriate measures encouraging insurers to use high level risk management processes
Sustainability  Corporations are becoming more aware of the role they can play in promoting sustainable development
 Climate change is increasingly understood as a business risk and has become an important element in many companies ’ long-term risk management strategies
Exchanging knowledge Swiss Re transfers its expert knowledge through a broad spectrum of channels, including training and conference centres, publications and web portals.
Swiss Insurance Training Centre Swiss Re offers knowledge and expertise directly to its clients through the Swiss Insurance Training Centre (SITC), which serves insurance professionals at different career levels. Since 1960, the year it was founded by Swiss Re, the SITC has attracted participants from more than 130 countries.
Today, it offers a modern, skills-based agenda covering both general and specialised insurance courses. In 2004, 20 sessions were provided at the training centre in Zurich to more than 500 insurance professionals.
To satisfy the evolving requirements of the insurance industry and provide a further service to Swiss Re’s clients, the SITC has added the On Wings programme to give customised courses directly to Swiss Re clients abroad. In 2004, On Wings conducted ten seminars as far afield as Bahrain, Estonia, Taiwan and Turkey.
Client seminars and workshops Every year, Swiss Re holds client seminars, workshops and other events tailored to specific industries or regions. The largest in 2004 was Europe Division’s Product & Knowledge Fair, a non-life reinsurance trade fair at the Centre for Global Dialogue. Information desks and workshops gave visitors an insight into Swiss Re’s products and solutions and provided a chance to discuss industry issues. Another important event included the 5th Asian Forum organised in Singapore, where local industry experts shared their views on new and emerging risks in the region.
Publication series Swiss Re’s technical publications and the sigma series address topics of market relevance, delivering in-depth reinsurance knowledge to clients and the broader public.
In 2004 the technical publication “Too big to ignore: the impact of obesity on mortality trends” examined the growing obesity epidemic and assessed its impact on the life insurance industry. “The true value of aviation insurance” defined the benefits that insurance offers to the airline industry. “Business interruption insurance ” offered a concise analysis of this important and increasingly complex line of business. Swiss Re produced eight technical publications in 2004.
www.swissre.com Swiss Re’s public website also offers business information and technical knowledge on topics relating to Swiss Re and the insurance industry. The client portal and its community pages provide client groups with comprehensive technical knowledge and facilitate information exchange. In 2004, community pages were created for life insurance clients in France, Germany, Japan and Spain.
Capital markets stable, yields moderate, dollar devaluing The global economic recovery firmed further in 2004. The US and Japan achieved solid GDP growth of about 4% and 3% respectively; Western Europe also headed for recovery, although at a markedly lower rate of 2%. Emerging markets saw exceptionally rapid expansion with the booming Chinese economy contributing in particular to global recovery, although it also sparked shortages and price increases in many commodity markets. Rising oil prices were additionally driven by supply-side concerns in several oil-exporting countries, as well as by speculative activity.
Interest rates remained at historically low levels. US government bond yields drifted upwards at the year’s end, while yields in euro-denominated bonds sank slightly.
Property and casualty reinsurers also achieved good underwriting results in 2004, despite record claims for the insurance industry of almost USD 46 billion from natural catastrophes. The North Atlantic was badly affected, with four hurricanes (out of a total of nine) making
Currency exchange rates remained reasonably stable for the first three quarters of 2004. During the final months of the year, however, the US dollar devalued further (EUR –7% and CHF –8%) due to concerns about US current account and budget deficits. This again impacted the balance sheets and results of global firms, by significantly reducing US dollardenominated income and capital.
Life insurance: back on the road to expansion Demand for private and occupational pension products remained in the spotlight as governments, particularly in Europe, grappled with pension system reform. Further growth in this area has been anticipated by many market observers. Sales of unit-linked and variable annuity products continued at a modest pace, reflecting the current low interest rate environment and modest stock market performance. Overall, premium growth was greater in 2004 than in 2003. Initial evidence suggests the average for emerging markets was between 5% and 10%, while for industrialised countries it was 5% or lower.
Life reinsurance premium growth continued to outpace the primary markets in 2004, reflecting in part the higher growth in protection business over savings products. However, growth was marginally slower than in 2003, particularly in the US and UK, which account for about 70% of global life reinsurance volume and where life insurers have stabilised their cession rates.
Financial strength returning; stable outlook from rating agencies The recovery of the financial markets and the general profitability of insurance have also improved the capital position of the insurance and reinsurance industry. Companies are regaining the financial strength lost between 2001 and 2003 – a fact the rating agencies have recognised by reflecting an improved outlook for the industry.
On a national or regional level – especially in Europe – the trend towards stricter reinsurance regulation is accelerating. The European Union is introducing the socalled “fast track” Reinsurance Directive which defines minimum regulatory standards for reinsurers in member states. The new Swiss insurance supervisory law will equally strengthen supervision in reinsurance. The insurance industry has expressed its support for these initiatives and emphasised that solvency requirements should reflect reinsurers’ risk profiles.
In the wake of the corporate defaults and accounting scandals in the US, corporate governance has become a hot topic for
the whole business community. In order to comply with the Sarbanes-Oxley Act, US companies and foreign companies listed on US stock markets have been required to review and enhance internal controls over financial reporting. Several European jurisdictions are also introducing regulation that specifically oversees and monitors risk management practices as a basis
A recent sigma study from 2004 entitled “The impact of IFRS on the insurance industry“ concluded that, while the new financial reporting standards will increase transparency, they will also bring higher earnings and capital volatility for most listed insurers. Another sigma study “The economics of liability losses“ examined the development of liability claims and the forces driving those claims, whereas “Emerging insurance markets“ highlighted the growth potential of developing markets, particularly China and India. The sigma study “Mortality protection” observed the shortfalls in the amount of mortality cover purchased in key markets when compared to consumers‘ protection needs. The 2005 “Natural catastrophes and man-made disasters” sigma provided an overview of the insured losses caused by catastrophes in 2004.
for capital and solvency requirements. These trends directly impact the insurance and reinsurance industry. The challenge for companies lies in introducing consistent governance models and control processes that address insurance-specific risk management processes and the increased requirements for internal controls over financial reporting.
Trade credit insurance provides protection to small and mediumsized enterprises, which are the backbone of most economies, whereas surety bonds fulfil a vital role for infrastructure and construction projects. Traditionally driven by economic cycles, Swiss Re has put a strong emphasis on active cycle management during recent years. Due to its leading market position, Swiss Re is able to ensure high quality standards in credit risk underwriting and improve pricing discipline, achieving sustainable results over the cycle.
The upcoming implementation of the Basel II framework influences banks in their credit risk portfolio and capital management decisions. Insurance-based products offer a complementary solution by addressing the specific nature of a bank’s loan book. Swiss Re’s solutions combine in novative loss portfolio structures with non-proportional insurance techniques. Swiss Re expects an increasing demand for this type of solution in the medium term.
Swiss Re’s Credit Solutions unit is the world market leader in trade credit and surety reinsurance and, at the same time, offers highly specialised insurance and reinsurance products to commercial banks.
Mr Kärle, can you explain why trade credit insurance is perceived as a rather volatile line of insurance business? This is indeed a perception. The reality is quite different. As long as the credit insurance industry focuses on tested products and underwriting standards are maintained, the volatility is quite low. Despite high insolvency levels in the last two years, economic results have been positive. The use of proprietary market intelligence and close risk monitoring enabled Swiss Re to enforce a thorough underwriting standard and maintain a sound pricing policy. We believe that active cycle management combined with dynamic credit portfolio management allow Swiss Re to mitigate cycle impacts to a large extent.
of business and create a strong alignment of interest with our clients.
Mr Eugster, as a provider of insurancebased credit solutions, what can Swiss Re offer banks? Swiss Re has a very strong track record, having successfully written this line of business for almost ten years. In addition to capital market offerings, we have developed insurance products addressing specific client credit capital and loan portfolio management needs. This flexibility and the broad skill-set of our professionals are something of a rarity in the industry. Our products aim to anticipate industry developments such as the Basel II banking regulation or changes in financial reporting. The key for us is to select those risks and structures that will diversify our book
The Swiss franc appreciated 8% against the US dollar compared to 2003 average rates. As Swiss Re’s business is global, currency fluctuations can markedly affect the comparison of year-on-year reported figures.
The Property & Casualty Business Group reported premiums earned of CHF 16.0 billion, down 8% from 2003. This decrease was largely due to higher client retentions in non-traditional business. Excluding the impact of currency exchange, the decrease was 5%.
The Financial Services Business Group increased premiums earned to CHF 3.2 billion, up 5% compared to the previous year. Excluding currency exchange effects, underlying growth was 9%.
The total investment result reached CHF 6.0 billion in 2004, an increase of 20% compared to 2003.
Other revenues remained stable at CHF 243 million, compared to CHF 236 million in 2003.
Items excluded from the business groups: Net realised investment gains/losses –89 26
Other operating costs and expenses were CHF 2.9 billion, an increase of 3% at constant exchange rates. The increase was mainly due to the Admin ReSM acquisitions, partially offset by lower expenses in other parts of the business including the Corporate Centre, where expenses decreased by CHF 60 million. The overall Group management expense ratio increased marginally to 8.4% from 8.2% in 2003.
The Group recorded net income of CHF 2.5 billion, compared to a net income of CHF 1.7 billion in 2003. Earnings per share were CHF 8.00 compared to CHF 5.48 in 2003.
Net realised gains or losses on certain financial instruments, amortisation of goodwill and other income and expenses
The outlook for property and casualty reinsurance remains positive, even though pressure on premium rates and terms and conditions will continue. Swiss Re achieved another successful renewal in January 2005 with prices remaining stable at attractive levels across all lines of business. Swiss Re is deriving increased benefit from differentiated terms and conditions, including more effective exclusion clauses, sublimits on named perils, reduced deposit requirements, and the right to perform claims audits. These factors will help to maintain good results going forward.
Within its life and health business, Swiss Re will continue to explore attractive opportunities for Admin ReSM in its key markets. Furthermore, the transfer of insurance risk to capital markets is expected to continue in 2005 and beyond.
Expectations for 2005 Provided that large claims are within expected levels, Swiss Re anticipates improved operating performance for the fourth consecutive year. The combined ratio for the Property & Casualty Business Group is expected to be in the region of 96%.
Swiss Re achieved an excellent investment performance despite historically low interest rates, thanks to its ability to respond rapidly to investment opportunities. The return on investment of 5.8% reflects good returns from fixed income and an excellent contribution from equities.
Swiss Re’s diversified investment strategy is designed to earn a spread over the interest-bearing liabilities relating to the life and health business and optimise total returns on the rest of the portfolio. This is done within closely monitored risk limits that combine Value at Risk (VaR), shortfall, stress testing and exposure limits. This strategy delivered strong results in 2004. The overall investment result, including net realised gains, rose by close to CHF 1.0 billion or almost 20% compared to 2003. Net investment income increased at constant exchange rates by 10% to CHF 4.9 billion, as Swiss Re continued to earn attractive yields on its large life and health fixed income portfolio, combining a longterm investment horizon with a disciplined focus on spread products.
Net realised gains more than doubled to CHF 1.1 billion. Swiss Re’s emphasis on absolute return in its publicly traded equity portfolio yielded strong realised capital gains, echoed by gains on real estate and diversified private equity holdings. In addition, net impairment charges decreased to CHF 82 million, down from CHF 725 million in 2003, a level mainly relating to the 2002 stock market decline.
Fixed income A flattening yield curve in the US became apparent in the second half of 2004, dampening investors’ expectations of a rapid rate rise. But the main theme of the last two quarters was the change in shape of the curve in the main markets – the US, the eurozone and the UK. Swiss Re successfully dealt with these uncertainties, actively managing yield curve and interest rate risks to earn attractive risk-adjusted returns while protecting the portfolio against the risk of rapid rate hikes. On the life and health portfolios, yield enhancement strategies favoured spread products, while tactical opportunities with yield curve volatility and credit events generated excess returns. Duration management for accounts other than life and health focused on barbell strategies for North America, which were successful as the curve flattened.
Equities Swiss Re enjoyed very strong returns from publicly traded equities in 2004. Most stock markets posted modest gains compared to those of 2003, but there was great variability among the quarters and markets, with Europe and Asia, in particular, outpacing the US. As an active, diversified investor, Swiss Re was quickly able to adapt its equity exposure to changing conditions, anticipating a rise after the summer correction and favouring European and Asian over US stocks, which proved to be advantageous in the fourth quarter. Shortly before year end, Swiss Re reduced its exposure in anticipation of a short-term market correction and was able to lock in sizeable capital gains. In addition, the balanced private equity fund of funds, built up over the years, delivered
1 Excluding assets held for linked liabilities of CHF 12.6 billion solid results. Net realised investment gains on publicly traded and private equities rose to CHF 774 million, compared to CHF 67 million in 2003, which included net impairments of CHF 583 million mainly relating to the 2002 market decline.
The following information is a summary of the audited 2003 and 2004 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.
Deferred acquisition costs and other intangible assets 10 706 11 611 8
Liabilities for life and health policy benefits 37 244 43 239 16
Key business group topics A key topic for the business group during 2004 was the active management of the insurance cycle. The cycle appears to have peaked but prices still remain at attractive levels. During this phase of the cycle, the business group has successfully demonstrated its ability to identify the most profitable market segments and to maintain the integrity and quality of its underwriting process.
Over the past three years Swiss Re has focused its resources on enhancing its management of the insurance cycle. This is best illustrated by Swiss Re’s development of Underwriting Steering Values
Individual business trends affecting the business group were in line with recent years; terrorism, contingent business interruption and pharmaceutical liability all required underwriters’ attention. Swiss Re issued new pharmaceutical guidelines, which significantly strengthened terms and conditions for this industry. In liability, the poor loss experience of US business
written in the period 1997–2001 has led to considerable effort being expended on researching and improving Swiss Re’s own internal pricing methods. Swiss Re also put great emphasis in 2004 on identifying new and emerging risks, thus enabling these risks to be addressed as early as possible by the market: one ex ample is nanotechnology, where Swiss Re released a new publication to coincide with industry seminars and initiate debate across the insurance and reinsurance industry.
Business group results Operating income grew to CHF 2.3 billion from CHF 1.8 billion, an increase of 29%. The business group generated an underwriting profit of CHF 258 million and a combined ratio of 98.4%. The ratio for 2004 was affected by the abnormally high level of large claims which were relieved in part by the release of equalisation reserves of CHF 241 million. There was no equalisation reserve movement in 2003.
US liability again showed considerable losses from the 1998–2001 underwriting years, with further claims being reported in excess of expectations. Nevertheless, there was positive development in other lines of business and regions and in the more recent underwriting years so that overall the claims ratio improved.
Premiums earned Premiums earned declined by 8%, in part due to the weaker US dollar (5% in original currencies). Underlying growth in current business was consistent with expectations at the 2004 renewals, but this was more than offset by two key factors. In 2003 Swiss Re reported growth in premiums earned arising from 2002 late reported business from clients; in 2004 late reported business from clients was much lower, resulting in a net reduction in premiums earned of CHF 0.8 billion. Non-traditional premiums declined by CHF 0.8 billion (27%) in 2004 due to treaty can cellations and cession reductions in some large treaties. As clients’ balance sheets improve, demand for these large covers drops.
increased by 1% to 16%. These proportions, particularly the liability element, are heavily influenced by the non-traditional portfolio. For the traditional portfolio alone, the weightings have remained stable in original currencies.
Combined ratio The combined ratio for the business group was 98.4%, unchanged from 2003. This ratio combines the effects of the claims ratio, which improved by 0.9 percentage points; the acquisition cost ratio, which rose slightly by 0.3 points; and the expense ratio, which increased by 0.6 percentage points.
Performance in the 2003 and 2004 underwriting years was in line with Swiss Re’s expectations and the indications apparent at renewals. Prices increased in 2003 and remained at attractive levels in 2004, with terms and conditions gener ally stable, leading to an underlying improvement in the claims ratio for 2004. In contrast, the many large natural catastrophe claims in 2004 produced a higher claims burden, which offset most of the underlying improvement in profitability.
The small increase in the acquisition cost ratio stemmed from non-traditional business; the ratio for traditional business actually declined. The increase in the expense ratio was mainly due to the reduction in premiums earned.
The catastrophe events in the second half of the year have put a brake on further declines in catastrophe rates, especially in those markets that were affected.
This underlying positive performance was offset by the large natural catastrophe claims in property, engineering and marine, and the adverse development in liability from previous underwriting years.
Property business exposed to man-made risks again produced satisfactory results, although the underwriting environment was more challenging: prices declined by as much as 15% in some markets. Swiss Re succeeded in controlling its exposure to the threat of terrorism and continues to play a leading role in urging the industry to take a more active stance on managing exposures to contingent business interruption.
¹ Excluding the 11 September event, the combined ratio was 110.5%
New business pricing, which has strengthened significantly during the past three years, is now reflected in the development of more recent underwriting years, which show considerable improvement. Nevertheless, in line with industry-wide experience, liability business with US exposures reported negative results after taking the impact of the 1998–2001 underwriting years into account, producing an overall combined ratio of 117.1%, of which 23 percentage points are attributable to the prior year impact.
Motor premiums fell by 14%; this was largely due to a reduction in the cession rate on non-traditional business. Traditional business decreased slightly.
The combined ratio for motor business rose from 102.4% to 104.2%, reflecting an increase in the expense ratio as a result of a change in the allocation of internal claim adjustment expenses. The long settlement periods associated with motor business mean that, even at this nominal combined ratio, results will still be positive on an economic basis.
Accident premiums fell by 36%, partly due to a drop in non-traditional premiums, and partly to the cancellation of workers’ compensation business in the US.
Accident business continued to perform well, with an overall combined ratio of 80.2%. This improvement can be directly attributed to the continued switch away from long-tail traditional workers’ compensation covers to short-tail business that covers claims only in the event of a catastrophe.
Over 80% of the business classified under “other lines” stems from the marine and engineering lines of business, with some prior year adjustments in the run-off lines of aviation and credit and surety (new business in these lines is written in the Financial Services Business Group).
Total CHF 16.0 billion 16% Other 32% Property5% Accident 17% Motor 30% Liability
One of CatNet™’s key advantages is the built-in search function, which makes it easy to select locations from a set of 650 000 entries. The interactive atlas allows the user to map historical events and hazard intensities for earthquakes, windstorms (Europe ), tornadoes (US), tropical cyclones and floods in various locations. As a result, users can build up a clear picture of the risk exposures in particular areas.
The more than 1 000 users of the service are major insurance and broker companies as well as numerous local insurers, banks or investment companies.
The outlook for the Property and Casualty Business Group remains positive. The January 2005 renewals indicated a slight softening in rates, but the business group was again successful in securing attractive profit margins.
China is a major emerging market where Swiss Re obtained a branch licence in 2003. What precisely does Swiss Re have to offer to the Chinese market, particularly with regard to natural catastrophe insurance? One key asset is CatNetTM, Swiss Re’s online natural catastrophe information platform.
Ms Chang, where does Swiss Re stand in China right now? We have had a branch in China since December 2003 and we are already a leading reinsurer in the market. But what is really exciting about this region is the mid- to long-term outlook. It is no secret that insurance penetration in China is still very low, offering us the huge opportunity to help in shaping the Chinese insurance market.
Why is that? It is because the demand comes from almost every area. Take natural perils, for example, where we see much of the potential growth. Average annual economic losses from natural catastrophes are estimated at around 3% of China‘s GDP, but only a tiny share is currently insured. Swiss Re’s welldiversified global portfolio and local presence will enable us to respond to the strongly growing need for natural catastrophe capacity.
Swiss Re’s proprietary cat modelling tools, which I have access to here in Beijing as part of our global underwriting systems. Together with the back-up from my catastrophe expert colleagues in Hong Kong and Zurich, we can provide in-depth technical advice to our clients and the Chinese insurance regulator for the design of natural catastrophe insurance and reinsurance products suitable for the Chinese market.
“ Natural catastrophe risk is a key challenge and opportunity for China. Swiss Re is well positioned to provide superior assistance in this field.” Agnes Chang, Treaty Underwriting, Swiss Re Property & Casualty, Beijing
“Coping with potential catastrophic losses requires coverage and pricing structures derived from the best scientific expertise available.
Swiss Re’s ongoing commitment to our natural perils knowledge base is a cornerstone of our superior service offering to our clients.”
, t h e ar ea a ro un d th e ci ty o f D at o n g in th e n o rt h h as s uf fe re d s o il er o si on c au se d b y h ea vy fl o o d in g , s us ta in ed d ro ug h t a n d s tr o n g w in d s.
The return on operating revenues of 9.1% exceeded the three year average target of 9% and the prior year return of 8.7%, reflecting strong underlying results. The business group extended its successful Admin ReSM offering with the largest transactions to date in both the US and the UK.
Admin ReSM has delivered consistently attractive returns to the business group. Swiss Re benefits from a high degree of diversification across its Admin ReSM portfolio, with more than 40 individual blocks of business acquired since 1998.
Insurance-linked securitisation On 21 January 2005, Swiss Re announced that it had transferred the insurance and investment risks from five blocks of US Admin ReSM business to the capital markets. Through this USD 245 million securitisation, Swiss Re realised a USD 57 million deferred gain on the securitised portion (78%) of the business while retaining the remainder (22%). By transforming insurance risk into a tradeable security, Swiss Re is able to turn assets (present value of future profits) into cash that would otherwise emerge only over time. Transferring risk to the capital markets allows for more effective use of capital: Life & Health Business Group results
Traditional business Swiss Re successfully repriced its North American business during 2004 in response to revised economic and mortality assumptions. These revised assumptions are now fully reflected in the pricing of all new business and will have a positive impact on earnings over time.
By the year’s end, almost 2 500 underwriting professionals at client companies were benefiting from access to one of the industry‘s most comprehensive and up-to-date underwriting reference sources. This number is projected to increase to between 8 000 and 10 000 users as Life Guide is deployed in further markets in 2005.
Excluding foreign exchange movements, the life operating result remained stable at CHF 1 049 million. Included in the life result is a provision for tsunami claims of CHF 58 million which was not part of
The management expense ratio increased to 5.2% in 2004 from 4.4% in 2003, reflecting the increased volume of Admin ReSM business and the absence of the one-off savings present in 2003. The expense ratio for Admin ReSM business, which is fully priced in each transaction, is higher than for traditional reinsurance business, due to the maintenance costs of dealing with individual policyholder records and communications.
At constant exchange rates, acquisition costs declined by 9%, reflecting lower amortisation of the present value of future profits following adjustment of the future profit emergence profile corresponding to current experience.
Admin ReSM is a key solution through which Swiss Re acquires individual closed blocks of inforce life and health business, either through reinsurance or with the purchase of an entire life insurance company. Swiss Re also typically assumes responsibility for administering the underlying policies.
Admin ReSM allows insurers to release capital and gain access to future profit streams from noncore portfolios. It also increases operational efficiency by removing the need for life insurers to maintain legacy IT and processing infrastructures. Admin ReSM enables a company and its shareholders to exit a line of business and redeploy the resulting capital and available resources to core operations or new ventures.
Total CHF 10.2 billion 9% Rest of the world 65% North America26% Europe
At constant exCHF millions 2003 2004 Change in % change rates in %
Admin ReSM is a core offering of Swiss Re. Pioneered in the US, Admin ReSM allows Swiss Re to optimise its allocation of capital and enables insurers to release capital from non-core operations.
Ms Kinnaird, why does Swiss Re want to increase its portfolio of Admin ReSM business? Admin ReSM provides an important alternative source of earnings – over extended periods of time – against periods of slower growth in traditional life reinsurance. Its profitability is typically steady and predictable, complementing and affording further stability to our overall life and health business.
“ Swiss Re’s experience in Admin ReSM transactions is supported by our financial strength and understanding of what makes this type of business sustainable in the long term.” Donna H. Kinnaird, Admin Re, Swiss Re Life & Health, Armonk (left) Dean Miller, Admin Re, Swiss Re Life & Health, London (right)
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Continued improvement in operating performance, complemented by higher investment returns, produced growth of 25% in operating income.
Premium business Premium business reported an operating income of CHF 608 million, up 28% compared to 2003. The combined ratio of traditional business was 92.9%, compared to 94.7% in the previous year. Aviation, credit and property reinsurance contributed positively to this excellent combined ratio. The casualty combined ratio improved, although it has not yet reached a satisfactory level.
Credit business benefited from a continuation of its strong underwriting record and a favourable credit environment. The corporate risk business produced an attractive return thanks to active cycle management in all segments.
¹ Total revenues are net of acquisition costs; the 2003 figure gross of acquisition costs was 13.3%
Premium business trading revenues, fees and commissions were CHF 126 million, compared to CHF 88 million in the prior year, driven largely by a rise in mark-tomarket valuation from the portfolio credit default swap book as spreads tightened.
Fee business Operating income from fee business was CHF 87 million in 2004, up 4% compared to 2003. The return on total revenues, excluding proprietary asset management, was 12.9% in 2004, compared to 14.7% in the prior year.
Total revenues net of acquisition costs were CHF 687 million, compared to CHF 785 million in 2003. Excluding proprietary asset management and adjusted for currency effects, net revenues were 8% lower than in 2003. The credit and asset backed as well as insurance-linked securities businesses contributed strong growth to total revenues, above the three year average target of 10% for the fee business. This excellent result was partially offset by trading losses associated with lower market volatility in the second half of 2004. The niche equity brokerage and corporate finance markets in which Fox-Pitt, Kelton operates suffered from lower activity in 2004, and this also reduced income.
Worldwide third party assets under management grew from USD 47 billion to USD 52 billion, an increase of 11% over 2003. Third party fee income grew on a like for like basis by over 9% to CHF 66 million. Growth was partially offset by the disposal of non-core asset management operations in 2003.
Conning’s insurance expertise starts with Conning Research & Consulting, a provider of independent insurance research focused on the US insurance industry. Conning Asset Management levers its insurance knowledge and expertise to provide customised, full-service third party asset management.
Life securitisation transactions to date have been motivated by a need for efficient capital management, most notably in connection with “closed blocks” of business from demutualised companies. These transactions amount to approximately USD 2.6 billion in total issuance so far.
The Financial Services Business Group expects continued improvement in operating performance in 2005.
Competition in the property market is expected to exert continued pressure on rates, however pricing should remain at favourable levels in most industry segments. The business group believes that casualty market rates will remain stable at attractive levels. Swiss Re’s underwriting stance is expected to result in continued loss of business in certain sub-segments (eg the pharmaceutical and financial services industries). Swiss Re expects general aviation and product manufacturers’ premiums to stay at current levels or increase, whereas airline premiums may decrease further if favourable claims experience continues. Credit and surety should benefit from the ongoing favourable credit environment.
The portfolio credit default business is not expected to contribute to earnings in 2005 to the same extent as in 2004, but this will be offset by increased earnings in premium business as the full effects of improved pricing and stronger terms and conditions in recent years become evident.
The business group expects further improvement in profitability for fee business, along with a return to growth in the trading and advisory product lines.
How are the markets reacting to this business? The reaction to date has been very positive. This is partly due to ILS being uncorrelated with the equity markets or fixed income asset classes, which makes many investors see it as an ideal way to diversify their portfolios. Furthermore, as confidence grows, we are able to lengthen the term of our cover to between three and five years and even longer on occasion.
As we aim to widen the scope of our ILS business, we have started to offer out higher return layers to the markets. In doing so, we are effectively broadening our investor base. We are also seeking to use ILS for other high-volume lines of business. At this juncture, one of our main challenges lies in successfully expanding the scope of our ILS activities.
Why are you increasing your participation in the ILS market? Our motivation is simple. As the sector grows we are seeing more opportunities emerging, these opportunities fit in with our business strategy. As a result we are actively increasing our transaction volume to respond to both the demand by sponsors and institutional investors.
“ Investor confidence in ILS is rising in tandem with the expansion of our activities in the sector. That is good for business.” Dan Ozizmir, Capital Markets, Swiss Re Financial Services, New York
Lo n d o n f in a n ci a l d is tr ic t,
C ity w h ic h is lo ca te d b et w ee n
Risk and capital management are key to Swiss Re’s business. Risk management monitors the amount of capital required to support risk-taking activities. Capital management monitors the level of capital available to support Swiss Re’s risk landscape. Swiss Re’s main objectives for capital and risk management are to ensure controlled risk taking, ongoing adequate capitalisation and to maintain sufficient financial flexibility to profit from attractive business opportunities.
Risk management principles At Swiss Re, risk management is based on four guiding principles that are applied throughout the Group:  Controlled risk taking: financial strength is important to Swiss Re’s business. The Group’s overall risk limits are clearly defined. Within these limits risk-taking activities are directed towards businesses that provide shareholders with attractive risk-adjusted returns.
 Open risk culture: risk transparency and responsiveness to change are integral to Swiss Re’s risk control process which is designed to effectively facilitate timely risk mitigation. Swiss Re has institutionalised processes to facilitate risk management knowledge sharing at all levels.
It also develops risk measurement and risk aggregation techniques as well as managing risk reporting, risk aggregation and risk steering at Group level.
Each business group has a dedicated Chief Risk Officer. The business units implement the relevant Group guidelines, adhering to limits and procedures as well as managing data in the reporting process.
In addition to the committees at Executive Board level, the Group Risk Management Committee is the platform through which
The Group Executive Board is responsible for the operational implementation of the risk management framework. The following committees address risk management matters at Executive Board level:  The Executive Board Committee decides on urgent business matters between Executive Board meetings, approves significant transactions and establishes principles for dealing with catastrophe and accumulation risks.
 The Group Capital and Capacity Allocation Committee is responsible for allocating capital and capacity, approving strategic asset allocation and any changes to internal risk and capital methodology.
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 changes in financial market risk factors, such as equity market prices, interest rates, credit spreads, foreign exchange rates or real estate prices.
 Credit risk is the risk of incurring a financial loss due to adverse changes in the creditworthiness of counterparties of Swiss Re and/or third parties.
Operational risk is the risk of incurring a direct or indirect loss due to inadequate or failed internal processes, people, systems, external events or non-compliance with regulation resulting in regulatory penalties or a total or partial inability to operate properly.
Integrated risk modelling Swiss Re has developed its own internal integrated risk model, which is used to determine the amount of capital required to support the risks on Swiss Re’s books and to allocate overall risk-taking capacity to specific lines of business. The model is continuously reviewed and relevant new techniques and insights are included to reflect prevailing best practice.
Swiss Re’s model is based on two important principles. Firstly, an asset liability management (ALM) approach to assess risk, measuring its net impact on the economic value of both assets and liabilities, is used. Secondly, the impact of risk is measured on an integrated basis, taking into account the fact that a single risk factor can impact different sub-portfolios and different risk factors can exhibit de pendencies.
Stress scenario analyses complement the integrated risk model by providing information on the economic implications for Swiss Re if certain adverse situations arise. Some of these analyses appear in the following sections. For insurance, the impact of rare insurance events is shown.
For financial markets and credit, the results of fairly well established scenarios that are more likely to occur have been chosen to facilitate comparison with other companies.
The Chief Underwriting Office within the Property & Casualty Business Group is responsible for Group-wide reporting of property and casualty risks. The various underwriting systems across the Group
Table 2 reports the expected discounted claims 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.
The main procedures and limits are laid out by Life Risk Management 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.
Reporting is done on a regular basis at all levels, including effectiveness of the control environment as well as key risk and performance indicators. The Risk Management Committee and the Chief Risk Officer of the Life & Health Business Group are responsible for risk steering and ensuring that an adequate and effective system of internal controls is maintained and that key risks in the business group are managed and controlled to an acceptable level. The Vita index-linked security transaction, for example, was arranged to provide protection against extreme mortality events.
Financial market risk management Financial market risk arises primarily from Swiss Re’s Proprietary Asset Management unit (PAM), the interest rate sensitivity of the present value of liabilities and the capital markets trading activities of the Capital Management and Advisory business sector (CMA). The overall risk limits framework is defined by the Group Capital & Capacity Allocation Committee (GCAC) which sets, generally on an annual basis, the strategic asset allocation benchmark for the PAM portfolio. The framework includes a combination of VaR, shortfall, stress testing and exposure limits for specific asset classes. The framework may include some reserve capacity delegated to the CFO and CRO that can be used in exceptional circumstances without the prior approval of, but requiring subsequent notification to, the GCAC. CMA and PAM then translate this limits framework for their own activities, generally incorporating a much more granular set of risk limits to their business. For instance CMA uses a 10 day 99% VaR to limit and monitor its financial market risk on a daily basis (see page 51 for more details). Minimum standards for the man agement of financial market risk are specified in the Market Risk Guidelines.
These are supplemented by Derivative Guidelines, Investment Guidelines and business specific guidelines.
Credit risk management Credit risk exposure within the Group arises directly from Swiss Re’s investment activities and from business sources, comprising the portfolio of assets or liabilities underwritten directly by the various business units. Swiss Re distinguishes between three kinds of exposure: the risk of issuer default from instruments in which Swiss Re invests or trades, eg corporate bonds; counterparty exposure in a direct contractual relationship, eg retrocession or OTC derivatives; and portfolio exposure from risk transferred to Swiss Re with no direct contractual relationship, eg trade credit and surety reinsurance business. All contribute to an overall credit risk portfolio governed by Group Credit Risk Guidelines that are approved by the GCAC.
The figures in Table 5 report the estimated pre-tax impact of credit scenarios on available economic capital. For instance the default scenario shows estimated additional (unexpected) losses due to adverse default rate changes. In general the modelled scenarios are based on a credit environment development similar to 2001, which was the worst credit experience of
Estimated economic impact of loss event in CHF billions as of 31 December 2004
Estimated economic impact of scenarios in CHF billions as of 31 December 2004 30% fall in global equity markets –2.4 100 bp increase in global yield curves 0.3 15% fall in global real estate markets –0.6
the past ten years. This period also reflects the changes in credit markets due to the increased use of credit derivatives.
Operational risk Exposure to operational risk is an inevitable consequence of doing business. Operational risk management at Swiss Re focuses on early identification, prevention, mitigation and timely reporting. The most important management method is a system of risk and control self assessments which provides an overview of the risks embedded in the organisation or originating from external sources together with the related mitigation and control measures. In this respect Swiss Re’s corporate culture of integrity, personal responsibility, openness and learning is an important component of operational risk management.
Operational risk is managed as close to its source as possible: it is primarily the responsibility of line management, supported by a network of risk management professionals at each organisational level from division to Group. This management network is coordinated by Group Operational Risk Management, which is also responsible for defining guidelines and setting standards.
Other operational risk management functions include: compliance, ie monitoring adherence to relevant legislation and regulations as well as the Group Code of Conduct; the IT security function, protecting Swiss Re’s critical IT systems and applications; and business continuity management and security, ensuring optimal operational reliability.
Swiss Re is in the process of broadening and deepening the scope of its operational risk reporting. This will reinforce process alignment and common data structures across the Group. The aim is to introduce a Group-wide management in-
Capital Management and Advisory (CMA) is exposed to market risk through trading in financial products where the underlying risk factors may include equity risk, interest rate risk (including spread risk), currency risk and commodity price risk. In this area Value at Risk (VaR) is one of the primary tools used for setting trading limits and steering the overall portfolio. Overall limits are delegated down to each trading desk, depending on the market outlook and available opportunities. These limits are monitored daily by Market Risk Management to ensure that risk taking remains within the defined range of risk appetite.
The CMA business sector monitors its VaR at a 99th percentile level using a 10 day time horizon. This means that, assuming a static portfolio over 10 days, there is a 1% chance that losses will exceed VaR.
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 were no back testing exceptions in 2004.
formation system that allows reporting along the same governance structure as with the core risk categories.
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.
Internal capital adequacy Swiss Re determines the amount of capital it has available for buffering against adverse claims experience as follows: first, it adjusts published shareholders’ equity for unrealised gains and losses on the investment portfolio and for economic values on liabilities, as far as neither of these are recognised in the published balance sheet. It then deducts goodwill, and adds capital items that meet the underlying principles of loss absorbency and permanence, such as hybrid capital and equalisation reserves. The tax impact on the valuation adjustments is shown separately. These figures are shown in Table 6.
Dividing the available capital of CHF 28.4 billion by the base capital requirement of CHF 10.2 billion based on 99% VaR – see Risk management, Table 1 – gives a capital adequacy ratio (CAR) of 278% at 30 June 2004, compared to 260% at 30 June in the previous year. This CAR improvement is mainly due to an increase in shareholders’ equity of CHF 1.5 billion. The amount of underlying capital required remained stable.
Swiss Re occasionally funds these transactions through long-term debt. During 2004, Swiss Re’s funded business continued to take advantage of favourable conditions, raising a total of USD 926 million maturing after 2005; all related interest rate and currency risks are hedged.
Credit ratings Standard & Poor‘s (S & P), Moody‘s and A.M. Best rate Swiss Re‘s financial strength based on interactive relationships.
² Includes discounting of non-life reserves, life and health’s value not recognised in the balance sheet, and other
³ Excludes EUR 672 million mandatory convertible security issued in July 2004 which received full equity credit from Moody’s and Standard & Poor’s
In October 2004 the Group launched a USD 3.5 billion syndicated six-year, dual tranche LoC and credit line facility, replacing the maturing October 2003 facility. Due to heavy oversubscription, Swiss Re decided to increase this line to USD 4 billion. Both facilities allow Swiss Re to profit from favourable market conditions and to reduce the roll-over risk of 364 day credit facilities.
Swiss Re regards sustainability as an important contributor to its long-term business success. Trends that endanger environmental resources and social cohesion pose risks for society and business. As the final link in the risk chain, a reinsurer needs to be aware of how these emerging risks may ultimately end up on its balance sheet. Consequently, Swiss Re is committed to identifying such risks and developing appropriate business responses by minimising loss potential but also by seizing opportunities to create new sustainabilityrelated products.
Sustainability has been integrated into Swiss Re’s business practices. It is one of four core values laid down in the Group Code of Conduct and is defined as a specific management responsibility in the there is a high likelihood of a rise in both average temperatures and the number of relatively hot days in nearly all land areas (see graph on frequency distribution).
Climate change is expected to have significant implications for reinsurance, for example:  property losses from weather events and increased risk for certain business lines, such as agriculture and energy, leading to increased demand for insurance;  changing disease patterns, altering the demand for life and health insurance coverage;  rising likelihood of legal action by shareholders and others against the top management of companies neglecting climate change strategies, creating new challenges for Directors’ & Officers’ insurance.
Swiss Re has been addressing the challenge of climate change in three ways: by conducting an extensive risk dialogue with concerned stakeholders; by developing innovative risk transfer solutions; and by reducing its own greenhouse gas emissions.
Risk dialogue Through a focused exchange of information and know-how with its stakeholders, Swiss Re seeks to improve understanding of climate change and raise awareness of its associated risks.
business groups and divisions. It has also been the subject of extensive internal and external dialogue. In recognition of these efforts, the Dow Jones Sustain ability Indexes have confirmed Swiss Re as the sustainability leader in the insurance sector. Further information on the Group’s sustainability and corporate citizenship initiatives can be found on Swiss Re’s website at www.swissre.com.
Climate change Swiss Re concluded at an early stage that climate change was an important issue with potentially serious long-term consequences for society and business. This assessment is being confirmed by a growing scientific consensus on key climate developments and their likely impact. Based on current trends and predictions,
 Current frequency distribution of daily maximum temperatures  Expected frequency distribution of daily maximum temperatures  Distribution extremes; represent the probability of extreme events
Weather risk products also offer the prospect of protection against climate effects. While traditional weather insurance is indemnity-based and secures against specific events, new derivative products provide covers for unseasonable weather patterns, such as mild winters or drought. According to the Weather Risk Management Association, between April 2003 and March 2004 the notional value of contracts transacted reached USD 4.6 billion. Swiss Re estimates its current market share to be about 20% and was named “Weather Derivatives Dealer of the Year” by Environmental Finance magazine for the second consecutive year.
Swiss Re was the main sponsor of “The Great Warming”, a three-part television documentary exploring the consequences of climate change and its possible solutions. Filmed in eight different countries spanning four continents, it gives a voice to concerned citizens as well as experts and scientists. The documentary was first shown to an audience of 1.8 million viewers on Discovery Channel Canada in April 2004 and attracted considerable attention in the Canadian media. In 2005 it will be screened by the PBS Network in the US, the ABC Asia Pacific Network and by broadcasters in Sweden, Hong Kong and Japan.
Corporate sponsorship: Sharing Solutions Swiss Re also contributes to sustainability issues through corporate sponsorship. The Group’s Sharing Solutions sponsorship programme brings issues that are relevant both to its business and society in general into sharper focus, allowing Swiss Re to use its existing expertise and skills to create tangible social value and raise public awareness.
Swiss Re is committed to supporting the victims of the tsunami in Asia, and many employees have donated funds and are contributing to the aid effort in their free time. Several ideas and initiatives designed to ensure long-term relief have also been discussed and will be developed more fully over the coming months.
Change from 2003 2004 base year kg/employee Share in % kg/employee Share in % (2003) in %
Total CO₂ emissions for the Group increased by 5.3% in 2004 to 45 466 t, reflecting a rise in the number of staff employed due to Admin ReSM acquisitions in both the US and the UK. Per employee, this amounted to a small rise of 0.1%. Several locations managed to cut power consumption, leading to an 11.2% reduction in CO₂ emissions per employee. Emissions relating to business travel rose 9.5% mainly due to increased business activity in Asia.
State-of-the-art modelling of natural perils is done by using a so-called event-set approach. Historical events form the basis of such a model, but the event catalogue is expanded and enriched with additional “artificial “ events. This creates a far more stable and realistic event set that includes a vast array of possible events which could happen (in any given year with a certain probability).
Event-based modelling using a comprehensive storm set is Swiss Re’s answer to the challenge of optimising capital allocation and portfolio diversification in the field of natural catastrophes.
Mr Castaldi, would you give us a brief description of what Swiss Re’s eventbased modelling involves? The concept of event-based modelling has been around for a long time, but the models previously available on the market were too limited in scope and often only concentrated on an individual country. Swiss Re writes business in many areas of the world so we needed to develop a model that was able to measure our total exposure as accurately as possible. Our approach uses a catalogue of simulated hazards that mimic potential naturally occurring events, such as earthquake, tropical cyclone, winter storm (extra tropical cyclones) and flood, to produce estimates of potential insured losses. This gives us the realtime advantage of understanding how each current or potential acceptance will affect Swiss Re’s natural catastrophe claims estimates and capital needs.
What are your expectations from this approach? How will it add value to Swiss Re‘s business? Our event-based modelling approach is more refined than in the past, so it will help us to estimate more accurately how each risk could impact Swiss Re’s overall portfolio, and to select and price business accordingly. I expect that the gained efficiency will enable us to write more business within our existing catastrophe risk limits. The fact that we have this information also allows us to improve our
Do you think this model will change the way the natural catastrophe market operates? It will definitely bring about considerable improvements in terms of the accuracy of risk assessments and consistency across analysis, pricing, underwriting and risk management. These factors combined will strengthen our operating basis by substantially reducing uncertainty and promoting the insurability of risks. Ultimately, the model will enable us to improve business steering and optimise our insurance capacity for disaster risks.
“ Our approach is special: we have one comprehensive storm set for the entire North Atlantic Basin. This enables us to maintain an accurate picture of our catastrophe risk exposure over multiple portfolios and countries.” Andrew R. Castaldi, Chief Underwriting Office, Swiss Re Property & Casualty, Armonk capital allocation because we can make more targeted and specific decisions concerning our risk portfolio.
Event-based modelling will be the main factor on which our underwriting decisions for natural catastrophe accumulation and capital allocation are based because it is the only tool that works in conjunction with the rest of the Swiss Re Group. Having said that, we will continue to use other technologies and cross-reference our own findings with those of other models.
Non-listed Group companies Please refer to the Financial Statements, note 16 on “Subsidiaries, equity investees and variable interest entities”, page 50–55.
1.2 Significant shareholders As of 31 December 2004, there was one shareholder 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 any of its group companies, Swiss Re is unable to track, on its own, changes in Franklin Resources’ aggregate holdings.
The Capital Group Companies, Inc., domiciled in Los Angeles, informed SWX Swiss Exchange that its holdings fell below the threshold of 5% of Swiss Re’s voting rights on 30 November 2004.
1.3 Cross-shareholdings There are no cross-shareholdings to report as Swiss Re does not hold 5% or more of the shares or voting rights of any company which, in turn, also owns 5% or more of Swiss Re’s shares or voting rights.
As of 31 December 2004, Swiss Re’s total conditional capital outstanding amounted to CHF 2 662 221.60 consisting of 26 622 216 registered shares. Of these 26 622 216 shares, 20 000 000 shares were reserved for the exercise of conversion rights and war-
rants granted in connection with bonds or similar instruments and 6 622 216 shares for employee participation purposes. As of 31 December 2004, 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 pre-emptive rights are excluded, then (1) the bonds are to be placed at market conditions, (2) the exercise period is not to exceed ten years from the date of issue for options and twenty years for conversion rights, and (3) the conversion or the exercise price for the new shares is to be set at least in line with the market conditions prevailing at the date on which the bonds are issued.
In 2003 the company’s share capital remained at CHF 32 million. Total reserves decreased by CHF 195 million to CHF 9.9 billion. The higher profit for the financial year of CHF 1.2 billion (compared to CHF 106 million in 2002) led to an increase of disposable profit from CHF 122 million to CHF 1.2 billion. Total shareholders’ equity before allocation of profit increased from CHF 10.3 billion to CHF 11.2 billion. At the Annual General Meeting shareholders approved a dividend payment of CHF 341 million, c ompared to CHF 310 million in the previous year.
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 will vote on a dividend payment of CHF 497 million, compared to CHF 341 million in the previous year.
The point is not applicable as no statutory privileges or limitations on transferability exist.
2.7 Convertible bonds and options Convertible bonds As stated in note 6 on “Debt” on page 26–30 of the Financial Statements, the following convertible bonds are outstanding: Maturity Instrument Issued in Currency Nominal (m) Exchange terms 2007 Mandatory Convertible Bond 2004 EUR 672 ii)
3 Board of Directors 3.1 Members of the Board of Directors Status as at 31 December 2004 With the exception of Mr Walter B. Kielholz, no member of the Board of Directors has ever held a management position in the Group. No director has any significant business connections with Swiss Re or any of its Group companies.
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.
Mr Kielholz has been a member of the board of Credit Suisse Group since 1999. He served as chairman of the audit committee from 1999 to 2002 and as vice-chairman of the board 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.
Mr Bechtler joined Swiss Re’s Board of Directors in November 1993. His mandate was renewed in 1997 and 2001, each time for a further four years. He will stand for re-election at the Annual General Meeting on 9 May 2005. Mr Bechtler has been managing director of Hesta AG as well as Hesta Tex AG, Zug, since 1972. In this capacity he is chairman of the boards of Zellweger Luwa AG, Uster, and Schiesser Group AG, Küsnacht.
1990, he became group treasurer of Sandoz Ltd, and, in 1993, head of group finance and member of the Sandoz executive board.
Mr Breu is a member of the board of directors of Chiron Corp, Emeryville, California, and of the SWX Swiss Exchange and its admission panel. He is also a member of the Swiss Takeover Board.
Ms Gibson was elected to Swiss Re’s Board of Directors in June 2000. Her mandate was renewed in 2004 for a further four year term. She has been a professor of financial economics at the Swiss Banking Institute of the University of Zurich since March 2000. Ms Gibson was previously a professor of finance at the University of Lausanne. She is also a director of the National Centre of Competence in Research (NCCR) “Financial Valuation and Risk Management” research network, and an adviser to scientific councils of various educational institutions. She was a member of the Swiss Federal Banking Commission until the end of 2004.
Mr Lemann joined Swiss Re’s Board of Directors in 1999. He was re-elected for a further four year term at the Annual General Meeting in 2003. In autumn 2004, he decided to
Mr Smith, a US and Swiss citizen born in 1938, received a Bachelor of Business Administration from the University of Massachusetts in 1960 and a Master of Business Administration from Boston University in 1965.
Mr Villiger, a Swiss citizen born in 1941, graduated from the Swiss Federal Institute of Technology (ETH) in Zurich, with a degree in mechanical engineering in 1966.
Mr Villiger joined Swiss Re’s Board of Directors in 2004 for a four year term. As an entrepreneur, Mr Villiger co-owned and managed two businesses from 1966 until 1989. Simultaneously, Mr Villiger had several political positions, first in the parliament of canton Lucerne and, from 1982, in the Swiss Federal Parliament. He became a Federal Councillor in 1989. He initially served as Defence Minister, with responsibility for the Federal Military Department. He then became Finance Minister in 1995, charged with running the Feder-
3.2 Other activities and functions Please refer to the information provided in each director’s biography on page 62–66.
3.3 Cross-involvement 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 2004: Peter Forstmoser, Chairman, is also a director of Mikron Holding AG.
3.4 Elections and term of office Principles of the election procedure and term limits The term of office of a directorship is four years. It begins with the date of election by an Annual 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 Annual General Meeting and is separately voted upon.
Certain changes in professional circumstances require the directors to offer their resignation at the following Annual General Meeting.
First election and remaining term of each director Please refer to the information provided in each director’s biography on page 62–66.
a. Allocation of tasks within the Board of Directors Chairman of the Board of Directors The Chairman of the Board of Directors (the “Board”) exercises ultimate supervision of the Executive Board on behalf of the Board; he attends the meetings of the Executive Board and the Executive Board Committee and receives all related documentation and minutes; he is responsible for Group Internal Audit and appoints its head, subject to confirmation by the Audit Committee; he convenes meetings of the Board and its committees; he makes preparations for, and presides at, the meetings of the Board; he presides at the Annual General Meeting of shareholders; he ensures adequate reporting to the Board by the Executive Board, the Executive Board Committee and the Board committees; he coordinates the activities of the Board committees; he receives comments from the directors as to the Board’s performance and reports annually to the Board with an assessment of the Board’s performance; he represents the company in matters involving shareholders; in cases of doubt, he makes decisions concerning the authority of the Board or its committees and about the applicability and interpretation of the Corporate Bylaws.
Executive Vice Chairman The Executive Vice Chairman liaises between the Board and management in matters not reserved for the Chairman; he may attend the meetings of the Executive Board and the Executive Board Committee and receives the relevant documentation and minutes. Other responsibilities include supervising management’s preparation and execution of Board resolutions in operational matters, monitoring the Group’s strategic direction and overseeing management development for the Group’s senior executives.
The Committees may conduct or authorise investigations into any matters within their respective scope of responsibilities, as laid down in their respective charters of duties, thereby taking into consideration relevant peer group practices and general best practice. They are empowered to retain independent counsel, accountants or other experts if deemed necessary, including for purposes of benchmarking best practice.
Thomas W. Bechtler, Chair Raymund Breu Rajna Gibson Robert A. Scott John F. Smith, Jr.
All members of the Audit Committee must be non-executive, independent and financially literate. At least one member must have accounting or related financial management expertise. 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.
Tasks and responsibilities The central task of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities as they relate to the integrity of the Group’s financial statements, the Group’s compliance with legal and regulatory requirements, the external auditor’s qualifications, and the performance of the Group’s internal audit unit and its external auditor.
The Committee serves as an independent and objective monitor of the Group’s financial reporting process and system of internal control, and facilitates ongoing communication between the external auditor, management, Group Internal Audit and the Board with regard to the Group’s financial position and affairs.
Tasks and responsibilities In compensation matters, this Committee oversees the development of a compensation philosophy, which is submitted to the Board for approval; it reviews and approves the Group’s compensation and pension plans; it recommends to the Board the amount and composition of directors’ remuneration; it determines the amount and composition of remuneration for the Chairman, the Executive Vice Chairman, the CEO and the members of the Executive Board on the basis of their performance; it approves the total amount available for performance based compensation; and it ensures compliance with any remuneration disclosure requirements.
In personnel matters, the Committee makes proposals that ensure an adequate size and a well-balanced composition of the Board and further ensure that a majority of the Board is independent; it develops guidelines for selecting candidates for election to the Board and the Executive Board; it evaluates Board member candidates and makes recommendations to the Board; it evaluates proposals made to the Board for the appointment and removal of members of the Executive Board; it approves employment contracts with the Chairman, the Executive Vice Chairman, the CEO and the members of the Executive Board; and it reviews executive succession and emergency plans. The Compensation and Appointments Committee reviews its own performance annually.
Rajna Gibson, Chair Walter B. Kielholz Jorge Paulo Lemann Robert A. Scott Kaspar Villiger
Tasks and responsibilities This Committee oversees risk management, approves the fundamental risk management principles, reviews their implementation and the appropriateness of the Group’s risk management framework; in respect of risk strategy, it evaluates the bases on which the Board determines the overall risk tolerance and the risk appetite for the most significant risk taking activities and reviews the strategic asset allocation; in respect of risk controlling, it reviews the methodology for risk measurement, the results of risk adjusted capital calculations and the most significant risk exposures and their limits; in respect of financial risk, it reviews the valuation of assets and liabilities for economic accounting and regulatory purposes and the treasury strategy; it reviews capital adequacy, the ratings received from the rating agencies and management’s reaction and recommendations
George L. Farr, Chair Raymund Breu Bénédict G. F. Hentsch Walter B. Kielholz Jorge Paulo Lemann
Tasks and responsibilities As regards Group assets, the Committee reviews the principles to be applied in capital investments; it keeps itself informed of the guidelines governing asset management and approves those regulating the use of derivative instruments; it reviews the tactical allocation of assets for the next financial reporting period; it keeps abreast of the strategic asset allocation, investment policy and the valuation of investment assets; it reviews the performance of the asset management operations; it receives semi-annual reports on the Group-wide use of derivative instruments; and it reviews the business relationship of the asset-managing units with their counterparties, as well as associated transaction fees.
In 2004, the following meetings were held: Month BoD¹ AC² CAC³ FRC⁴ IC⁵ GSRC⁶
¹ Board of Directors ⁴ Finance and Risk Committee ² Audit Committee ⁵ Investments Committee ³ Compensation and Appointments Committee ⁶ Governance and Shareholder Relations Committee
Normally, the members of the Executive Board Committee attend the meetings of the Board in an advisory capacity. Attendance at Committee meetings is normally restricted to those members of the Executive Board with the information and expertise required for the relevant Committee to perform its duties. The Head of Group Internal Audit and two senior representatives of the external auditor regularly participate in Audit Committee meetings.
3.6 Definition of areas of responsibility Swiss Re’s Board of Directors has delegated the conduct of business operations to an Executive Board made up of 16–17¹ senior executive officers. Members of the Executive Board are appointed by the Board of Directors upon recommendation of the Chief Executive Officer and after consultation with the Compensation and Appointments Committee. The Executive Board is headed by the Chief Executive Officer and comprises his deputy,
¹ In 2004 the Executive Board consisted of 17 members, as listed in “Executive Board”, page 74–79. Three of them stepped down on 31 December 2004 and were replaced by two new members. Since 1 January 2005, therefore, the Executive Board has been composed of 16 members.
The responsibility for the conduct of day-to-day operational business activities lies with the Executive Board Committee. In 2004, it comprised seven members, now six, namely the Chief Executive Officer, the Chief Financial Officer, the Chief Risk Officer and the heads of the three business groups. The Executive Board Committee has, as a rule, two meetings per month, except when the full Executive Board meets and in holiday seasons. In 2004, the Executive Board Committee met 16 times.
3.7 Information and control instruments Swiss Re’s governing bodies have recognised 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.
Risk Management For the risk management organisation and its responsibilities please see Risk and capital management, page 46–53 of the Business Report.
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).
Prior to the commencement of the external audit, the external auditor presents its plan and estimated fees to the Audit Committee for approval. At the conclusion of the external audit, the external auditor presents and discusses its report on the financial statements with the Audit Committee, and highlights any significant internal control issues identified. Each year the external auditor is required to discuss the internal quality assurance processes that ensure the external audit is conducted in accordance with the required professional standards, and provide a formal written statement to the Audit Committee defining all relationships it has with the Swiss Re Group. The Audit Committee and external auditor discuss any disclosed relationships or services that might affect the external auditor’s objectivity and independence.
To further protect the independence of the external auditor, the Audit Committee is required to pre-approve all non-audit services to be provided by the external auditor. In addition, proposals to employ former senior executives of the external auditor, previously involved in the external audit, must be reviewed and approved in advance by the Audit Committee.
Mr Coomber started his career with the Phoenix Insurance Company. He joined Swiss Re in 1973. Having qualified as an actuary in 1974, he first specialised in the company’s life reinsurance. He was Swiss Re (UK)’s appointed actuary from 1983 to 1990. In 1987 he assumed responsibility for the life division, and, in 1993, was made head of the company ’s UK operations. Mr Coomber was appointed Member of the Executive Board in April 1995, responsible for the Group’s Life & Health Division. In June 2000, he became a member of the Executive Board Committee. In November 2002, the Board of Directors appointed him CEO with effect from 1 January 2003. Mr Coomber also serves as a member of the supervisory board of Euler Hermes.
Jacques Aigrain Head of the Financial Services Business Group and Deputy Chief Executive Officer as of 1 January 2005, Member of the Executive Board Committee
Mr Aigrain joined Swiss Re in June 2001 as head of the Financial Services Business Group. Previously, Mr Aigrain worked for JP Morgan in various positions and locations, predominantly in investment banking, capital markets, and mergers and acquisitions. Immediately prior to joining Swiss Re, he was a managing director and a member of JP Morgan’s investment banking management committee, where he was co-head of client coverage, responsible for the financial institutions and classical economy sectors.
Martin Albers Head of the Risk Solutions business sector in the Financial Services Business Group
Mr Albers, a Swiss citizen born in 1960, graduated from the Swiss Federal Institute of Technology (ETH) in Zurich in 1985 with a master’s degree in engineering, and in 1991 earned an MBA from the JL Kellogg Graduate School of Management at Northwestern University, Chicago.
Walter Anderau Head of the Communications & Human Resources Division, appointed Chairman of the Swiss Re Centre for Global Dialogue as of 1 January 2005 following his retirement from the Executive Board
Mr Anderau, a Swiss citizen born in 1946, received a degree in history from the University of Zurich in 1972 after studies both in Zurich and Paris.
Mr Anderau joined Swiss Re in 1998 as head of Group Human Resources. Prior to that, he worked for ten years at Kraft Jacobs Suchard, where he was chairman of the board of Swiss operations, director on the company’s European board and, as vice president of corporate affairs, member of Kraft’s executive board (Europe). From 1985 to 1988, Mr Anderau headed Switzerland’s “700th anniversary celebration” (CH 91). He was appointed to the Executive Board in July 1999.
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 to his current position in January 2000.
Phillip Colebatch Head of the Capital Management and Advisory business sector within the Financial Services Business Group
Jacques E. Dubois Deputy Head of the Life & Health Business Group until 31 December 2004, Chairman & CEO of Swiss Re America Holding Corporation and in charge of corporate development and US public affairs as of 1 January 2005
Mr Dubois joined Swiss Re in conjunction with the company’s acquisition of Life Re in 1998. In June 2000, he was appointed a member of the Executive Board and Deputy Head of the Life & Health Business Group.
co-head of Securitas Capital, a private equity firm focused on the insurance industry. From 1996 to 1998 he was a senior managing director at Zurich Centre Resources Ltd, where he focused on startups of new insurance companies. From 1990 to 1996 he was CFO and a member of the board of directors of Kemper Corporation. He started with Kemper as a financial analyst in 1978, holding several positions in corporate finance until 1990.
Ann F. Godbehere Chief Financial Officer, Head of the Finance Division, Member of the Executive Board Committee
Mr Kellenberger joined Swiss Re in 1978, holding various assignments in facultative and treaty business within the engineering department. In the early 1980s, he was responsible for Southeast Asia, operating from Hong Kong. In 1990 he was appointed head of the engineering department. In 1993 he was appointed to the Executive Board, responsible for the Northern Europe reinsurance sector and special lines. In 1998 he was appointed Head of Europe Division. On 1 April 2000, he became Deputy Chief Executive Officer. He stepped down from the Executive Board on 31 December 2004 as he will reach retirement age in 2005. Mr Kellenberger started his career as a project engineer in bridge construction before moving to England, where he worked for a major Swiss construction company.
Mr Kellenberger was a member of the board of the Swiss Insurance Association until the end of 2004. He is vice-chairman of the supervisory board of Atradius, Amsterdam and a member of the board of directors of Swiss Life Group. In addition he is chairman of the Swiss Pool for Aviation Insurance.
Michel M. Liès Head of the Europe Division within the Property & Casualty Business Group
Mr Liès joined Swiss Re’s life department in 1978. Based in Zurich, he first covered the Latin American market. From 1983 to 1993, he was responsible for France and the countries of the Iberian Peninsula. In 1994 he moved to the property & casualty department in charge of Southern Europe and Latin America, which he headed from 1997. Mr
Mr Liès is a member of the board of the Swiss Insurance Association.
Mr Ozendo joined the Swiss Re Group in 1995, taking on an assignment as chief executive officer of the subsidiary Union Re, with effect from 1 January 1996. Mr Ozendo was appointed to Swiss Re’s Executive Board on 1 July 1996. He was named Head of the Group’s Asia Division in 1998 following Union Re’s integration into Swiss Re. Before joining Swiss Re, Mr Ozendo worked for General Reinsurance Corporation from 1975 to 1995. In 1986 he moved to Switzerland as general manager of General Reinsurance Corporation (Europe) in Zurich. He was appointed president and managing director of General Re Europe Limited in 1994. Mr Ozendo was previously employed as an underwriter by the New York Life Insurance Company in San Francisco.
Bruno Porro Chief Risk Officer, Head of the Risk & Knowledge Division, Member of the Executive Board Committee until 31 December 2004
Mr Porro joined Swiss Re in 1978, where he established a group involved with the assessment of natural hazards. In 1987 he became head of the development and capacity
Mr Wilson has been associated with Swiss Re, and previously Life Re, since 1991, as general counsel, secretary, and director of Swiss Re Life & Health America Inc. and its subsidiaries. Before his appointment in 2003 to the Executive Board, he held the position of executive vice president and head of the business engineering services unit, where he was responsible for overseeing the firm’s Admin ReSM programme as well as other non-traditional reinsurance solutions for life and health clients in North America. Mr Wilson formerly served as general counsel for the Life & Health Business Group. Before joining Life Re, Mr Wilson worked for two Texan law firms as an associate attorney.
Changes in the course of the 2004 business year Benjamin Meuli was appointed Chief Investment Officer and Member of the Executive
He continues to serve as Head of the Financial Services Business Group.
Walter Anderau was appointed Chairman of Swiss Re’s Centre for Global Dialogue from 1 January 2005 following his retirement from the Executive Board as of 31 December 2004.
Christian Mumenthaler was appointed Group Chief Risk Officer and Head of Risk and Knowledge Division effective 1 January 2005. He also joined the Group’s Executive Board and became a member of the Executive Board Committee. 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. He started his professional career in 1997 as an Associate at the Boston Consulting Group, before joining Swiss Re in 1999 as a manager in Group Strategic Planning. Between 1999 and 2002, Mr Mumenthaler was responsible for a number of key projects for the company including innovative securitisation solutions. In 2002 he established a new unit, Group Retro and Syndication, which is responsible for optimising the Group‘s risk and capital base through retrocession and securitisation. As head of Group Retro and Syndication, he was responsible for a number of innovative capital market transactions including the first securitisation of mortality risk.
4.3 Management contracts Disclosed hereunder are key elements of management contracts between Swiss Re, or any of its Group companies, and companies not belonging to the Group, including the companies’ names, domiciles and delegated management tasks. The form and extent of compensation are not, however, disclosed as all the contracts are commercially sensitive.
Originally included in the IMA was the management of certain real estate properties. A partial deed of assignment was entered into with Arlington Property Investors UK Limited (“Arlington”) to make Arlington the exclusive manager of the Windsor Life property portfolio. Other terms were unchanged.
Compensation of the Chairman of the Board of Directors, the Executive Vice Chairman, the CEO and other members of the Executive Board is set by the Board of Directors’ Compensation and Appointments Committee. The Committee convenes two to three times a year and presents its proposals to the full Board for approval. The Committee’s
The former member of the Executive Board performs periodic services on behalf of the Group.
18 executive members (as defined in 5.2) 338 078 10 non-executive members (as defined in 5.2) 22 415
Members of the Board of Directors receive an honorarium, 25% of which is in the form of shares; the remainder may be taken either in the form of cash or shares with a four year deferral period. Such shares have a discounted taxable value of CHF 65.60.
5.5 Share ownership Number of shares held on 31 December 2004 18 executive members (as defined in 5.2) 1 200 193 10 non-executive members (as defined in 5.2) 163 872
In addition to those shares held by the person in question on the reporting date, shareholdings consist of any shares held by such person’s spouse, minors, and of directly controlled companies.
5.6 Options and related instruments Please refer to note 12 on “Stock compensation plans” on page 37–38 in the Financial Statements.
Restricted shares In 2004, 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. Beneficiaries of long-term incentive awards will have the same choice between stock options and restricted shares at grant in April 2005.
Overview of the restricted shares held in 2004 Share price as of date of grant CHF 93 3 executive members (as defined in 5.2) 11 500 1 non-executive member (as defined in 5.2) 10 000 5.7 Additional fees and remuneration Under the SWX Directive, Swiss Re is required to disclose the sum of the honorariums (eg consultancy fees) and other remunerations billed to Swiss Re or any of its Group companies by a member of a governing body, or parties closely linked to such persons for additional services performed during the year under review, in the case of sums exceeding half of the ordinary remuneration of the member in question. No such additional payments were made.
All credit is secured against real estate or pledged shares. The terms and conditions of loans and mortgages are the same as those available to all Swiss Re employees in the respective locations. Fixed-rate mortgages have a maturity of five years and interest rates that correspond to the five year Swiss franc swap rate plus a margin of 10 basis points. Adjustable-rate mortgages have no agreed maturity dates. The basic preferential interest rates equal the corresponding interest rates applied by the Zurich Cantonal Bank minus one percentage point. To the extent that fixed or adjustable interest rates are preferential, such values have been factored into the compensation sums given to the governing body members under “Compensation for acting members of governing bodies”, on page 81.
5.9 Highest total compensation The compensation of the highest paid member of the Board of Directors (Peter Forstmoser ) during the reporting year can be broken down as follows: Number of shares/options CHF millions
Statutory rules on participating in the General Meeting of shareholders if differing from legal provisions
6.2 Statutory quorums The Articles of Association do not provide for any statutory quorums. Any General Meeting of shareholders passes resolutions by an absolute majority of the votes validly cast, subject to the compulsory exceptions provided by law.
6.5 Registrations in the share register There is no statutory rule on the deadline for registering shareholders in connection with the attendance of the General Meeting. In recent years, Swiss Re has acknowledged voting rights of shares which were registered at least two working days before the General Meeting. In 2004, the qualifying date was Wednesday, 12 May, while the Annual General Meeting was held on Friday, 14 May.
8.2 Auditing honorarium The following summarises fees for professional services for the year ended 31 December 2004.
8.3 Additional honorarium In addition to the fees described above, aggregate fees of CHF 2.4 million were billed by PricewaterhouseCoopers during the year ended 31 December 2004, primarily for the following: Income tax compliance and related tax services CHF 0.9 million Other fees CHF 1.5 million
Other fees comprise, among other things, amounts for accounting, actuarial and legal advisory, benchmarking studies and treasury advisory services.
Swiss Re reports semi-annually on its financial performance and on an ad-hoc basis to announce important corporate news. Furthermore, Swiss Re organises events with investors and analysts where specific topics are discussed.
Placing small to medium-sized facultative business via SwiftRe is very efficient and extremely easy. Thanks to the system’s user-friendly design and high usability, Swiss Re’s facultative reinsurance capacity is easily accessible. Data requirements, and therefore input fields, have been kept to an absolute minimum: only information needed for pricing and exposure purposes and for Swiss Re’s accumulation control has to be entered.
SwiftRe is now available in more than 40 countries worldwide and is currently used by over 200 insurance and broker companies. There is no membership or transaction fee. It offers facultative covers for property and liability business on a proportional as well as non-proportional basis. Considering only business that has been bound, SwiftRe has so far transacted more than 17 000 facultative acceptances.
Date News Method of dissemination 14 January Nomination of former Federal Councillor of Switzerland Kaspar Villiger for election to the Board of Directors
News release 5 February Announcement of acquisition of CNA’s life book in Admin ReSM transaction
News release and telephone conference 2 March Appointment of Benjamin Meuli as Chief Investment Officer
News release 1 July Announcement of acquisition of Life Assurance Holding
News release 26 August Interim reporting 2004 News release, press conference and analysts’ meeting in London (including telephone conference and webcasting)
News releases 19 November Requests to provide documentation on non-traditional insurance products
News release and Investors’ day in Rüschlikon (including telephone conference and webcasting)
Corporate news in 2004 and method of dissemination 30 December Claims estimate for the tsunami in the Indian Ocean
SwiftRe is Swiss Re’s full-featured e-business reinsurance solution for small to medium-sized facultative business. Since its launch in 2000, SwiftRe has become increasingly popular and has grown dramatically, both geographically and in terms of business volume.
Mr Kuhn, what was your initial aim when you started developing SwiftRe? In 1999, the reinsurance industry in general and Swiss Re in particular were faced with a tough choice prompted by increased cost pressure: either Swiss Re would have to substantially reduce its small to mediumsized business, decreasing its service and product range, or cut the administration costs associated with this type of reinsurance cover. SwiftRe, which combines state-of-the-art technology and in-depth business know-how, was Swiss Re’s solution to increase efficiency.
Has the system been widely accepted by your clients? Yes, the results have been very encouraging.
Bearing in mind that we first started to process business via SwiftRe in Europe, expanding later to the Americas and now to Asia and Australia, our experience has been mainly positive. In markets where we have moved beyond the pilot phase, we have actually transacted up to 30% more of the targeted business than we originally expected. This is an astonishing result by any standards.
In addition to offering online reinsurance capacity, SwiftRe allows clients to report premiums and claims and to make modifications online once the business has been bound, thus reducing their overall costs. For example, if an insurance company wishes to make a change in the terms of its insurance or reinsurance policy during the year, all it needs to do is enter the necessary changes online to get immediate confirmation subject to changes being within Swiss Re’s pre-established terms and conditions. In a nutshell, the whole process, from obtaining quotes to getting final claims payment settled, is concentrated in one system.
“ SwiftRe was not invented in a back room at Swiss Re. It was developed by experts who know the business and understand the particular needs of the markets and our clients.” Felix R. Kuhn, eUnit, Swiss Re Property & Casualty, Zurich
Swiss Re share price performance in 2004 Swiss Re’s share price did not perform in line with global equity markets during 2004: it fell 1.6% while its benchmark indices, the Swiss Market Index (SMI) and Dow Jones Europe STOXX Insurance Index (STOXX Ins. Index), rose 5.4% and 11.0% respectively. The share price reached its highest level for the year, CHF 97.05, on 20 February and its lowest, CHF 66.35, on 16 August. The average daily volume traded amounted to 1.3 million shares on-exchange and 0.5 million shares off-exchange.
Swiss Re’s shares outperformed the benchmark indices by 1.8 (SMI) and 3.9 (STOXX Ins. Index) percentage points in the first quarter, when Swiss Re announced its Admin ReSM transaction with CNA and published its non-life January 2004 renewals and 2003 annual results. During the second quarter, Swiss Re’s shares underperformed the SMI and the STOXX Ins. Index by 6.8 and 9.8 percentage points respectively. The third quarter proved to be the worst in terms of performance.
by 8.7 percentage points during that period. From its year low on 16 August, the share had regained 22.2% by the end of 2004.
Index representation Swiss Re is a member of many indices, including the SMI, the Dow Jones STOXX 50 and the Financial Times Stock Exchange Eurotop 100. The composition of these indices is primarily based on freefloat market capitalisation; this favours Swiss Re, as it has a 100% free float in relation to its shares entitled to dividend. Swiss Re is also a member of various sustainability indices, including the Dow
Swiss Re share identification Swiss Re’s shares are listed on the main board of the SWX Swiss Exchange (SWX) and traded on the virt-x exchange under the symbol “RUKN”. In 2004 the average daily turnover of the Swiss Re share registered at the SWX amounted to CHF 104 million.
Investor Relations homepage The Investor Relations section of Swiss Re’s website (www.swissre.com/investorrelations ) hosts all corporate financial reporting back to 1997, as well as complete share information in real time, including price quotes, downloads of past share prices, chart tools, an investment calculator, information on outstanding traded bonds, presentations dating back to 1999 and much more. Swiss Re also publishes the analysts’ views on the Group.
Price per share year high 207.25 192.40 196.25 200.15 171.25 108.00 97.05 86.20
ADR price at year-end (USD) 125.00 101.50 119.75 101.00 65.50 67.40 71.80 73.95
Accumulation risk The risk that arises when a large number of individual risks are correlated such that a single event will affect many or all of these risks.
Admin ReSM Acceptance of a closed block of in-force life and health insurance business either through acquisition or reinsurance, typically assuming the responsibility to administer the underlying policies. Admin ReSM can also extend to the acquisition of an entire life insurance company.
Business interruption Insurance covering the loss of earnings resulting from, and occurring after, destruction of property; also known as “loss of profits” or “business income protection insurance”.
Capacity Maximum amount of risk that can be accepted in insurance. One factor in determining capacity is government regulations that define minimum solvency requirements. Capacity also refers to the amount of insurance coverage allocated to a particular policyholder or in the marketplace in general.
Nuclear energy insurance Property and liability insurance for atomic reactors, power stations or any other plant related to the production of atomic energy or its incidental processes.
Premiums earned Premiums an insurance company has recorded as revenues during a specific accounting period.
Reinsurance Insurance for insurance companies which spreads the risk of the direct insurer. Includes various forms such as facultative, financial, non-proportional, proportional, quota-share, surplus and treaty reinsurance.
Return on operating revenues Measure of profitability in the Life & Health Business Group: the 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.
Underwriting result Premiums earned less the sum of claims paid, change in the provision for unpaid claims and claim adjustment expenses and expenses (acquisition costs and other operating costs and expenses).
Some of the terms included in the glossary are explained in more detail in note 1 “Organisation and summary of significant accounting policies” in the Financial Statements.
Certain statements contained herein are forward-looking. These statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact. Forwardlooking statements typically are identified by words or phrases such as “anticipate”, “assume”, “believe”, “continue”, “estimate ”, “expect”, “foresee”, “intend”, “may increase” and “may fluctuate” and similar expressions or by future or conditional verbs such as “will”, “should”, “would” and “could”. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others:  cyclicality of the reinsurance industry;  changes in general economic conditions, particularly in our core markets;  uncertainties in estimating reserves;  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
These factors are not exhaustive. We operate in a continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance on our forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
Photographs: Michael Sieber (p 7–9) Markus Bühler (p 17, 35 right, 89) Andreas Seibert (p 29) Thomas Kern (p 35 left, 43, 57) Georg Gerster (cover, p 30–31, 36–37) London Aerial Photo Library (p 44–45)
The Annual Report 2004 summary is available in English, German and French.