12 What we do 14﻿ How﻿we﻿operate 16﻿ Our﻿business 18﻿ Our﻿global﻿presence 20 Innovations for success 22﻿ ﻿Enabling﻿success﻿in﻿a﻿challenging﻿
challenges 34﻿ ﻿The﻿other﻿side﻿of﻿reinsurance 38﻿ ﻿Living﻿up﻿to﻿our﻿responsibilities 42﻿ ﻿The﻿place﻿to﻿succeed 46 Corporate governance 48﻿﻿ Overview﻿ 50﻿﻿ ﻿Board﻿of﻿Directors 52﻿ ﻿Executive﻿Committee 54 General information 56﻿ Business﻿contact﻿details 57﻿ Corporate﻿calendar 58﻿ ﻿Cautionary﻿note﻿on﻿forward-﻿﻿
Delivering on our promises From the beginning of 2009, we sharpened our focus on our core business, restored capital strength and ensured we are fit to compete – while building on the expertise of our employees.
Focus on core business Enhance our strong market position ̤ We have shown consistent strength in underwriting and in delivering a strong track record of combined ratios in comparison to our peers in recent years – including a 2010 Property & Casualty combined ratio of 93.9%.
Sharpen our client focus ̤ Our new dedicated client service model allows us to offer clients solutions that are tailored to their specific needs.
We are now firmly focused on realising our mission and making best use of our core capabilities.
Our mission Swiss Re continues to sharpen its focus on core business. Our mission is clear and simple: to be the leading player in the wholesale re/insurance industry.
Being the leading player in the wholesale re/insurance industry means that we strive to be: The preferred partner For our clients, we want to be the preferred partner. This means winning clients’ trust and confidence, and delivering a service unmatched elsewhere in the market. It also means delivering tailored solutions that meet specific needs. To measure these efforts and their success, we ask our clients and broker partners to give us their feedback through an annual survey, introduced in 2007. Over 3 600 responses in 2010 revealed an improvement in average satisfaction ratings of more than 30% from 2007 for our flexibility and our tailoring of coverage, and of over 20% for our account management, ease of doing business and claims service.
A serious challenge For our competitors, we want to represent a serious challenge. This means being a top competitor for every opportunity for which we have an appetite to write business. We also want to be known as the innovator and thought leader in the industry.
Our mission is to be the leading player in the wholesale re/insurance industry.
We want to expand our business in Corporate Solutions, Longevity and Emerging Markets.
Corporate Solutions Commercial insurance is an arena where, with our Corporate Solutions business unit, we can play to our strengths in writing large and complex risks, and thus see potential for profitable growth.
Longevity Swiss Re is emerging as a leading player in the longevity field, having closed a number of longevity risk transactions in the UK and Australia with traditional insurance clients and a UK pension fund. Our experience in risk transfer solutions enabled us to issue the first bond covering longevity trend risk to the capital markets in December 2010.
Emerging markets We have played an active role in emerging markets for at least 50 years. Limited insurance and reinsurance penetration in these markets presents an opportunity for us to accelerate growth and generate appropriate returns.
We will come back to the adjusted legal structure later in this letter. First, let us summarise the highlights of our performance in 2010.
Strong earnings power demonstrated in 2010 Swiss Re reported net income of USD 863 million for 2010, an increase of 74%, including the impact from terminating the CPCI. This result demonstrates strong earnings power despite the continuing soft pricing cycle in the property and casualty market and the prevailing low interest rate environment during 2010. Earnings per share were USD 2.52 (CHF 2.64), compared to USD 1.46 (CHF 1.49) in 2009. Return on equity was 3.6% in 2010 and 2.3% in 2009. Excluding the impact of the CPCI, net income in 2010 was USD 2.3 billion. The return on equity excluding the CPCI was 9.2%.
Asset Management achieved good results with operating income of USD 4.5 billion, due to lower impairments and lower hedging costs compared to 2009, which offset the impact of lower net investment income from lower yields. Return on investment was 3.5% and total return was 6.5%.
Walter B. Kielholz Stefan Lippe * Swiss withholding tax exempt distribution out of legal reserves from capital contributions.
The intent of these measures is to increase value for you, our shareholders.
Review of the year 2010 2010 presented Swiss Re and its industry with a broad spectrum of challenges, from natural catastrophes to regulatory reform. The Group responded by continued strengthening of its core capabilities.
January Swiss Re transfers risk from a closed block of US individual life reinsurance business to Berkshire Hathaway in order to redeploy capital at more attractive returns.
March A project led by Fundación Natura Bolivia to maintain drinking and irrigation water supplies and to conserve upper watershed forests in Bolivia wins the eighth Swiss Re International ReSource Award 2010.
Market environment: A stress test by the European insurance supervisor CEIOPS indicates that the largest European insurers and reinsureres would remain resilient even in severe scenarios.
July Swiss Re maintains stable price levels during the July renewals, despite an estimated 3% softening in the underlying market. The Group continues to focus on disciplined cycle management.
Market environment: China surpasses Japan in the second quarter of 2010 to become the world’s second-largest economy in terms of GDP, behind the US. Four of the world’s top ten companies by market capitalisation are from China.
Market environment: A magnitude 7.0 earthquake strikes the South Island of New Zealand on 4 September. According to Swiss Re estimates, it will cost the insurance industry approx. USD 4.4 billion.
Market environment: In Switzerland, the Federal Council welcomes the proposals for big banks submitted by the Too-big-to-fail Commission of Experts. These proposals focus on higher capital levels as well as regulations concerning organisation, risk diversification and liquidity.
November Swiss Re announces repayment of the convertible security issued to Berkshire Hathaway and reports net income of USD 618 million for the third quarter of 2010.
Market environment: The G-20 approves more stringent international rules on bank capital and liquidity standards for systemically important financial institutions.
Titel, titel 12 Swiss Re 2010 Business Report 12 Swiss Re 2010 Business Report
How we operate Reinsurance creates stability. By managing risks and covering losses, we protect investments and enable economic growth.
Changing regulations New regulations and potentially higher solvency requirements add pressure to insurers’ balance sheets and increase the need for capital. Changes in regulatory standards may lead insurers to increase investments in low-risk, low-return assets.
Supporting clients Swiss Re has longstanding experience with solvency standards based on economic principles, specifically the Swiss Solvency Test. Clients can benefit from our diversification and capital strength as they seek capital relief solutions.
Soft cycle Property and casualty is going through an advanced phase of the soft cycle. Fierce competition combined with abundant capital leads to weaker underlying underwriting performance within the sector.
Active cycle management We remain committed to active cycle management and portfolio steering, and deploy capital to those lines of business where we expect to achieve an economically profitable return. We will continue to focus on writing profitable business, while opening up new sources of income through our capacity for innovation.
Low interest rates Risk-free interest rates are extremely low. Low investment yields force insurers and reinsurers to focus on underwriting profitability. This will give a competitive advantage to companies with a strong combined ratio history.
Asset-liability management Our Asset Management manages the assets Swiss Re generates through its business activities. Prudent investment decisions are taken from a strict asset-liability management perspective. This allows us to optimise risk-adjusted economic profit while navigating volatile financial markets.
Increasing catastrophe losses Natural catastrophes are becoming increasingly severe, but many risks are not sufficiently insured. The 2010 Haiti earthquake and Pakistan floods, amongst the most deadly events since 1990, generated hardly any insured losses, yet set back their respective countries’ development for years.
We manage the assets Swiss Re generates through its business activities. Our priority to ensure that the assets match our reinsurance liabilities is underpinned by a robust asset-liability management framework. Based on the Group’s prudent approach to risk taking and risk management, this framework allows us to optimise risk-adjusted economic profit in a disciplined and transparent manner.
Europe: % of total net premiums earned and fee income in 2010
Number of employees Regular staff as of 31.12.2010 20.6 USD billions, total net premiums earned and fee income in 2010 (USD 23.5 billion in 2009)
USD 4.6 billion in 2010 for Property & Casualty USD 3.9 billion in 2010 for Life & Health
USD 1.7 billion in 2010 for Property & Casualty USD 1.3 billion in 2010 for Life & Health
USD 10.9 billion in 2010 for Property & Casualty USD 9.7 billion in 2010 for Life & Health
Titel, titel 20 Swiss Re 2010 Business Report 20 Swiss Re 2010 Business Report
Innovations for success Swiss Re is a leader in identifying emerging risks: We have a long tradition of innovation and leading-edge, efficient solutions. A highly diversified reinsurer with significant global capacity, we share with our clients our deep risk knowledge and expertise. Our goal: to be integral to their success.
For full details on financial information, please see 2010 Financial Report
Enabling success in a challenging environment After two difficult years, insurers and reinsurers are set to grasp new opportunities.
Life and health: standing by our clients through longer lives Low yields and an ageing population are transforming life and health insurance in developed markets. Longevity-related products are clearly the growth drivers in societies where life expectancies are increasing and government finances seem insufficient to meet promises of social protection. There remains a deep shortfall in basic life cover – a Swiss Re study estimates that the 12 major European markets are under-insured by EUR 10 trillion – that represents an obvious opportunity for the industry.
These are Swiss Re’s strengths: We can handle the challenges of longevity and demands of emerging markets thanks to our ability to create innovative, fully researched solutions, from insurance-linked securities to automated underwriting systems.
Ensuring long-term stability and profit for Swiss Re’s investment portfolio Swiss Re’s Asset Management consolidated the foundations laid in 2009: continuing to reduce risk in the portfolio, strengthening control principles and procedures while profiting from opportunities offered by recovering financial markets. The mandates, both for Swiss Re’s internal and selected external third-party asset managers, are clear and based on a three-tier investment structure: matching of Swiss Re’s assets and liabilities; top-down asset allocation to secure macroeconomic gain; and active risk taking to benefit from market dislocations. Asset Management is fully aligned with Swiss Re’s Group-wide risk management principles.
Securing a sustainable world As a company whose core business is ensuring the long-term stability of enterprise and society, Swiss Re embodies sustainability. We see significant opportunities in combining the capabilities of governments and businesses to tackle large-scale challenges, especially with regard to sustainable development. Swiss Re has played a major role in creating public-private partnerships to address the threat of natural catastrophes in some of the most disaster-prone areas of the world. We also help our clients to find effective combinations between various adaptation measures and risk-transfer solutions to deal with a changing climate. Our commitment extends to our own operations, which we run as sustainably as possible.
A human company Swiss Re is two things: expertise and capital. We rely for our success on the knowledge, commitment and imagination of our people. We ask a great deal of them – and give back by opening paths to personal and professional development, offering access to the in-depth, wide expertise this company has built up over so long. For our employees, we want to be the place to succeed.
Thinking ahead to meet life’s challenges As a global leader in life and health reinsurance, Swiss Re helps its clients grow through a period of fundamental change. See page 30
Living up to our responsibilities Swiss Re helps to develop innovative public-private partnerships, tackling key environmental and social challenges. See page 38
Antoine Bommier: Emerging risks also include those that change their nature. Natural catastrophes have become more significant as populations concentrate in big cities. Risks are now of a different magnitude, and because the world is increasingly connected, they can propagate very quickly.
Sir John Scarlett: Some governments do use risk management techniques to identify and prioritise risks, but find it hard to turn assessment into meaningful policy. That said, they do allocate significant resources to understanding the risks they face – good information and analysis is essential to serious mitigation.
Antoine Bommier: We need better risk understanding: this is where private companies and governments can work together. Emerging risks like climate change and the ageing population are a joint responsibility, with risk shared between individuals, governments and companies. Insurance is part of the solution, but developing that solution requires cooperation.
“Shifts in economic power, especially over resources like energy, will have global security implications.”
Reto Schneider Head of Swiss Re’s Emerging Risk Management team. PhD in immunology from the Swiss Federal Institute of Technology (ETH).
Sir John Scarlett Former Chief of the British Secret Intelligence Service (SIS or MI6) from 2004 to 2009. He is a member of the Swiss Re Advisory Panel*.
For more information on the Swiss Re Centre for Global Dialogue, visit swissre.com/cgd
For more information, visit swissre.com/rethinking/emerging_risks *Swiss Re Advisory Panel The Swiss Re Advisory Panel is an external consulting body to Swiss Re senior management as well as to the Board of Directors. The Advisory Panel consists of leading public figures from across the world, specialising in the realms of science, politics, economics and law. The Panel meets twice a year to discuss major global trends and events, and how they might affect the insurance and reinsurance industry and the wider financial sector.
The Advisory Panel is managed by the Swiss Re Centre for Global Dialogue, the premier conference facility of Swiss Re, dedicated to the exploration of global insurance and risk issues.
What new approaches do emerging risks require? Antoine Bommier: We need to recognise the interconnectivity between different risks, a global approach where we analyse different risks at the same time and trace their interactions.
Reto Schneider: There also needs to be a readiness to act – to start risk mitigation. Managing emerging risk is basically about good change management.
Are there positives in emerging risks? Sir John Scarlett: Many emerging risks arise from changes in the global economy that are fundamentally positive, lifting millions of people out of poverty and improving health. The future is unpredictable: that can also mean unexpected good things – such as technology to improve energy supply prospects.
Reto Schneider: I’m very optimistic. Insurance has always enabled and supported technological and societal innovation: If we understand risk better, we can reduce uncertainty and open up new fields for risk transfer solutions, making societies more resilient. That’s the positive twist in emerging risks.
”Emerging risks like climate change and the ageing population are a joint responsibility, with risk shared between individuals, governments and companies.”
Managing catastrophe loss draws on deep expertise – from risk analysis to risk transfer. Seen here, Balz Grollimund, Head Earthquake, Property & Specialty, and Judith Klugman, Head of ILS Distribution & Sales.
Modelling expertise is also the basis for monitoring our total exposure to major natural catastrophe scenarios, ensuring that the risk we take on matches our risk appetite, and that we have achieved the diversification that underpins our ability to absorb risk efficiently for our clients. When our exposure reaches a pre-determined limit, our risk expertise allows us to repackage parts of that exposure into innovative, tradable, transparent products
Insured claims, however, were comparatively low at around USD 43 billion. Many hazard-prone regions still have insufficient insurance coverage: for example, low insurance penetration in Haiti led to very small insured claim amounts, despite the huge humanitarian cost of the earthquake. Where insurance penetration is high, as in Chile or New Zealand, much of the loss is transferred to insurers and subsequently to reinsurers. Thanks to their globally diversified business, reinsurers like Swiss Re can absorb local insurers’ peak risks, stabilise their balance sheets and free up capital they would otherwise need to hold. Our ability to release funds rapidly helps ease post-catastrophe burdens on individuals, companies and governments, mitigating the cost of emergency relief efforts, reconstruction and stalled economic activity.
Swiss Re is highly optimistic about the prospects for insurance-linked securities. Demand for natural catastrophe cover will grow, and will draw on the capacity of the capital markets. With annual growth projected at 5 to 7%, the cat bond market seems likely to reach USD 20 billion within a few years. Peak life and health risks – such as pandemics and longevity – are also potential drivers of insurance-linked securities activity.
With Swiss Re’s expertise and continuing research, and our innovative transformation of risks into investable forms, we are confident and enthusiastic about helping our clients and society manage the largest risks that nature has to offer.
Life and health reinsurance accounts for nearly a quarter of the global reinsurance market, which totals around USD 200 billion. Swiss Re is a market leader, with USD 9.7 billion in premiums earned and fee income. The company sees growth potential in longevity as well as in traditional life insurance. Demographic and medical trends are evolving quickly – as are consumer and regulatory demands. Swiss Re supports its clients so that they can grow profitably while adapting their business models to change.
A changing business landscape Economic development and medical advances have greatly increased life expectancy in many countries: In 1990, for example, a 60-year-old British woman would be expected to live to the age of 84. Today, that expectation is over 88 – and could be over 90 by 2030. As a result, the life insurance and reinsurance industry has shifted its focus from predominantly covering mortality risk to developing longevity and viable health insurance solutions – the other side of the coin. Increased life expectancy is clearly a good thing, but tackling the costs associated with an ageing population has become a major challenge for governments and employers, which means that individuals often end
The majority of the Life & Health premium and fee income is generated by the more mature operations within North America, the UK and Western Europe, although the emerging markets within Asia have seen substantial growth in recent years.
̤ The Life & Health benefit ratio increased 4.9 percentage points to 88.7%, compared to 83.8% in 2009.
For full details on Life & Health performance, please see 2010 Financial Report 810 million Operating income in USD (USD 687 million in 2009)
9.7 billion Premiums earned and fee income in USD (USD 10.7 billion in 2009)
At the same time, there is still vast growth potential in traditional life insurance: Millions of people worldwide fail to buy sufficient protection because they are unaware of how effectively it can mitigate the financial impact of death, illness or disability. A recent survey conducted by Swiss Re revealed that, in continental Europe alone, consumers are under-insured by EUR 10 trillion – an opportunity for Europe’s life insurers to earn an additional EUR 25 billion in annual premiums.
Swiss Re’s presence is global: In 2010, the company wrote new life and health business in 107 countries worldwide, working with 1 207 business partners. In a major market like the US, where Swiss Re reinsures all of the top 50 life insurance groups, the company insures approximately 8% of the population: around 24 million lives. Globally, Swiss Re paid life claims of more than USD 8 billion in 2010 – and a total of USD 50 billion over the past decade.
This scale and scope mean that Swiss Re’s clients all benefit from deep, global insight into demographic and medical trends. They gain access to leading research and underwriting knowledge, provided by over 200 life and health underwriters and medical experts. Today, more than 7 500 insurance professionals in 90 countries rely on Life Guide, Swiss Re’s online life and health underwriting manual. Introduced in 2004, Life Guide’s expertise-driven, evidence-based format has helped extend the limits of insurability, making it possible for more people with illnesses like cancer and serious heart conditions to buy life insurance.
Technology is also essential to profitable growth in a competitive environment. Insurers in sixteen countries now use Magnum, Swiss Re’s automated life and health underwriting tool, to get more business on their books quickly and efficiently, maintaining consistent standards while improving client relationships and reducing costs through a straightforward underwriting process at the point of sale. Magnum processes more than 2.5 million policies every year and through its data capabilities enables insurers to gain a deep insight into the business they write.
Key facts and figures for our Life & Health business in 2010 ...
Preparing for and preventing a peak mortality risk Bird flu, swine flu – with the last major global H5N1 outbreak in 2007 and the H1N1 influenza in 2009, it is tempting to regard pandemics as a dead issue. This is far from the case: A serious pandemic, with its widespread loss of life, would not only bring the global economy to a halt, it would also pose a significant risk to global life and health insurers. It is important for the industry and for society to continue to be vigilant about peak mortality risk – as Professor Rolf M. Zinkernagel, member of the Swiss Re Advisory Panel and 1996 Nobel laureate in Physiology or Medicine, explains.
What new technological measures are being deployed against future influenza pandemics? There have been two main innovations: antiviral drugs and new vaccine production techniques. While conceptually very clear, antiviral drugs should be efficient but the epidemiological evidence and the efficacy of antiviral drugs in a pandemic is far from clear. For vaccines, the well-established method of growing influenza strains in chicken eggs is still widely used, but may increasingly be replaced by proven and FDA-approved in vitro cultivated cell lines, which allow for faster production – and improved purification procedures. In addition, the use of adjuvants in cultivated cell lines enhances the vaccine’s immunising power.
Professor Rolf M. Zinkernagel, member of the Swiss Re Advisory Panel and 1996 Nobel laureate in Physiology or Medicine
Our Portfolio Analytics team ensures that Swiss Re’s assets are matched with its liabilities. From left to right: Jianbo Xue, Charlotte Kalthoff, Jonathan Ostler, Michele Doronzo, Caitriona O’Callaghan, Gallus Steiger and Benjamin Weidmann.
Three layers of asset management To meet these various mandates, Asset Management separates its investment activities into three layers: a ‘risk-free’ return, a market return, and an active risktaking return. The ‘risk-free’ return comes from the liability-matching portfolio, which is mainly invested in a wide range of lowrisk fixed income instruments, chosen for cash flow characteristics similar to those of expected future claims. The market return is generated by ‘top-down’ asset allocation decisions: putting more or less weight into various broad asset classes depending on the macroeconomic outlook. Active risk-taking return, finally, can arise through identifying and profiting from temporary market dislocations. The proportion of market return and active return to overall return depends on the risk capacity and the risk appetite of the Group. Thus, Asset Management has a significant influence on profitability.
The role of regulation Swiss Re Asset Management believes that a clear and consistent ‘top-down’ investment strategy is appropriate for generating stable risk-adjusted returns. But investment strategy is only part of the picture: Regulatory requirements, which are currently changing at a fast pace, can also influence a company’s investment decisions. Some current reforms are strongly welcomed by the industry because they signal a move from a rigidly rules-based approach to a principles-based one like the Swiss Solvency Test and the EU’s Solvency II regime: regulation that takes account of the economic risks that insurance and reinsurance companies actually face.
If there is one idea of the world that currently unites corporate boards and investors, it is that the main forces of growth during the next five, perhaps even ten years will be the emerging markets. While Europe, America and Japan are preoccupied by de-leveraging and dealing with deflation, emerging Asia, Latin America and Africa all have much brighter prospects, with the sole worry being inflation. It all sounds very neat. But we should have two concerns about this conventional wisdom.
The first is the simplest. It is that we should have learned during the dotcom boom of the 1990s and the western credit bubble of 2001 – 2007 that when the investment herd all run in the same direction, hubris and then nemesis can quickly result. After all, it is barely more than a decade since a currency crisis in Thailand triggered off a financial crisis that led to a Russian debt
Outside view on financial markets default, the overthrow of the Indonesian dictator, Suharto, and bank collapses all across East Asia.
For asset managers, the real issue surrounding emerging market investments, and indeed commodities, is not growth but correlation and diversification. In 1997 – 1998, emerging market investments turned out to be highly correlated, once the crisis began. The most important question now is whether that is still the case or whether asset classes and the underlying economies have matured sufficiently to permit portfolio diversification and proper risk management.
Asset Management’s primary mandate is to manage the assets that Swiss Re generates through its reinsurance and insurance business using a clear, robust asset-liability management framework.
̤ In 2010, Asset Management’s operating income increased to USD 4.5 billion from USD 3.6 billion in 2009. This was driven mainly by realised gains, lower impairments and lower hedging costs.
̤ The return on investments for 2010 was 3.5%, compared to 1.8% for the prior year.
Key facts and figures of our Asset Management for 2010 …
Public-private partnerships help extend insurance protection in emerging and developing countries. Swiss Re’s cat bond solution in Mexico demonstrates how governments can transfer earthquake and hurricane risks using innovative insurance instruments. From left: Ernesto Cordero, Minister of Finance, Mexico, and Michel Liès, Swiss Re’s Chairman Global Partnerships.
Several member countries benefited from CCRIF in 2010. The government of Haiti received a payout directly after its devastating earthquake. The government of Anguilla was paid in September 2010 after Hurricane Earl damaged buildings, downed power lines and caused flooding and beach erosion. The governments of Barbados, Saint Lucia and St. Vincent and the Grenadines all received payments in November 2010 following tropical cyclone Tomas.
Accounting for climate change Many developing nations also find themselves in the front line facing the potential effects of a changing climate. CCRIF invited us, as a principal member of the Economics of Climate Adaptation (ECA) working group, to help refine its disaster risk management in the light of climate change. Launched in 2009, the ECA framework is a pioneering instrument to assess total climate risks and identify cost-effective adaptation strategies. An ECA study with analytical input from Swiss Re of eight CCRIF countries found that, for some of them, damage from wind, storm surges and inland flooding already amounted to 6% of GDP, a figure that could rise another 1 – 3% by 2030 (assuming a strong climate change scenario). But the study also revealed that (most of) these countries could implement cost-effective adaptation measures, ranging from constructing sea walls to enforcing building codes. Dealing effectively with climate change will require combinations of practical adaptation and risk transfer through insurance.
First application in a mature market Interest in parametric risk transfer solutions is also growing among governments of high-income countries. Though a much larger proportion of direct losses will be covered by insurance in the event of a natural disaster, public authorities still face similar challenges in funding emergency measures and dealing with uninsured economic losses. In 2010, Swiss Re developed a parametric hurricane solution for the Alabama State Insurance Fund (SIF) in the US – the very first programme of its kind. As with other Southern US states, catastrophic hurricanes pose a large and growing risk to Alabama. Under this parametric solution, the SIF would rapidly receive a payment if a hurricane of a certain strength reaches Alabama, giving the state government the flexibility to apply funds when and where they are most needed.
Our commitment to environmental sustainability and social responsibility is comprehensive. In addition to developing innovative solutions and playing an active role in society, we integrate sustainability criteria in our risk management and our own operations. Key activities include our Sensitive Business Risk assessments and Greenhouse Neutral Programme.
̤ In recognition of Swiss Re’s strong overall commitment to corporate responsibility, we achieved the position of insurance sector leader in the Dow Jones Sustainability Indexes for the third consecutive year.
Disaster assistance for Haiti After the devastating earthquake that hit Haiti in January 2010, Swiss Re immediately set up local fundraising drives and fully matched our employees’ CHF 195 000 in donations. An additional CHF 250 000 has been earmarked for rebuilding efforts.
Climate-friendly development in India We supported an initiative of the Swiss Agency for Development and Cooperation to promote climate-friendly economic development in India. The project aims to create viable ‘green’ jobs for the poorest inhabitants of the Bundelkhand region.
Launch of Community Days We introduced a Group-wide programme of Community Days: all our employees are invited to spend one working day per year to take part in corporate volunteering activities that reflect Swiss Re’s commitment to environmental sustainability and social responsibility.
Tsunami evacuation hill in Indonesia In partnership with GeoHazards International, Swiss Re agreed to fund the design of an evacuation hill (‘Tsunami Evacuation Raised Earth Park’) in the city of Padang, Indonesia. In the event of a tsunami, this simple but effective solution will allow inhabitants to reach high ground quickly.
Playing an active role in society beyond our core business is important to us. We are committed to making a sustainable difference in locations all over the world.
From his earliest years, Jan Schmidt was fascinated by aircraft. He extended that fascination to space technology during his student years, earning him a position in the European rocket programme. During six years of working on component development and manufacturing for Ariane launch vehicles, he learned a lot about the risks involved in lifting satellites into orbit and the tremendous costs connected with space projects.
Enabling the world to connect with itself: Jan Schmidt, Swiss Re’s Head Space Insurance, Corporate Solutions.
Learning a new science Jan Schmidt recalls the extensive support he received in getting up to speed on insurance. “I don’t know how many courses I took in the first six months! Basically, I had to get a grip on the whole process from risk assessment and risk modelling to underwriting and claims – and fast.” Jan rose swiftly through the ranks, and soon the insurance courses were being replaced by leadership training and networking opportunities.
Tailoring the product to the client “There is no such thing as a standard space insurance policy,” Jan explains. ”Cover is tailored to each individual satellite and mission, and each specific client’s needs. We are recognised industry-wide for our ability to offer clients multi-year coverage, such as our ‘launch plus 5-year’ policies: Swiss Re is the only market participant offering such a product.”
Our managers are made fully aware of the importance of talent retention, motivation, development and succession planning.
They are regularly asked, through a talent review process, to identify development opportunities for their staff; these can include mentoring programmes, key projects, or nomination to our internal talent development programmes.
Talent development programmes Senior roles at Swiss Re naturally require proven leadership skills as well as strong technical knowledge and effective organisational behaviour. We have created focused programmes to develop candidates for positions at the Director and Managing Director level. These are both multi-year and multi-faceted learning experiences based on formal learning modules, networking, project assignment and career counselling as well as active dialogue with Swiss Re’s top management.
Every year we select about 70 employees around the globe for these courses, and the majority who complete these leadership programmes have advanced to a more senior position within five years
Junior power@swissre This is a professional development programme for young people (15 – 25 years old) in Zurich and Munich. Apprentices and trainees are trained in a range of areas, adding a fresh perspective, and challenging existing practices. Swiss Re gains new insights, marks itself out as a progressive employer and ensures that it has the expertise it needs for the future. While our goal is to prepare these young individuals for employment in any company, we are encouraged that over the last five years, 70% of our Junior Power graduates have obtained regular employment at Swiss Re.
Titel, titel 46 Swiss Re 2010 Business Report 46 Swiss Re 2010 Business Report
Swiss Reinsurance Company Ltd, the parent company of Swiss Re Group, is listed in the main segment of the SIX Swiss Exchange. Its corporate governance is therefore assessed under the Swiss Code of Best Practice for Corporate Governance (Swiss Code), issued by economiesuisse in 2002, and its 2007 appendix concerning recommendations on the process for setting compensation. Swiss Re fully adheres to the principles set out in the Swiss Code and is also compliant with the Directive on Information relating to Corporate Governance (including its annex), issued by the SIX Swiss Exchange in 2002 and amended in 2009 (SIX Directive). Moreover, Swiss Re conforms to the provisions on corporate governance, risk management and internal control systems, issued by the Swiss Financial Market Supervisory Authority (FINMA) with effect from 1 January 2009. Finally, Swiss Re’s corporate governance complies with the applicable local rules and regulations of all the jurisdictions in which it conducts business.
̤ Working instructions and road maps, describing work methods, governance processes and time schedules of the Board and Board committees.
Key developments in 2010 and 2011 ̤ The shareholders elected Malcolm D.
̤ Michel M. Liès, former Chief Marketing Officer and member of the Executive Committee, took the position of Chairman Global Partnerships as of 1 January 2011.
̤ Raj Singh, former Chief Risk Officer and member of the Executive Committee, left Swiss Re as of 28 February 2011.
̤ Swiss Re’s leading position in corporate governance was confirmed in the 2010 Dow Jones Sustainability Indexes assessment.
̤ On 17 February 2011, Swiss Re announced its intention to establish a new corporate structure under a newly formed holding company.
Outlook 2011 On 17 February 2011, Swiss Re announced that it plans to establish a new corporate structure under a newly formed holding company. Accordingly, the new company will launch an exchange offer for all shares in Swiss Reinsurance Company Ltd. The corporate governance arrangements in the new holding company are intended to mirror those currently in place in Swiss Reinsurance Company Ltd. Further information on the new holding company structure will be provided in an offer prospectus for the exchange offer, which is to be released around the end of March 2011.
Chairman and Vice Chairman Walter B. Kielholz serves as Chairman of the Board of Directors, Mathis Cabiallavetta as Vice Chairman.
Board committees The Board of Directors has established five Board committees to ensure effectiveness of decision making, taking advantage of the specialist knowledge and skills of the committee members. ̤ Chairman’s and Governance Committee ̤ Audit Committee ̤ Compensation Committee ̤ Finance and Risk Committee ̤ Investment Committee
Board meetings in 2010 The Board met 14 times during 2010, and the Board committees held 36 meetings in total.
Jean-Pierre Roth Jean-Pierre Roth was elected to Swiss Re’s Board of Directors in April 2010, with effect from 1 July 2010. He is the Chairman of the Board of Directors of the Geneva Cantonal Bank and also serves on the Boards of Directors of Nestlé S.A. and Swatch Group AG.
Mathis Cabiallavetta Vice Chairman Mathis Cabiallavetta was elected to Swiss Re’s Board of Directors in 2008. He was nominated Vice Chairman as of 13 March 2009. He is a member of the Boards of Philip Morris International and BlackRock, Inc., and a member of the Executive Advisory Board of General Atlantic Partners (GAP) in New York.
Raymond K. F. Ch’ien Raymond K. F. Ch’ien joined Swiss Re’s Board of Directors in 2008. He is Chairman of CDC Corporation and serves as Chairman of the Boards of Directors of MTR Corporation Limited and Hang Seng Bank Limited. He is also a member of the Boards of Directors of the Hong Kong and Shanghai Banking Corporation Limited, Convenience Retail Asia Limited, China Resources Power Holdings Company Limited, The Wharf (Holdings) Limited and the Hong Kong Mercantile Exchange.
Raymund Breu Raymund Breu was elected to Swiss Re’s Board of Directors in 2003. He was Chief Financial Officer of the Novartis Group and a member of Novartis’ Executive Committee until January 2010. He also serves as a Director of Nobel Biocare Holding AG and on the Swiss Takeover Board.
Carlos E. Represas Carlos E. Represas was elected to Swiss Re’s Board of Directors in April 2010. He was Chairman of the Board of Nestlé Group Mexico from 1983 to 2010. He also serves on the Boards of Directors of Bombardier Inc. and Merck & Co. Inc. and on the Board of the Mexican Health Foundation A.C.
Group Management Board * as of 31 December 2010 * The Group Management Board supports the Chief Executive Officer as a cross-functional and global sounding forum in the design, implementation and monitoring of the Group strategy and operation.
For full details on Corporate governance, please see 2010 Financial Report
Titel, titel 54 Swiss Re 2010 Business Report 54 Swiss Re 2010 Business Report
General information Headquartered in Zurich, Switzerland, Swiss Re has operations across the globe. Thanks to our client-centric model, our team structure and global organisation align with our clients’ needs, so that we remain their provider of choice.
For full details on financial information, please see Financial Report 2010
Business contact details Swiss Re has over 50 office locations in more than 20 countries. For a full list of our office locations and service offerings, please visit swissre.com Head Office Swiss Reinsurance Company Ltd Mythenquai 50/60, P.O. Box, 8022 Zurich, Switzerland
Mumbai Unit 701–702, 7th Floor Tower ‘A’ Peninsula Corporate Park Ganpatrao Kadam Marg Lower Parel
̤ the possibility that hedging arrangements may not be effective; ̤ the lowering or loss of financial strength or other ratings of one or more of the companies in the Group or developments adversely affecting the ability to achieve improved ratings; ̤ the cyclicality of the reinsurance industry; ̤ uncertainties in estimating reserves; ̤ 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; ̤ extraordinary events affecting Swiss Re’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events; ̤ current, pending and future legislation and regulation affecting Swiss Re or its ceding companies, and regulatory or legal actions; ̤ changes in accounting standards; ̤ significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions, including, in the case of acquisitions, issues arising in connection with integrating acquired operations; ̤ changing levels of competition; and ̤ operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks.
Photographs: StockTrek/Getty Images (cover, back cover); Katharine Andriotis Photography (pg 27); Marc Wetli (pg 33); Anthony Robins (pg 37); pg 41 from top to bottom: Swiss Re, Rebecca Janes/Save the Children, Development Alternatives, Oxfam America and Kornberg Associates, ESA/J.Huart/Novapix (background pgs 42 – 43)
The web version of the 2010 Annual Report is available at: www.swissre.com/annualreport
This Business Report does not constitute an offer of securities for sale, or a solicitation of an offer to acquire securities, in any jurisdiction, including the US, and refers to securities that have not been, and will not be, registered under the US Securities Act of 1933.
1 Return on equity is calculated by dividing net income attributable to common shareholders by average common shareholders’ equity.
and﻿defence﻿measures 79﻿ ﻿Auditors 81﻿ ﻿Information﻿policy 32 Risk and capital management 34﻿ Overview 35﻿ ﻿Capital﻿management 37﻿ ﻿Liquidity﻿management 39﻿ ﻿Risk﻿management 41﻿ ﻿Risk﻿assessment 84 Compensation 86﻿ ﻿Report﻿from﻿the﻿
Our business We provide Property & Casualty and Life & Health clients and brokers with reinsurance products, insurance-based capital market instruments and risk management services. Our new dedicated client service model allows us to offer clients solutions that are tailored to their specific needs.
Titel, titel 4 Swiss Re 2010 Financial Report 4 Swiss Re 2010 Financial Report
Financial year In 2010, we continued to shift capacity to those lines of business where we expect to achieve an economically profitable return. Driven by our active cycle management and portfolio steering, we achieved a strong result for the year, despite the prevailing low interest rate environment.
06 Market environment 11 Group results 14 Summary of financial statements 16 Property & Casualty 21 Life & Health 25 Asset Management 29 Legacy 30 Share performance
Global economy: Modest expansion in 2010 amid fiscal worries Most developed economies, having come out of recession in the second half of 2009, continued to grow at a moderate pace in 2010. In many emerging markets, growth was robust. Fiscal deficits in industrialised countries, which surged in 2009 due to the sharp drop in economic output and the fiscal stimulus programmes adopted during the crisis, remained elevated in 2010.
Worries about the sustainability of public finances led to increased volatility in sovereign yield spreads, particularly in the peripheral euro area countries. To avoid sovereign default and collapse of their banking systems, some countries received emergency funding from the IMF, the EU or the European Monetary Union.
Corporate bond yields moved in line with government bond yields, as corporate bond spreads were nearly constant over the year.
The US dollar strengthened during the first half of 2010, benefiting from the euro area fiscal crisis, but the US Federal Reserve’s decision to expand the money supply weakened the US dollar significantly in the third quarter of the year. The resurgence of the euro crisis boosted the US dollar again in the fourth quarter. The US dollar ended 2010 7% stronger versus the euro and 3% versus the British pound, but lost value against the Swiss franc (–10%) and against the Japanese yen (–13%).
In this economic context, most insurance and reinsurance companies continued to build a larger capital buffer, restoring their capital to pre-crisis levels by mid- to end of 2010. This is true for life insurers and reinsurers and non-life insurers and reinsurers in the developed and developing economies. The following provides the industry context, identifying the challenges and opportunities facing the insurance and reinsurance industry in 2010.
The credit and stock markets recovery produced a swift rebound in non-life Insurers’ capitalisation. 20% of the global capital funds lost during 2008 was regained by mid-2010. Global non-life capital now stands at record levels, with plenty of capacity in all insurance segments and a rising number of companies actively returning excess capital through share buy-backs. Little equity is being issued: Insurers’ valuations remained depressed, as is normal for this low-growth, low-profitability phase of the underwriting cycle.
Modest underwriting results were accompanied by low investment yields: The contribution to operating results from investment returns rose slightly to about 11% in 2010, though still substantially below the average of 12.5% between 1999 and 2009. Industry 2010 operating results and overall profitability similarly improved over 2009, but were still far below pre-crisis levels. Return on equity remained flat at 6% – clearly below cost of capital for the industry.
Non-life reinsurance: Fared better than primary non-life insurance The reinsurance industry faced many of the same challenges as primary insurers: weak profitability from low-yielding investments, reduced premium income, abundant capacity competing for depressed exposure in many lines of business, and high economic and regulatory uncertainty. Competition remained fierce, with substantial capacity chasing premium volume in many lines of business – most particularly in segments perceived as diversifying risk, such as agro business and the Middle East. Global reinsurance capacity, which also quickly
The July 2010 renewals confirmed the trend from the January and April renewals: Reinsurance rates continued a gradual decline across virtually all lines of business and territories. High natural catastrophe losses in the first quarter of 2010 and the Deepwater Horizon disaster did not trigger a turn of the cycle: There were selective rate increases, but these were restricted to loss-affected market segments, such as Chilean property risks and deepwater drilling risks.
The industry-estimated average combined ratio was 96% for 2010, up from 87% in 2009, and slightly up from 94% in 2008 – due to the year of hurricane Ike. Reinsurers’
Reinsurers’ investment returns profited strongly from rebounding capital markets. While current investment yields further declined due to the low interest rate environment, the industry reaped capital gains from rising markets in the first and the third quarter of 2010. Thanks to higher asset leverage, reinsurers profited more than primary non-life insurers from improving asset values.
The figure for 2010 does not include estimates for the insurance losses for the floods in Australia, whose assessment was still in progress at the time of writing this report and is still subject to substantial uncertainty.
Outlook for non-life primary insurance and reinsurance The primary non-life industry is heading for higher growth in 2011 and 2012, but expectations should not be set too high. Growth will be supported by demand for cover as the economy continues to grow. In terms of pricing, the situation in the various markets appears mixed. A broader and stronger turn in insurance pricing is expected for 2012.
By 2012, the primary non-life insurance underwriting cycle could turn toward a general hardening if profits deteriorate in 2011, adverse reserve developments occur and mark-to-market asset values decline due to rising interest rates. Decreasing underwriting results will be partially offset by improving investment results as interest rates rise in 2011 and 2012. Overall, investment results will improve, but will not reach the pre-crisis levels any time soon. As a result, overall profitability will remain subdued for the next two years.
Traditional life reinsurance continued to be pressured by a challenging protection market and increasing retentions. Preliminary estimates suggest stagnating global reinsurance premiums in 2010: In industrialised countries, traditional life reinsurance slightly declined in real terms, while premiums in emerging markets grew 4%.
Traditional life reinsurance growth will be subdued. In industrialised countries, it will stagnate as a result of declining cession rates in the two major markets US and UK, which account for more than 60% of the global traditional reinsurance business. In emerging markets, traditional life reinsurance is expected to grow 7% to 8% annually.
Swiss Re reported annual net income of USD 863 million in 2010, up 74% from USD 496 million in the previous year. Earnings per share were CHF 2.64 (USD 2.52), compared to CHF 1.49 (USD 1.46) in 2009.
Full-year 2010 Group results Premiums earned decreased 15% to USD 10.9 billion for Property & Casualty, compared to the prior-year period. The combined ratio increased to 93.9% in 2010 from 88.3% in 2009, reflecting the higher impact from natural catastrophe losses in the current year, partly offset by the improved quality of the Group’s Property & Casualty portfolio. The net impact from natural catastrophes in 2010 was 3% above the expected level, compared to a benign natural catastrophe experience in the prior year.
The Group reported proprietary net realised investment gains of USD 553 million in 2010, compared to a loss of USD 2.7 billion in the same period of the prior year. 2009 was impacted by mark-to-market losses on derivatives hedging the Group’s credit exposure, as well as by impairments mainly in the securitised products portfolio, partly offset by realised gains on the sale of investments. Foreign exchange remeasurement reported in realised gains had a significantly less unfavourable impact in 2010 compared to 2009. The losses are mainly attributable to the appreciation of the Swiss franc against the US dollar and the euro during 2010.
Other revenues were USD 60 million, a decrease of 66% compared to the prior year as a result of the disposal of non-core fee business in the Property & Casualty and Asset Management segments in the course of 2009.
Life & Health benefits decreased 5% to USD 8.2 billion in 2010, mostly attributable to the improvement in the financial markets and favourable mortality experience. The prior year had been favourably impacted by the outcome of an arbitration panel ruling in the health line of business.
Acquisition costs decreased 18% to USD 3.7 billion. Property & Casualty and Life & Health contributed equally to the decrease. The commutation of a nontraditional Property & Casualty transaction had unfavourably impacted acquisition costs in 2009. Decreasing acquisition costs in the Life & Health traditional lines of business reflected the impact of the retrocession agreement announced in the first quarter of 2010.
Income reconciliation The income reconciliation table reconciles the income from Swiss Re’s segments and the operations of the company’s Corporate Centre with the Group’s consolidated net income before tax. Net realised gains or losses on certain financial instruments, certain currency exchange gains and losses and other income and expenses – such as indirect taxes, capital taxes and interest charges – have been excluded from the assessment of each segment’s performance.
Cash flow from operating activities –7 696 –6 086 –21 Cash flow from investing activities 14 084 –2 052 – Cash flow from financing activities 4 312 –3 761 – Effect of foreign currency translation 885 224 –75 Change in cash and cash equivalents 11 585 –11 675 – Cash and cash equivalents as of 1 January 16 225 27 810 71 Impact of adoption of ASU No. 2009-17 793 – Cash and cash equivalents as of 31 December 27 810 16 928 –39
Short-term investments, at amortised cost which approximates fair value 10 144 21 446 111
Deferred acquisition costs and other intangible assets 9 948 8 136 –18
Property & Casualty Market environment In 2010, the reinsurance industry continued its gradual recovery from the financial crisis. Insurance and reinsurance balance sheets appeared strong, suggesting ample capacity. Prices and volumes remained subdued in many markets, delaying the hardening of reinsurance rates. Indeed, most markets saw a further decline, although those markets that suffered significant losses in 2010, such as Chile (earthquake) and Australia (hailstorms, floods), showed higher premium rates. Accordingly, it became challenging to maintain adequate profitability levels in many segments. Industry earnings on current business were often supplemented with reserve releases from prior underwriting years. While these releases are almost certain to end in the near future, the generally positive results recorded by insurers and reinsurers mean that they are not yet under sufficient pressure to take immediate action on rate levels.
Property claims activity was near normal for both natural catastrophe and man-made claims. Notable large natural catastrophe events for the year included winter storm Xynthia, which hit Europe in February 2010, strong earthquakes in Chile (March 2010) and New Zealand (September 2010), as well as hailstorms in Melbourne and Perth, and floods in Queensland, Australia. The tropical storm season in the northern hemisphere saw an above-average number of storms, but none produced significant claims. This comparatively benign claims activity delayed the correction of declining rate levels.
The same can be said for casualty lines, where potentially significant loss events – such as the Deepwater Horizon oil spill in the Gulf of Mexico and the PG & E gas pipeline explosion in San Bruno, California – resulted only in coverage adjustments for those specific exposures, without widespread impact on either price or capacity.
Thanks to these efforts, Swiss Re has shown above-average underwriting results for five consecutive years. Even when excluding favourable claims activity, these strong results have proven the value of strict underwriting discipline and active cycle management.
Cycle management remains one of Swiss Re’s top priorities: We continuously shift capacity to those segments where we expect the most attractive return on our capital.
Segment information The Property & Casualty portfolio consists of the following business, in order of size based on net premiums earned: Property, Casualty, Specialty lines including Credit, and non-traditional business.
Swiss Re’s Property & Casualty business segment provides coverage for insurance companies (reinsurance) as well as for large and mid-size corporates (direct insurance). In 2010, 87% of gross premiums written were reinsurance business. Swiss Re’s Property & Casualty portfolio is diversified as to lines of business, type of reinsurance as well as geography.
The largest part of the premium income is generated with clients from the Americas and European countries. The most important factor for Property & Casualty profitability is sound and disciplined underwriting, ensuring that Swiss Re obtains adequate prices for the risks it assumes. The result in a given period is exposed to the actual experience in large catastrophic events. The financial markets can also influence operating income through changes in net investment returns, in particular for long tail business.
Performance Operating income decreased 30% to USD 2.5 billion in 2010 from USD 3.5 billion in 2009. At constant foreign exchange rates, operating income decreased 28%.
Operating income was impacted by prior years’ development in the technical result, partially offset by a net favourable reserve development of 0.8% of the combined ratio.
The mix between proportional and nonproportional business experienced a shift in 2010. Based on gross premiums written, the share of proportional business reduced to 48% in 2010, compared to 56% in 2009, reflecting increased client retentions and reductions in large quota share treaties during the 2010 renewals.
The composition of premiums earned by region changed in 2010 compared to 2009, largely due to the 2010 renewals. The Americas and Asia increased proportionally compared to the Europe region.
Combined ratio The combined ratio in 2010 increased to 93.9%, compared to 88.3% in 2009. The increase mainly reflected the higher impact from natural catastrophe losses in 2010 compared to 2009, partly offset by the improved quality of Swiss Re’s Property & Casualty portfolio.
The net impact from natural catastrophes on the combined ratio in 2010 was 11 percentage points, which is 3 percentage points above the expected level. 2009 benefited from an overall benign natural catastrophe experience, being 4 percentage points below the expected level.
The discount, net of capital costs, of Property & Casualty reserves, applied following the acquisition of GE Insurance Solutions in 2006, was further amortised in 2010, increasing the combined ratio by 1.6 percentage points in 2010. Excluding this unwind, the combined ratio of traditional business was 92.3%.
Specialty lines The credit portfolio benefited from significantly improved technical margins after the portfolio changes during the 2010 renewals, better current year claims experience and from retained positive net claims development in prior years. As a result, the combined ratio decreased to 69.6% in 2010, compared to 100.9% in 2009.
Non-traditional business Operating income in non-traditional business increased to USD 236 million in 2010 from USD 23 million in 2009, driven by better net claims experience and realised gains, partly offset by lower investment income.
Expense ratio The expense ratio slightly increased to 10.8% in 2010, compared to 10.4% in 2009.
Outlook Following the large natural catastrophe events in New Zealand and Japan in early 2011, we expect the declining rate trend in the Property and Specialty segment to come to an end in 2011 and to probably start to reverse. Capacity for peak natural catastrophe will remain scarce and valued. Markets with significant claims in 2010 and 2011 are most likely to see the sharpest price increases. This trend may also affect other Property and Specialty lines of business, including marine, engineering and the very cyclical commercial risks business.
Net realised investment gains/losses 22 110 400 Other revenues 34 –100
Claims ratio in %, including unwind of discount 60.5 66.2 Expense ratio in % 27.8 27.7 Combined ratio in %, including unwind of discount 88.3 93.9 Combined ratio in %, excluding unwind of discount 86.5 92.3
Casualty prices in many regions are not high enough to meet our return threshold, particularly in a low-interest environment – yet we see few indications of widespread rate improvement. The encouraging signs in some European motor markets have begun to yield positive results, but more broadly we expect continued ample capacity. This trend may continue until prior years’ reserve releases can no longer mask the current profitability challenges.
Net realised investment gains/losses –80 92 11 23 87 110 Other revenues –2 –2 2 0
Expenses Claims and claim adjustment expenses –2 904 –1 417 –967 –308 –250 –1 096 –6 942 –258 –7 200 Acquisition costs –571 –338 –254 –63 –264 –287 –1 777 –82 –1 859 Other expenses –489 –272 –97 –55 –30 –190 –1 133 –51 –1 184
Asia and other emerging markets continue to show strong growth potential for health insurance products, including critical illness and medical insurance. Swiss Re supports its emerging market clients by developing sustainable products that meet the needs of an increasingly affluent population, while retaining sound risk management principles.
Swiss Re is at the forefront of developing longevity insurance-linked securities and is a founding member of the Life and Longevity Markets Association, a non-profit organisation promoting a liquid traded market in longevity- and mortality-related risk. With the transfer of USD 50 million of longevity trend risk to the capital markets, Swiss Re completed the first longevity trend bond in December 2010. The transaction marks an innovative transfer of longevity trend risk to the capital markets, as it provides protection against adverse deviation in mortality improvements for both Swiss Re’s mortality and longevity portfolios, whilst taking into account the complementary nature of the two risks.
Longevity risk protection for life insurance companies and corporate clients continues to be a strategic priority for Swiss Re.
L&H gross premiums earned and fee income in 2010 by line of business
The majority of Life & Health premium and fee income is generated by the more mature operations within North America, the UK and Western Europe, although the emerging markets within Asia have seen substantial growth in recent years.
The Life & Health segment continues to develop innovative risk solutions for our clients while also executing risk protection and capital relief structures for existing, assumed risks. During 2010, the company successfully developed and deployed customised client solutions for extreme mortality risk associated with collateralised funding solutions, while also extending its own extreme mortality protection through the Vita programme by issuing USD 225 million in two tranches, and launching a structure to transfer a portion of its own longevity risk to the capital markets through the Kortis Capital Ltd. securitisation programme.
Performance Life & Health reported operating income of USD 810 million in 2010, compared to USD 687 million in 2009. Improving financial markets and favourable mortality experience were partially offset by higher amortisation of the PVFP and lower allocated net investment income in a declining interest rate environment. In addition, the 2009 results included the effects of several one-time items which did not recur in 2010, including the rescission of a disability contract and the commutation of certain personal accident treaties, offset by a change in lapse assumption on the variable annuity business as well as the effect of Swiss Re’s own credit spreads.
Traditional health premiums increased to USD 2.1 billion from USD 2.0 billion in 2009, largely due to new business written in Asia.
Net investment income for 2010 was USD 3.1 billion, down 3.8% from 2009. Excluding foreign exchange movements, net investment income decreased 2.9%. The allocated net investment return, which is based on the net reinsurance reserves underlying liabilities, decreased due to a decline in risk-free rates. Investment income generated on unit-linked contracts is passed straight through to contract holders as returns credited to policyholders, and therefore does not directly impact the operating result. However, as the market value of assets underlying the unit-linked contracts changes, the fee income generated will vary. Acquisition costs decreased 20% to USD 1.8 billion in 2010 from USD 2.3 billion in 2009. The decrease was primarily driven by the US life retrocession agreement noted above in conjunction with the favourable effects of a one-time gain recognised in the prior year related to an arbitration award on a rescinded disability reinsurance agreement and updated cedent data.
The management expense ratio increased 0.9 percentage points to 6.8%, mainly due to the decline in operating revenues associated with the life retrocession agreement.
Traditional life Operating income for traditional life business rose by USD 480 million from USD 36 million in 2009 to USD 516 million in 2010. The reporting year result was driven by better than expected mortality experience, predominantly within North
Operating income/loss 36 784 –133 687 Benefit ratio2 in % 83.8
Operating income/loss 516 363 –69 810 Benefit ratio2 in % 88.7 1 Operating revenues exclude net investment income and net realised investment gains/losses from unit-linked and with-profit business as these are passed through to contract holders. Operating revenues also exclude net realised investment gains/losses from non-participating business.
Admin Re® Admin Re® operating loss was reduced by USD 64 million to USD 69 million. The Admin Re® segment benefited from higher fee income related to the improvement in the UK equity markets. US mortality was favourable compared to expectations for 2010. This was partially offset by an increase in reserves due to model enhancements and higher amortisation of PVFP and lower allocated net investment income in a declining interest rate environment.
On the positive side, the global recovery further entrenched itself. Growth in the US remained more muted than many had expected at the start of the year – although the pessimism seemed excessive when low US GDP growth in the second quarter of 2010 drove Treasury bond yields close to new lows (the ten-year Treasury yield, for example, dropped below 2.5% in October 2010). Emerging countries, having come through the global crisis with relatively healthy debt and fiscal indicators, grew stronger, attracting the bulk of inward investment. In broader market developments, low yields and an uncertain macroeconomic environment proved beneficial for credit risk, with USD investment-grade credit again providing exceptional returns. Equities also advanced in 2010, reflecting reduced fears of a double-dip recession.
The rate development also proved to be bumpy for government bonds, with, for example, ten-year US Treasury rates reacting strongly to macro and policy movements. Rates were driven from 3.8% at the start of 2010 to just below 2.4%, before regaining the 3.4% level in mid-December. Given the volatile rate environment and the uncertain macro outlook, the investment decision taken early in 2010 not to deviate too far from a neutral duration benchmark and to continue focusing on asset-liability management (ALM) in rates management also positively contributed to the investment results. With respect to the market volatility induced by the European sovereign debt crisis, the application of a top-down driven investment strategy also proved to be successful in maintaining a disciplined investment approach as long-term investors.
Control principles and procedures remained a high priority; the operating and systems platform saw further upgrades and improvements. Asset Management achieved operational efficiencies and control improvements in several areas. Several operations tasks were transferred to Bratislava in Slovakia. Systems technology continued to be upgraded: There is now one core operating system for Asset Management, which will materially improve underlying data quality and reporting efficiency. Data was an area of particular focus in 2010: Clear governance protocols were established and a Head of Data was appointed to ensure adherence to best industry standards.
Implementation of the risk budgeting process significantly increased transparency and accountability throughout the investment process, including new risk and profit and loss reports. The process is now codified and supported by sound policies and procedures, giving our investment governing bodies the transparency they need for timely exposure analysis. The risk budgeting process not only allows for a transparent performance and risk attributions in an ALM context, but also for an integrated and stable framework in navigating volatile financial markets.
Net realised gains on investments in Asset Management were USD 0.8 billion for 2010, compared to net realised losses on investments of USD 0.7 billion for 2009. For 2010, net realised and unrealised gains of USD 1.1 billion were partially offset by impairments of USD 0.3 billion. The impairments decreased USD 1.1 billion in 2010 from 2009, and hedges lost USD 17 million compared to USD 1.8 billion in 2009, as we reduced the hedging programme.
Investment and operating expenses decreased 14% to USD 366 million in 2010 from USD 424 million during the prior year.
Outlook The global recession ended more than a year ago, but recovery remains sluggish, particularly in developed economies where high unemployment generates low consumer confidence. We expect the recovery to continue, but at a more modest pace – as suggested by the IMF forecast of 4.4% GDP growth in world output for 2011, after 5.0% in 2010 (IMF World Economic Outlook Update, January 2011).
With growth likely to remain more modest than would typically be the case after such a massive downturn, monetary policy in developed economies is set to remain very accommodative, at least through the first half of 2011. This is especially true for the Federal Reserve Bank, which has shown a preference to err on the side of caution in raising interest rates. As the recovery continues, however, central banks will begin re-examining plans to extricate themselves from their stimulating role.
Net realised investment gains/losses –571 –146 –717 Fees, commissions and other revenues 69 2 71
Net realised investment gains/losses 769 39 808 Fees, commissions and other revenues 25 25
1 The return on investments includes currency exchange rate remeasurements and designated trading portfolios. The designated trading portfolios comprise trading fixed income securities denominated in foreign currencies, which back certain liabilities denominated in foreign currencies. The overall impact of the currency exchange remeasurements was USD –1 229 million in 2009 and USD –552 million in 2010.
FG Re reported an operating loss of USD 61 million in 2010, compared to an operating loss of USD 326 million in 2009. The loss in 2010 decreased as de-risking continued on a smaller portfolio with less impact on income. During 2010, an additional USD 3.6 billion of exposure was commuted.
Former trading activities reported net operating income of USD 47 million in 2010, compared to net operating income of USD 454 million in 2009. The 2010 operating income was driven mainly by investment income of USD 279 million from the remaining securitised products offset by impairments of USD 114 million, expenses and realised and unrealised losses. As the portfolio was de-risked in 2010, impairments decreased over 70% compared to 2009.
Share price performance Swiss Re’s share price was relatively stable during 2010. The stock opened the year at CHF 49.91, saw an intra-day high of CHF 53.75 on 7 April 2010, experienced an intra-day low of CHF 42.10 on 31 August 2010 and ended the year at CHF 50.30.
Index representation In addition to its relevant industry indices, Swiss Re is also represented in various Swiss, European and global indices, including the SMI and the STOXX Europe
Weighting in indices As of 31 December 2010 Index weight (in %)
Sustainability indices Dow Jones Sustainability Europe 0.47 Dow Jones Sustainability World 0.21 FTSE4Good Global 0.16 MSCI Global Climate 1.05 600 Insurance. The composition of these indices is usually based on free-float market capitalisation. Swiss Re is also a member of various sustainability indices, including the Dow Jones Sustainability and FTSE4Good index families.
General information on Swiss Re shares Identification numbers Share ADR level I1
Price per share year-end 103.60 80.45 50.30 49.91 50.30 Price per share year high (intra-day) 108.50 119.40 93.95 53.10 53.75 Price per share year low (intra-day) 79.60 78.70 35.38 11.88 42.10 Daily trading volume (in CHF millions) 153 253 214 98 86 Market capitalisation5 (in CHF millions) 38 792 29 798 18 285 18 502 18 646 ADR price at year-end (in USD) 85.25 71.00 47.80 48.19 53.72 1 Nominal value of CHF 0.10 per share 2 Dividend divided by year-end share price of corresponding year 3 Calculated by dividing net income by the weighted average number of common shares outstanding 4 Based on shareholders’ equity (excluding convertible perpetual capital instrument) divided by the number of external common shares entitled to dividend 5 Based on shares outstanding
Risk and capital management In 2010, Swiss Re further strengthened its capital position, enabling us to bring forward the repayment of the capital instrument issued to Berkshire Hathaway in 2009. In addition, Standard & Poor’s and A.M. Best have affirmed our financial strength rating and revised the rating outlook to positive from stable.
34 Overview 35 Capital management 37 Liquidity management 39 Risk management 41 Risk assessment
Overview The financial crisis and its aftermath have confirmed the integrated nature of risk – and the importance of a coordinated approach to managing it. At Swiss Re, we treat capital and liquidity management, risk management, sustainability, and regulatory dialogue as linked elements in our central mission: to generate innovative solutions for our clients and sustainable economic returns for our shareholders.
During 2010, we further strengthened our capital position, which was recognised in the revision of the rating outlook to positive from stable by Standard & Poor’s and A.M. Best. Our stronger capital base enabled us to terminate the convertible perpetual capital instrument issued to Berkshire Hathaway with no additional charge for bringing forward the repayment date. After the redemption payment, Swiss Re still holds excess capital under all relevant capital adequacy requirements. We also further improved our Group’s liquidity position in 2010.
We actively manage our capital to ensure that the Group and all Group companies are adequately capitalised at all times. The level of capitalisation and the capital structure are determined by regulatory capital requirements (both for the Group and individual legal entities), rating agency requirements, as well as management’s view of risks and opportunities arising from our business operations.
Capital management actions ̤ During 2010, we further strengthened our capital position, which was recognised in the revision of the rating outlook to positive from stable by Standard & Poor’s and A.M. Best.
̤ We also continued our efforts to de-risk our balance sheet. By mid-year 2010 we had sold all remaining assets from the former Structured CDS positions and further reduced our Financial Guarantee Re and Portfolio CDS notional.
̤ With effect from 3 November 2010, the CPCI issued to Berkshire Hathaway was terminated with no additional charge for bringing forward the repayment date to January 2011. Swiss Re expensed the brought forward interest charges and the 20% premium in the fourth quarter, adjusted for foreign exchange.
Estimated external Group capital adequacy As of 31 December 2010 Standard & Poor’s Solvency I Swiss Solvency Test (SST)
> USD 10 billion excess of AA requirement > 200% > 200%
Regulatory capital requirements Swiss Re is supervised by the Swiss Financial Market Supervisory Authority (FINMA), both at Group level and for its legal entities domiciled in Switzerland. The supervision comprises minimum solvency requirements, a wide range of qualitative assessments and governance requirements.
At Group level and for legal entities domiciled in Switzerland, Swiss Re provides regulatory solvency reporting to FINMA under the rules of Solvency I and the SST. The SST is based on an economic view. We calculate available and required capital under SST based on our Economic Value Management (EVM) framework and internal risk model, respectively. The minimum requirement for Solvency I and SST is a ratio of 100%. The Swiss Insurance Law, which came into force on 1 January 2006, introduced the SST requirement. Companies had a five-year implementation period until 1 January 2011, at which point the SST ratio became legally binding. Swiss Re’s Solvency I and SST ratios both materially exceed the minimum requirement (see Estimated external Group capital adequacy table below).
Rating agency capital requirements Rating agencies assign credit ratings to the obligations of Swiss Reinsurance Company Ltd and its rated subsidiaries. The agencies evaluate Swiss Re based on a set of criteria, which include an assessment of our capital adequacy. Each rating agency uses a different methodology for this assessment; for example, A.M. Best and Standard & Poor’s base their evaluation on their proprietary capital models.
On 18 March 2010, Moody’s affirmed our insurance financial strength and debt ratings and revised the outlook for long-term ratings to stable from negative. Short-term ratings were also affirmed. The stabilisation of the outlook was mainly driven by the significant progress we made with regard to the de-risking of our Legacy portfolio and the improvement in asset quality and capitalisation metrics.
On 12 October 2010, Standard & Poor’s revised the outlook for Swiss Re’s ratings to positive from stable, thanks primarily to the speed and effectiveness of our de-risking process, as well as the resilience of our franchise.
Standard & Poor’s A+ Positive 12 October 2010 Moody’s A1 Stable 18 March 2010 A.M. Best A Positive 15 December 2010
Liquidity management Swiss Re prudently manages liquidity to ensure that it is able to meet its financial obligations efficiently when they fall due. As a reinsurance company, our core business generates liquidity primarily through premium income. Our exposure to liquidity risk stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group. To manage these risks, we have a range of liquidity policies and measures in place. In particular, we aim to ensure that: ̤ sufficient liquidity, mainly in the form of unencumbered liquid assets, is held centrally to meet Group liquidity requirements that could result from a range of potential stress events; ̤ funding is charged at an appropriate market rate through our internal transfer pricing; ̤ diversified sources are used to meet Swiss Re’s residual funding needs; and
Liquidity management actions In 2010, we further improved Swiss Re’s liquidity position by issuing CHF 1 billion of senior debt (see Note 6 on pages 149–151 of the Group financial statements), by further increasing the amount of funds held centrally, as well as by continuing to reduce Swiss Re’s exposure to contingent collateral requirements.
Other assets besides spot liquidity are held in the central liquidity pool. We aim to hold total assets, including spot liquidity, that can be pledged or sold at a sufficient level to fund the liquidity requirements stemming from an aggregate extreme loss event corresponding to 99% Tail VaR (see page 41). In addition to the cash and collateral requirements resulting from such a loss, our scenarios assume a two-notch ratings downgrade within 90 days and a four-notch downgrade within one year. The stress tests also assume that funding from assets is subject to conservative haircuts, that intra-Group funding is not available if it is subject to regulatory approval, that no new unsecured funding is available, and that funding from new reinsurance business is reduced.
Swiss Re also holds other committed facilities not reflected in these liquidity stress tests. As of 31 December 2010, Swiss Re had a total of USD 1.8 billion of unutilised committed repurchase agreement facilities.
47% G7 government bonds, Swiss government bonds and reverse repurchase agreements 42% Cash and bank deposits 8% Other developed market government and supranational bonds 3% Agencies and municipal bonds
Risk management Risk management ensures an integrated, pre-emptive approach to managing current and emerging threats. Embedded throughout the business cycle, our Risk Management function upholds Swiss Re’s Group-wide risk tolerance in strategic planning and limit setting. In addition, it is involved in capital cost assessment, large transaction approvals, portfolio monitoring and performance measurement. Its key objective is to enable controlled risk-taking and the efficient, risk-adjusted allocation of capital.
̤ Clear accountability: Our operations are based on the principle of delegated and clearly defined authority. Individuals are accountable for the risks they take on, and their incentives are aligned with Swiss Re’s overall business objectives.
The Chief Risk Officer (CRO), who is a member of the EC, reports directly to the CEO as well as to the Board’s Finance and Risk Committee. The CRO participates in the four committees described above and chairs both the Group Risk and Capital Committee and the Group Regulatory Committee. In addition, he leads the global Risk Management function, which is responsible for risk oversight and control across the Group.
Senior managers of business and corporate units are responsible for managing operational risks in their area of activity, based on a centrally coordinated methodology. The self-assessments are reviewed and challenged by operational risk specialists in each of the dedicated risk management units. Risk management experts also review our underwriting decision processes.
A key responsibility of Risk Management is to ensure that Swiss Re’s risk tolerance is applied throughout the business cycle. In particular, the Group’s risk tolerance forms the basis for risk management in our business planning process. Both our risk tolerance and risk appetite – the amount of risk we seek to take – are clearly defined and are translated into a consistent limit framework across all risk categories. The limit framework is approved at Executive Committee level through the Group Risk and Capital Committee. The individual limits are established through an iterative process to ensure that the overall framework complies with our Group-wide policies on capital adequacy and risk accumulation.
Risk assessment In 2010, Swiss Re’s overall risk decreased 3%. This was mainly driven by de-risking in the credit and surety underwriting book, as well as lower financial market and insurance exposure.
to USD 6.4 billion, driven by lower reserves – as a result of our selective underwriting, in particular in long-tail lines – which reduced our reserving and inflation risk.
̤ Life and health risk decreased 2% to USD 5.2 billion, mainly due to the transfer of a closed book of US life business to Berkshire Hathaway.
Swiss Re’s risk landscape Our risk landscape, as shown on page 42, comprises insurance, financial market and credit risks, as well as liquidity, operational, strategic, regulatory, reputational and other risks that arise as a result of doing business. We provide definitions of these risk categories in the following sections and discuss risk management related to liquidity on pages 37–38.
Group capital requirement based on one-year 99% Tail VaR USD billions, as of 31 December 2009 2010 Change in %
The risk management function is embedded in our business process. Prior to business being transacted, Risk Management is involved in the annual planning process and reviews underwriting guidelines, pricing models and large individual transactions. Total risk exposure is monitored against the agreed exposure limits.
Property and casualty insurance risk Property and casualty insurance risk arises from the coverage that Swiss Re provides for Property, Liability, Motor and Accident risks, as well as for specialty risks such as Engineering, Aviation and Marine. We classify and model our property and casualty risks based on the following categories: natural catastrophes (eg earthquakes and windstorms), man-made risks (eg liability and fire) and geopolitical risks (eg terrorism). We also monitor and manage underlying risks inherent in the business we underwrite, such as inflation or uncertainty in pricing and reserving.
Insurance risk stress tests: Single events with a 200-year return period Pre-tax impact on economic capital in USD billions, as of 31 December 2009 2010 Change in %
Natural catastrophes Atlantic hurricane –3.1 –3.2 3 Californian earthquake –3.1 –2.6 –16 European windstorm –2.6 –2.4 –6 Japanese earthquake –1.9 –1.9 5
Financial market ̤ Credit spread ̤ Equity market ̤ Foreign exchange ̤ Interest rate ̤ Real estate
Management Our limit framework for life and health business includes an aggregate Group limit governing the acceptance of all life and health risks. There are also separate individual limits for mortality and longevity exposures. Local business units can write reinsurance within their allocated capacity and within clearly defined boundaries, such as per-life retention limits for individual business. Market exposure limits are in place for catastrophe and stop loss business. We pay particular attention to accumulation risk in areas of high population density and apply limits based on expected maximum loss for individual buildings. All large, complex or unusual transactions are reviewed and require individual approval from Underwriting, Client Markets and Risk Management.
Financial market and credit risk Group-wide financial market and credit risk management involves identifying, assessing and controlling risks inherent in the financial and credit markets, and includes monitoring compliance with risk management standards. Both risk categories are managed by our Financial Risk Management team.
Financial Risk Management independently overviews financial market activities, sets limits, provides quantitative risk assessment across financial risk factors, monitors portfolio risk, develops tactical proposals for risk mitigation or risk reduction, reviews risk and valuation models, assesses asset valuations, and approves transactions as well as new products. These responsibilities are exercised through defined governance procedures, including monthly reviews by our Asset Management Senior Risk Committee, where the Head of Financial Risk Management is a voting member. Financial Risk Management is responsible for both internally managed assets and Swiss Re’s external investment mandates.
Financial market risk Financial market risk is the risk that Swiss Re’s assets or liabilities may be affected by movements in financial market prices or rates – such as equity prices, interest rates, credit spreads, foreign exchange rates or real estate prices. Swiss Re’s financial market risk originates from two main sources: our investment activities and the sensitivity of the economic value of liabilities to financial market fluctuations.
Risk developments The table above shows the pre-tax impact of various market scenarios on available economic capital. The equity scenario includes listed equities, private equities, hedge funds, equity derivatives, equity exposure embedded in insurance liabilities (eg guaranteed minimum death benefit products, including variable annuities), fee income related to equities in unit-linked business and funding obligations from equity holdings in Swiss Re pension funds. In 2010, Swiss Re’s sensitivity to spread widening increased due to the reduction of corporate bond hedges. Our interest rate sensitivity was lower due to the closing of our short position.
Management All activities involving financial market risk are subject to Group-wide risk limits defined by the Group Risk and Capital Committee. In addition to an overall Group limit for market and credit risk, we also monitor limits by risk factor and by business unit – including limits for the Group’s external investment managers. Individual limits are expressed in terms of 10-day VaR, stress testing and sensitivity analysis. The Asset Management unit determines a more detailed set of risk limits for its businesses.
100 bp increase in credit spreads –2.8 –3.3 20 30% fall in global equity markets –2.4 –2.4 –4 15% fall in global real estate markets –0.6 –0.6 –1 100 bp parallel increase in global yield curves 1.0 –0.1 –111
The risk measures derived from the model are expressed as economic loss severities taken from the total economic profit and loss distribution. Swiss Re measures its total capital requirement at 99% Tail VaR (expected shortfall). This represents an estimate of the average annual loss likely to occur with a frequency of less than once in one hundred years. A less conservative measure is the 99% value at risk (VaR), which measures the loss likely to be exceeded in only one year out of one hundred. 99.5% value at risk (VaR) measures the loss likely to be exceeded in only one year out of two hundred.
Weekly Group-level reports are provided on risks, as well as on specific limits for internally and externally managed investment mandates. These reports track exposures, document limit usage, which is independently monitored by Financial Risk Management, and provide information on key risks that could affect the portfolio. Specific limits are assigned to business unit heads, who seek to optimise their portfolios within those limits, using cash and derivative instruments to do so, if necessary. The reports are presented and discussed with the relevant business units at the weekly Asset Management Risk Committee. This process is complemented by bi-weekly risk discussions between Financial Risk Management, Asset Management and the Group’s external fund managers.
Credit risk Credit risk is primarily the risk of incurring a financial loss from the default of Swiss Re’s counterparties or of third parties. In addition, we take account of the increase in risk represented by any deterioration in credit ratings. Credit risk arises directly from our investment activities as well as from liabilities underwritten by our business units.
Swiss Re’s dedicated risk management units are responsible for overseeing the management of operational risks arising in their area of control, applying a centrally coordinated methodology to identify and assess risks.
Managing exposure to operational risk requires first the identification of risk events that could potentially cause a large financial loss or significant reputational damage. Senior management therefore conducts a self-assessment of existing and required controls, which represents the basis for Group-wide assurance as well as independent testing by Group Internal Audit. In 2010, we launched a project to validate the operational risk landscape across the Group. The project has already covered a number of areas and will be completed in 2011 to enable a more efficient and focused approach to risk mitigation.
Risk developments The table above shows Swiss Re’s exposure to a defined credit default stress situation. This is based on historical corporate default data from Moody’s and assumes that a combination of the worst default frequencies observed over a 12-month period for all credit rating categories occurs in a single year. The significantly lower impact from the credit default stress test in 2010 was driven by active de-risking in the credit and surety underwriting book, partly offset by the reduction of corporate bond hedges.
Management Credit risk is managed and monitored by a dedicated Credit Risk Management team within our Financial Risk Management unit. In addition to the credit default stress limit set by the Group Risk and Capital Committee, we assign aggregate credit limits by business unit, by corporate counterparty and by country. These limits are based on a variety of factors, including the prevailing economic environment, the nature of the underlying credit exposures and, in the case of corporate counterparties, a detailed internal assessment of a corporate entity’s financial strength, industry position and other qualitative factors. Risk Management is also responsible for regularly monitoring corporate counterparty credit quality and exposures, and compiling watch lists of cases that merit close attention. As part of this responsibility, Risk Management works closely with the Group’s external investment managers to assess systemic credit risks and monitor specific industry-related issues as well as key individual corporate counterparties.
Risk Management monitors and reports credit exposure and limits on a weekly basis. The reporting process is supported by a Group-wide credit exposure information system that contains all relevant data, including corporate counterparty details, ratings, credit risk exposures, credit limits and watch lists. All key credit practitioners in the Group have access to this system, thus providing the necessary transparency to implement specific exposure management strategies for individual counterparties, industry sectors and geographic regions.
Strategic risk Strategic risk for Swiss Re is the risk of loss from adverse decision-making in strategic planning, poor execution of strategy or lack of responsiveness to industry changes. It relates to the unintentional risk arising from long-term approaches to guiding our company (as opposed to shorter-term steering or tactical decisions).
Regulatory risk Regulatory risk includes the potential impact of changes in the supervisory regimes of the countries in which we operate. At the same time, regulatory changes, in particular efforts to introduce economic-based supervisory regimes such as Solvency II, are aligning regulatory views with our internal economic view and also offer business opportunities for Swiss Re.
The financial crisis has prompted far-reaching micro- and macro-prudential reforms in the EU and the US as well as internationally, in order to support global financial stability and strengthen regulatory regimes. In 2010, the EU established a new supervisory architecture and further developed the implementation measures for Solvency II.
We have a formal framework to manage environmental, social and ethical risks. Currently, this contains eight policies for sectors or issues with pre-defined exclusions, criteria and quality standards. Transactions that could potentially compromise these standards need to be submitted to our Sensitive Business Risks process for review by Swiss Re’s sustainability experts. The potential impact on Swiss Re’s reputation is also taken into account when assessing and controlling operational risk.
In 2010, Swiss Re was once again rated as insurance sector leader in the Dow Jones Sustainability Index. Swiss Re was also listed, for the second consecutive year, as one of the world’s most ethical companies by Ethisphere™, a leading international think tank.
Emerging risks Anticipating possible developments in Swiss Re’s risk landscape is an important element of our integrated approach to enterprise risk management. Our risk management culture therefore encourages pre-emptive thinking on risk in all areas of our business. In particular, we combine our broad claims experience and risk expertise with forward-looking thinking to identify potential future exposures and threat scenarios. The insights gained are used to foster a risk dialogue with internal and external stakeholders, limit potential exposure, and develop business opportunities.
Since 2000, we have built up a Group-wide process to identify, assess, manage and control emerging risks such as potential threats from nanotechnology, critical civil infrastructure, prolonged power blackouts or climate change liability. The role and responsibility for implementation, operation, control and oversight are defined within our Group Risk Management Standards. The Group Emerging Risk Framework aims to create awareness, mitigate risks where possible and thus reduce uncertainties. Typical mitigation actions include risk monitoring and developing underwriting recommendations. Regular reports on emerging risks are provided to senior management to ensure risk transparency and oversight.
Swiss Re is a key partner in various strategic risk initiatives, including the World Economic Forum’s Global Risk Network, the International Risk Governance Council and the CRO Forum Emerging Risk Initiative. We contributed to several publications on emerging risk topics in 2010, including the World Economic Forum’s annual Global Risk Report and a CRO Forum position paper on nanotechnology.
Corporate governance framework at Swiss Re Good corporate governance requires an effective system of mutual checks and balances among the top corporate bodies. Swiss Re maintains a dual Board structure, with the Board of Directors responsible for oversight and the Executive Committee responsible for managing operations. Our corporate governance principles and procedures are defined in a series of documents governing the organisation and management of the company. They include: ̤ Code of Conduct, setting the framework and defining the basic legal and ethical compliance principles and policies we apply globally; ̤ Articles of Association, defining the purpose of the business and the basic organisational framework; ̤ Corporate Bylaws, defining the governance structure within the Swiss Re Group, the responsibilities of the Board of Directors, Board committees and executive management, as well as the relevant reporting procedures; ̤ Board committee charters, outlining the duties and responsibilities of the Board committees; ̤ Group committee charters, outlining the duties and responsibilities of the committees at executive management level; and
2010 Focus areas Legal entity governance In 2010, Swiss Re successfully completed an initiative, which aimed at consolidating the governance framework for legal entities within the Group. A new classification system for Group companies and branch offices was implemented as part of the project for the purpose of determining appropriate Board, Board committee and management structures at entity level. At the same time, the supervision of legal entities was enhanced by appointing a number of additional independent Board members for key Group companies. Furthermore, the project resulted in harmonised processes for creating and liquidating Group companies, in standardised intra-Group reporting and in consistent interaction between the entities and the Group.
̤ The Board appointed David Cole, Christian Mumenthaler and Thomas Wellauer new members of the Executive Committee.
̤ Michel M. Liès, former Chief Marketing Officer and member of the Executive
Committee, took up the position of Chairman Global Partnerships as of 1 January 2011. ̤ Raj Singh, former Chief Risk Officer and member of the Executive Committee, left Swiss Re as of 28 February 2011.
̤ A new introduction programme for Board members enabled new directors of the parent company and subsidiaries to take office quickly and effectively. ̤ Swiss Re’s leading position in corporate governance was confirmed in the 2010
Dow Jones Sustainability Indexes assessment. ̤ On 17 February 2011, Swiss Re announced its intention to establish a new corporate structure under a newly formed holding company.
Legal structure – listed and non-listed Group companies Swiss Reinsurance Company Ltd, the Group’s parent company, is a joint stock company, listed on the SIX Swiss Exchange (ISIN CH0012332372), domiciled at Mythenquai 50/60 in 8022 Zurich and organised under Swiss law. The other companies of the Group are not listed. For more information, see Note 16 to the Group financial statements as of page 180.
Operations ̤ Human Resources ̤ Information Technology ̤ Legal ̤ Logistics ̤ Technical Accounting
Board of Directors Chairman Vice Chairman Members of the Board of Directors
Products ̤ Property & Specialty ̤ Casualty ̤ Life & Health ̤ Corporate Solutions Underwriting ̤ Claims & Liabilities
In addition, Swiss Reinsurance Company Ltd holds, as of 31 December 2010, directly and indirectly 28 635 251 shares, representing 7.7% of voting rights and share capital. The company cannot exercise the voting rights of own shares held.
As of 31 December 2010 Shareholders in % Shares in %
Capital structure Capital As of 31 December 2010, the fully paid-in share capital of Swiss Reinsurance Company Ltd, the parent company of the Swiss Re Group, amounted to CHF 37 070 415.30. It was divided into 370 704 153 registered shares, each with a nominal value of CHF 0.10.
Conditional capital in favour of Berkshire Hathaway Inc. Conditional capital of CHF 16 000 000 was available to settle conversion rights granted in connection with a convertible perpetual capital instrument (CPCI) issued by Swiss Reinsurance Company Ltd in favour of Berkshire Hathaway Inc. and certain of its subsidiaries. The CPCI was terminated with effect from 3 November 2010.
Authorised capital Authorised capital of CHF 18 000 000 was available, expiring on 13 March 2011. Increases by underwriting as well as partial increases are permitted. The subscription rights of shareholders remain in place. The issue amount, the dividend entitlement, the type of contribution and any possible acquisition of assets are determined by the Board of Directors.
Changes in 2009 In 2009, the company’s fully paid-in share capital increased from CHF 36 351 603.60 to CHF 37 070 116.80, resulting from the creation of 7 184 407 shares from conditional capital in connection with the conversion of a mandatory convertible bond and the creation of 725 shares from conditional capital for employee participation purposes. The Annual General Meeting approved the creation of conditional capital of CHF 16 000 000 to secure the necessary underlying shares for the CPCI issued in favour of Berkshire Hathaway Inc. and certain of its subsidiaries. The Annual General Meeting also approved the creation of authorised capital with shareholders’ subscription rights of CHF 18 000 000.
Changes in 2008 and previous years Information about changes in capital in 2008 is provided on pages 91 and 92 of the 2008 Annual Report. Information about changes in capital for earlier years is provided in the Annual Reports for the respective years.
Shares All shares issued by Swiss Reinsurance Company Ltd are fully paid-in registered shares. Each share carries one vote. There are no categories of shares with a higher or limited voting power, privileged dividend entitlement or any other preferential rights, nor are there any other securities representing a part of the company’s share capital. The company cannot exercise the voting rights of treasury shares. As of 31 December 2010, of a total of 370 704 153 shares issued, shareholders had registered 199 998 288 shares for the purpose of exercising their voting rights. 342 620 523 shares were entitled to dividend.
Options Had all stock options granted to Swiss Re employees been converted into shares as of 31 December 2010, an additional 5.3 million shares would have been outstanding.
Board of Directors Members of the Board of Directors The Board of Directors consisted of the following members as of 31 December 2010: Independence Swiss Re requires a majority of the Board of Directors to be independent. To be considered independent, a director may not be, and may not have been in the past three years, employed as an executive officer of the Group. In addition, he or she must not have a material relationship with any part of the Group – directly or as a partner, director or shareholder of an organisation that has a material relationship with the Group. Based on Swiss Re’s independence criteria, all directors qualified as independent in 2010.
Walter B. Kielholz Swiss 59 Chairman of the Board 1998 2013 Chairman of the CGC
Jakob Baer Swiss 66 Chairman of the AC 2005 2012 Member of the CGC and FRC
Raymund Breu Swiss 65 Member of the AC and IC 2003 2011 Raymond K. F. Ch’ien Chinese 58 Member of the AC and IC 2008 2011 John R. Coomber British 61 Chairman of the FRC 2006 2012
Member of the CGC and AC Rajna Gibson Brandon Swiss 48 Member of the FRC and IC 2000 2011 Malcolm D. Knight Canadian 66 Member of the FRC 2010 2013 Hans Ulrich Maerki Swiss 64 Member of the CC and FRC 2007 2011 Carlos E. Represas Mexican 65 Member of the CC 2010 2013 Jean-Pierre Roth Swiss 64 Member of the IC 2010 2013 Robert A. Scott British/ 68 Chairman of the CC 2002 2012
CGC = Chairman‘s and Governance Committee FRC = Finance and Risk Committee AC = Audit Committee IC = Investment Committee CC = Compensation Committee
Skills, experience and expertise The Board aims to attain among its members the requisite balance of skills, knowledge, and tenure for today’s business needs. Potential new candidates are assessed against Boardapproved selection criteria, including integrity, skill, qualifications, experience, communication capabilities and community standing. In addition to their managerial skills and expertise, Swiss Re’s Board members collectively represent a mix of backgrounds and a mix of experience or expertise in key areas such as accounting, legislation, insurance/reinsurance, finance, risk management, and capital markets, thus providing a solid foundation for decision making. Newly elected Board members receive a general introduction to the responsibilities of Board and committee members. In the course of the year, the Board members also meet with experts regularly to update and enhance their knowledge on emerging business trends and risks.
Walter B. Kielholz Chairman, non-executive and independent Walter B. Kielholz, a Swiss citizen born in 1951, was elected to Swiss Re’s Board of Directors in June 1998.
He began his career at the General Reinsurance Corporation, Zurich, in 1976. After working in the US, UK and Italy, he assumed responsibility for the company’s European marketing. In 1986, he joined Credit Suisse, Zurich, where he was responsible for client relations with large insurance groups in the multinational services department.
In 1989, Walter B. 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 1997 to 2002. He was Executive Vice Chairman of the Board of Directors from 2003 to 2006 and Vice Chairman from 2007 to April 2009. He was nominated Chairman with effect from 1 May 2009.
Walter B. Kielholz has been a member of the Board of Directors of Credit Suisse Group AG since 1999. He was Chairman of the bank’s Board of Directors from 2003 to 2009.
Walter B. Kielholz studied business administration at the University of St.Gallen and graduated in 1976 with a degree in business finance and accounting.
Mathis Cabiallavetta Vice Chairman, non-executive and independent Mathis Cabiallavetta, a Swiss citizen born in 1945, was elected to Swiss Re’s Board of Directors in 2008 and nominated Vice Chairman as of 13 March 2009.
He is a member of the Boards of Philip Morris International and BlackRock, Inc. He is also a member of the Executive Advisory Board of General Atlantic Partners (GAP) in New York.
Mathis Cabiallavetta graduated from the University of Montreal with a bachelor’s degree in economics.
He also serves on the Boards of Directors of Adecco S.A., Rieter Holding AG, Allreal Holding AG, Barry Callebaut AG, Stäubli Holding AG and a small-sized company.
Jakob Baer became an attorney-at-law in 1971 and graduated from the University of Bern in 1973 with a doctorate in law.
Raymund Breu Non-executive and independent director Raymund Breu, a Swiss citizen born in 1945, was elected to Swiss Re’s Board of Directors in 2003.
He was Chief Financial Officer of the Novartis Group and a member of that company’s executive committee from December 1996, when Novartis was created, until January 2010. He joined the group treasury of Sandoz, a predecessor company of Novartis, in 1975. Ten years later, he was appointed Chief Financial Officer of Sandoz Corporation in New York. In 1990, he became Group Treasurer of Sandoz Ltd and, in 1993, Head of Group Finance and a member of the Sandoz Executive Board.
Raymund Breu also serves as a director of Nobel Biocare Holding AG and on the Swiss Takeover Board.
Raymund Breu graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a doctorate in mathematics.
Raymond K. F. Ch’ien Non-executive and independent director Raymond K. F. Ch’ien, a Chinese citizen born in 1952, was elected to Swiss Re’s Board of Directors in April 2008.
Raymond K. F. Ch’ien has been Chairman of CDC Corporation since 1999. He served as Chief Executive Officer of the company in 2005 and as acting Chief Executive Officer in 2004. From 1984 to 1997, he was Group Managing Director of Lam Soon Hong Kong Group.
Raymond K. F. Ch’ien also serves as Chairman of the Boards of Directors of MTR Corporation Limited and Hang Seng Bank Limited. He is also a member of the Boards of Directors of the Hong Kong and Shanghai Banking Corporation Limited, Convenience Retail Asia Limited, China Resources Power Holdings Company Limited, The Wharf (Holdings) Limited, and the Hong Kong Mercantile Exchange. In addition, Raymond K. F. Ch’ien holds positions in several public service institutions. He is Chairman of the Hong Kong/European Union Business Cooperation Committee, honorary President of the Federation of Hong Kong Industries, and a member of the Standing Committee of the Tianjin Municipal Committee of the Chinese People’s Political Consultative Conference. He became a Trustee of the University of Pennsylvania in 2006.
Raymond K. F. Ch’ien studied at Rockford College and the University of Pennsylvania, graduating with a PhD in economics in 1978.
John R. Coomber serves as Chief Executive Officer of Pension Insurance Corporation Limited, and is a director of MH (GB) Limited and Qatar Insurance Services. He is also a Trustee of The Climate Group, and a member of the Deutsche Bank Climate Advisory Panel. John R. Coomber is an Honorary Fellow of the Chartered Insurance Institute.
John R. Coomber graduated in theoretical mechanics from Nottingham University in 1970.
Rajna Gibson Brandon is a professor of finance at the University of Geneva and director of the Geneva Finance Research Institute. She was a professor of financial economics at the University of Zurich from 2000 to 2008 and was previously a professor of finance at the University of Lausanne.
Malcolm D. Knight was the General Manager (CEO) of the Bank for International Settlements from 2003 to 2008. He served as Senior Deputy Governor of the Bank of Canada from 1999 to 2003. From 1975 to 1999, he held senior positions at the International Monetary Fund in both research and operations.
Malcolm D. Knight holds an Honour BA in Political Science and Economics from the University of Toronto, and Master of Science (Economics) and PhD degrees from the London School of Economics and Political Science.
Hans Ulrich Maerki joined IBM Switzerland in 1973. After some years in the sales area, he was promoted to a number of managerial positions in IBM’s Paris European Headquarters as well as in IBM Switzerland. From 1993 to 1995, he led IBM’s business in Switzerland as General Manager, before moving to IBM Europe in Paris to build the largest IT services business in the market. In August 2001, he was appointed Chairman of the Board of Directors of IBM Europe, Middle East and Africa (EMEA). From 2003 to 2005, he was also Chief Executive Officer of IBM EMEA. He retired from IBM after 35 years of service in April 2008.
Between 1968 and 2004, Carlos E. Represas held various senior positions at Nestlé in the US, Latin America and Europe. He was Executive Vice President and also Head of the Americas of Nestlé S.A. from 1994 to 2004.
Jean-Pierre Roth Non-executive and independent director Jean-Pierre Roth, a Swiss citizen born in 1946, was elected to Swiss Re’s Board of Directors in April 2010, with effect from 1 July 2010.
Robert A. Scott Non-executive and independent director Robert A. Scott, a British and Australian citizen born in 1942, joined Swiss Re’s Board of Directors in 2002.
He is also a director of Pension Insurance Corporation Limited and an adviser to Duke Street Capital.
Robert A. Scott was educated at Scots College, Wellington, New Zealand. He has been a Senior Associate of the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) since 1965 and was made a Commander of the British Empire (CBE) in 2002.
Changes in the course of 2010 At the Annual General Meeting of 7 April 2010, Malcolm D. Knight, Carlos E. Represas and Jean-Pierre Roth were elected members of the Board of Directors. At the same time, the shareholders re-elected Walter B. Kielholz and Robert A. Scott members of the Board of Directors.
The Board has further decided to nominate the following candidate for first-time election to the Board of Directors for a three-year term: ̤ Renato Fassbind, a Swiss citizen born in 1955. Renato Fassbind was Chief Financial
Officer and a member of the Executive Board of Credit Suisse Group from 2004 to September 2010. Before, he held the position of the Chief Executive Officer of Diethelm Keller Group. From 1997 to 2002, he was Chief Financial Officer of ABB Ltd. Renato Fassbind currently serves on the Boards of Directors of three significant European Group companies of Swiss Re.
Elections and term of office Election procedure The members of the Board of Directors are elected at a General Meeting of shareholders.
Term The regular term of office of a directorship is three years, based on the decision taken at the Annual General Meeting of 18 April 2008. It usually begins with the date of election by a General Meeting of shareholders and ends on the third subsequent Annual General Meeting.
Members whose term has expired are immediately eligible for re-election. Members who reach the age of 70 during a regular term of office shall tender their resignation at the Annual General Meeting following the attainment of that age. The Board can exempt a member from this age limit under exceptional circumstances.
Allocation of tasks within the Board of Directors Chairman of the Board of Directors The Chairman of the Board of Directors exercises ultimate supervision of executive management on behalf of the Board. He has the right to attend the meetings of the Executive Committee and receives the documentation and minutes of all the meetings. He facilitates reporting to the Board by executive management. He is also responsible, with the Chairman of the Audit Committee, for overseeing Group Internal Audit and appoints its head, subject to confirmation by the Audit Committee.
He presides at General Meetings and represents the Group to shareholders and other stakeholders such as regulatory and political authorities, industry associations or the media.
Committees of the Board of Directors The Board has delegated certain responsibilities, including the preparation and execution of its resolutions, to five committees: Chairman’s and Governance Committee, Audit Committee, Compensation Committee, Finance and Risk Committee and Investment Committee.
Each committee is headed by a chairperson. He or she prepares and presides over the committee meetings. Any such committee must keep the Board briefed on a timely basis of actions and determinations.
The committees may conduct or authorise special investigations, at any time and at their full discretion, into any matters within their respective scope of responsibilities, thereby taking into consideration relevant peer group practice and general best practice. They are empowered to retain independent counsel, accountants or other experts if deemed
Corporate governance / Board of Directors necessary, including for the purposes of benchmarking best practice, and shall receive appropriate funding for payment of compensation to such outside advisers.
Compensation Committee Responsibilities The Compensation Committee proposes to the Board compensation principles for the Group and determines the establishment of compensation plans, thereby ensuring that plans do not encourage inappropriate risk taking. The committee also defines, or proposes as appropriate, individual compensation at Board and management level, as well as overall variable compensation pools for the Group and executive management. Furthermore, it reviews the effectiveness of performance management processes and ensures compliance with compensation-related disclosure requirements.
Members Robert A. Scott, Chair Mathis Cabiallavetta Hans Ulrich Maerki Carlos E. Represas (as of 7 April 2010)
Rajna Gibson Brandon Jean-Pierre Roth (as of 1 July 2010) Robert A. Scott (as of 7 April 2010)
Minutes are kept of the discussions and the resolutions of each meeting, and are usually approved at the next Board or Board committee meeting.
Corporate governance / Board of Directors the year. The meetings were attended by members of the Board and, in an advisory capacity, by the members of the Executive Committee as well as the Head Legal and the Company Secretary.
Finance and Risk Committee The Finance and Risk Committee held four regular meetings and one extraordinary meeting in 2010. On average, the meetings lasted 2.5 hours. Attendance was 96.0% during the reporting year. Besides the committee members and the Company Secretary, the Chief Executive Officer, the Chief Risk Officer, the Chief Underwriting Officer, the Chief Investment Officer and the Group Treasurer were invited to attend Finance and Risk Committee meetings in an advisory capacity.
The Board of Directors, among other things, ̤ defines the Group’s guiding principles, adopts the strategy of the Group and approves a consolidated medium- and short-term Group business plan; ̤ determines the risk tolerance level of the Group, monitors risk development and establishes the methods and applicable standards for accounting, budgetary control and financial planning; ̤ determines the structure of the Group and defines its Global Functions; ̤ reviews and approves annual reports of the parent company and the Group prior to their submission to the Annual General Meeting; ̤ reviews periodic business status reports as well as reports on major business transactions and events, and decides on transactions of a strategic nature and high-limit transactions in alternative investments and Admin Re®; ̤ has overall responsibility for corporate governance matters; ̤ reviews the Group’s adherence to legal, regulatory and compliance standards, as well as the status of significant legal, regulatory or compliance matters; ̤ nominates Board member candidates for election or re-election by the General Meeting, elects the Chairman of the Board, the Vice Chairman and the chairpersons and members of the Board committees, and assesses the performance of the Board and its committees; ̤ appoints the Chief Executive Officer and the other members of the Executive Committee and assesses the performance of the Chief Executive Officer; ̤ approves the compensation principles of the Group and share-based employee compensation plans; ̤ determines the compensation of the members of the Board, the compensation of the Chief Executive Officer, the total amount available for compensation of the other members of the Executive Committee and the overall incentive pool for the company; ̤ approves material transactions with any of the Group’s significant shareholders; ̤ makes preparations for and convenes General Meetings of shareholders and executes the resolutions of General Meetings.
The Executive Committee, among other things, ̤ submits proposals to the Board relating to all matters within the Board’s responsibility, such as the Group strategy, the Group business plan, the Group’s organisational structure, the Group’s risk tolerance, accounting principles and high-limit transactions; ̤ approves the strategies, structures and business plans of the Global Functions; ̤ establishes the performance targets for the Group and the Global Functions, monitors performance and takes any necessary action; ̤ decides on individual debt issuances, bank facilities and similar instruments; ̤ establishes the principles for intra-Group transactions and funding; ̤ establishes the principles for external retrocession and the balancing of Group-wide catastrophe and accumulated risks; ̤ defines the underwriting authorities of the Group committees and the Global Functions and decides on individual reinsurance transactions exceeding these authorities; ̤ is responsible for the assessment of the existence and effectiveness of the Group’s system of internal control;
̤ oversees the implementation of Group compliance procedures, monitors remediation of identified regulatory and compliance deficiencies and ensures that appropriate risk management committees are constituted; ̤ assumes responsibility for personnel planning and management development of the Group, subject to the authority of the Board of Directors; ̤ develops the Group’s communications policy.
Information and control instruments of the Board with respect to executive management Swiss Re maintains effective and consistent control of executive management through the Board of Directors. The Board of Directors has a number of controlling and information gathering mechanisms in place to monitor the handling of responsibilities it has delegated to the executive management.
Risk management Risk Management provides regular risk reports to the Board of Directors which are discussed by the Finance and Risk Committee. These reports cover Swiss Re’s compliance with the Group’s risk tolerance criteria, major changes in risk and capital adequacy measures and a description of the Group’s main risk issues, including related risk management actions.
Duty to inform about extraordinary events As soon as the Executive Committee becomes aware of significant extraordinary business developments or events, it is obliged to inform the Board of Directors immediately.
Group Internal Audit Group Internal Audit (GIA) is an independent, objective assurance function, performing activities designed to assess the adequacy and effectiveness of the Group‘s internal control systems. GIA helps the Group accomplish its objectives by applying a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
In October 1983, he joined Bavarian Re as a team member of a business analysis project. From 1985, he was involved in the casualty department’s operations in the Germanspeaking area. In 1986, he became Head of the non-proportional underwriting department.
David J. Blumer Chief Investment Officer / Head Admin Re® David J. Blumer, a Swiss citizen born in 1968, holds a degree in economics from the University of Zurich.
Stefan Lippe German 55 Chief Executive Officer David J. Blumer Swiss 42 Chief Investment Officer /
Head Admin Re® Agostino Galvagni Italian 50 CEO Corporate Solutions Brian Gray Canadian 48 Chief Underwriting Officer Michel M. Liès Luxembourg 56 Chief Marketing Officer George Quinn British 44 Chief Financial Officer Raj Singh US 48 Chief Risk Officer Thomas Wellauer Swiss 55 Chief Operating Officer
David Cole Deputy Chief Risk Officer David Cole, a Dutch and American citizen born in 1961, holds a Bachelor of Business Administration from the University of Georgia and an International Business degree from the Nijenrode Universiteit in the Netherlands.
David Cole joined Swiss Re on 1 November 2010 from ABN AMRO Holding, where he was, until April 2010, Chief Financial Officer and Chief Risk Officer and member of the Board of Managing Directors. He became a member of Swiss Re’s Executive Committee in 2011.
In 2001, he returned to Amsterdam to assume Corporate Centre responsibility for Credit Portfolio Management within Group Risk Management. Later that year he was appointed Managing Director and Head of Wholesale Clients (WCS) Change Management. In 2002, David Cole became Chief Financial Officer of WCS and in 2004, was appointed Senior Executive Vice President and Chief Operating Officer of WCS. In January 2006, he was appointed Head of Group Risk Management for ABN AMRO Bank and in 2008 Chief Financial Officer and Chief Risk Officer.
After undertaking various activities in the fields of underwriting and marketing as well as project work, he joined Swiss Re New Markets, New York, in 1998, structuring and marketing insurance-linked and asset-backed securities. He returned to Bavarian Re in 1999 as member of the Board of Management. In 2001, he joined Swiss Re, Zurich, as Head of the Globals business unit and member of the Europe division executive team. He was appointed to the Executive Board with effect from September 2005 to head the Globals & Large Risks division within Client Markets and was appointed Chief Operating Officer and member of the Executive Committee as of May 2009.
Agostino Galvagni was appointed CEO Corporate Solutions with effect from 1 October 2010.
Brian Gray became a member of the Executive Board in September 2005 as Head of Property & Specialty, based in Zurich. In September 2008, he was appointed to the Executive Committee as Chief Underwriting Officer.
Michel M. Liès became a member of the Executive Board in 1998 and was appointed Head of the Latin America division. In April 2000, he became Head of the Europe division of the Property & Casualty Business Group. In September 2005, he assumed the position of Head of Client Markets.
George Quinn Chief Financial Officer George Quinn, a British citizen born in 1966, holds a degree in engineering from the University of Strathclyde and is a member of the Institute of Chartered Accountants in England and Wales.
He started his career at KPMG in London, where he held a number of positions as adviser and consultant to insurance and reinsurance companies. He joined Swiss Re in 1999 as Chief Accounting Officer, based in Zurich. In 2003, he was appointed Chief Financial Officer for the Financial Services Business Group. He moved to New York in 2005 as Regional Chief Financial Officer for Swiss Re Americas. On 1 March 2007, George Quinn became Chief Financial Officer of the Swiss Re Group.
He is a member of the Financial Services Chapter of the Swiss-American Chamber of Commerce.
He is the former Chairman of the International Financial Risk Institute and was the founding Chairman of the Chief Risk Officers Forum. He represents Swiss Re at the World Economic Forum, The Climate Group, the Institute for International Finance, the United Nations Environment Program, and the Board for Actuarial Standards (UK), among others.
Thomas Wellauer was appointed Swiss Re’s Chief Operating Officer and member of the Executive Committee with effect from 1 October 2010.
David J. Blumer, Chief Investment Officer, assumed additional responsibility for Admin Re®, effective 1 October 2010.
David Cole joined Swiss Re as Deputy Chief Risk Officer on 1 November 2010.
On 1 March 2011, David Cole took over the Chief Risk Officer position from Raj Singh, who resigned from Swiss Re, effective 28 February 2011.
Other activities and vested interests To the extent that members of the Executive Committee are engaged in activities in governing and supervisory bodies, institutions and foundations, or perform permanent management and consultancy functions for important interest groups or accepted official functions and political posts, such information is included in the curricula vitae on pages 72–75.
Management contracts Swiss Re has not entered into reportable management contracts with any third party.
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 acknowledged the voting rights of shares which were registered at least two working days before the General Meeting. In 2010, the qualifying date for the Annual General Meeting held on Wednesday 7 April 2010, was Wednesday 31 March 2010.
The acquisition by a shareholder of more than 33⅓% of the Swiss Re shares would trigger a mandatory takeover offer for the shares owned by all other shareholders. Under the Swiss Stock Exchange Act, if a shareholder acquires shares representing more than 33⅓% of the voting rights of a Swiss company listed on a Swiss exchange, the shareholder would be obligated to launch a takeover offer for the shares it does not own. The Stock Exchange Act also allows these companies to include in their articles of association an “opt up” provision (in which the threshold could be raised above 33⅓%) or an “opt out” provision (where the obligation to make a takeover offer upon reaching the 33⅓% threshold is waived). The Swiss Re Articles of Association, however, contain neither an “opt up” provision nor an “opt out” provision.
Auditors Duration of the mandate and term of office of the lead auditors PricewaterhouseCoopers Ltd (PwC), formerly known as Revisuisse Price Waterhouse AG, was elected as Swiss Re’s auditor at the Annual General Meeting of 25 November 1991 and, since then, has been re-elected annually. At the Annual General Meeting of shareholders on 7 April 2010, based on the recommendation of the Audit Committee and a proposal of the Board of Directors, PwC was re-elected as Swiss Re’s statutory auditor and auditor of the consolidated financial statements for a term of one year.
Auditing fees The following summarises fees (excluding VAT) for the professional services of PwC for the year ended 31 December 2010: ̤ Audit fees: USD 30.4 million ̤ Audit-related fees: USD 2.9 million
Additional honorarium In addition to the fees described above, aggregate fees of USD 1.5 million were billed by PwC during the year ended 31 December 2010, primarily for the following: ̤ Income tax compliance and related tax services: USD 0.3 million ̤ Other fees: USD 1.2 million
Information tools pertaining to the external audit Responsibilities The Board of Directors reviews the professional credentials of the external auditor. The Audit Committee assists the Board in fulfilling its oversight of the auditor. The auditor is accountable to the Audit Committee, the Board of Directors and ultimately to the shareholders.
The Committee reviews and approves the planned audit services of the auditor and approves in advance non-audit services anticipated to be provided by the auditor. It discusses the results of the annual audits with the auditor, in particular their reports on the financial statements, necessary changes to the audit plans and critical accounting issues. The auditor shares with the Audit Committee its findings on the adequacy of the financial reporting process and the efficacy of the system of internal controls. It informs the Audit Committee about differences in opinion between the auditor and management encountered during the audits or in connection with the preparation of the financial statements.
Independence In order to demonstrate its independence, the auditor has to supply a formal written statement at least once per year, delineating all relationships with the company that might affect auditor independence. Any disclosed relationships or services that might impact the auditor’s objectivity and independence are reviewed by the Audit Committee, and appropriate action is taken by the Board on the recommendation of the Audit Committee.
In accordance with the Swiss Federal Act on the Licensing and Oversight of Auditors, and to foster independence of the auditor, the lead audit partner rotates from his or her role after seven years.
Performance The performance-related assessment is based on the input of key people involved in the financial reporting process and the observations of the Audit Committee members. The auditor is measured against a number of criteria, such as understanding of Swiss Re’s business, technical knowledge and expertise, comprehensiveness of the audit plans, quality of the working relationship with management and clarity of communication.
Information policy One of Swiss Re’s core values is integrity through an uncompromising commitment to transparency and ethical principles. As a result, the Group’s information policy goes beyond legal requirements, aiming to meet best practice standards.
The Investor Relations unit at Swiss Re is responsible for managing all contacts with investors and analysts. Meetings are held regularly with institutional investors and analysts to discuss important corporate news or specific topics. These meetings can also be followed by private shareholders via telephone conference or on the Swiss Re website. In 2010, Swiss Re held an Investors’ Day on its business priorities, asset management and Swiss Solvency Test. Presentations and conference call recordings are made available to the public on the Group’s website.
Date News Method of dissemination 4 January Swiss Re enters into USD 1.0 billion long- News release term Letter of Credit facility with JP Morgan 5 January Swiss Re obtains USD 150 million of News release natural catastrophe protection 18 January Risk transfer from closed block of US life News release, press and reinsurance business analysts’ telephone conference 18 February 2009 annual results: Swiss Re reports net News release, press conference income of CHF 506 million for the full and analysts’ meeting in Zurich year 2009 10 March Provisional estimates of losses from Chilean News release earthquake and European storm 12 March Swiss Re publishes its 2009 Annual Report News release 29 March Swiss Re places USD 120 million of natural News release catastrophe protection 7 April Swiss Re’s 146th Annual General Meeting News release, meeting in Zurich 6 May First quarter 2010 results and EVM 2009 News release, press and results analysts’ telephone conference 11 June Investors’ Day News release, analysts’
conference in London 27 July Alabama State Insurance Fund transaction News release marks first parametric insurance solution on behalf of US state government 5 August Second quarter 2010 results News release, press conference and analysts’ telephone conference in Zurich 13 September “Les Rendez-vous de Septembre 2010”, News release, press and insurance and reinsurance industry event analysts’ conference in
Monte Carlo 1 October Swiss Re’s senior leadership structure News release aligned to sharpen strategic focus 27 October Swiss Re transfers USD 175 million of News release extreme mortality risk 4 November Third quarter 2010 results News release, press conference and analysts’ telephone conference in Zurich 7 December Swiss Re’s Economic Forum 2010 News release, press conference in London 23 December Swiss Re completes first longevity trend News release bond of USD 50 million
Titel, titel 84 Swiss Re 2010 Financial Report 84 Swiss Re 2010 Financial Report
Compensation Swiss Re was among the first companies in the reinsurance industry to introduce deferred compensation in 2006. In 2010, Swiss Reʼs compensation policy was further refined to improve risk alignment and provide more clarity about the levels of delegated authority, segregation of duties and oversight in compensation matters.
Our compensation system takes long-term factors into account, thus aligning compensation paid to executives and employees with the interests of shareholders. For example, our deferred variable compensation plan called Value Alignment Incentive introduced in 2006 has proved to be well devised. The aim is to ensure that the ultimate value of the annual variable compensation, awarded for short-term performance, is significantly affected by the longer-term performance outcome. The Value Alignment Incentive supports the companyʼs objectives by providing a claw-back mechanism over three years.
̤ The Compensation Report 2009 was subject to a consultative vote for the first time at the Annual General Meeting on 7 April 2010 and was approved by a majority of shareholder votes of more than 90%.
̤ The Compensation Report 2010 has been enhanced to accommodate the additional reporting requirements of the Swiss financial regulator FINMA as well as the SIX Stock Exchange.
Compensation Committee activities during 2010 The Compensation Committee primarily focuses on financial results and risk metrics in determining global variable compensation awards. Shareholder value considerations make it important that the Compensation Committee views these results in context: Swiss Re needs to retain key talent and protect strongly performing business areas if it is to sustain and grow long-term shareholder value.
January ̤ Performance assessment of the company and of top management during 2009; ̤ Annual Performance Incentive pool for performance year 2009 for the Group; ̤ Annual Performance Incentive pool for performance year 2009 for the Chief Executive
Officer and the Executive Committee; ̤ Long-term Incentive pool for 2010.
The Compensation Committee also reviewed the performance of multi-year plans that expired in 2010. Specifically the Long-term Incentive granted in 2007 expired in March 2010 without generating any value for executives. In May 2010, the Value Alignment Incentive, which is the deferred compensation vehicle of the firm, came to its first payout. These Value Alignment Incentive awards were made in March 2007 as part of the overall variable compensation for the performance year 2006. Because the prior-year reserving quality of the underlying reinsurance business developed positively during the deferral period, the amounts deferred under Value Alignment Incentive were paid at an average rate of 124%. It should be noted that the combined effect of high deferral rates for variable compensation and stringent performance requirements for Long-term Incentives have left the top executive team with significantly lower levels of effective income than the compensation reports of recent years might suggest.
Compensation framework Guiding principles Swiss Reʼs remuneration structure is designed to attract, motivate, and retain the qualified talent the Group needs to succeed globally. The aim is to provide remuneration that is competitive in the local labour markets and supports the Groupʼs core values, while ensuring that employees focus on delivering outstanding results without taking inappropriate risks.
A balanced compensation package is complemented by a range of learning and development opportunities and an appealing work environment.
The Compensation Committee acts on behalf of the Board of Directors in reviewing and approving proposals to ensure that they comply with the Groupʼs compensation principles and relevant regulations. The Compensation Committee also ensures that proposals ̤ meet the overall objectives of the compensation approach; ̤ keep compensation in line with company and individual performance; ̤ provide a linkage between compensation and the Groupʼs values and long-term strategy; ̤ allow for competitive levels of compensation in cases of high performance; ̤ ensure alignment with shareholder interests; and ̤ discourage inappropriate risk taking.
The primary authority lies with the Compensation Committee under its powers delegated from the Board of Directors. Certain powers are retained by the full Board of Directors, as illustrated in the following table: Compensation Committee procedures In addition to the Compensation Committee members, the Chairman, the Chief Executive Officer, the Chief Operations Officer and the Head of Human Resources are normally invited to attend the meetings of the Compensation Committee. Other members of senior management may attend parts of the meetings, as the Committee deems appropriate. No individual may attend any part of a meeting where his or her own compensation is discussed.
Management is responsible for putting forward compensation and benefit plan changes and proposals for levels of compensation. The Compensation Committeeʼs role is to consider these proposals; it may either accept the proposals, suggest amendments, or decline the recommendations. The Committee will then either approve any changes or, where such authority is not delegated, propose them to the Board of Directors for approval. The Chairman of the Audit Committee and the Chairman of the Finance and Risk Committee are required to endorse the aggregate compensation pool of the respective control functions, as well as the individual compensation for the head of each function. In addition, they also provide input into the process of determining the overall Annual Performance Incentive pools from a risk, compliance and control perspective.
Each meeting starts with a closed session of the Committee members. The Committee held six meetings during 2010 after each of which a summary of decisions was submitted to the full Board of Directors. The Committee has a predetermined annual agenda to ensure that important reviews take place at the appropriate time throughout the year. The Compensation Committee also undergoes a periodic self-review to ensure continued high effectiveness.
Total compensation, of which base salary is an element, is regularly reviewed against the market to ensure that it remains competitive. Base salary is primarily determined by the employment markets in which Swiss Re competes for talent – but Swiss Re also considers factors such as individual expertise when making salary-related decisions.
Swiss Re also aims to provide a package of employee benefits appropriate to local employment market conditions, to attract, motivate and retain talent. The primary purpose is to provide a proper degree of security for employees and their dependents in managing the costs of old age, health matters, disability, and death.
̤ Paid annually ̤ Employees can elect to receive in cash, shares or a mix of cash and shares
̤ Applies above a certain threshold of variable compensation and is paid after three years
Swiss Re offers its employees a share purchase programme, the Employee Participation Plan (EPP), to help align employee with shareholder interest and encourage an ownership culture across the firm. Employees may purchase a limited number of Swiss Re shares at favourable prices, from their salary. In countries where a direct investment in shares is not possible, employees are offered an indirect interest in shares.
When the variable annual compensation level for an employee exceeds a pre-defined amount, the variable pay is delivered through two components: a cash incentive payment (API) and a deferred Value Alignment Incentive (VAI).
Employees also have the opportunity to take some or all of their cash API in the form of Swiss Re shares at a discount of 10% (the incentive share plan), encouraging alignment with shareholder interests. At the end of a one-year period, the employee generally assumes full ownership of the shares.
The higher the variable annual compensation, the greater the portion of variable compensation that remains at risk through deferral in the VAI. 50% of the variable annual compensation in excess of USD 100 000 remains at risk through this claw-back mechanism. The VAI award is adjusted at the end of a three-year performance period. In those cases where performance during this period remained below expectations, a reduction in VAI will apply; conversely, where performance is better than expected, a premium will apply. The adjusted payment can range between 50% and 150% of the original award. The final VAI payment may also contain an additional mark-up element to assist with retention and compensate for the time value of money.
Long-term Incentive The purpose of the Long-term Incentive plan (LTI) is to provide an additional incentive for Swiss Reʼs senior management to make significant contributions to shareholder value and to ensure that Swiss Re continues to attract and retain individuals of exceptional skill. The LTI is a forward-looking instrument focusing on incentivising top executives to take decisions that are in the long-term interest of shareholders.
The LTI is a discretionary grant for a select group of key executives, over and above their annual cash remuneration. The intention is to: ̤ focus participantsʼ energies on earnings and capital efficiency, both of which are critical to long-term shareholder value creation; ̤ achieve competitive total compensation for top executive talent by giving the participant a long-term incentive; and ̤ assist with the retention of key executives.
The performance hurdles for the LTI award made in 2008, expiring in March 2011, were centred on an ROE target of 14% and a compound annual earnings per share (EPS) growth rate target of 15%. The preceding LTI award made in 2007, which expired during 2010, had an ROE target of 13% and an EPS compound annual growth rate target of 6.5%. Because the LTI targets reflect the current corporate strategic thinking of the Board, they are published once the actual performance of each LTI award is assessed, rather than when such targets were defined.
LTI plan year Performance measurement period as of 31 December 2010 Current status/Likelihood of payment 2006 3 years (closed) expired without value 2007 3 years (closed) expired without value 2008 3 years to expire without value 2009 2 years intact 2010 1 year intact
Overall variable compensation pools Management makes a proposal to the Compensation Committee based on the Groupʼs overall economic value management performance for the year. The Compensation Committee considers these proposals and recommends a total variable compensation pool to the Board of Directors for approval. Within this overall pool, the Compensation Committee also proposes a separate pool for the Executive Committee and an individual award for the Chief Executive Officer.
Aggregate compensation of the Swiss Re Group The aggregate compensation for the performance year 2010 for all employees was as follows: As of 31 December 2010, the Swiss Re Group employed 10 362 regular staff worldwide. Of these, 2 694 employees were located in the Americas, 986 in Asia-Pacific and the remaining 6 682 in Europe and Africa, of whom 2 862 are in Switzerland. The number of employees of the Group remained stable relative to the prior year (2009: 10 552 employees) and the annual variable compensation remained constant relative to 2009. In light of the stable performance of the core reinsurance business, the overall pools were held within a relatively narrow bandwidth over several years.
Fixed compensation Base salaries 949 – 10 362 Annual variable Annual Performance compensation Incentive 333 – 9 103
Aggregate compensation for significant risk takers The company identified 130 positions which were categorised as “Key Risk Takers” in line with regulatory recommendations. This group consists of the Executive Committee, most Group Management Board members and numerous Managing Directors or Directors with significant risk authorities. The list of key risk taking positions was derived together with the risk management function. The aggregate compensation of the individuals that held such a key risk taking position during the performance year 2010 was: Significant risk takers are systematically identified and individual risk taking authorities are defined in the Limits and Qualitative Referrals Framework. The authorities specified in that framework are primarily determined by the expertise and experience of each position holder.
Aggregate variable compensation expense The Compensation Committee takes its decisions to award variable compensation on an economic value basis at the time of grant. In the financial statements the recognition of deferred compensation follows the accrual principles as defined under GAAP. Compensation cost accrued under US GAAP for LTI plans is based on three-year average return on equity (ROE) and earnings per share (EPS) as set out in the Groupʼs three-year plan. Each LTI award is subject to demanding targets which are agreed and approved at the outset. For the purpose of financial valuation, periodic assumptions, which take new information into account, are then made throughout the vesting period.
LTI awards remain at risk and will only result in a payment if the performance criteria are sustained over a three-year period. Furthermore, the Value Alignment Incentive (VAI) award remains subject to a potential claw-back depending on the multi-year performance of Swiss Re. These amounts cover the variable compensation for all 10 362 regular employees of the Group as of 31 December 2010.
Annual Performance Incentive 53 – 130 Value Alignment Incentive – 34 128
LTI 2010 (granted in March 2011) 40 VAI 2010 (granted in March 2011) 65
The CEO and the other members of the Executive Committee are remunerated under the same compensation framework and guiding principles as all other Swiss Re employees. The CEO and the other members of the Executive Committee are paid a fixed base salary and are eligible to receive variable compensation in the form of an API, VAI as well as LTI.
The Compensation Committee assesses the performance of the CEO and the Executive Committee members against a set of quantitative and qualitative objectives. The main financial performance indicators are based on the Groupʼs economic profit, net income, ROE, EPS and cost targets. The qualitative criteria are a set of leadership, compliance, and client relationship objectives in areas vital to the overall success of the Group. These objectives are agreed at the beginning of the year and aligned with the financial plan of the Group.
The external adviser, Mercer, conducts an annual review of the total compensation for the Executive Committee relative to a group of reference companies in the financial services industry to ensure that market competitiveness is maintained. This peer group consists of globally active primary insurance and reinsurance firms such as Ace, Aegon, Allianz, Allstate, Aviva, AXA, ING Group, MetLife, Munich Re, Partner Re, Prudential, QBE, Scor, and Zurich Financial Services.
The CEO and the other Executive Committee members have standard employment contracts without severance payment agreements. There are no specific “change in control” or retention agreements in place with members of the Executive Committee, aside from those provisions applicable to all Swiss Re employees. Executives are covered by the standard defined-contribution pension plan of the Company in Switzerland. The Swiss legal cap of CHF 835 200 on insurable salaries applies; no additional provisions have been made.
2 In the 2010 Compensation Report, the LTI presentation approach has been changed to align and reflect all awards within a compensation cycle. The 2009 value now reflects the LTI granted in March 2010, and the 2010 value reflects the LTI granted in March 2011.
Value Alignment Incentive Performance metric Sustained EVM performance Measurement period 3 years Settlement type Cash The Value Alignment Incentive (VAI) award is adjusted at the end of the three-year performance measurement period. If performance of the underlying business during this period is lower than expected, a reduction in VAI will apply; conversely, if performance is higher than expected, a premium will apply. The adjustment can range between 50% and 150% of the original award. The final VAI payment may also contain an additional mark-up element to assist with retention and compensate for the time value of money.
Compensation for the highest paid member (Extract from Note 6 to the Financial statements of Swiss Reinsurance Company Ltd)
Amounts reported under Shares relate to incentive shares and restricted stock units granted. Like all Swiss Re employees, the CEO and Executive Committee members may receive a combination of cash and incentive shares as part of their variable compensation; the shares granted are subject to a one-year blocking period.
Shares held by members of the Executive Committee The following table reflects total current Swiss Re share ownership by members of the Executive Committee as of 31 December 2010: CHF thousands 2009 2010
Funding of pension benefits 252 172 1 Includes mark-up on nominal value, which will be paid out at vesting after three years. In 2010 the mark-up was reduced from 25% to 15%.
Unvested restricted shares held by members of the Executive Committee Swiss Re does not grant employee stock options or restricted stock units (RSUs) on a regular basis, but reserves the right to provide ad-hoc grants based on events such as exceptional business cycles, significant acquisitions or the replacement of forfeited equity for new executive hires. As of 31 December the following restricted shares were outstanding: Vested options held by members of the Executive Committee The following table reflects total vested option ownership by members of the Executive Committee as of 31 December: Swiss Re granted options to senior management between the years 2000 and 2006. The remaining vested options will expire between 2011 and 2015, and have an average exercise price of CHF 109.13 (within a range between CHF 67.65 and CHF 186.00).
David J. Blumer, Chief Investment Officer 176 342 Raj Singh, Chief Risk Officer 4 000
Weighted average strike price in CHF 109.13 Stefan Lippe, Chief Executive Officer 99 000 Brian Gray, Chief Underwriting Officer 17 000 Michel M. Liès, Chief Marketing Officer 114 000 George Quinn, Chief Financial Officer 42 000
Loans to members of the Executive Committee 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 employees of the Swiss Re Group in their particular 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.
This section describes the compensation arrangements for the Board of Directors. As with all Swiss Re compensation arrangements, the objective in compensating members of the Board of Directors is to attract and retain experienced individuals who are motivated to perform a critical role in the strategic management of the company and to contribute their individual business experience and expertise. The structure of compensation for members of the Board of Directors must, however, take account of the way their contribution to the success of Swiss Re differs from that of the Executive Committee.
It is important that the compensation elements be used so as to achieve a strong alignment with the shareholders of Swiss Re. Therefore, a significant portion of the compensation arrangements for the Board of Directors has to consist of shares of the company or instruments linked to the performance of the companyʼs shares.
The Chairman of the Board of Directors devotes himself full-time to his role. In defining the Chairmanʼs role as a full-time role, Swiss Re applies international best practice for highly regulated, complex financial institutions. The Chairman participates in developing the firmʼs strategy, supervises the implementation of the agreed strategy and organises the work of the Board of Directors and its committees. He also has an important task, together with the Chief Executive Officer, in representing the firm to shareholders, industry associations and other stakeholders, such as political and regulatory authorities, the media and the general public, at all key locations where Swiss Re operates.
At Swiss Re, the Vice Chairman works closely with executive management – notably in the area of asset management as Chairman of the Investment Committee. In addition, he represents the Board of Directors in the Boards of the Groupʼs US subsidiaries, which are highly relevant to Swiss Re from both a risk and revenue perspective. Throughout the year, he devotes about three-quarters of his time to the task.
The degree of in-depth oversight requires from each Board member a high level of professional experience and expertise in their respective field. Furthermore, the demands on the chairs of the respective Board committees continue to increase. Swiss Re is confident that the skill set of its Board of Directors is well balanced, which in turn promotes a high level of supervision and integrity.
Compensation for the Chairman and Vice Chairman The members of the Boards of Directors of major financial institutions such as Swiss Re devote a large share of their working time to the interests of the company. In addition Swiss law and Swiss financial regulators place a high level of responsibility into the hands of the Board of Directors and in particular the Chairman of the Board. This establishes a high level of supervision over time and ensures an excellent level of ongoing interaction with executive management.
Performance shares Performance metric Relative Total Shareholder Return Measurement period 3 years Settlement type Shares The final number of shares to be released after three years can vary between 0% and 150% of the original award, depending on Swiss Reʼs relative total shareholder return ranking against a peer group. Performance on this measure must exceed the median to vest at 100% of the original award.
The individual compensation for the remaining members of the Board of Directors for 2010 was: Shares held by members of the Board of Directors The numbers of shares held by members of the Board of Directors as of 31 December were: CHF thousands Total 2009
Jakob Baer, Chairman of the Audit Committee 800 480 320 800
Raymond K.F. Ch’ien, Member 365 225 150 375 John R. Coomber, Chairman of the Finance and Risk Committee 695 426 280 706 Rajna Gibson Brandon, Member 345 210 140 350 Malcolm D. Knight, Member1 121 80 201 Hans Ulrich Maerki, Member 325 195 130 325 Carlos E. Represas1, Member 120 81 201 Jean-Pierre Roth2, Member 90 61 151 Robert A. Scott, Chairman of the Compensation Committee 485 300 200 500 Thomas W. Bechtler, Former member3 64 Peter Forstmoser, Former Chairman4 550 Bénédict G.F. Hentsch, Former member3 64 Kaspar Villiger, Former member5 64 1 Elected to Swiss Re’s Board of Directors at the Annual General Meeting of 7 April 2010. 2 Elected to Swiss Re’s Board of Directors at the Annual General Meeting of 7 April 2010, effective 1 July 2010. 3 Term of office expired as of 13 March 2009 and did not stand for re-election. 4 Resigned from the Board of Directors as of 1 May 2009. 5 Resigned from the Board of Directors as of 13 March 2009.
Performance shares held by members of the Board of Directors The numbers of performance shares held by members of the Board of Directors as of 31 December were: Vested options held by members of the Board of Directors Swiss Re does not grant employee stock options to members of the Board of Directors. The stock options shown in the table below were awarded at a period when the recipients were still members of Swiss Reʼs executive management. The vested options held by members of the Board of Directors as of 31 December were: As of 31 December 2010, the range of expiry years for vested options held by members of governing bodies was 2011–2015.
Weighted average strike price in CHF 121.81 Walter B. Kielholz, Chairman 170 000 John R. Coomber, Chairman of the Finance and Risk Committee 290 000
Walter B. Kielholz, Chairman 125 415 Mathis Cabiallavetta, Vice Chairman 69 653
equity 116 Statement of comprehensive income 117 Statement of cash flow 196 Swiss Reinsurance Company Ltd 196 Annual Report 199 Income statement 200 Balance sheet 202 Notes 218 Proposal for allocation of disposable profit 219 Report of the statutory auditor 118 Notes to the Group financial statements 118 Note 1 Organisation and summary of significant accounting policies 126 Note 2 Investments 132 Note 3 Fair value disclosures 142 Note 4 Derivative financial instruments 148 Note 5 Deferred acquisition costs
149 Note 6 Debt 152 Note 7 Unpaid claims and claim adjustment expenses 154 Note 8 Reinsurance information 156 Note 9 Earnings per share 157 Note 10 Income taxes 160 Note 11 Benefit plans 168 Note 12 Share-based payments 171 Note 13 Compensation, participations and loans of members of governing bodies 172 Note 14 Commitments and contingent liabilities 173 Note 15 Information on business segments 180 Note 16 Subsidiaries, equity investees and variable interest entities 189 Note 17 Restructuring provision 190 Note 18 Risk assessment 191 Note 19 Subsequent events 192 Report of the statutory auditor 194 Group financial years 2001 – 2010
Expenses Claims and claim adjustment expenses 8, 15 –8 336 –7 254 Life and health benefits 8, 15 –8 639 –8 236 Return credited to policyholders 15 –4 597 –3 371
Fixed income securities: Available-for-sale, at fair value (including 9 011 in 2009 and 5 157 in 2010 subject to securities lending and repurchase agreements) (amortised cost: 2009: 89 031; 2010: 79 443 ) 87 182 80 950 Trading (including 518 in 2009 and 2 187 in 2010 subject to securities lending and repurchase agreements) 11 562 11 252
Income taxes recoverable 601 426 1 The Group changed its reporting currency from CHF to USD. Please refer to Note 1.
Reclassification of convertible perpetual capital instrument2 –2 670 Balance as of period end 2 670 0
Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January –497 –453 Change during the period 44 –69 Balance as of period end –453 –522
Cash flows from operating activities Net income attributable to common shareholders 496 863 Add net income attributable to non-controlling interests 154
Total net cash provided/used 10 700 –11 899 Effect of foreign currency translation 885 224 Change in cash and cash equivalents 11 585 –11 675 Cash and cash equivalents as of 1 January 16 225 27 810 Impact of adoption of ASU No. 2009-172 793 Cash and cash equivalents as of 31 December 27 810 16 928 1 The Group changed its reporting currency from CHF to USD. Please refer to Note 1. 2 The Group adopted a new accounting pronouncement, ASU No. 2009-17 (FAS167), an update to Topic 810 – Consolidation, as of 1 January 2010, which resulted in the full consolidation of certain VIEs.
Basis of presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and comply with Swiss law. All significant inter-company transactions and balances have been eliminated on consolidation.
Use of estimates in the preparation of financial statements The preparation of financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the related disclosure including contingent assets and liabilities. The Swiss Re Group’s liabilities for unpaid claims and claim adjustment expenses and policy benefits for life and health include estimates for premium, claim and benefit data not received from ceding companies at the date of the financial statements. In addition, the Group uses certain financial instruments and invests in securities of certain entities for which exchange trading does not exist. The Group determines these estimates based on historical information, actuarial analyses, financial modelling, and other analytical techniques. Actual results could differ significantly from the estimates described above.
Investment in real estate that the Group intends to hold for the production of income is carried at depreciated cost, net of any write-downs for impairment in value. Impairment in value is recognised if the sum of the estimated future undiscounted cash flows from the use of the real estate is lower than its carrying value. Impairment in value, depreciation and other related charges or credits are included in net investment income. Investment in real estate held for sale is carried at the lower of cost or fair value, less estimated selling costs, and is not depreciated. Reductions in the carrying value of real estate held for sale are included in realised investment losses.
Short-term investments are carried at amortised cost, which approximates fair value. The Group considers highly liquid investments with a remaining maturity at the date of acquisition of one year or less, but greater than three months, to be short-term investments.
Derivative financial instruments and hedge accounting The Group uses a variety of derivative financial instruments including swaps, options, forwards and exchange-traded financial futures for the Group’s trading and hedging strategy in line with the overall risk management strategy. Derivative financial instruments are primarily used as a means of managing exposure to price, foreign currency and/or interest rate risk on planned or anticipated investment purchases, existing assets or liabilities and also to lock in attractive investment conditions for funds which become available in the future. The Group recognises all of its derivative instruments on the balance sheet at fair value. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings.
The Group recognises separately derivatives that are embedded within other host instruments if the economic characteristics and risks are not clearly and closely related to the economic characteristics and risks of the host contract and if it meets the definition of a derivative if it were stand-alone.
The underlying liabilities and assets acquired are subsequently accounted for according to the relevant GAAP guidance, including specific guidance applicable to subsequent accounting for assets and liabilities recognised as part of the purchase method of accounting, including present value of future profit, goodwill and other intangible assets.
Capitalised software costs External direct costs of materials and services incurred to develop or obtain software for internal use, payroll and payroll-related costs for employees directly associated with software development and interest cost incurred while developing software for internal use are capitalised and amortised on a straight-line basis through earnings over the estimated useful life.
Deferred income taxes Deferred income tax assets and liabilities are recognised based on the difference between financial statement carrying amounts and the corresponding income tax bases of assets and liabilities using enacted income tax rates and laws. A valuation allowance is recorded against deferred tax assets when it is deemed more likely than not that some or all of the deferred tax asset may not be realised.
Liabilities for life and health policy benefits Liabilities for life and health policy benefits from reinsurance business are generally calculated using the net level premium method, based on assumptions as to investment yields, mortality, withdrawals, lapses and policyholder dividends. Assumptions are set at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. The assumptions are based on projections from past experience, making allowance for possible adverse deviation. Interest assumptions for life and health reinsurance benefits liabilities range from 1% to 12%. Assumed mortality rates are generally based on experience multiples applied to the actuarial select and ultimate tables based on industry experience. 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.
Policyholder account balances Policyholder account balances relate to universal life-type contracts and investment contracts. Interest crediting rates for policyholder account balances range from 3% to 9%.
Investment contracts are long-duration contracts that do not incorporate significant insurance risk, ie there is no mortality and morbidity risk, or the mortality and morbidity risk associated with the insurance benefit features offered in the contract is of insignificant amount or remote probability. Amounts received as payment for investment contracts are reported as policyholder account balances. Related assets are included in general account assets.
Under the deposit method of accounting, the deposit asset or liability is initially measured based on the consideration paid or received. For contracts that transfer neither significant timing nor underwriting risk, and contracts that transfer only significant timing risk, changes in estimates of the timing or amounts of cash flows are accounted for by recalculating the effective yield. The deposit is then adjusted to the amount that would have existed had the new effective yield been applied since the inception of the contract. The revenue and expense recorded for such contracts is included in net investment income. For contracts that transfer only significant underwriting risk, once a loss is incurred, the deposit is adjusted by the present value of the incurred loss. At each subsequent balance sheet date, the portion of the deposit attributable to the incurred loss is recalculated by discounting the estimated future cash flows. The resulting changes in the carrying amount of the deposit are recognised in claims and claim adjustment expenses.
Subsequent events Subsequent events for the current reporting period have been evaluated up to 23 March 2011. This is the date on which the financial statements are available to be issued.
The Group also updated Note 19 Subsequent events to reflect the announcement made by the Group on 2 March 2011 regarding the provisional estimate for its claims cost from the earthquake in New Zealand on 22 February 2011, the Australian cyclone Yasi (announced by the Group on 17 February 2011), and for the earthquake and the tsunami in Japan, on 11 March 2011 (announced by the Group on 21 March 2011).
In July 2010, the FASB issued “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (ASU No. 2010-20), an update to Topic 310 – Receivables. This ASU requires additional disclosures about an entity’s allowance for credit losses and the credit quality of its financing receivables. The Group adopted this update as of the fourth quarter of 2010. The new disclosure requirements are included in Notes 1, 2 and 8.
Realised gains and losses Realised gains and losses for fixed income, equity securities and other investments (including unit-linked and with-profit business) were as follows: USD millions 2009 2010
Other-than-temporary impairments –1 784 –423 Net realised investment gains/losses on trading securities –18 108 Change in net unrealised investment gains/losses on trading securities 4 469 2 372 Other investments: Net realised/unrealised gains/losses –2 581 213 Foreign exchange gains/losses –1 229 –552 Net realised investment gains/losses 875 2 783
A reconciliation of the other-than-temporary impairment related to credit losses recognised in earnings was as follows: USD millions 2009 2010
Unit-linked realised gains/losses 3 332 2 034 With-profit realised gains/losses 289 196
A real estate portfolio with a carrying amount of USD 274 million serves as collateral for short-term senior operational debt of USD 697 million.
Debt securities issued by governments and government agencies 7 671 8 308
Mortgage- and asset-backed securities 1 643 447 Fixed income securities trading 11 562 11 252
Less than 12 months 12 months or more Total 2009 USD millions Fair value Unrealised losses Fair value Unrealised losses Fair value Unrealised losses
As of 31 December 2009 and 2010, investments in real estate included USD 7 million and USD 6 million, respectively, of real estate held for sale.
Depreciation expense related to income producing properties was USD 41 million and USD 40 million for 2009 and 2010, respectively. Accumulated depreciation on investment real estate totalled USD 499 million and USD 528 million as of 31 December 2009 and 2010, respectively.
The category Other assets mainly includes the Group’s private equity and hedge fund investments which are made directly or via ownership of funds. Substantially all these investments are classified as level 3 due to the lack of observable prices and significant judgment required in valuation. Valuation of direct private equity investments requires significant management judgment due to the absence of quoted market prices and the lack of liquidity. Initial valuation is based on the acquisition cost, and is further refined based on the available market information for the public companies that are considered comparable to the Group’s holdings in the private companies being valued, and the private company-specific performance indicators; both historic and projected. Subsequent valuations also reflect business or asset appraisals, as well as market transaction data for private and public benchmark companies and the actual companies being valued, such as financing rounds and mergers and acquisitions activity. The Group’s holdings in the private equity and hedge funds are generally valued utilising net asset values (NAV), subject to adjustments, as deemed necessary, for restrictions on redemption (lock-up periods and amount limitations on redemptions).
The Group also holds complex structured credit contracts, such as collateralised debt securities (CDS) referencing MBS, certain types of collateralised debt obligation (CDO) transactions, and the products sensitive to correlation between two or more underlying parameters (CDO-squared); all of which are classified within level 3 of the fair value hierarchy. A CDO is a debt instrument collateralised by various debt obligations, including bonds, loans and CDS of differing credit profiles. In a CDO-squared transaction both the primary instrument and the underlying instruments are represented by CDOs. Generally, for CDO and CDO-squared transactions, the observable inputs such as CDS spreads and recovery rates are modified to adjust for correlation between the underlying debt instruments. The correlation levels are modelled at the portfolio level and calibrated at a transaction level to liquid benchmark rates.
Total assets at fair value 36 614 81 928 5 912 –6 560 117 894
Liabilities for life and health policy benefits –271 –271 Accrued expenses and other liabilities –398 –1 290 –1 688 Total liabilities at fair value –975 –6 939 –4 803 5 772 –6 945 1 The netting of derivative receivables and derivative payables is permitted when a legally enforceable master netting agreement exists between two counterparties. A master netting agreement provides for the net settlement of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default or on the termination of any one contract.
Private equity funds 492 646 514 non-redeemable na Hedge funds 356 332 redeemable1 90–120 days2 Private equity direct 236 232 non-redeemable na Real estate funds 132 168 65 non-redeemable3 na 1 The redemption frequency varies from monthly to up to three years. 2 Cash distribution can be delayed for up to three years depending on the sale of the underlyings. 3 One exception is a real estate fund that can be redeemed annually based on a 90-day notice period. This redeemable fund had a fair value of USD 15.1 million as of 31 December 2010.
The Group uses a variety of derivative financial instruments including swaps, options, forwards, credit derivatives and exchange-traded financial futures in its trading and hedging strategies, in line with the Groupʼs 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 notional amounts of derivative financial instruments give an indication of the Groupʼs volume of derivative activity. The fair value assets are included in other invested assets and the fair value liabilities are included in accrued expenses and other liabilities. The fair value amounts that were not offset were nil as of 31 December 2009 and 2010, respectively.
Derivatives not designated as hedging instruments Interest rate contracts –85 –64 Foreign exchange contracts 1 494 Equity contracts –955 –2 Credit contracts –2 723 –73 Other contracts 744 –116 Total gain/loss recognised in income –3 018 239
The total fair value of derivative financial instruments containing credit risk-related contingent features amounted to USD 3 970 million and USD 1 975 million as of 31 December 2009 and 2010, respectively. For derivative financial instruments containing credit risk-related contingent features, the Group posted collateral of USD 403 million and USD 335 million as of 31 December 2009 and 2010, respectively. In the event of a reduction of the Groupʼs credit rating to below investment grade, additional collateral would need to be posted with a fair value of USD 3 567 million and USD 1 640 million as of 31 December 2009 and 2010, respectively. The total equals the amount needed to settle the instruments immediately as of 31 December 2009 and 2010, respectively.
Credit derivatives written/sold The Group writes/sells credit derivatives, including credit default swaps, credit spread options and credit index products, and total return swaps. The total return swaps, for which the Group assumes asset risk mainly of variable interest entities, qualify as guarantees under FASB ASC Topic 460. These activities are part of the Groupʼs overall portfolio and risk management strategies. The events that could require the Group to perform include bankruptcy, default, obligation acceleration or moratorium of the credit derivativeʼs underlying.
The fair values of the credit derivatives written/sold do not represent the Groupʼs effective net exposure as the ISDA master agreement and the cash collateral netting are excluded.
The Group has purchased protection to manage the performance/payment risks related to credit derivatives. As of 31 December 2009 and 2010, the total purchased credit protection based on notional values was USD 45 462 million and USD 30 304 million, respectively. Thereof USD 14 091 million and USD 12 025 million, respectively, were related to identical underlyings for which the Group sold credit protection. For tranched indexes and baskets, only matching tranches of the respective index were determined as identical. In addition to the purchased credit protection, the Group manages the performance/payment risks through a correlation hedge, which is established with non-identical offsetting positions.
Total credit derivatives written/sold –1 017 18 855 10 664 1 441 30 960
148 Swiss Re 2010 Financial Report 5 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
Interest accrued on unamortised PVFP 119 Effect of foreign currency translation 33 200 233 267 Effect of change in unrealised gains/losses 6 Closing balance as of 31 December 2009 869 3 025 3 894 6 054 2010 DAC PVFP USD millions Non-Life Life & Health Total Total
Interest accrued on unamortised PVFP 247 Effect of foreign currency translation –6 18 12 –75 Effect of change in unrealised gains/losses –58 Closing balance as of 31 December 2010 792 2 779 3 571 4 565
Senior financial debt 33 Senior financial debt – convertible perpetual capital instrument1 3 966
Long-term debt – financial and operational debt 19 184 18 427 1 The CPCI was reclassified from equity to short-term debt upon termination in the fourth quarter of 2010. Please refer to Note 9 Earnings per share for details on the accounting for the CPCI.
USD millions 2009 2010 1 Balance was reclassified to short-term debt.
Interest expense on long-term debt Interest expense on long-term debt for the periods ended 31 December 2009 and 2010 was as follows: Long-term debt issued in 2010 In June 2010, the Group issued CHF 500 million under the EMTN programme with a five-year maturity and a coupon of 2% and CHF 250 million, due in 2012, bearing interest of three-month CHF Libor plus 45 basis points.
Paid related to: Current year –1 426 –1 202 Prior year –10 250 –8 501
Prior-year development Claims incurred development on prior years includes the impact of the adverse development cover (ADC) entered into with Berkshire Hathaway, covering non-life claims reserves for accident years 2008 and prior, with limited exceptions. The net prior-year development after the ADC cover was influenced by the reserves release below the ADC minimum commutation value, some adverse development on accident year 2009, and a release from the provisions for future claims expenses.
Ceded –80 –80 –18 –18 Total fee income from policyholders 847 847 918 918
Change in unpaid claims and claim adjustment expenses; life and health benefits
Premium receivables invoiced were USD 1 598 million as of 31 December 2010. The recognised allowance for these receivables was USD 37 million. Claims receivables invoiced from ceded reinsurance business were USD 614 million as of 31 December 2010. The recognised allowance for these receivables was USD 77 million. Assets arising from the application of the deposit method of accounting and meeting the definition of financing receivables were USD 568 million. No allowance has been recognised related to those contracts.
Policyholder dividends are recognised as an element of policyholder benefits. The relative percentage of participating insurance of the life and health policy benefits was 7% in 2009 and 2010. The amount of policyholder dividend expenses in 2009 and 2010 was USD 105 million and USD 110 million, respectively.
Earnings per share for the years ended 31 December were as follows: In March 2009, Swiss Re Zurich issued to National Indemnity Company, a subsidiary of Berkshire Hathaway Inc, a convertible perpetual capital instrument. The instrument has an aggregate face value of CHF 3 000 000 000, with a fixed coupon at a rate of 12% per annum. The coupon could be settled in cash or shares/warrants in lieu of cash at the option of Swiss Re.
As announced on 4 November 2010, the convertible perpetual capital instrument was terminated in the fourth quarter of 2010. The final cash settlement was made in January 2011. As a result, an amount of USD 2 670 million was reclassified from shareholders’ equity to short-term debt due in January 2011.
The impact of early termination in earnings is recognised net of tax in the “Convertible perpetual capital instrument” line. This includes the 20% premium due on redemption under the original contract of USD 613 million and a foreign exchange loss of USD 393 million. The interest on the convertible perpetual capital instrument before 4 November 2010 amounts to USD 290 million for the period between 1 January 2010 and 3 November 2010. An income tax benefit of USD 179 million is recognised in the same line.
Effect of dilutive securities Change in income available to common shares due to convertible bonds 229 Change in average number of shares due to convertible bonds and employee options 2 846 457 106 778 101
Diluted earnings per share Net income assuming debt conversion and exercise of options 496 1 092 Weighted average common shares outstanding 342 389 798 449 302 818 Net income per share in USD 1.45 2.43 Net income per share in CHF1 1.48 2.54 1 The translation from USD to CHF is shown for informational purposes only and has been calculated at the Group’s average exchange rates for the years ended 31 December 2009 and 2010, respectively.
The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: Tax rate reconciliation The following table reconciles the expected tax expense at the Swiss statutory tax rate to the actual tax expense in the accompanying income statement: USD millions 2009 2010
Current taxes 659 696 Deferred taxes –438 –155 Income tax expense 221 541
Deferred and other non-current taxes The components of deferred and other non-current taxes were as follows: As of 31 December 2010, the aggregate amount of temporary differences associated with investment in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognised amount to approximately USD 2 200 million. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
Income taxes paid in 2010 and 2009 were USD 476 million and USD 707 million, respectively.
Deferred tax liabilities Present value of future profits –1 522 –1 059 Income accrued/deferred –622 –591 Bond amortisation –224 –184 Deferred acquisition costs –628 –538 Technical provisions –1 636 –1 642 Unrealised gains on investments –93 –529 Untaxed realised gains –448 –336 Foreign exchange provisions –517 –416 DFI losses –128 –99 Other –563 –930
Liability for unrecognised tax benefits including interest and penalties –1 214 –1 196
Unrecognised tax benefits A reconciliation of the opening and closing amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: The amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately USD 961 million and USD 630 million at 31 December 2009 and 31 December 2010, respectively. The movement between the opening and closing balance in 2010 includes a significant amount which did not impact the 2010 effective tax rate, due to an equal write-off of certain loss carryforwards previously recorded net of the unrecognised tax benefit.
The following table summarises tax years that remain subject to examination in jurisdictions of significance to the Group: USD millions 2009 2010
Acquisitions/disposals/additions 1 1 Effect of curtailment and termination benefits –18 –63 –2 –83 Effect of foreign currency translation 75 112 7 194 Benefit obligation as of 31 December 2 688 1 915 305 4 908
Fair value of plan assets as of 1 January 2 514 1 280 3 794 Actual return on plan assets 236 220 456
Acquisitions/disposals/additions 4 –1 3 Effect of foreign currency translation 81 108 189 Fair value of plan assets as of 31 December 2 723 1 670 0 4 393 Funded status 35 –245 –305 –515
Non-current assets 35 99 134 Current liabilities –15 –15 Non-current liabilities –344 –290 –634 Net amount recognised 35 –245 –305 –515
Benefit obligation as of 1 January 2 688 1 915 305 4 908
Net gain/loss 671 224 –143 752 Prior service cost/credit 44 –122 –78 2009 USD millions Swiss plan Foreign plans Other benefits Total
Other changes in plan assets and benefit obligations recognised in other comprehensive income were as follows: The estimated net loss and prior service cost for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2011 are USD 55 million and USD 7 million, respectively. The estimated net gain and prior service credit for the other defined post-retirement benefits that will be amortised from accumulated other comprehensive income into net periodic benefit cost in 2011 is USD 11 million and USD 12 million, respectively.
Fair value of plan assets 1 085 4 290 2009 USD millions Swiss plan Foreign plans Other benefits Total
Net gain/loss –119 134 –13 2 Prior service cost/credit –1 –1 Amortisation of: Net gain/loss –31 –68 11 –88 Prior service cost –10 –1 21 10 Exchange rate gain/loss recognised during the year 37 –9 –3 25 Total recognised in other comprehensive income, gross of tax –123 56 15 –52 Total recognised in net periodic benefit cost and other comprehensive income, gross of tax –59 93 1 35
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend rates would have had the following effects for 2010: Swiss plan Foreign plans weighted average Other benefits weighted average
Equity securities include Swiss Re common stock of USD 4 million (0.1% of total plan assets) and USD 4 million (0.1% of total plan assets) as of 31 December 2009 and 2010, respectively.
Assets measured at fair value For a description of the different fair value levels and valuation techniques see Note 3 Fair value disclosures.
Swiss plan allocation Foreign plans allocation 2009 2010 Target allocation 2009 2010 Target allocation
Debt securities issued by the US government and government agencies 5 21 26 Debt securities issued by non-US governments and government agencies 1 006 1 006
Residential mortgage-backed securities 155 155 Commercial mortgage-backed securities 8 8 Other asset-backed securities 31 31
Total assets at fair value 812 2 925 560 4 297
Assets measured at fair value using significant unobservable inputs (Level 3) For the years ended 31 December, the reconciliation of fair value of pension plan assets using significant unobservable inputs were as follows: Expected contributions and estimated future benefit payments The employer contributions expected to be made in 2011 to the defined benefit pension plans are USD 128 million and to the postretirement benefit plan are USD 15 million.
Balance as of 1 January 431 106 537 Realised/unrealised gains/losses: Relating to assets still held at the reporting date 1 –26 –25 Relating to assets sold during the period 0
Stock option plans Stock option plans include a fixed-option plan and an additional grant to certain members of executive management. No options were granted under these plans from 2007 onwards.
A summary of the activity of the Group’s stock option plans is as follows: The following table summarises the status of stock options outstanding as of 31 December 2010: All stock options outstanding are also exercisable and the status of these exercisable options is reflected in the table above.
The fair value of each option grant was estimated on the date of grant using a binomial option-pricing model.
Options sold 87 –163 450 Options forfeited or expired 129 –902 420
Restricted shares The Group issued 153 109 and 3 727 restricted shares to selected employees in 2009 and 2010, respectively. Moreover, as an alternative to the Group’s cash bonus programme, 400 663 and 234 560 shares were issued during 2009 and 2010, respectively.
A summary of the movements in shares relating to outstanding awards granted under the restricted share plans as of 31 December 2010 were: The weighted average fair value of restricted shares, which equals the market price of the shares on the date of the grant, was CHF 57 and CHF 65 in 2009 and 2010, respectively.
Performance share plan In 2009, the Group introduced a new share plan for the Chairman and Vice Chairman of the Board of Directors. The plan has a requisite service period of three years and is settled in shares. The plan is measured based on Swiss Re’s Total Shareholder Return (TSR), representing the share price performance plus paid dividend in any performance period, against a selected peer group. The final number of shares to be released upon vesting can vary between 0% and 150% of the original grant. The fair value of the 2009 and 2010 plans was based on the share price as of the date of grant, which was CHF 36.00 and CHF 53.60, respectively. 111 111 and 83 957 units were issued under these plans in 2009 and 2010, respectively.
The LTI grants from 2007 and 2008 were expected to be settled in cash. The payout factors were driven by average ROE and EPS compound annual growth over the vesting period. The LTI grant from 2007 vested in March 2010 and there was no payout as the plan performance targets were not achieved. As of 31 December 2010, the LTI plan granted in 2008 is also expected to expire without value.
The LTI plan granted in 2010 is expected to be settled in shares. The payout factor is driven by an average ROE and average EPS over the vesting period. The share price used for measurement was based on the date of grant and was CHF 48.15.
Delivery of restricted shares –384 424 25 1 The number of shares unvested as of 1 January 2010 was revised to include incentive shares vesting over a four-year period in certain jurisdictions.
In 2010, the Group changed the valuation methodology of the payout factor to a stochastic model which considers the likelihood of achieving the performance targets and the impact of dividends. This valuation approach has been applied to all unvested plans as of 31 December 2010 which did not result in a significant change to the prior period valuations.
Stock appreciation rights In 2006, the Group issued 3 million stock appreciation rights (SAR) as an extraordinary grant following the Insurance Solutions acquisition. The plan will be settled in cash. The requisite service period is two years, while the maximum contractual term is five years. The plan vested in 2008; however, holders of the award are still able to exercise their rights until the maximum contractual period expires. The fair value of the appreciation rights are estimated at date of grant using a binomial option-pricing model and is revised at every balance sheet date until exercise.
Unrecognised compensation costs As of 31 December 2010, the total unrecognised compensation cost (net of expected forfeitures) related to non-vested, share-based compensation awards was USD 84 million and the weighted average period over which that cost is expected to be recognised was 1.2 years.
Employee participation plan The Group’s employee participation plan consists of a savings scheme lasting two or three years. Employees combine regular savings with the purchase of either actual or tracking options. The Group contributes to the employee savings over the period of the plan.
In 2009 and 2010, 8 703 959 and 656 569 options, respectively, were issued to employees and the Group contributed USD 58 million and USD 67 million, respectively, to the plan.
The disclosure requirements under Swiss Company Law in respect of management compensation to the members of the Board of Directors and of the Executive Committee of the Group, as well as to closely related persons, are detailed on pages 207 – 212 of the Annual Report of Swiss Reinsurance Company Ltd.
Leasing commitments As part of its normal business operations, the Group enters into a number of lease agreements. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: The following schedule shows the composition of total rental expenses for all operating leases as of 31 December (except those with terms of a month or less that were not renewed): Other commitments As a participant in limited investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnerships in general for periods of up to 10 years. The total commitments remaining uncalled as of 31 December 2010 were USD 1 617 million.
Legal proceedings In the normal course of business operations, the Group is involved in various claims, lawsuits and regulatory matters. In the opinion of management, the disposition of these or any other legal matters, except as disclosed in this note, is not expected to have a material adverse effect on the Group’s business, consolidated financial position or results of operations.
The Group provides reinsurance, insurance and capital market solutions for clients that complement its re/insurance offering throughout the world through its business segments. The business segments are determined by the organisational structure and by the way in which management reviews the operating result of the Group.
The Property & Casualty segment consists of the following sub-segments: Property traditional, Casualty traditional, Specialty traditional and Non-traditional business. The Property & Casualty business segment includes Property & Casualty insurance-linked securities, Environmental & Commodity Markets business and, in the Specialty traditional sub-segment, Credit Reinsurance, Bank Trade Finance, and Credit securitisations.
Net realised investment gains/losses 110 2 331 808 –191 –275 2 783
The allocation is based on technical reserves and other information, including duration of the underlying liabilities, and was allocated in the years ended 31 December of 2009 and 2010 as follows: USD millions, for the year ended 31 December 2009 Property & Casualty Life & Health Asset Management Allocation
USD millions, for the year ended 31 December 2010 Property & Casualty Life & Health Asset Management Allocation
Net realised investment gains/losses 97 –3 2 237 2 331 Other revenues
Benefit ratio2 in % 88.7 1 Operating revenues exclude net investment income and net realised investment gains/losses from unit-linked and with-profit business as these are passed through to contract holders. Operating revenues also exclude net realised investment gains/losses from non-participating business.
Swiss Re 2010 Financial Report 179 e) Net premiums earned and fee income from policyholders by geography Net premiums earned and fee income from policyholders by regions for the years ended 31 December
Belgium Swiss Re Treasury (Belgium) N.V., Brussels 0 0 100 f
Ireland Swiss Re International Treasury (Ireland) Ltd., Dublin 0 0 100 f Swiss Reinsurance Ireland Limited, Dublin 107 100 100 f
Switzerland European Reinsurance Company of Zurich Ltd, Zurich 283 264 100 f Tertianum AG, Zurich 10 10 20 e