Base client relations on partnerships This client is a global leader in agricultural processing, a field with its own particular physical and financial risks. The pictures show how Swiss Re helps this company maintain efficient control over a vast and complex operational structure.
Bay Bridge, San Francisco: California Department of Transportation (Caltrans) inspector on site – walking on a suspension cable
■ Net loss of CHF 91 million in adverse financial environment
Market information as of 19 March 2003 Share price in CHF 70.00 Market capitalisation in CHF million 21 727 Number of shares entitled to dividend 310 379 068
For detailed information on financial statements and notes, please see Annual Report 2002 – Financial Statements.
Fellow shareholders, colleagues, ladies and gentlemen 2002 produced a disappointing result for Swiss Re. Strong performance improvements in our property and casualty business were more than offset by asset impairments resulting from the decline in the world’s equity markets, leading to an overall loss of CHF 91 million. This compared to a loss of CHF 165 million in 2001, which was of course severely impacted by the 11 September event. In view of this second consecutive year of incurring a loss, the Board of Directors will propose to the Annual General Meeting on 12 May 2003 a reduced dividend of CHF 1.00 per share.
At the operational level, there were many pleasing developments in 2002. Net premiums earned rose to CHF 29.1 billion, an increase of 15% over the previous year. Importantly, administrative costs have declined despite the strong growth, as we achieved further operating efficiencies.
As expected, the Life & Health Business Group registered a strong increase in net premiums earned, 26%, due primarly to Lincoln Re and a continuation of robust organic growth in this sector. Despite absorbing
The three-year decline in equity markets, coupled with the low inflation and low interest rate economic environment which now exists across the world, is having a profound effect on our business. Balance sheets for insurers and reinsurers have become stretched. With capital in short supply, available risk capacity is being exceeded by demand, leading to significant price increases. In addition, the prospect of low investment returns means that the industry no longer has the luxury of using investment income to offset or, as happened during the bull market of the 1990s, even overcompensate for underwriting losses. If insurers are to provide a proper reward to shareholders, the industry has to sustain or further increase prices, cut costs, tighten policy conditions, intensify its loss prevention measures, and achieve combined ratios below 100% on a regular basis.
On 1 January 2003, Walter B. Kielholz was succeeded as Chief Executive Officer by John R. Coomber. Walter B. Kielholz spent six highly successful years as CEO of Swiss Re; the Board of Directors thanks him for all his efforts. We are pleased that he will be Vice Chairman and Delegate of the Board of Directors, where he will continue to use his wide knowledge and experience to serve Swiss Re.
At the next Annual General Meeting, we will propose Raymund Breu and John F. Smith, Jr. for election to the Board of Directors. Raymund Breu is chief financial officer and member of the Novartis executive committee; John F. Smith, Jr. is former chief executive officer and chairman of General Motors Corporation.
It is with great sadness that we inform you of the death of Ernesto Jutzi, a long-serving member of the Executive Board and Board of Directors, on 4 September 2002 at the age of 70. Mr Jutzi played a defining role in the development of our corporation; we will always remember him fondly.
We would like to extend our sincere gratitude to our shareholders for standing by Swiss Re during these difficult times and showing confidence in us. We will do our best to reward your loyalty through more positive results in the future. We also thank our clients for their trust and their productive partnership with us.
Swiss Re is fully committed to integrating sustainable development into its practices and aims to achieve the right balance between its economic, social and environmental impact.
Risk finance Swiss Re employs a wide array of products, from finite reinsurance to equity, using its knowledge and understanding of worldwide risk markets to finance risk retention.
Swiss Re’s guiding principles direct the implementation of its core competencies in support of the long-term success of the company. Swiss Re’s guiding principles are to: ■ be experts on capital and risk; ■ offer excellence based on knowledge; ■ base client relations on partnerships; ■ foresee the nature of risks; ■ maintain a global yet local perspective; ■ communicate clearly and openly; and ■ support social progress.
Swiss Re’s stated strategic goals are to: ■ be the global market leader in property and casualty and life and health reinsurance; Target Matrix
By identifying and communicating shared strategic priorities, the Balanced Scorecard ensures the alignment of individual initiatives with Group goals. The Balanced Scorecard also improves the understanding of how Swiss Re is performing against set objectives by focusing attention on measuring the implementation of the strategy.
In addition to publishing a sigma study devoted to property and casualty cycle management, Swiss Re distributed an internal publication and presentation: The Insurance Cycle as an Entrepreneurial Challenge. These helped enhance internal and external awareness of the cyclical nature of property and casualty business, as well as of the importance of managing the cycle by anticipating cyclical turns and actively adjusting capacities.
On the subject of convergence, the Financial Services Business Group has compiled a handbook providing detailed suggestions for improving capital efficiency. Conference speeches, media articles and other communication activities have confirmed Swiss Re’s global leadership in this area.
In the field of sustainability, stakeholder dialogue on water quality and availability has been carried on through an international conference at the Rüschlikon Centre for Global Dialogue and through the publication of two focus reports. The publication Opportunities and Risks of Climate Change also attracted broad public and media attention. Swiss Re continues to evaluate systematically the business opportunities arising from implementation of the Kyoto agreement, such as trading solutions for greenhouse gas emission rights.
Transportation is conducting a seismic upgrade of the Bay Bridge, which involves strengthening the columns with steel casing, increasing supports and extending hinge units.
Every time an earthquake strikes, society learns how to improve construction technology. Existing buildings can also be brought up to current standards through earthquake-resistant reinforcement and seismic isolation retrofitting, thus preserving structures that have become familiar landmarks or have historical value.
After the marked economic slowdown that affected the US, Japan, and the euro zone in 2001, all three major economic zones showed an increase in economic activity during the first half of 2002. The expansive monetary and fiscal policy adopted after 11 September 2001 prevented a major slump, particularly in the US. During the second half of 2002, however, economic growth slowed across the globe. Inflation was restrained, and longterm interest rates continued to decline.
The stock markets experienced heavy losses stemming from political uncertainty, particularly the worldwide concern over further terrorist attacks and the possibility of war in Iraq. In addition, distrust of certain accounting practices at some corporations caused equity markets to fall further, strengthening general scepticism about future economic growth prospects.
Real GDP growth and CPI inflation (percentage change against previous year)
who were heavily invested in equities, suffered losses on their asset portfolios, whereas their US competitors suffered from high corporate bond default rates.
Swiss Re’s sigma study (10/2002) estimates that non-life insurers worldwide have lost about USD 180 billion since the beginning of 2001, equivalent to 25–30% of insurers’ equity. This ratio may be even higher in Europe, where insurers tend to hold a greater proportion of equities than in other regions. The life insurance industry fared no better, although it is hard to judge the exact amount of shareholder funds lost by European life companies due to profit-sharing schemes with policyholders. Life insurers were also hit by a substantial decline in so-called “bonus reserves ”. This reduced the attractiveness of with-profits products and put a drag on potential business expansion.
The squeeze on reinsurance capacity continued in 2002, due to the unfavourable financial market conditions, to which were added – particularly in the US – a strengthening of reserves and the reemergence of the asbestos liability crisis. The overcapacity of the soft market phase during the late 1990s turned into a hard market in 2001/2002, which is expected to remain over the coming years.
■■ France (MSCI France) ■■ Germany (DAX 30) ■■ Japan (Nikkei 225) ■■ Switzerland (SMI) ■■ UK (FTSE 100) ■■ US (DJ Industrials) Source: Datastream
25 April International conference on sustainable water management International leaders in water policy, the Swiss government and Swiss Re discussed solutions for improving the use of water resources as well as the policy framework and best-management practices for sustainable water management.
10 July Phillip Colebatch joins Swiss Re’s Executive Board Swiss Re’s Board of Directors appointed Phillip Colebatch to the company’s Executive Board, effective 10 September 2002. Mr Colebatch also serves on the Executive Team of Swiss Re’s Financial Services Business Group as head of its capital markets and advisory activities.
12 July Swiss Re receives go-ahead for China reinsurance licence Swiss Re received regulatory authorisation to prepare for branch operation in China. The approval by the China Insurance Regulatory Commission (CIRC) covers both property and casualty and life reinsurance; it will enable Swiss Re to extend its worldwide presence to China, where it will establish underwriting and related capabilities.
17 July Publication on climate change: learning to harness the risks and opportunities The climate has changed visibly, tangibly and measurably. The Swiss Re publication Opportunities and Risks of Climate Change shows that the focus should also be on the non-obvious dangers of extreme meteorological phenomena.
18 July Swiss Re obtains risk protection of USD 255 million through an innovative securitisation Swiss Re received a four-year protection against a series of natural catastrophe risks from PIONEER 2002 Ltd. The proceeds will serve to replenish Swiss Re’s capital should any of the specified natural catastrophes occur. The protection has been increased to USD 334 million by the end of 2002.
14 August Swiss Re creates US Advisory Board Swiss Re established a US Advisory Board to provide advisory and consultative services to Swiss Re America Holding Corporation and its US subsidiaries.
29 August Swiss Re’s 2002 half-year result Swiss Re’s net premium income rose 16% in the first half of 2002 to CHF 13 836 million. Net income was CHF 118 million, compared to CHF 1 345 million in 2001. Due to the equity market decline in 2002 and during the first half-year, Swiss Re recorded impairment charges of
CHF 917 million. Firming non-life rates and better conditions led to the Property & Casualty Business Group’s combined ratio improving to 106%.
19 December Swiss Re appoints Ann F. Godbehere as Chief Financial Officer (CFO) The Board of Directors appointed Ann F. Godbehere as CFO of Swiss Re, effective 1 April 2003. Ann F. Godbehere is CFO of Swiss Re’s Property & Casualty Business Group until 31 March 2003.
Year 2003 to date 26 February 2003 renewals successful; 2002 heavily impacted by impairment charges due to continued deterioration of equity markets Swiss Re reported highly successful January renewals, continuing the previous year’s trend towards substantial improvements in both pricing and conditions. Swiss Re disclosed that it expected to report a 2002 loss due to increased impairment charges. In view of the second consecutive year of loss, and to maintain the company’s long tradition of prudent financial management, the Executive Board proposed a reduced dividend to the Board of Directors.
Premiums in the Life & Health Business Group increased by 26.4% to CHF 11.3 billion, due primarily to the acquisition of Lincoln National’s reinsurance business and to growth in traditional life business in North America and the United Kingdom.
Net realised investment losses were CHF 515 million, compared with net realised gains of CHF 2.7 billion in 2001. The main reason for the change was the net impairment charge of CHF 3.9 billion, due to the decline in equity markets, fixed-income securities, and private equity values. This impairment loss was partially offset by realised gains on investments, including gains on the sale of parts of the Group’s holdings in NCM and Partner Re.
Other revenue decreased by 19.8% to CHF 365 million as a result of the sale of NCM, partially offset by a full year of revenue from Conning Corporation, which was acquired on 2 July 2001.
There was no net change to equalisation reserves in 2002, compared to a release of CHF 1.5 billion in 2001. The equalisation charge in the first half of 2002 was released in the second half of 2002 due to the losses from the floods in Germany.
Amortisation of goodwill decreased from CHF 368 million in 2001 to CHF 350 million, due to changes in currency-exchange rates.
Other operating costs and expenses declined from CHF 3.4 billion to CHF 3.2 billion, due mainly to currency-exchange effects. The increase in expenses due to the business acquired from Lincoln National was offset by the fall in expenses caused by the deconsolidation of NCM. The management expense ratio declined for the fourth year in a row, to 9.3% in 2002, from 10.8% in 2001, as the Group maintained its focus on strategic cost leadership. Expense ratios declined in the Property & Casualty Business Group from 5.1% to 4.9%, and in the Financial Services Business Group from 31.3% to 25.7%.
Net realised investment gains/losses on certain financial instruments including own shares; amortisation of goodwill; and other income and expenses – such as indirect taxes, capital taxes and interest charges – have been excluded when assessing the performance of each business group.
Financial Services –932 –633 32 Total business group operating income 1 031 992 –4 Corporate Centre expenses –450 –437 –3 Items excluded from the business groups: Net realised investment gains 131 259 98 Amortisation of goodwill –368 –350 –5 Other income/expenses –448 –428 –4
Total impairments charged to the income statement amounted to CHF 3.9 billion, CHF 0.9 billion in the first half-year and CHF 3.0 billion in the second half-year.
Re’s overall policy of diversification, the company manages its portfolio to take into account significant trends in the different investment markets.
The sharp decline of stock markets had a positive impact on bond markets, as funds were reallocated from equities to fixed-income securities. The risk aversion that had depressed equity markets also triggered a widening of spreads on corporate bonds. Government bonds rallied to very high levels and yields fell to long-term lows. The resulting increase in the value of the bond portfolio was CHF 3.0 billion. However, this increased value is not recognised in Swiss Re’s income statement or shareholders ’ equity, unless the bonds are sold. Realised gains on bonds for the year amounted to CHF 1.3 billion.
Investments decreased from CHF 96 billion to CHF 87 billion in 2002. The significant decline of the US dollar against the Swiss franc and the equity downturn far outweighed the positive cash flow and gains on the bond portfolio. At 31 December 2002, equities accounted for CHF 12.3 billion, or 14% of investments, compared to 20% in the prior year. The net equity risk was significantly lower at 9%. At 31 December 2002, fixed-income investments, including fixed-income securities, mortgages and other loans as well as short-term investments, represented 81% of the portfolio, compared to 75% in the prior year. Other investments, comprising of investment real estate and other invested assets, remained stable at 5%.
Net realised investment gains/losses 2 665 –515 Other revenues 455 365 –20
Amortisation of goodwill –368 –350 –5 Other operating costs and expenses –3 384 –3 240 –4
Earnings/losses per share in CHF Basic –0.57 –0.29 Diluted –0.57 –0.29
As of 31 December CHF millions 2001 2002 Change in %
Liabilities and shareholders’ equity Liabilities Unpaid claims and claim adjustment expenses 68 618 62 652 –9 Liabilities for life and health policy benefits 41 370 37 269 –10
Handling grain always presents an explosion hazard: devastating accidents with numerous fatalities have repeatedly underlined the dangers. Good housekeeping and the use of dust separators keep potentially explosive dust under control, while silos and machines are fitted with pressure relief panels.
Advanced research improves processes and creates new products. The production of foodstuffs is sensitive to risks such as fire, smoke contamination and water damage. Even small, localised fires can lead to a loss of all the goods in a building and require costly clean-up of plant and machinery.
There was little merger and acquisition activity, although a number of smaller transactions were generated by the need to concentrate on core strategic business segments or geographical areas. Terrorism was a major topic as insurers attempted to provide their clients with coverage, while protecting their own balance sheets from a risk that is difficult to model and price. The solutions ranged from absolute exclusion to full or partial coverage,
The shift to non-proportional coverage continued, providing reinsurers with more transparency and control over pricing and exposures.
Latin American operations were streamlined into a regional organisation managed from the US.
The business group continued its drive for client focus, efficiency and effectiveness. Claims and liability management, underwriting and client relationship management are effectively managed locally according to global guidelines. Technical expertise in the local markets was enhanced with Chief Underwriting Office representatives in Zurich, Munich, Hong Kong and the US. An improved risk-clearing system supports risk accumulation control and ensures a uniform underwriting approach throughout the Group. The Group’s focus has been to promote expertise, strengthen client focus, improve efficiency, install operational responsibility, further refine pricing methodology and reinforce a consistent global approach.
In view of recent legal developments in the US as well as Europe, and to avoid new claims, such as asbestos, exposure control was reinforced through tighter exclusion clauses, the introduction of sublimits and other underwriting measures. Liability capacity for large industrial risks was further tightened according to strict transparency and profitability targets. These risks are written either facultatively or are priced separately under treaty arrangements. Swiss Re continued its strict risk selection in its pharmaceutical product liability portfolio, with a strong focus on the extent of coverage and pricing.
Claims ratio in % 95 77 Acquisition cost ratio in % 24 22 Administration expense ratio in % 5 5 Combined ratio in % 124 104 Combined ratio in % excluding changes in equalisation reserves 128 104
Growth was achieved despite the continued disciplined re-underwriting of the book and the marked shift from proportional to non-proportional treaty business. This allows a greater degree of control and transparency in the pricing process, thereby improving the overall quality of the portfolio, but has a dampening effect on premium growth.
Key drivers for the increase were the widespread improvement in rates, in both the primary and reinsurance markets, and strong new business. Large single transactions also contributed to growth.
An analysis by line of business shows that property constitutes the same proportion of the total portfolio as in 2001, ie 34%; liability has increased its share from 21% to 25%; motor has reduced from 22% to 18%; accident remains the same with 8%, and other lines reduced from 16% to 15% due to the transfer of aviation and credit and surety business to the Financial Services Business Group.
The combined ratio declined considerably from 124% in 2001 to 104% in 2002. The underlying improvement in 2002 was 6%, after adjusting 2001 to exclude
The increase in primary and reinsurance rates and the tightening in terms, conditions and coverages contributed to the significant improvement in the claims ratio, and there was also a marked reduction of two percentage points in the average acquisition cost ratio. The expense ratio fell from 5.1% to 4.9%, reflecting management’s continued focus on cost management.
The combined ratio improved, most notably in property due to the strong rate increases and better terms and conditions. The liability ratio also decreased markedly. The other lines of business have reacted more slowly to the improved conditions but recent renewals indicate that rates, particularly in liability, are still rising appreciably.
Including the terrorist attack which impacted the year 2001, the combined ratio improved from 136% to 97%. Excluding the terrorist attack, the combined ratio improved from 109% to 97%, due to increased insurance and reinsurance rates and to the lower incidence and severity of both natural catastrophes and man-made losses.
Solid growth in premiums earned of 34% was recorded in this line of business. The growth by division ranges from 26% in Europe Division to 38% in Americas Division and slightly over 50% in Asia Division. While half of the rise in Americas Division was generated by a single large transaction, the balance is due to the much higher rates noted around the world, new business and increased participations.
Excluding the 11 September 2001 loss, the combined ratio improved by 9 percentage points, helped by a lower incidence and severity of newly reported claims.
Growth in premiums earned was modest at 9%. Most of the growth came from the Asia and Americas divisions.
The focus on quality led to the cancellation of further under-performing business and a continuing shift from proportional to non-proportional solutions. Some business was lost due to Swiss Re’s firm position on the underwriting topics mentioned earlier. Nevertheless, new opportunities and share increases on existing business which met Swiss Re’s requirements led to strong premium growth.
Aviation, credit & surety: following the transfer to the Financial Services Business Group, only the run-off of these two lines of business is reflected in the figures. Total income from premiums earned amounted to CHF 300 million, compared to CHF 738 million in 2001.
The primary market shifted from investment -linked products toward fixed-return and protection products as consumers reacted to unattractive equity returns and their awareness of personal risk heightened. Term life premiums grew at a rate of 13% in the US. It is anticipated that future US growth will reduce to more historical levels of 3–5%. In the UK, term life new business premiums grew by 36%, as premium rates continued to fall resulting in significant replacement of business, supplemented by the rise in the demand for life cover, due to the booming housing market. A predicted housing market slowdown, together with hardening premium rates, may curtail UK term life new business growth going forward.
The ageing population is increasing demand for pension protection; however, increased uncertainty regarding the structure and value of pension products has acted as a brake on growth in this area. Increased demand is anticipated in Germany, Italy and Spain, where pension reforms are being implemented or are under discussion. Tax advantages included in the German reforms are expected to encourage people to buy pension products with occupational pension funds. However, only some of these pension funds will be administered by insurance companies.
The growth in the life reinsurance market has slowed gradually from the strong pace demonstrated during the late 1990s. New business cession rates in the US and UK are likely to have peaked, although in-force cession rates of total life business are forecast to continue to rise over the next few years. This results from an increasing proportion of higher cession rates on new business compared to older business. Accordingly, growth in the life reinsurance market as a whole is expected to exceed the growth in the primary market over the next few years.
The primary market’s increased focus on capital management and cost control is expected to provide more opportunities for Admin ReSM and other in-force transactions and may also create further opportunities for traditional reinsurance.
Although there is evidence of a greater awareness of capital management within the European market, progress in this area has been slow but is anticipated to improve, especially in certain markets such as eastern Europe.
CHF 14 751 million and the operating result (excluding realised gains) increased by 15% to CHF 1 344 million.
The Life & Health Business Group successfully sustained its track record for profitability, despite challenging financial markets.
Swiss Re’s strategy to focus on protection products rather than investment-linked products (eg variable annuities), combined with an asset and liability management strategy which requires largely durationally matched fixed-interest securities to back its liabilities, has allowed it to create substantial advantage in the current volatile markets. This long-term strategy fits all parts of the market cycle including the challenges faced in 2002: low interest rates, falling equity markets and an uncertain global environment.
Swiss Re continued to identify new opportunities to develop its Admin ReSM
In Asia, Swiss Re has built a strong franchise by offering its clients access to its global experience and knowledge in risk management, product development and pricing through its experienced and dynamic local teams of reinsurance experts. In view of the region’s growth potential, Asia’s weight in Swiss Re’s overall portfolio will increase over time. In particular, the recent opening of the Indian market to foreign companies and the anticipated nationwide branch licence in China will ensure Swiss Re’s optimal positioning to capture this growth.
The operating result (excluding realised gains and losses) improved from CHF 1 167 million in 2001 to CHF 1 344 million in 2002, an increase of 15%. The principal reason for the increase was the inclusion of Lincoln Re and certain nonrecurring gains on the health portfolio, partially offset by a charge of CHF 280 million on Guaranteed Minimum Death Benefit contracts (GMDB) primarily related to poor equity market performance. In addition, higher mortality claims, lower net investment yields and adverse foreign exchange impacts also affected the results.
Expenses Claims and claim adjustment expenses; life and health benefits –8 502 –10 084 19
Favourably impacting the results were several non-recurring gains from the recapture or settlement of certain treaties in the accident and health segment. Whilst Swiss Re has withdrawn from writing new long-term guaranteed critical illness business in the UK, losses were experienced in 2002 on the run-off of existing business.
In addition to the above, the depreciation of the US dollar and other currencies against the Swiss franc had a significant impact in 2002, reducing the result compared to 2001 by CHF 74 million (6%).
The management expense ratio increased in 2002 to 5.0%, from 4.6% in 2001. This ratio declined from 5.3% for the first half of the year as the full benefits of the Lincoln Re integration were realised.
Traditional life reinsurance premium growth is expected to outpace the growth in the primary market, predicted to be approximately 3–5% per annum, which is consistent with the growth expected in the global economy as a whole. The rate of life reinsurance growth, however, will be less than experienced in recent years due to the stabilisation of cession rates in the US and UK. As a result, the Group has reduced its target growth rate in operating revenues to 7%. The actual growth rate will depend on many factors, including the growth rate of the primary market, the Group’s success in consummating Admin ReSM transactions, and the investment income on fixed-income investments.
Consistent with the current low interest rate environment, Swiss Re is reverting to its historical target return on operating revenues of 9%.
The opportunities to consummate Admin ReSM transactions should continue as the supply of deals increases, reflecting the continuing capital pressures on the primary market. Admin ReSM capital invested to date in 2003 is approximately CHF 235 million.
Net investment income 619 522 –16 Net realised investment gains/losses 218 –339 Trading revenues –54 217 Fees and commissions 567 456 –20
Expenses Acquisition costs –225 –307 36 Claims and claim adjustment expenses –3 241 –2 898 –11
Operating costs –1 267 –1 008 –20 Operating income/loss –932 –633 32 Operating result, excluding net realised investment gains/losses –1 150 –294 –74
Risk Solutions’ overall premium volume rose strongly in 2002 to CHF 1 980 million due to Corporate Risk Underwriting’s premium growth of CHF 600 million, or more than 60% in local currencies. During 2002, Corporate Risk Underwriting was able to raise prices and extend its market share in property and casualty as well as in aviation business.
■ Risk Solutions 58.1% ■ Credit Solutions 21.7% ■ Advisory & Capital Markets 11.2% ■ Asset Management 9.0% Total CHF 3 580 million
Gross revenues Premiums earned 885 740 –16 Net investment income 117 62 –47 Net realised investment gains/losses –59 –29 51 Trading revenues 8 4 –50 Fees and commissions 39 –1
Expenses Acquisition costs –85 –237 179 Claims and claim adjustment expenses –391 –886 127
Operating costs –407 –87 –79 Operating income/loss 107 –434 1 Credit Solutions in 2001 included the results of NCM, the credit primary insurer which the Group sold as of 31 December 2001.
The consideration included an equity share in the newly formed Gerling NCM company. In 2001, NCM, as a primary insurer, reported premiums of CHF 543 million, fees and commissions of CHF 39 million, total investment income of CHF 37 million, claims of CHF 256 million, acquisition costs of CHF 28 million and operating costs of CHF 338 million.
In 2002, the Structured Risk Finance business was well diversified by products and by insurance and corporate clients, although production was below expectations. The in-force portfolio of transactions performed well, above original expectations.
In the course of 2002, the global financial sector was exposed to significantly higher credit losses as insolvency rates climbed and a record number of downgrades contributed to generally lower credit quality.
The operating loss occurred primarily in the first half of the year. In addition to a few claims from large corporate defaults, there were substantial new claims from previous underwriting years, the main source being the Lloyd’s Central Fund contract. The final six months of 2002 developed more favourably with no new large losses reported in the European credit reinsurance portfolio despite depressed credit markets. The US surety portfolio had a high claims ratio in the second half of the year arising from previous treaty years.
Production of structured credit business was limited as Swiss Re proactively lowered its level of exposure. The portfolio credit default swap business incurred no cash losses during the year, but markedto -market there was a CHF 57 million negative impact on operating income.
Both credit reinsurance and structured credit underwriting have demonstrated comparatively low volatility due to a longestablished policy of conservative underwriting measures, prudent risk management as well as systematic risk mitigation.
Credit reinsurance continues to benefit from clients’ “flight to quality”, which allows improving terms and conditions, higher deductibles and other remedial action, including more stringent collateral requirements. The Advisory & Capital Markets unit comprises the investment bank Fox-Pitt, Kelton and Financial Products. Fox-Pitt, Kelton provides research and brokerage in its core area of banks and insurance stocks, while Financial Products concentrates on debt capital markets origination, trading and distribution.
Swiss Re Capital Markets Corporation, the entity within Swiss Re Financial Products responsible for the underwriting and distribution of securities, is the leading underwriter and dealer of insurancelinked securities.
Gross revenues Premiums earned 4 Net investment income 5 12 140 Net realised investment gains Trading revenues –62 213 Fees and commissions 206 173 –16
The Asset Management unit manages fixed-income, traded-equity and certain private equity investments for Swiss Re and third parties, primarily insurance companies. In the US, Conning Asset Management principally serves insurance companies with asset management and asset liability management services. Swiss Re is among the top three US management firms for insurance company assets.
Asset Management’s 2002 operating results were negative to the extent of CHF 20 million. Realised gains on the partial flotation of Swiss Re’s Partner Re participation and the sale of NCM were offset by additional write-downs in the company’s private equity investment portfolio and slightly lower fee revenues. Fees for the management of Swiss Re’s proprietary assets decreased due to the adverse development of equity capital markets, whilst fees for third-party business increased.
Having contributed 45% to operating revenues in 2002, Corporate Risk Underwriting will benefit from the continued hard market in property, casualty and aviation business. Credit Solutions, as the second largest business unit, expects to report good results in 2003, based on the favourable credit reinsurance renewals in January as well as on increased price levels of the primary credit insurance.
Nanotechnology describes the real-world application of science at the scale of individual atoms and molecules. A nanometre is a billionth of a metre: about 1/80 000 of the diameter of a human hair.
Swiss Re’s experts are constantly watching the development of new technologies to recognise the risks and changes of tomorrow and to work out how a reinsurer can cope with these exposures.
Working at nanoscale: focus on the tip of a scanning tunnelling microscope (STM) Researcher Reto Schlitter at the STM A view into the vacuum chamber of an STM Model of a designer molecule used for experiments in moving and placing individual molecules at room temperature
Swiss Re’s Corporate Centre with its four divisions Finance, Risk & Knowledge, Information, Processes & Technology and Communications & Human Resources supports the Board of Directors and the Executive Board in managing the Group’s assets and liabilities and developing Swiss Re’s role as a global company.
Significant and rapid changes in the legal environment and liability regime mean that the (re)insurance industry must rely increasingly on a global approach to comprehensive claims management. This situation has prompted Swiss Re to create the position of Chief Claims Strategist, reporting to the Chief Risk Officer. The new position involves developing strategies to cope
Swiss Re’s communication effort focused on the full implementation of “Top Topics ”, an initiative to concentrate attention on strategic and business-relevant themes. These are areas in which Swiss Re has developed a wealth of expertise and know-how thanks to its research capabilities (please refer to pages 8 and 9 for more information). This approach, combined with the requisite additional communication measures, has considerably increased Swiss Re’s profile among the international media.
In these times of financial market turbulence and a changing risk landscape, Swiss Re’s Corporate Centre plays a vital role in managing the Group’s resources.
Both initiatives are important parts of Swiss Re’s risk management process (please refer to pages 45 and 46 for more information) to further improve underwriting quality, claims handling and reinsurance business terms and conditions.
Challenging times increase the need for fast and effective information delivery: several Group-wide solutions became available in the area of information technology during 2002, supporting business requirements around the world and enhancing the use of information for improved business decisions. Some webbased solutions, such as the enhanced global Client Management System, facilitate access to knowledge within the Group; others accelerate the exchange of information between Swiss Re and its business partners. An Enterprise Document Management System was rolled out to enable Swiss Re employees to gain rapid access to the documents relevant to their business function.
While there has been a reduction in the company’s book equity, the exposures to both stocks and US dollar underwriting risk denominated in Swiss francs have also declined. Swiss Re actively reduced its risk profile during 2002. From a risk perspective, the combination of these factors more than compensates for the decline in shareholders’ equity.
Swiss Re’s USD 2 billion European Medium Term Notes (EMTN) programme was successfully renewed during 2002. The aggregate face value of European medium term notes outstanding at the end of 2002 was equivalent to USD 975 million.
As part of its strategic ambitions to provide risk management solutions to its clients, Swiss Re may purchase assets with borrowed funds. This type of business generates new revenue sources whilst enhancing value for clients. Funded structures allow Swiss Re to access familiar risk classes at more attractive rates of return than would be available on an unfunded basis.
Funded business is disclosed as separate line items ‘Financial services assets and liabilities ’ in the balance sheet. The funding is just a means of accessing a desired category of risk without significantly affecting the financial market risk profile of the company. Therefore ‘Financial services assets and liabilities’ are structured with the intention of creating assets and liabilities that generate offsetting foreign-exchange and interest-rate risks. Group Capital Management coordinates funded business activities throughout the Group. Currently, the main contributor is the Advisory & Capital Markets unit of the Financial Services Business Group.
Long-term debt that is strictly used for funded business is classified as operational debt. During 2002, Swiss Re took advantage of opportunities to issue medium and long-term operational debt. The aggregate value of European Medium Term Notes issued in 2002, maturing after the fiscal year 2003, was the equivalent of EUR 34 million, with a weighted average maturity of 3.5 years. Operational long-term debt raised under Payment Undertaking Agreements in 2002 totalled USD 487 million, with a weighted average maturity exceeding 12 years. All interest-rate and currency risk for operational debt is hedged to a three-month Libor benchmark.
Syndicated loans totalling CHF 458 million matured in March 2002. These loans had been taken up to finance the acquisition of the former Uniorias in Italy in early 1997, and were repaid in 2002. Swiss Re had no other maturities or issues of longterm financial debt or hybrid capital.
Since traditional retrocession is carried out amongst reinsurance industry players, prices are highly cyclical, and supply is very limited during the hard cycle. In addition, there is a substantial credit risk, especially for these rare event covers. With cat bonds, the money is paid up-front, so there is no credit risk for Swiss Re if one of the events is triggered.
You mentioned the implementation of a substantial hedge programme on the company’s equity portfolio. From a risk management perspective, why did you do it? Between January 2000 and January 2002, Swiss Re had reduced its equity positions from 34% to 20% of its total investments. We had a very good renewal in January 2002, and it was obvious that returns were rising on the core business. On the other hand, stocks were down approximately 10% in the first half of 2002, and the political and economic outlook was starting to get cloudy. So at mid-year, we put CHF 7.2 billion of notional value of hedges on our CHF 16.4 billion portfolio of stocks to mitigate the risk of a downturn in the second half, which did in fact occur. These hedges have performed quite well, and we continue to benefit from them as markets have also been declining to date in 2003.
– but also by transaction category, single transaction, maturity of the exposure, and so on. Moreover, we can perform trend analyses on all these dimensions based on historical data.
What are the responsibilities of Group Operational Risk Management? Swiss Re’s Group Operational Risk Management is responsible for the integrated view of Swiss Re’s operational risk landscape and works in close cooperation with the business groups and the Corporate Centre; they are responsible for their own operational duties, while Group Risk Management sets standards to support implementation and promote best practice. The goal is to minimise exposure to operational risks as far as reasonable from a cost /benefit perspective.
What were the main achievements for operational risk management in 2002? The establishment of the Group Operational Risk Management network; the organisation of the main operational risk reporting; the agreement on the content of respective guidelines; and the list of top operational risks at Swiss Re. This is a generic list based on experts’ broad opinions and was presented to the Finance and Risk Committee of the Board of Directors; it is intended to be a first guide to areas that will be examined in more detail.
What are your goals in the future? Risk management is never a rigidly defined process, but more of an ongoing one. For Swiss Re, going beyond the defensive approach of limiting downside risks means actively optimising the portfolio from a risk/return perspective and managing the cycle using appropriate tools. Substantial changes have been made to strengthen contract wordings, event limits and exclusions, which are all a part of good risk management. Risk management is, of course, everyone’s responsibility.
Rüschlikon’s long-term aim is to engage in a dialogue on topics that are of particular importance to the Group and its clients. Sustainability has become a recurring theme at the Centre: in 2002 it staged several events on the subject, ranging from peer discussions and awarenessbuilding to intensive workshops aimed at developing business strategies and solutions. Conferences on water usage and the reduction of greenhouse gases confirmed Rüschlikon’s reputation for attracting experts with a strong focus on business solutions.
To keep event themes relevant, the Centre continually explores new developments. One event in 2002 assessed the risk of terrorism after 11 September 2001 through expert presentations and a panel. At times the Centre collaborates with other organisations on events. Last year the Centre, in partnership with Harvard University, invited 40 experts to explore the complexities of intellectual property ownership, copyright and the new legal frameworks for the 21st century. A conference on intangible values, another relevant topic in today‘s business climate, saw 40 cross-industry peers meet to exchange ideas about new models for assessing and valuing intangible assets such as knowledge and human capital. By staging events of this kind, Swiss Re has the opportunity to actively engage with its stakeholders, present an industry viewpoint and gain early insight into new and emerging risks. Rüschlikon has become an ideal setting to explore future topics as well as current Swiss Re Top Topics. (Please refer to page 9 for more information on Top Topics.)
To find out more about the Centre‘s events and initiatives, past and present, please visit its website on www.ruschlikon.net.
social, political, economic or environmental – that have an impact on the global risk market. The aim is to build networks, leverage knowledge and create business opportunities for Swiss Re.
The insurance industry carries a substantial part of the operational and economic risk involved in this transport system.
– At periodic risk inspections, operators, insurers and reinsurers check the required safety standards and risk management issues to keep the system at an optimum risk level.
Risk & Knowledge Finance Communications & Information, Processes Human Resources & Technology
Asia Continental Europe Advisory & Capital Markets Asia & rest of world Asset Management
As an internationally active company, Swiss Re complies with the local rules and regulations of all the countries in which it chooses to do business. But ultimately, Swiss Re is a Swiss company, domiciled in Zurich and organised according to the laws of Switzerland. Its shares are listed on the SWX Swiss Exchange and traded on the virt-x. In 2002, SWX Swiss
2.6 Limitations on transferability and nominee registrations a. Free transferability Swiss Re’s shares are freely transferable, without any limitations, provided that the buyers declare they are the beneficial owners of the shares and comply with the disclosure requirements of the Federal Act on Stock Exchanges and Securities Trading (“Stock Exchange Act”) of 24 March 1995.
c. Procedure and conditions for cancelling statutory privileges and limitations on transferability The point is not applicable as no statutory privileges and limitations on transferability exist.
1.2 Significant shareholders There is only one shareholder with a participation exceeding the 5% threshold of Swiss Re’s share capital. The Capital Group Companies, Inc. (“Capital Group”), domiciled in Los Angeles, informed SWX Swiss Exchange on 24 June 2002 that it holds 5.06% of Swiss Re’s voting rights on behalf of funds and clients. As these shares have mostly not been registered under any name of the Capital Group companies, Swiss Re is unable to track, on its own, changes in Capital Group’s holdings.
2.3 Changes in capital Please refer to the statement of shareholders’ equity on page 6 of the Financial Statements.
2.4 Shares As of 31 December 2002, Swiss Re’s share capital amounted to CHF 32 205 787. It is fully paid-in and divided into 322 057 870 registered shares, each with a nominal value of CHF 0.10. There are no other types of shares with a higher or a limited voting power, privileged dividend entitlement or any other preferential rights; nor are there any other securities representing a part of the company’s equity capital. Swiss Re’s capital structure ensures equal treatment of all shareholders in accordance with the principle “one share one vote”.
Maturity Instrument Issued in Currency Nominal (m) Exchange terms 2004 Exch. Bond (TRIPLES) 1999 USD 530 i) 2021 Convertible Bonds 2001 USD 1 150 ii)
Swiss Re pursued an option strategy and sold call options on shares reserved for corporate purposes. A total amount of 1983 000 of these shares were used in 2002. The settlement, however, can also be in cash.
Mr Forstmoser is a law professor at the University of Zurich and has been a partner of Niederer Kraft & Frey, Attorneys, in Zurich, since 1975. He is also chairman of the board of directors of Hesta AG and Hesta Tex AG, Zug, vice-chairman of the board of Mikron Holding AG, Biel, as well as a board member of Bank Hofmann AG, Zurich, and apr – AG für Public Relations, Zurich.
Mr Forstmoser has never had a managing position in the Swiss Re Group and has no important business connections with Swiss Re or any of its Group companies.
i) Each noteholder shall have the right to exchange all or any of his/her notes into a) fully paid registered shares of
Walter B. Kielholz Vice Chairman and Delegate of the Board of Directors from 1 January 2003, Chief Executive Officer until 31 December
Thomas W. Bechtler Vice Chairman (until 31 December 2002), non-executive and independent director
Mr Bechtler joined Swiss Re’s Board of Directors in November 1993. His mandate was renewed in 1997 and 2001, each time for a further four years. In May 2002 he was appointed Vice Chairman. Mr Bechtler has been managing director of Hesta AG, Zug, since 1972. He also serves on the board of directors of Credit Suisse Group, Zurich, Bucher Industries, Niederweningen, Robert Bosch Internationale Beteiligungen AG, Zurich, Sika AG, Baar, and Conzzeta Holding, Zurich.
Mr Farr, a US citizen born in 1941, received both a bachelor’s and a master’s degree in business administration from the University of Michigan in 1963 and 1964, respectively.
Mr Farr has never had a managing position in the Swiss Re Group and has no important business connections with Swiss Re or any of its Group companies.
Ms Gibson was elected to Swiss Re’s Board of Directors in June 2000 for a four-year term of office. She has been a professor of financial economics at the Swiss Banking Institute of the University of Zurich since March 2000. She was previously a professor of finance at the University of Lausanne. Ms Gibson is also a member of the Swiss Federal Banking Commission, a director of the National Centre of Competence in Research NCCR, responsible for the financial valuation and risk management project, and an adviser to scientific councils of various educational institutions.
Ms Gibson has never had a managing position in the Swiss Re Group and has no important business connections with Swiss Re or any of its Group companies.
He is an entrepreneur with controlling stakes in AmBev, a brewery, Lojas Americanas, a discount store chain, and GP Investimentos, a buy-out and restructuring firm with interests in Brazilian railways, supermarkets, amusement parks and telecommunications. He also serves on the board of directors of The Gillette Company, Boston, and of the Associates at the Harvard Business School. In addition, he serves on the international advisory boards of DaimlerChrysler Corp., Auburn Hills, Michigan and Credit Suisse Group, Zurich (until March 2003), and as chairman of the Latin American Advisory Committee of the New York Stock Exchange.
Mr Lemann has never had a managing position in the Swiss Re Group and has no important business connections with Swiss Re or any of its Group companies.
Mr Scott, a British and Australian citizen born in 1942, 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) since1965 and was made a Commander of the British Empire (CBE) in 2002.
Mr Scott joined Swiss Re’s Board of Directors in 2002 for a four-year term of office. He is a retired group chief executive of CGNU plc. In the 1990s, he was group chief executive of General Accident and, following the merger with Commercial Union in 1998, was appointed group chief executive of CGU plc. Following the merger in 2000 with Norwich Union, Mr Scott became group chief executive of CGNU plc, retiring in May 2001. Mr Scott was also chairman of the Association of British Insurers in 2000–2001, and board member during the previous four years.
Mr Scott is a non-executive director of the Royal Bank of Scotland plc, Jardine Lloyd Thompson Group plc, Yell Group plc and Focus Wickes Ltd.
Mr Scott has never had a managing position in the Swiss Re Group and has no important business connections with Swiss Re or any of its Group companies.
d. Nominations for the election to be held at the Annual General Meeting of
Mr Breu has been CFO and a member of the executive committee of Novartis since the group’s foundation in 1996. In the preceding three years, Mr Breu was the head of group finance and a member of the executive board of Sandoz.
3.4 Elections and term of office a. Principles of the election procedure and term limits The term of office of a directorship is four years. It begins with the date of election by an Annual General Meeting and ends on the fourth subsequent Annual General Meeting. Members whose term has expired are immediately eligible for re-election.
Delegate of the Board of Directors Until the end of 2002, the Delegate also held the function of Chief Executive Officer. However, the Board of Directors amended the Corporate Bylaws with effect from 1 January 2003. Accordingly, the Delegate’s responsibilities are to liaise between the Board of Directors and the Executive Board with particular regard to strategy, management development and succession planning.
Swiss Re Annual Report 200258 b. Committees of the Board of Directors: members, tasks and responsibilities General provisions for all Committees The Board of Directors may delegate the preparation and execution of its resolutions to committees or individual members of the Board. The Board is responsible for ensuring that the corresponding reporting is adequate.
Audit Committee (AC) Members Thomas W. Bechtler, Chair Rajna Gibson Jorge Paulo Lemann Bob Scott
The Committees conduct or authorise investigations into any matters within their respective scope of responsibility, thereby taking into consideration both relevant peer group practices as well as general best practices. They are empowered to retain independent counsel, accountants or other experts if deemed necessary including for purposes of benchmarking best practices.
The Committees seek to verify full legal and regulatory compliance within their respective scope of responsibilities and consider compliance with best practice recommendations.
In carrying out this function, the Committee serves as an independent and objective monitor of the performance of the company’s financial reporting process and system of internal control and provides for ongoing communication between the external auditor, management, Group Internal Audit and the Board with regard to the company’s financial position and affairs.
Compensation and Appointments Committee (CAC) Members George L. Farr, Chair Thomas W. Bechtler Peter Forstmoser Bob Scott
Tasks and responsibilities As regards compensation, the Committee ensures the development of a compensation philosophy; it reviews and approves the Group’s compensation and pension plans; it recommends to the Board the amount and composition of remuneration of the members of the Board; it determines the amount and composition of remuneration of the Chairman, the Delegate, the CEO and the members of the Executive Board under consideration of their performance; it approves the total amount available for performance-based compensation; and it ensures compliance with any remuneration disclosure requirements.
In respect of personnel matters, the Committee makes proposals to the Board that ensure an adequate size and a well-balanced composition of the Board; it ensures the development of guidelines for selecting candidates for election to the Board and the Executive Board; it evaluates Board-member candidates and makes recommendations to the Board; it evaluates proposals made to the Board for the appointment and removal of members of the Executive Board; it approves employment contracts with the Chairman, the Delegate, the CEO and the members of the Executive Board; and it reviews executive succession and emergency plans.
Finance and Risk Committee (FRC) Members Rajna Gibson, Chair Walter B. Kielholz Bob Scott
Investments Committee (IC) Members George L. Farr, Chair Bénédict G.F. Hentsch Walter B. Kielholz Jorge Paulo Lemann
In respect of balance sheet issues, the Committee reviews capital adequacy; it reviews strategic asset allocation and its conformity with the risk tolerance level as determined by the Board; it reviews the structure of the balance sheet; it reviews the management of equity capital and the corresponding risk management techniques; it reviews the ratings received from the major rating agencies, takes note of their considerations and reviews management’s reaction and recommendations thereto.
Tasks and responsibilities As regards Group assets, the Committee reviews the principles to be applied in capital investments; it approves the guidelines regulating the use of derivative instruments; it keeps abreast of the other guidelines relating to asset management; it reviews the tactical allocation of assets for the next financial reporting period; it reviews the performance of the asset-managing units, measured against benchmarks; it receives reports on the use of derivative instruments; and it reviews the business relationship of the asset-managing units with their counterparties and the transaction fees.
3.6 Definition of areas of responsibility Swiss Re’s Board of Directors has delegated the conduct of business operations to an Executive Board made up of 18 senior executive officers. Members of the Executive Board are appointed by the coordination and execution of the Group’s business operations. The Executive Board has delegated authority to the Executive Board Committee, consisting of eight members. The Executive Board Committee is responsible for the conduct of dayto -day operational business activities. The Executive Board held seven meetings in 2002, mostly on two consecutive days. Two of those meetings were extended ones for the consideration of strategic issues. The Executive Board Committee has, as a rule, two meetings per month, except when the full Executive Board meets and in holiday seasons. In 2002, it met 17 times.
Board of Directors upon recommendation of the Chief Executive Officer and after consultation with the Compensation and Appointments Committee. The Executive Board is headed by the Chief Executive Officer and comprises his deputy, the heads of the three business groups with the respective division and business unit heads, and the heads of the four divisions of the Corporate Centre. The Executive Board is responsible for the operational management of the Group as well as the
b. Group Internal Audit Within Swiss Re Group, Group Internal Audit provides the Chairman, Board of Directors and Executive Board of Swiss Re with an independent, objective assurance and consulting activity designed to assess the adequacy and effectiveness of the Group’s system of internal control, adding value through improving the Group’s operations.
Group. Group Internal Audit maintains a regular dialogue with the external auditor to share reports and risk issues arising from their respective audits and to coordinate their activities.
c. Compliance Compliance at Swiss Re means the upholding of legal, regulatory and ethical standards by staff throughout the company. Swiss Re fulfils this task based on a Group-wide Code of Conduct that expresses Swiss Re’s core principles and values, providing guidance on their application in all business conduct and stipulating the behavioural requirements applicable to every Swiss Re employee. A Group Compliance Programme defines the role and duties of the compliance officers employed by Swiss Re, who report to the Group Compliance Officer and run local centres of competence whose remit is to maintain Group procedures and local or regional practices. The necessary training of staff and compliance officers in order to attain best practice in compliance matters is carried out regularly at a local and Group level. The Group Compliance Officer provides the Audit Committee with a compliance report on a regular basis, and also reports to the Chief Risk Officer as part of Group Risk Management. The Group Compliance Officer also conducts periodic compliance risk assessments. Management is advised on appropriate control measures, with corresponding action plans being implemented via the Compliance Officer network, and in cooperation with key functions such as Group Internal Audit, Group Risk Management and line management.
Swiss Re Annual Report 200262 4. Executive Board 4.1 Members of the Executive Board
Mr Coomber started his career with the Phoenix Insurance Company. He joined Swiss Re in 1973. Having qualified as an actuary in 1974, he first specialised in the company’s life reinsurance. He was Swiss Re (UK)’s appointed actuary from 1983 to 1990. In 1987 he assumed responsibility for the life division and, in 1993, was made head of the company’s UK operations. Mr Coomber was appointed Member of the Executive Board in April 1995, responsible for the Group’s Life & Health Division. In June 2000, he became a member of the Executive Board Committee. In November 2002, the Board of Directors appointed him CEO with effect from 1 January 2003.
Mr Aigrain, a Swiss and French citizen born in 1954, received a PhD in economics, in 1981, from the Sorbonne, in France, after studying law at the Sorbonne and economics at Dauphine University.
Martin Albers Member of the Executive Board, Head of the Risk Solutions Unit in the Financial Services Business Group
Mr Albers, a Swiss citizen born in 1960, graduated from the Swiss Federal Institute of Technology, Zurich, in 1985 with a degree in engineering, and in 1991 earned an MBA from the JL Kellogg Graduate School of Management at Northwestern University, Chicago.
Mr Albers joined Swiss Re as head of Product Controlling in 1994, after having worked for over three years with Boston Consulting Group. In 1996 he became head of property and casualty business in Canada and, in 1999, in the UK. Mr Albers was appointed to the Executive Board in January 2002. He assumed his current position in June 2002.
Walter Anderau joined Swiss Re in 1998 as head of Group Human Resources. Prior to that, he worked for ten years at Kraft Jacobs Suchard, where he was chairman of the board of Swiss operations, director on the company’s European board and, as vice president corporate affairs, member of the executive board of Kraft (Europe). From 1985 to 1988, Mr Anderau headed Switzerland’s “700th anniversary celebration ” (CH 91). He was appointed to the Executive Board in July 1999 to take on his present position.
Mr Beerli is a member of the board of the Reinsurance Association of America.
Mr Benelli joined Swiss Re on 1 January 2000 as a member of the Executive Board, and was appointed to the Executive Board Committee on 1 January 2002. He first worked in research, financial analysis and fund management for UBS in Zurich, before moving to Bank Leu in 1988, where he headed the financial analysis and portfolio management service centre. He became a member of Bank Leu’s executive board in 1998.
Phillip Colebatch Member of the Executive Board, Head of the Advisory and Capital Markets Unit within the Financial Services Business Group
Mr Colebatch, an Australian citizen born in 1944, received a Master of Science from the Massachusetts Institute of Technology in 1969 and a doctorate in business administration from Harvard Business School in 1973.
Jacques E. Dubois Member of the Executive Board, Deputy Head of the Life & Health Business Group, Chairman & CEO of Swiss Re America Holding Corporation
Mr Dubois joined Swiss Re in conjunction with the company’s acquisition of Life Re in 1999. In June 2000, he was appointed a member of the Executive Board and Deputy Head of the Life & Health Business Group.
Mr Fitzpatrick, a US citizen born in 1956, graduated from the Loyola University of Chicago with a Bachelor of Business Administration in 1979. He is a Chartered Financial Analyst (CFA) (1987) and a Certified Public Accountant (CPA) (1979).
Mr Hendrickson, a US citizen born in 1960, obtained a Master of Science degree in industrial engineering with emphasis on financial analysis and also a Bachelor of Arts in history, both in 1983 from Stanford University.
Mr Kellenberger joined Swiss Re in 1978, holding various assignments in facultative and treaty business within the engineering department. In the early 1980s, he was responsible for Southeast Asia, operating from Hong Kong. In 1990 he was appointed head of the engineering department. In 1993 he was appointed to the Executive Board, responsible for the Northern Europe reinsurance sector and special lines. In 1998 he was appointed Head of Europe Division. On 1 April 2000, he became Deputy Chief Executive Officer. Mr Kellenberger started his career as a project engineer in bridge construction before moving to England, where he worked for a major Swiss construction company.
Walter B. Kielholz Chief Executive Officer until 31 December 2002 Please refer to section 3 above.
Michel M. Liès Member of the Executive Board, Head of the Europe Division within the Property & Casualty Business Group
Mr Lippe joined Bavarian Re in 1983. In 1986 he became head of the non-proportional underwriting department. He was appointed deputy member of the board of management in 1988 and a full member in 1991, when he assumed general responsibility for the company’s operations in the German-speaking area. In 1993 he became chairman of the board of management of Bavarian Re. In 1995 he was appointed a member of Swiss Re’s Executive Board, responsible for the Bavarian Re Group. He was assigned his current position in April 2001.
Mr Ozendo serves as a vice chairman of the Evian Group and is a board member of the International Insurance Society.
Mr Porro, a Swiss citizen born in 1945, graduated from the Swiss Federal Institute of Technology, Zurich, in 1969 as a civil engineer. While in employment, he obtained a doctorate in economics in 1978.
Chris C. Stroup Member of the Executive Board, in charge of the Life & Health Business Group’s North American operations
Mr Stroup, a US citizen born in 1961, received a BSc degree in economics from the University of Pennsylvania in 1983, and a Master of Business Administration from the Columbia University, New York, in 1990.
Mr Stroup, who is also a Certified Public Accountant, has been active in professional societies for a number of years. He has been involved in the American Institute of Certified Public Accountants as well as the Connecticut Society of Certified Public Accountants.
Mr Zaytsev, a US citizen born in 1949, studied engineering and computer technology at the Technical University of Lvov, Ukraine, graduating in 1971 with a master ’s degree in mechanical engineering.
Mr Zaytsev joined Swiss Re in 1992 as head of corporate information resources for US subsidiaries, based in New York. In 1995 he was seconded to head office in Zurich, where he was put in charge of Group Information and Technology and the Group’s Data Centre. Mr Zaytsev was appointed to the Executive Board in 1999 as Group Information Officer. Prior to joining Swiss Re, Mr Zaytsev developed the IT systems for the 1980 Olympic Games in Moscow. He then emigrated to the US, where he first worked as an IT project manager for the retail group Kmart in New Jersey. He then spent seven years working for the American International Group, New York, where he handled the firm’s domestic and international IT applications.
Ann F. Godbehere, a Canadian citizen born in 1955, qualified as a Certified General Accountant in Canada in 1984. Ms Godbehere joined Mercantile & General Re in 1981, where she rose to senior vice president and controller. When Swiss Re acquired M&G, she became Chief Financial Officer of Swiss Re Life & Health, North America. In 1997 she was appointed CEO of Swiss Re Life & Health Canada. She moved to London as Chief Financial Officer of the Swiss Re Life & Health Division in 1998 and joined the Property & Casualty Business Group, based out of Zurich, as CFO in 2001.
With effect from 1 March 2003, Swiss Re simplified its asset management organisation. Capital Partners has been integrated into Swiss Re Asset Management in order to streamline processes and achieve operational efficiencies. In this context, John J. Hendrickson will step down from the Executive Board as of 31 March 2003.
Swiss Re Annual Report 200266 4.3 Management contracts Swiss Re Life & Health America Inc. and one of its direct subsidiaries, both of which are US life insurance subsidiaries of Swiss Reinsurance Company (such US insurance subsidiaries are hereinafter referred to as “Swiss Re Life”), are parties to third party administration contracts (the “TPA Agreement”) with Computer Sciences Corporation or one or more of its affiliates (“CSC”), which is a Nevada-based corporation. The TPA Agreement provides for CSC to deliver substantially all policyholder administration services, including claims services, for an aggregate of approximately 1.8 million direct life insurance policies and annuities of Swiss Re Life and its clients. Pursuant to the TPA Agreement, CSC provides such policyholder administration services at a number of operational sites throughout the United States. The TPA Agreement has various expiration dates depending on the various blocks of insurance business and types of services covered by a particular TPA Agreement. The expiration dates range from 2003 to 2009. Swiss Re Life and CSC are negotiating new agreements to supersede the TPA Agreements currently in existence and expect to conclude such negotiations in 2003 on terms substantially similar to the terms of the current TPA Agreements.
the bonus can be either in cash or shares that are deferred for four years. Furthermore, all Executive Board members are obliged, after a period of four years, to own a minimum of four years’ base salary in shares. For the Chief Executive Officer, the requirement is the equivalent of six annual base salaries.
The Executive Board’s performance assessment is based on annual objectives involving financial and qualitative elements. The bonuses distributed for a year’s service are paid in April of the following year. All amounts disclosed relate to the performance year 2002 with some elements to be credited in April 2003.
Executive Board (18 members) 39.8 Board of Directors (9 members) 1.1 Total 40.9 5. Compensations, shareholdings and loans 5.1 Content and method of determining the compensation and the shareholding programmes Compensation of the Chairman of the Board of Directors, the CEO and other members of the Executive Board is set by the Board of Directors’ Compensation and Appointments Committee. This Committee convenes three to four times a year and presents its proposals to the full Board of Directors for approval. The Committee’s remit also includes responsibility for the compensation philosophy and approving compensation plans.
The total shown includes all the remuneration components except for deferred shares and options, which are shown separately. Cash payments, allowances, value of preferential rates on loans, other financial benefits as well as the amount of actuarial funding needed for pensions are included in this figure. Swiss Re does not have a separate pension plan for members of the governing bodies.
Executive Board members must receive between 25% and 100% of their performancerelated pay in shares. All shares awarded to the Executive Board are subject to a four-year deferral period. The bonus plan provides that the final split between cash and shares has to be elected by April. For the purpose of this disclosure, we assumed a take-up rate of 75% which is in line with experience from prior years. The Swiss Re share has a discounted taxable value of CHF 53.60 for the performance bonus payable in April 2003.
Executive Board (18 members) 325 647 Board of Directors (9 members) 29 591
Two former members of the Executive Board perform periodic services on behalf of the firm. The shares allotted to a former member of the Board of Directors relate to services rendered over several years prior to 2002. The shares are deferred for four years and have a discounted taxable value of CHF 122.40.
Information on Swiss Re’s governance 5. Compensations, shareholdings and loans (continued)
Swiss Re Annual Report 200268 5.7 Additional honorariums and remuneration Nothing to report.
All credit is secured against real estate or shares. All loans, with two exceptions, have a variable interest rate which is 1% below normal market rates. The terms and conditions of loans and mortgages are the same as those available to all Swiss Re employees in the respective location. The preferential interest rates have been factored into the compensation sums given to the governing body members under 5.2.
5.9 Highest total compensation The compensation of the highest paid member of the Board of Directors (Walter B. Kielholz ) during the reporting year can be broken down as follows: The options have an exercise price of CHF 67.65, run for ten years and have a fouryear restriction period during which there is a forfeiture risk. The taxable value per option was CHF 9.55, while the discounted taxable value of the shares was CHF 53.60.
All options have a four-year vesting period during which there is a risk of forfeiture and an exercise period of six years. Each option entitles the beneficiary to purchase one share. The taxable value of the options granted in March 2003 is CHF 9.55.
6. Shareholders’ participation rights 6.1 Voting-right restrictions and representation a. Voting-right restrictions, statutory group clauses, exception rules There are no voting-right restrictions, no statutory group clauses and hence no rules on making exceptions.
b. Reasons for making exceptions in the year under review No exceptions were made.
6.2 Statutory quorums None. The Annual General Meeting of shareholders passes resolutions by an absolute majority of the votes validly cast, subject to the compulsory exceptions provided by law.
6.3 Convocation of the Annual General Meeting of shareholders The statutory rules on the convocation of the Annual General Meeting of shareholders correspond with the legal provisions. Accordingly, the Annual General Meeting of shareholders is summoned at least 20 days before the date of the meeting by notice publicised in the “Schweizerisches Handelsamtsblatt”.
6.4 Agenda The Board of Directors states the matters on the agenda. Shareholders with voting powers whose combined holdings represent shares with a nominal value of at least CHF 1 million may, up to 45 days before the date of the meeting, demand that matters be included in the agenda. Such demands must be in writing and must specify the items and the proposals to be submitted.
7. Changes of control and defence measures 7.1 Duty to make an offer Swiss Re has not taken any defence measures against take-over attempts. The governing bodies believe that the best protection is a fair valuation of the shares. They believe in the efficiency of a free market rather than relying on defence measures that normally have a long-term negative effect on the share price development. Therefore, there are no statutory rules on “opting up” or “opting out”, meaning that should a shareholder reach the threshold of 331/3% of all voting rights, then, pursuant to the Stock Exchange Act, he/she would be required to submit a general take-over offer. (“Opting up” means a statutory rule based on which the triggering threshold would be lifted to a higher percentage, while “opting out” means a statutory rule waiving the legal duty to submit an offer.)
7.2 Clauses on changes of control There are no clauses on changes of control in existence in agreements and plans benefiting members of the governing bodies.
Swiss Re Annual Report 200270 8.1 Duration of the mandate and term of office of the head auditor PricewaterhouseCoopers Ltd were elected as auditors of Swiss Re at the Annual General Meeting of 25 November 1991, known as Revisuisse Price Waterhouse AG at the time.
Mr Michael P. Nelligan and Mr Ray J. Kunz took up office as head auditors responsible for the existing auditing mandate as of 1 January 1997 and 1 July 2001, respectively.
8.3 Additional honorarium In addition to the fees described above, aggregate fees of CHF 3.3 million were billed by PricewaterhouseCoopers during the year ended 31 December 2002, primarily for the following.
Swiss Re maintains a close relationship with the financial community and the broader public by using all available communication channels. Swiss Re’s website includes full details of its corporate disclosure policy. Swiss Re is strongly committed to treating all investors equally. Meetings dealing with important corporate information are held with institutional investors and analysts; they can also be followed by private shareholders via telephone conference or on the Internet.
Swiss Re prevents selective disclosure by observing ad-hoc publicity rules and a strict policy of restrictions for the “Close Period”, during which the financial results are finalised. The Close Period commences on a given date preceding the official publication of the financial results and lasts until such publication has been made. No meetings are held with analysts or investors during this Close Period. In addition, members of the governing bodies, their secretariats and employees preparing or communicating material non-public financial information are subject to Close Period communication and trading prohibitions.
Presentations which are used to present Swiss Re at such conferences are made available to the public on the company’s website.
Date What Method 26 February Report on 2002 renewals News release and “Investors’ Day” meeting in Rüschlikon (telephone conference and webcasting)
10 April Annual Reporting 2001 News release, press conference and analysts ’ meeting in Zurich (telephone conference and webcasting)
6 May 138th Annual General Meeting in Zurich and news release Meeting 12 July Disclosure of life & health News release and telephone conference embedded value 2001 29 August Interim Reporting 2002 News release, press conference and analysts’ meeting in Zurich (telephone conference)
More and more people are living longer. Improved nutrition and medical care, as well as growing awareness of the importance of healthy lifestyles, have joined genetic factors in making life fulfilling into old age.
Other experts assume that a healthy, low-stress, agrarian lifestyle is the main reason why Sardinians outlive most of their peers. Studies on elderly twins suggest that only about 25% of the variance in adult longevity is attributable to genetic differences, the other 75% seems to be related to lifestyle choices and environmental factors. But demographers agree that the ranks of centenarians are rising rapidly as nutrition and health care improve.
Silanus, a small town with 2 500 inhabitants in the interior of the island. Over the past decade four natives have reached the age of 100 here.
Incremental costs to sell, underwrite, and initiate a new insurance contract.
Acceptance of a closed block of in-force life and health insurance business either through acquisition or reinsurance, typically assuming the responsibility to administer the underlying policies. Admin ReSM can also extend to the acquisition of an entire life insurance company.
Management of a business in a way that coordinates decisions on assets and liabilities. Specifically, the ongoing process of formulating, implementing, monitoring, and revising strategies related to assets and liabilities in an attempt to achieve financial objectives for a given set of risk tolerances and constraints.
Insurance of accident and liability risks, as well as hull damage, in connection with the operation of aircraft.
Branch of insurance – mainly comprising accident and liability business – which is separate from property, engineering and life insurance. In the US this term is used for non-life insurance other than fire, marine and surety business.
The work in connection with the investigation, settlement and payment of claims from the time of their occurrence until settlement.
Some of the following terms are explained in more detail in note 1 “Organisation and summary of significant accounting policies“ in the Financial Statements.
Measure of business performance in non-life reinsurance before investment returns. It is calculated as the combination of the claims ratio (sum of claims paid, change in the provision for unpaid claims and claim adjustment expenses in relation to premiums earned) and the expense ratio (sum of acquisition costs and other operating costs and expenses in relation to premiums earned).
Transaction in which policyholders or insurers surrender all rights under an insurance or reinsurance contract in exchange for a single current payment.
Insurance by employers covering employees’ injuries arising out of their employment.
Reserves prescribed by local regulatory authorities for future claim fluctuations and for large and catastrophic losses which are established and included in the unpaid claims and claim adjustment expenses liabilities.
Sum of acquisition costs and other operating costs and expenses in relation to premiums earned.
Reinsurance of the insurer’s risks on an individual basis. The reinsurance company looks at each individual risk and determines whether to accept or decline coverage.
Life insurance, sometimes referred to as life assurance, provides for a payment of a sum of money upon the death of the insured. In addition, life insurance can be used as a means of investment or savings.
Insurance against damage or loss of ships and cargoes; also includes offshore drilling platforms.
Insurance against accident and liability as well as against accidental collision damage in connection with motor vehicles.
Insurance against property damage, liability and accident in connection with the operation of nuclear energy installations.
Amount required to be carried as a liability in the financial statement of an insurer or reinsurer, to provide for future commitments under outstanding policies and contracts.
Fluctuation of actual from statistically anticipated claims experience as a result of technical, social, legal, commercial or political changes.
Certain statements contained herein are forward-looking. These statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact. Forward-looking statements typically are identified by words or phrases such as “anticipate”, “assume”, “believe”, “continue ”, “estimate”, “expect”, “foresee”, “intend”, “may increase” and “may fluctuate ” and similar expressions or by future or conditional verbs such as “will”, “should”, “would” and “could”. These forward -looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others: ■ cyclicality of the reinsurance industry; ■ changes in general economic conditions, particularly in our core markets; ■ uncertainties in estimating reserves; ■ risks and uncertainties relating to our estimates of the losses arising from the 11 September 2001 terrorist attack in the United States; ■ the performance of financial markets; ■ expected changes in our investment results as a result of the changed composition of our investment assets or changes in our investment policy; ■ the frequency, severity and development of insured claim events; ■ acts of terrorism and acts of war; ■ changes in rating agency policies or practices; ■ mortality and morbidity experience; ■ policy renewal and lapse rates; ■ the lowering or loss of one of the financial or claims-paying ratings of one or more of our subsidiaries; ■ changes in levels of interest rates; ■ political risks in the countries in which we operate or in which we insure risks; ■ extraordinary events affecting our clients, such as bankruptcies and liquidations; ■ risks associated with implementing our business strategies; ■ changes in currency exchange rates; ■ changes in laws and regulations, including changes in accounting standards and taxation requirements; and
The web version of the Annual Report 2002 is available in English at www.swissre.com/annualreport.
The Business Report appears separately. See Annual Report 2002 – Business Report.
Income/loss before income tax expense –104 36 Income tax expense 10 –61 –127
Fixed-income securities: Available-for-sale, at amortised cost (fair value: 2001: 60 636; 2002: 61 514) 59 905 59 282 Trading, at fair value (amortised cost: 2001: 636; 2002: 527) 622 517
Premiums and other receivables 13 197 12 397 Reinsurance recoverable on paid and unpaid claims 15 7 854 6 443 Funds held by ceding companies 15 914 18 266
Liabilities Unpaid claims and claim adjustment expenses 7, 15 68 618 62 652 Liabilities for life and health policy benefits 15 41 370 37 269
Shareholders’ equity Common stock, CHF 0.10 par value; 2001: 321 868 120 and 2002: 322 057 870 shares authorised and issued 32 32 Additional paid-in capital 5 757 5 969 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of deferred tax 2 259 –715 Cumulative translation adjustments 1 288 –913
Net income/loss –165 –165 Change in unrealised gains/losses on securities, net (note 2) –3 455 –3 455 Foreign currency translation adjustments 417 417 Dividends –713 –713 Change in own shares (note 9) 31 –31 Capital repayment –117 –117
Net income/loss –165 –91 Other comprehensive income: Foreign currency translation adjustments 417 –2 201 Change in unrealised gains/losses on securities, net –3 455 –2 974 Additional minimum liability, net –82
Equity securities: Proceeds from sale of investments 11 959 13 144 Purchase of investments –11 917 –12 321
Cash flows provided/used by financing activities Issuance of long-term debt 2 838 1 655 Issuance/repayment of other debt 781 747
Capital repayment –117 Dividends paid –713 –776 Net cash provided/used by financing activities 6 795 1 838
Notes to the Group financial statements 1. Organisation and summary of significant accounting policies
The Swiss Re Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company (the parent company, referred to as “Swiss Re Zurich”) and its subsidiaries (collectively, the “Swiss Re Group” or the “Group”). The Group provides reinsurance, alternative risk transfer products and services to insurance companies, clients and others worldwide. Reinsurance and other related products and services are delivered to clients through a network of more than 70 offices in over 30 countries as well as through reinsurance brokers.
The accompanying consolidated financial statements have been prepared in accordance with Swiss GAAP FER and comply with Swiss corporate legislation and include the financial statements of Swiss Re Zurich and its subsidiaries. The presentation requirements of FER 14 have been complied with except that certain financial information has been disclosed in the notes and not in the primary financial statements. All significant inter-company transactions and balances have been eliminated on consolidation.
Interest on fixed-income securities is recorded as income when earned and is adjusted for the amortisation of any purchase premium or discount. Dividends on equity securities are recorded on the basis of the ex-dividend date. Realised gains and losses on sales are included in the income statement and are calculated using the specific identification method.
Investment real estate that the Group intends to hold for the production of income is carried at depreciated cost, net of any write-down for impairment in value. An impairment in value is recognised if the estimated future undiscounted cash flows from the use of the real estate asset are less than its carrying value. Impairments in value, depreciation and other related charges or credits are included in net investment income. Investment 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 net realised investment losses.
Deferred acquisition costs associated with life and health reinsurance business are amortised over the premium-paying period. For investment-type contracts, deferred acquisition costs are amortised in relation to the present value of estimated gross profits.
Notes to the Group financial statements 1. Organisation and summary of significant accounting policies (continued)
Liabilities for life and health policy benefits from reinsurance business are generally calculated using the net level premium method, based on assumptions as to investment yields, mortality, withdrawals and policyholder dividends. Assumptions are set at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. The assumptions are based on projections from past experience, making allowance for possible adverse deviation. Interest assumptions for life and health reinsurance benefits liabilities range from 2.5% to 12%. Assumed mortality rates are generally based on experience multiples applied to the actuarial select and ultimate tables commonly used in the industry. Withdrawal assumptions for individual life reinsurance contracts issued by the Group range from 1% to 20% and are based on historical experience.
Liabilities for investment-type contracts, including separate-account (unit-linked) life reinsurance business, are based either on the contract account balance, if future benefit payments in excess of the account balance are not guaranteed, or on the present value of future benefit payments, if such payments are guaranteed. 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.
Basic earnings per common share are determined by dividing income/loss available to common shareholders by the weighted average number of common shares entitled to dividends during the year. Diluted earnings per common share reflect the effect on earnings and average common shares outstanding associated with dilutive securities.
Net investment income by source was as follows: CHF millions 2001 2002
Equity securities 414 358 Mortgages and other loans 683 651 Real estate 109 96 Short-term investments 322 106 Other current investments 40 66 Equity in earnings of equity-accounted investees 335 68 Cash and cash equivalents 73 69 Deposits with ceding companies 817 923
Net realised gains on other investments 238 1 081 Value readjustments 7 205 Value adjustments –670 – 4 078 Net realised investment gains/losses 2 665 –515
Realised gains and losses include the change in market value of trading fixed-income securities and of derivative financial instruments except for those classified as cash flow hedges.
Amortised cost or cost and estimated fair values of investments in fixed-income and equity securities classified as available-for-sale were as follows: Gross Gross As of 31 December 2001 Amortised unrealised unrealised Estimated CHF millions cost or cost gains losses fair value
Debt securities issued by governments and government agencies: Mortgage and asset-backed
Gross Gross As of 31 December 2002 Amortised unrealised unrealised Estimated CHF millions cost or cost gains losses fair value
The Group’s investment portfolio at carrying value comprises concentrations in the following major currencies: As of 31 December 2001 CHF millions USD EUR GBP CHF CAD Other Total
As of 31 December 2002 CHF millions USD EUR GBP CHF CAD Other Total
As of 31 December Amortised Estimated Amortised Estimated CHF millions cost or cost fair value cost or cost fair value
Due in one year or less 2 317 2 345 1 908 1 922 Due after one year through five years 20 876 21 122 19 757 20 237 Due after five years through ten years 14 643 14 736 17 559 18 169
As of 31 December 2001 and 2002, securities with a carrying value of CHF 509 million and CHF 552 million, respectively, were on deposit with regulatory agencies in accordance with local requirements.
As of 31 December 2001 and 2002 investments in mortgage and other loans, real estate and investment for separate-account business comprised the following: As of 31 December 2001 2002 CHF millions Carrying value Fair value Carrying value Fair value
The Group’s investment in mortgages and other loans included CHF 1587 million and CHF 1 676 million of mortgage participations associated with linked investment contracts as of 31 December 2001 and 2002, respectively. Contract-holders bear all investment risk related to mortgage participations. Fair value for other loans is considered to be equal to carrying value.
As of 31 December 2001 and 2002, investments in real estate included CHF 10 million and CHF 37 million, respectively, of real estate held for sale.
The Group has constructed or is in the process of constructing buildings for both own-use and investment purposes. This has resulted in the transfer of CHF 336 million from own-use property to investment property. The Group has transferred the investment in Partner Reinsurance Company from affiliated companies to equity securities following the disposal of part of that investment.
Cash and cash equivalents include short-term deposits with a carrying value of CHF 3544 million and CHF 1334 million as of 31 December 2001 and 2002, respectively.
The notional or contractual amounts of derivatives given below represent a standard of measurement of the level of involvement in these types of transactions and are not a quantification of market risk or credit risk. Notional amounts represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps.
The contract or notional amounts reported under Credit derivatives for 2001 and 2002 are largely (80% and 67%, respectively) portfolio credit default swap structures underwritten by the Credit Solutions Business Unit of the Financial Services Business Group. In such structures, under which the Group primarily sells credit protection, the protection buyer in most cases retains a first-loss position (or deductible). The Group is typically exposed only once the aggregate credit losses in the portfolio (net of any recovery amount) exceed this retained first-loss position. Each portfolio credit default swap can be tranched into layers of increasing credit quality, from “equity” (ie first-loss position) to “SuperSenior ” (ie with better than “AAA” quality). The Group has over 85% of its notional exposure assigned to the “Super-Senior” category.
The remaining 33% reported under Credit derivatives are credit default swaps on the trading book of the Advisory & Capital Markets Business Unit. This figure is reported as the sum of outstanding positions, therefore inflating the notional values of all hedged positions. A considerable amount of credit default swaps in the trading book are hedged with offsetting positions. However, the business unit does maintain open long and short positions in credit default swaps and related instruments as part of its trading function.
Equity and index contracts Forwards and futures 1 332 21 –118 –97
Contract/ Carrying As of 31 December 2002 notional Positive Negative value assets/ CHF millions amount fair value fair value liabilities
During the years ended 31 December 2001 and 2002, goodwill of CHF 368 million and CHF 350 million, respectively, was amortised.
As of 31 December 2001 and 2002, the balance of accumulated goodwill amortisation was CHF 945 million and CHF 1131 million, respectively.
5. Deferred acquisition costs and acquired present value of future profits
The Group has reclassified certain amounts principally related to the finalisation of the individual components of the Lincoln Re purchase transaction. These reclassifications had no impact on net income or net equity.
The Group has not recognised the effect of fixed-income securities unrealised gains and losses on PVFP in 2002 as the corresponding securities are valued at amortised cost. If the unrealised gains and losses on fixed-income securities had been recognised, then the adjustment to PVFP would have been a reduction of CHF 390 million. The effect of change in unrealised gains and losses of CHF 121 million in 2002 reflects the reversal of the effect on unrealised gains and losses on fixed-income securities from prior years.
The percentage of the PVFP which is expected to be amortised in each of the next five
+5.01% 2007 Trust-preferred Stock (TruPs)2 1997 USD 42 8.720% 73 2008 Private Placement (step-up) 2001 CHF 100 3.600% 100 2013 Index Linked Notes 2001 USD 10 Index 14
– Subordinated Perpetual Loan 1998 CHF 300 6M Libor 2008 300
Interest expense on long-term debt for the years ended 31 December 2001 and 2002, respectively, was as follows: CHF millions 2001 2002
Senior financial debt 81 104 Senior operational debt 9 42 Subordinated financial debt 92 132
In June 1999, the Group issued CHF 600 million in subordinated perpetual debt, with an interest rate of 3.75% for 12 years, resetting to six-month Libor plus 100–140 basis points thereafter, depending upon the rating of Swiss Re.
In June 1999, the Group also issued USD 530 million of exchangeable notes with a five-year term, bearing interest of 2.25% payable annually. The notes are exchangeable at the noteholders’ option for shares of Swiss Re, Credit Suisse Group or Novartis AG.
During 2001, the Group issued two private placements in Switzerland. The first private placement was issued in June in the amount of CHF 100 million and is due in 2008 with a coupon of 3.60%. In September, an additional private placement of CHF 100 million was issued maturing in 2006 with a coupon of 3.25%.
In November 2001, concurrent with its global equity offering, the Group issued USD 1 150 million of subordinated convertible bonds. The bonds have a maturity of 20 years and a fixed coupon of 3.25% during the first 10 years, which will be reset to a floating six-month Libor plus 180 basis points for the last 10 years. Up to and including 21 November 2011, the bonds can be converted into Swiss Re shares at a price of CHF 207.19 per share with a fixed USD exchange rate of 1.6641. The bonds have been issued by the Group and are unconditionally and irrevocably guaranteed on a subordinated level.
In June 2002, the Group issued USD 255 million of insurance-linked securities which provide for Swiss Re to receive payments if specified large natural catastrophe events occur. USD 209 million of these securities was placed with institutional investors at 31 December 2002 with an average interest rate of three-month Libor + 5.01% maturing in 2006.
A reconciliation of the beginning and ending reserve balances for asbestos, environmental and other long-latent liability claims and claim adjustment expenses for the periods presented is as follows: CHF millions 2001 2002
Provisions for long-latent injury claims outstanding on 31 December 2002 reflect the estimated future trend of claims payments and claims settlement charges. Due to the inherent uncertainties and assumptions on which these estimates are based, however, the Group cannot exclude the need to make further additions to these provisions in the future.
Basic earnings/losses per share Income/loss available to common shares –165 –91 Weighted average common shares outstanding 288 236 721 310 335 772 Net income/loss per share in CHF –0.57 –0.29
Diluted earnings/losses per share Income/loss available to common shares assuming debt conversion and exercise of options –165 –91 Weighted average common shares outstanding 2288 236 721 310 335 772 Net income/loss per share in CHF –0.57 –0.29
Own shares held as of 1 January at cost 1 499 080 249
Sales –842 140 –136 Realised gains 7 Own shares held as of 31 December at cost 1 311 772 218 Own shares held as of 31 December at market value 1 311 772 220
Sales –999 841 –157 Realised losses –61 Own shares held as of 31 December at cost 824 664 75 Own shares held as of 31 December at market value 824 664 75
Current taxes 3 162 Deferred taxes 58 –35 Income tax expense 61 127
Unrealised losses on investments 563 698 Benefit on loss carryforwards 1 145 1 725
Amendments –5 –35 –4 Actuarial gains/losses 88 89 –17 29 Benefits paid –112 –98 –8 –13 Acquisitions/disposals –257 59 Reclassification 137 –4 Foreign currency translation adjustments –4 –118 –1 –28 Benefit obligation as of 31 December 2 753 3 034 480 523
Fair value of plan assets as of 1 January 3 474 2 843 Actual return on plan assets –231 –283
Unrecognised prior service cost 53 48 –60 –56 Unrecognised transition obligation/asset –87 –62 Additional minimum liability, gross –106 Net amount recognised 176 166 –480 –491
Amounts recognised in the balance sheet consist of Prepaid benefit cost 389 436 Accrued benefit liability –213 –270 –480 –491 Net amount recognised 176 166 –480 –491
Expected return on assets –197 –174 Amortisation of: Net gain/loss –11 –6 1 2 Prior service cost 6 4 –1 –5 Transition obligation/asset –25 –25
Expected return on plan assets in % 5.8 5.8 Rate of compensation increase in % 3.3 3.0 Medical trend – initial rate in % 7.5 7.4 Medical trend – ultimate rate in % 4.7 4.5
Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one-percentage-point change in assumed health-care cost trend rates would have had the following effects for 2002: 1percentage 1percentage CHF millions point increase point decrease
Effect on total of service and interest cost components 16 –12 Effect on post-retirement benefit obligation 84 –66
As of 31 December 2001and 2002, the Group had the stock-based compensation plans described below.
Under the fixed option plan, the Group may grant options for a certain number of Swiss Re shares to members of the Executive Board and to certain members of management each year. Under the plan, the exercise price of each option equals the market price of the shares on the date of the grant. Options issued vest at the end of the fourth year and have a maximum life of ten years.
Weighted average fair value of options granted during the year per share 43 36
The Group does not recognise compensation expense for these options. If compensation expense for the options had been recognised, the Group’s net income/loss and earnings/ losses per share would approximate the pro-forma amounts in the following table: CHF millions 2001 2002
The employee compensation expense reflects the four-year vesting period of options. Previously the cost of options was recognised in full in the year of grant.
As a participant in limited investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnerships for periods of up to 10 years.The total commitments remaining uncalled as of 31 December 2001 and 2002 were CHF 1 176 million and CHF 1 104 million, respectively.
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.
Notes to the Group financial statements 15. Information on business segments
The Property & Casualty Business Group ceased underwriting credit, surety and aviation business during 2001. The Financial Services Business Group is now solely responsible for underwriting these lines of business. Contracts written before this change will continue to be managed by the business group that underwrote them until expiry, as will the run-off from the related claims liabilities. Accordingly, the prior periods have not been restated.
The Financial Services Business Group presents certain income statement items in a different format to the Group. These items are reclassified to the Group income statement format in the reconciliation column. The main reclassifications are to allocate certain fee income from fees and commissions and trading revenues to net investment income and certain investment expenses from other operating costs and expenses to net investment income. Certain trading revenues have also been allocated to net realised investment gains. The reclassifications do not affect operating income. 2001 has been restated accordingly.
Trading revenues –54 54 Fees, commissions and other revenues 567 140 –252 455
Amortisation of goodwill –368 –368 Other operating costs and expenses –706 –564 –1 267 –450 –682 285 –3 384 2002 Property & Life & Financial Corporate ReconciliCHF millions Casualty Health Services Centre Other ation Total
Net realised investment gains/losses –611 –28 –339 259 204 –515 Trading revenues 217 –217 Fees, commissions and other revenues 456 97 –188 365
Expenses Claims and claim adjustment expenses; life and health benefits –11 587 –10 084 –2 898 –24 569
Premiums, claims and claim adjustment expenses and acquisition costs are reported net of retrocession in the Group’s income statement. Gross, retroceded and net amounts for these items were as follows: 2001 Property & Life & Financial CHF millions Casualty Health Services Total
Change in unearned premiums, gross –579 –7 69 –517 Change in unearned premiums, retro 8 –88 –80
Unpaid claims and claim adjustment expenses, liabilities for life and health policy benefits and unearned premiums are reported gross in the Group’s balance sheet. Gross and retroceded amounts for these and other items were as follows: 2001 Property & Life & Financial CHF millions Casualty Health Services Total
Deferred expense on retroactive reinsurance1 1 246 1 136 2 382
Unpaid claims and claim adjustment expenses Unpaid claims and claim adjustment expenses 46 011 10 825 10 397 67 233 Equalisation reserves 1 385
Unpaid claims and claim adjustment expenses Unpaid claims and claim adjustment expenses 39 826 11 975 9 495 61 296 Equalisation reserves 1 356
Life and health policy benefits 37 269 37 269 1 These balances are included in other assets. 2 These balances are included in reinsurance balances payable. 3 These balances are included in accrued expenses and other liabilities.
d) Property & Casualty Business Group – by line of business
Expenses Claims and claim adjustment expenses –5 013 –2 685 –2 406 –690 –2 261 –13 055 Acquisition costs –1 117 –712 –702 –261 –579 –3 371 Other operating costs and expenses –233 –156 –129 –68 –120 –706
Certain business which provides principally critical illness benefits has been reclassified from Life to Health. Prior period amounts have been restated to reflect this change.
Notes to the Group financial statements 15. Information on business segments (continued)
f) Financial Services Business Group – by business unit 2001 Risk Credit Advisory & Asset CHF millions Solutions Solutions1 Capital Markets Management Total
Expenses Claims and claim adjustment expenses –2 850 –391 –3 241 Acquisition costs –125 –85 –15 –225
Financial 2002 Risk Credit Advisory & Asset CHF millions Solutions Solutions1 Capital Markets Management Total
Operating income/loss –175 –434 –4 –20 –633 1 Credit in 2001 included the results of NCM, the credit insurer which the Group sold as of 31 December 2001. The consideration included an equity share in the newly formed Gerling NCM company.
The Advisory & Capital Markets Business Unit provides marketing services to the Risk Solutions and Credit Solutions business units, and includes the fees charged in fees and commissions. The Asset Management Business Unit provides investment management services to other business units, and includes the fees charged in fees and commissions.
CHF millions 2001 2002 h) Gross premiums written by line of business
Switzerland Diax Holding 286 25.50 e European Reinsurance Company of Zurich 312 100 f Schweiz Versicherung 7 100 f Swiss Re Asset Management (Switzerland) AG 15 100 f Swiss Re Partnership Holding AG 0 100 f Xenum Finance AG 1 42.50 e
Netherlands Algemene Levensherverzekering Maatschappij NV 7 100 f Pension Factory NV 1 80 f Swiss Re Life & Health Nederland NV 5 100 f Swiss Re Nederland Holding BV 1 100 f
Barbados Atlantic International Reinsurance Company Ltd 6 100 f European Finance Reinsurance Company Ltd 7 100 f European International Holding Company Ltd 226 100 f European International Reinsurance Company Ltd 220 100 f Gasper Funding Corporation 0 100 f Joneswood Reinsurance Company Ltd 43 100 f Stockwood Reinsurance Company, Ltd 1 100 f
Bermuda Englewood Ltd 0 100 f Fields Holding Company Ltd 14 100 f Life Re International, Ltd 0 100 f Parkwood Reinsurance Company Ltd 27 100 f Swiss Re Capital Management (Bermuda) Ltd 0 100 f SwissRe Finance (Bermuda) Ltd 0 100 f SwissRe Investments (Bermuda) Ltd 0 100 f
United States Conning Corporation and group companies 0 100 f Facility Insurance Corporation 7 100 f Facility Insurance Holding Corporation 0 100 f Fort Wayne Health & Casualty Insurance Company 10 100 f Life Re Capital Trust I 4 100 f Life Re Capital Trust II 6 100 f Lincoln National Reassurance Company 4 100 f North American Capacity Insurance Company 6 100 f North American Elite Insurance Company 5 100 f North American Specialty Insurance Company 17 100 f Old Fort Insurance Company, Ltd 1 100 f Reassure America Life Insurance Company 3 100 f Southwestern Life Insurance Company 4 100 f Swiss Re America Holding Corporation 0 100 f Swiss Re Asset Management (Americas) Inc 51 100 f Swiss Re Atrium Corporation 1 100 f Swiss Re Capital Markets Corporation 7 100 f Swiss Re Capital Partners (US) Inc 0 100 f Swiss Re Financial Products Corporation 0 100 f Swiss Re Financial Services Corporation 0 100 f Swiss Re Life & Health America Holding Company 0 100 f Swiss Re Life & Health America Inc 6 100 f Swiss Re Management Corporation 0 100 f Swiss Reinsurance America Corporation 8 100 f Underwriters Re Group, Inc 0 100 f Washington International Insurance Company 6 100 f
Hong Kong, China Swiss Re Asset Management (Asia) Ltd 0 100 f
As auditors of the Group, we have audited the consolidated financial statements (income statement, balance sheet, statement of shareholders’ equity, statement of comprehensive income, statement of cash flow and notes to the Group financial statements / pages 3 to 52) of Swiss Re Group for the year ended 31 December 2002.
The business year was characterised by the continuing adverse trends of world stock markets with a considerable negative impact on the investment result. The negative development of the investment result was partly offset by the release of a valuation provision. After-tax profit for the financial year based on the Swiss legal accounting regulations amounted to CHF 106 million, compared to CHF 930 million in the previous year.
Net premiums written, which under the new accounting policy includes pipeline premiums, increased to CHF 15 751 million. A sizeable share is related to intra-Group business. The net result was improved by CHF 704 million to a loss of CHF 1 504 million. In 2001 an amount of CHF 1 262 million was released from the equalisation reserve, compared to a release of CHF 22 million in the current year.
The investment result decreased by CHF 3 934 million to a loss of CHF 733 million. Investment income, consisting of current income and realised gains, decreased by CHF 2 446 million to CHF 3 144 million.
Liabilities from technical account rose by 14% to CHF 35 422 million. Part of this increase is related to the change in accounting policy, since all positions are reported on a gross basis for 2002. More than 90% of the liabilities are technical provisions; the remainder refers to accounts payable and cash deposits. The equalisation reserve as at 31 December 2002 amounted to CHF 412 million.
Investment expenses –1 649 –3 272 Allocated investment return –740 –605 Investment result 3 201 –733
Assets from technical and deposit account Debtors from technical account 3 021 6 062 Deposits from technical account 4 928 6 748 Other assets from technical account 660 1 054 Debtors from deposit account – 652 Deposits from deposit account – 331 Total assets from technical and deposit account 8 609 14 847
Liabilities 4 Liabilities from technical and deposit account 31 022 36 637
Shareholders’ equity 5 Share capital 32 32 Reserve for own shares 218 137 Other legal reserves 650 650
The allocated investment return includes the actual investment income which can be directly attributed to the reinsurance business. In addition, it contains the investment return generated on the investments covering the technical provisions. The interest rate reflects the currency-weighted, five-year average yield on five-year government bonds.
The taxes relate to the financial year and include taxes on income and capital as well as indirect taxes. Value-added taxes are included in the respective expense lines in the income statement. The taxes attributable to foreign branches are included on the basis of local financial statements.
The following assets are stated at cost, less necessary and legally permissible depreciation: – Land and buildings/own-use property (purchase or construction cost) – Investments in subsidiaries and affiliated companies – Equity securities and fixed-income securities – Derivative financial instruments
These assets are not subject to revaluation. Discounted securities are valued at their amortised cost. The valuation rules prescribed by the Swiss insurance supervisory authority are observed.
The following items are stated at nominal value in the balance sheet, after deduction of known credit risks if applicable: – Loans to subsidiaries and affiliated companies – Mortgages and loans – Short-term investments – Debtors and deposits from technical and deposit account – Cash at bank and in hand
The technical provisions are valued in accordance with the following principles: Premiums written relating to future periods are stated as unearned premium reserves and are normally calculated by statistical methods. The accrual of commissions is determined analogously and is reported in the position ‘Other assets from technical account’.
Cash deposits withheld from retrocession as well as debts and other liabilities are stated at redemption value. The liabilities from derivative financial instruments are valued using the same principles applied for the derivative financial instruments included under investments.
Foreign currency translation All items denominated in foreign currencies are translated into Swiss francs. Balance sheet figures are translated at the currency exchange rates applicable on the balance sheet date and, in the income statement, figures are stated at the average exchange rates of the year under report.
The currency exchange rates applicable for key currencies are shown on page 15.
Change in unearned premium reserves –463 –2 –465 –1 571 9 – 1 562
Other technical income and expenses –1 –1 –2 19 –53 –34 Result from cash deposits 221 –21 200 457 –13 444
Result from technical and deposit account1 –2 208 –1 504 1 2002 including transition impact of CHF –40 million
Income from land and buildings 96 98 Income from subsidiaries and affiliated companies 949 614 Income from equity securities 141 139 Income from fixed-income securities, mortgages and loans 389 354 Income from short-term investments 24 27 Income from investment services – 1 Realised gains on sale of investments 3 991 1 911
Cash deposits withheld from retrocession – 302 302 – 226 226
Payables from deposit account – 1 147 Deposits from deposit account – 68 Total liabilities from deposit account – 1 215
Shareholders’ equity on 31 December after allocation of profit 10 169 9 977 1 Board of Directors’ proposal to the Annual General Meeting of 12 May 2003
From other allocations 299 299 Shareholders’ equity on 31 December after allocation of profit 10 169 9 977
Contingent liabilities, mainly towards Group companies, amounted on 31 December 2002 to CHF 3 181 million (2001: CHF 2 272 million). In addition there were 24 unlimited guarantees; 20 of these are for obligations of Group companies. No payments are expected under these guarantees.
Remaining contract term up to 1 year 0 1 Remaining contract term up to 5 years 4 13 Remaining contract term more than 5 years 4 2
To secure the technical provisions on the 2002 balance sheet date, securities in the amount of CHF 4 752 million were deposited in favour of ceding companies (2001: CHF 2 579 million).
The insurance value of tangible assets, comprising the real estate portfolio and other tangible assets, amounted on 31 December 2002 to CHF 2 554 million (2001: CHF 2 644 million).
The company has the following outstanding bonds: 33/4% interest, CHF 500 million, 2 July 1997–2007 33/4% interest, CHF 600 million, perpetual from 15 June 1999 but no less than 12 years. These bonds are included in the item debts.
The Annual General Meeting on 31 May 2001 approved the creation of conditional capital as follows: an amount of CHF 900 000 for conversion rights and warrants granted in connection with bonds and similar financial instruments issued by the company or by Group companies; and an amount of CHF 700 000 for employee participation purposes of which, as per 31 December 2002, CHF 36 948 was issued (2001: CHF 17 973).
The undisclosed reserves on investments in securities and participations, as the difference between cost or lower market valuation and the book values, and other financial provisions decreased by a net amount of CHF 3 654 million in the year under report.
Capital Group Companies Inc., Los Angeles, informed the SWX Swiss Exchange on 24 June 2002 that it holds 5.06% of Swiss Re’s voting rights on behalf of funds and clients. As no more information about these shareholders is available, Swiss Re is unable to track, on its own, changes in Capital Group’s holdings.
If the Board of Directors’ proposal for allocation of profit is accepted, a dividend of CHF 1.00 per share will be paid.
These financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.
We recommend that the financial statements submitted to you be approved.
Net realised investment gains/losses 1 281 2 509 3 588 4 275 2 665 –515
Expenses Claims and claim adjustment expenses –8 057 –8 514 –9 333 –12 153 –16 266 –14 485
Earnings/losses per share in CHF 5.90* 7.35* 8.55* 10.39* –0.57 –0.29 *Adjusted by 20-for-1share split
Net income per share (EPS)1 in CHF 5.90 7.35 8.55 10.39 –0.57 –0.29
Average daily trading volume in CHF millions 131 168 129 133 167 166 124
Stock market capitalisation3 in CHF millions 39 942 51 236 46 801 55 336 51 802 28 151 21 727
The figures 1997–2000 have been adjusted by the 20-for-1 share split in 2001 1 Per share entitled to dividend 3 Based on shares entitled to dividend 2 All data as of 19 March 2003 4 Subject to approval at the Annual General Meeting of 12 May 2003
Number of unregistered shares 111 641 863 36.0 Number of shares entitled to dividend 310 379 068 100.0
Share RUKN VX RUKN RUKZn.S ADR, Level 1 SWCEY US SWCEY
The Annual Report 2002 summary is available in English, German, French, Italian, Spanish and Portuguese.
Annual Report 2002 Financial Statements Swiss Reinsurance Company Mythenquai 50/60 P. O. Box CH-8022 Zurich Switzerland publications@swissre.com