 Swiss Re  Swiss Market Index  Dow Jones STOXX 600 Insurance 1 2005–2008 figures are based on US GAAP, and 2004 on Swiss GAAP FER
Who we are: Swiss Re is a leading and highly diversified global reinsurer. We combine financial strength and unparalleled insurance expertise with real commitment to our clients. What we do: We offer a comprehensive range of reinsurance solutions to manage risk. Our aim is to create sustainable value for both clients and shareholders. How we do it: Our strong business position is founded on expertise, dialogue with clients and sound governance. We attract, develop and inspire the best talent to advance our performance and deliver innovative solutions.
In view of extreme financial market turbulence and a higher natural catastrophe burden faced by the insurance industry, Swiss Re delivered a strong underwriting performance in our Property & Casualty and Life & Health business. However, the result was severely impacted by investment results. The sobering analysis is that even though we introduced corrective measures during 2008, in retrospect, we should have acted faster to de-risk the asset side of our balance sheet. All financial market activities that are not insurance-related have been terminated or put in run-off. We continue to focus on reduction of risk in our investment portfolio.
We are disappointed to have to report a loss for the year: 2008 ends with a net loss of CHF 0.9 billion and a severe reduction in the book value per share to CHF 60.96.
However, we take to heart the criticism that we have to further de-risk our investment portfolio. We must ensure the resilience of our balance sheet and protect the company’s long-term financial strength. Our challenge is to ensure that we are taking the necessary actions to build a stronger firm for the years to come.
Life & Health produced a benefit ratio of 85.5% and it is encouraging that we expect higher return on capital employed from the new business written. In a highly competitive market for life reinsurance, we are proud to report that our market share of new business, coupled with better pricing, improved in the Americas.
Reduce asset risk We disbanded our former Financial Markets division to establish two new units: Asset Management and Legacy. Asset Management has two core strategic mandates: to manage the assets generated through (re)insurance activities and match them to the benchmark set by reinsurance liabilities; and to work closely with the Client Markets and Products Underwriting teams to provide insurance-related solutions to our clients.
We are further seeking your approval to increase capital to provide the Board of Directors with the flexibility to raise up to CHF 2.0 billion. Given the need to strengthen the capital position of the Group, we propose to reduce the dividend to CHF 0.10.
Life & Health Backed by our strong balance sheet and global diversity, we are a leading provider of reinsurance to life insurance companies worldwide. Using specialist knowledge of global mortality and morbidity trends, we support clients with sustainable, pragmatic solutions.
Expertise in all forms of insurable risk; ̤ An integrated product offering, combining ̤ risk and capital management elements; Clear presentation of the true cost and ̤ benefit of different options, based on firm data and realistic models; Superior scale and financial capacity to ̤ take on risk; and Ability to respond to changing risk ̤ landscapes with sustainable solutions.
A reputation for reliability and integrity ̤ built up over the past 145 years; Products and services backed by financial ̤ strength ratings that are among the best in the industry; and Strong business and value proposition. ̤
How we add value Our clients demand value. This is real value beyond matching products and services to what we perceive to be their needs. Clients want to better understand and manage their own risks and capital. They want reinsurance products that help them pursue greater business opportunities.
From left: Raj Singh Andreas Beerli Stefan Lippe George Quinn Jacques Aigrain Brian Gray Michel M. Liès David J. Blumer
/EC Member of the Executive Committee /EB Member of the Executive Board
Stefan Lippe/EC Chief Executive Officer (as of 12 February 2009) Chief Operating Officer
We are an industry leader in (re)insurance. We aim to stay ahead by catering to our clients’ needs and focusing on what we do best: writing insurance risk and investing the premiums we receive.
In response to this crisis, we de-risked our balance sheet and disbanded our Financial Markets division in 2008. Our priorities are geared towards reinforcing our financial strength to support our clients in a challenging economic environment, further reducing capital allocation to investments and simplifying our business model.
Asset Management focuses on two main mandates. The primary mandate is to manage the assets generated through reinsurance activities. The secondary mandate is to provide capital market solutions for insurance risks to our clients, complementary to our traditional reinsurance solutions. Other capital market activities have been discontinued or put in run-off in the Legacy unit. The Legacy unit focuses its efforts on accelerating the natural run-off of these activities.
Innovation is not an isolated process at Swiss Re; it is integral to our daily work. Our commitment to accurate and timely identification of risk and our cooperative approach to product development – working with clients, brokers and partners to develop customised solutions – naturally generate innovation. A changing world constantly presents new risks and opportunities – our job is to anticipate, not just respond to them.
The ExEP product protects our clients against the financial consequences of a major loss, such as a sudden increase in insurance premiums. Traditional aviation insurance markets tend to overreact following a catastrophic loss, resulting in such an increase the following year. An analysis of 20 of the largest losses over the past 13 years showed that the average premium increase was 79%.
In addition to mitigating the additional cost burden following a catastrophic aviation event, ExEP protects our clients against hidden costs not covered by traditional
insurance policies, including the use of emergency services, consequential losses and marketing/public relations efforts.
In Italy, we secured an innovative placement for fire and earthquake covers. These protect real estate assets that serve as collateral for reverse mortgages sold by a leading financial institution. We also arranged a private variable annuity placement – the first of its kind in continental Europe – for a large Italian insurance company.
Agriculture Our Environmental & Commodity Markets unit continues to generate innovative ideas in fields ranging from agricultural insurance to emissions trading and weather derivatives, effectively combining our global expertise with local market needs.
Swiss Re firmly believes that listening carefully to our customers and working in close partnership with them is critical to ensuring their long-term loyalty and financial success. We conduct surveys, focus groups and one-on-one client visits to constantly gauge the quality of the services we provide to clients, brokers and business partners.
We measure our clientsʼ loyalty by using the Net Promoter® methodology, which asks the question: “How likely are you to recommend us to a business associate or colleague?”. Using this methodology, combined with qualitative analysis, we annually survey more than 20 000 customers worldwide to directly capture their feedback. The surveys give us insight into the key drivers of customer service and loyalty and have led to internal improvement projects to increase client satisfaction.
This continued focus on our service to clients is beneficial to our customers and also to our strategic objective of turning our customers into promoters of our business.
Ignacio Gil AntÓn, GNP’s Commercial Lines Head, called on Swiss Re’s expertise and resources to develop a customised risk transfer solution that allowed GNP to decrease volatility of its results. The result: a quota share arrangement in which GNP transferred a large part of its natural catastrophe risk to Swiss Re. This benefits both companies in terms of market participation and results stability.
How did Swiss Re help your company achieve its financial targets? We asked Swiss Re to help us optimise our capital position following a spate of natural catastrophes, combined with adverse development from prior years. Our aim was to reduce capital requirements and volatility of our results. Their experts looked at our books, our market position and our growth potential and offered us proportional reinsurance cover to mitigate the risk of earthquake and hurricane.
But GNP’s relationship with Swiss Re goes beyond pure risk transfer. Swiss Re is a business partner with a truly holistic approach; ours is a strong alliance in which both parties benefit from each other. We rely on Swiss Re’s financial strength, expertise and capacity to achieve our financial and growth targets.
Which of Swiss Re’s capabilities made the most difference to you? Swiss Re’s technical expertise, financial strength and integrated approach to risk management are undoubtedly valuable assets. From the planning process to the actual risk placement, we work together to find a solution that suits our needs.
How would you summarise Swiss Re’s service? Reliable, innovative and customer focused.
Where could Swiss Re improve its response to your needs? We believe that the claims processing function could be optimised. We are already working with the local Swiss Re team to find ways to improve claims assessment and processing time that will ultimately benefit GNP’s client base.
After discussions between senior executives at IAG and the Head of Swiss Re’s Australia & New Zealand unit, Swiss Re developed a way to reduce the P & L effect of natural perils losses without the financial impact of a retention buy-down option on its catastrophe cover. The result was an innovative multiyear solution. The new cover enabled IAG to reduce its maximum event retention whilst ensuring it was not penalised for its recent loss history.
How did Swiss Re help your company achieve its financial targets? IAG faced a year of varied challenges. Over the course of the past 12 months, we looked to Swiss Re for a number of solutions including those that stabilised earnings,
aided in our capital management or facilitated new product development. In each case Swiss Re was able to respond with a range of options or structures that gave us the flexibility we desired.
Assist in the training and development of our staff. Reinsurance skill is a rare resource and we would highly value training and development assistance.
How can Swiss Re help you with the challenges you face in 2009? With the impact of the current economic environment and the particular nature of the Australian investor base, we have for some time been looking at protections that reduce the volatility of our earnings. Given Swiss Re’s intimate knowledge of our portfolio, we would like to continue to work together to model options that would assist us in doing just that.
Risk landscapes change. That’s why we have to manage them: from detecting first signals, through mapping and modelling, to assessing which risks may have a major impact on our clients’ businesses and our own balance sheet.
Using models alone to represent emerging or complex risks creates a danger of false certainty as well as an unrealistic sense of control. That is the reason we often take a scenario approach: to explore how a risk situation might unfold and see what could happen, recognising that outcomes which at first sight may seem implausible – may still be possible.
The first step in assessing emerging risks is to systematically review them and translate them into quantifiable information. We want to be anticipatory and pre-emptive in our response, which means prioritising risks, evaluating their impact and making recommendations on how new insurance products or mitigation can support our clients’ business. The three key methodologies we use within the SONAR framework are described below.
Rapid Risk Research Since early 2007, we have conducted 24 Rapid Risk Research studies on topics from dam failures to food contamination, space debris to Thames flooding. Here we shine a spotlight on a specific risk, gather experts and ask them what its impact could be on all lines of business. Such focused investigations also incorporate desk research, quantitative analysis and a review of existing contract wording. This proactive approach helps us combine existing knowledge with creative thinking to avoid surprises and spot new business opportunities.
Insurance has a role in answering the challenge of interlinked risks. In the case of climate change, we not only collaborate with our clients to understand the risks and mitigate the effects of global warming within their risk portfolios, we are also actively involved in clean energy funds and in advising communities on how to deal with the challenges of climate adaptation. In agriculture, we are helping insurers create new index-based products as well as cooperating with governments and international organisations to devise parametric coverage that pays out, not simply in response to individual loss, but following defined trigger points in weather, crop yield or price.
By understanding the entire risk landscape and prioritising the allocation of resources, it is possible to improve disaster preparedness, including the accumulation and availability of funds as well as the collaborative implementation of mechanisms before a loss occurs. Aiming at a more resilient society, this will result in an optimal balance of public and private contribution to risk management.
One example of this approach is the proposed inclusion of adaptation funding measures within the post-Kyoto agreement, to be finalised in Copenhagen in 2009. We recognise that considerable efforts are needed for societies to become more resilient to the effects of global warming in order to reduce potential loss and harm in the long term.
Swiss Re contributes annually to the creation of the World Economic Forum (WEF) Risk Map in collaboration with the WEF and other major partners.
The changes in the 2009 Risk Map reflect the severe impact the financial crisis has had on global risks. Many of the risks with high likelihood and severity are related to the effects of the financial crisis: a sudden drop in Chinaʼs growth to 6% or below, deteriorating government fiscal positions, potential asset price collapse, continued retrenchment from globalisation, and global governance gaps.
Our Top Topics It is essential for the Groupʼs success to address emerging issues and industry trends that are shaping the business and social environment in which we operate, thus sharing knowledge and helping to develop innovative solutions.
Diversity drives our company’s innovative power and our relationships with clients, business partners and peers. We attract talent from a broad spectrum of disciplines to help us fully understand and meet the needs of our clients.
Swiss Re enables the risk taking activities that are essential to enterprise and progress in today’s business world. To be successful, we must know the risk inside and out, and transform this knowledge into business opportunities. Our people deliver the expertise and creativity to offer our clients solutions that best meet their ever-changing risk needs.
Our employees are today more then ever a source of vital skill and knowledge. An active and respectful exchange of ideas is at the heart of our way of finding competitive and sustainable answers to key business issues.
The prospect of working in an organisation which actively cultivates diversity is certainly one reason why people decide to join our company. Recent graduates and experienced professionals alike are just as much attracted by the intellectually stimulating work involved in facing up to a wide range of current and future challenges in our world – from globalisation to climate change and the ever-changing capital markets.
Naturally, diversity and expertise can only ever be of any practical use in a collaborative environment. That is why we actively encourage staff to expand their global network of contacts and increase their exposure to other business areas within Swiss Re. There are many options available to our staff to do so through training, expert networks or project teams. To be part of a cross-disciplinary team developing cuttingedge products is a challenge our staff are eager to meet. This is diversity in action: it drives innovation and allows us to develop solutions that go beyond standard ways of thinking.
A collaborative environment We also make sure that collaboration does not stop within the doors of our company. We have a long-standing history of sharing expertise with various stakeholders, and actively promote cooperation with external industry experts, risk analysts, business managers, scientists and public institutions. Swiss Re’s Centre for Global Dialogue plays an important role in this knowledge sharing strategy. The Centre regularly hosts international and regional conferences on a variety of global risk issues.
At Swiss Re we also use new learning technology to provide various learning platforms to reach our staff across the globe. Classroom courses make up 54% of our learning environment and 39% are online e-Learning courses. With this blended approach we meet the need for different learning styles of our diverse workforce.
Each year we identify high performers who have the potential and interest to grow in a changing global environment, and we foster their development. Talent pools of graduates and high-potential employees are always considered when filling open key positions. In 2008, about two-thirds of our vacancies at Managing Director level were filled internally. This proves that by investing in outstanding talent today, we ensure the sustainable development of the company in the future.
Hiring staff for their potential We do not hire staff only for the abilities they have, but also for the abilities they can develop. We want everyone to be passionate about personal development – their own and that of their colleagues. We provide the platform and processes for employees to meet their career objectives. By aligning business needs and personal goals, we aim to create a development culture that enables employees and the company to realise their full potential.
Employees by region As of 31 December 2008 28.4% America 66.1% Europe 5.5% Asia Pacific
At Swiss Re we promote diversity, networking and professional development to create a work environment that attracts and motivates employees with diverse knowledge backgrounds. Our employees drive our power of innovation.
“My rotational programme here at Swiss Re helps me understand the various functions within Operations both on a local and global level. As I progress among the different groups, I am getting a deeper insight into how these groups work together. Whatʼs more, I can experience directly how valuable cultural diversity is at Swiss Re: my on-the-job training programme will take me to London, Zurich and Bratislava.”
Philippe Brahin Head of Global Regulatory Affairs, Zurich A French citizen, Philippe received a masterʼs degree in economics and finance from the Sorbonne, Paris, in 1992.
Sharpened the focus of our activities on ̤ the prevention of humanitarian disasters through risk education measures.
Developed innovative solutions to address ̤ challenges such as climate change and risk cover in emerging countries.
Swiss Re continued to respond in an innovative way to key environmental and social challenges, both in its business and in cooperation with external partners. Our focus areas were climate change and insurance cover in emerging countries.
We won a bidding process to become the counterparty of the World Bank in a pilot weather derivative project developed with the government of Malawi. The solution provides cover against shortfalls in maize production due to droughts and works as an option on a rainfall index: when rainfall drops below a certain level, the World Bank pays the government the projected loss in maize production and is itself compensated by Swiss Re.
Through our risk assessment capabilities, we offer tailor-made products and services for the carbon markets. We also launched an innovative service, to be offered with partner organisations, for retail customers who want to offset their carbon emissions voluntarily. A first product developed with Mobiliar, Switzerland’s largest property insurer, offers this service to car users. On an internet portal, they can calculate the yearly emissions they cause through their car travel and pay in the corresponding amount. We then purchase and retire carbon credits from high-quality projects that meet internationally recognised quality standards.
In 2008, we also became the lead reinsurer of the World Bank’s Caribbean Catastrophe Risk Insurance Facility (CCRIF). This facility offers parametric hurricane and earthquake cover to 16 governments in the Caribbean. In parametric coverage, payouts are automatically triggered when an event reaches a certain level of intensity (eg wind speed), so funds become immediately available after a catastrophe has occurred. Such “ex-ante” risk management strategies are becoming increasingly popular because they allow advance planning of responses to natural disasters.
The carbon markets that have sprung up around the flexible mechanisms introduced under the Kyoto Protocol play an important role in the fight against climate change. Through the Clean Development Mechanism (CDM), so-called carbon credits can be earned by funding climate-friendly projects in emerging countries, and through Joint Implementation (JI) in countries which themselves have reduction targets under the protocol. In the European Union’s Emissions Trading Scheme (EU ETS), major emitters have been granted emissions allowances. Both carbon credits and allowances can be bought and sold. In addition to these
Sustainability portfolio (excluding traditional infrastructure) CHF millions, as of 31 December 2005 2006 2007 2008
In 2008, the largest number of SBR referrals (about one third) related to the defence industry and armaments. A further third were projects and transactions that can have significant environmental, social and governance impacts, especially in the mining, oil and gas industries or infrastructure projects, such as dam building. Sustainability risks associated with food exports emerged as a new sensitive issue last year.
Sensitive Business Risks referrals 2008 by industry 7% Other 4% Food 6% Heavy Industry& Manufacturing 10% Medicine & Health 17% Extractive Industries 17% Dams and Infrastructure 39% Defence
As an extension of our own efforts, in 2007 we launched the COYou2 Programme, which grants employees subsidies of up to 50% for emissions-reducing investments in their private lives. By the end of 2008, a total of 1 231 contributions had been paid out, equivalent to about 14% of the Group’s workforce. The most popular investments so far have been season tickets for public transport (31.3%).
Corporate citizenship For us, being a good corporate citizen means supporting the development of solutions to key environmental and social issues (“solution building“), and benefiting the communities we work in (“community building“).
We supported a second new project in Honduras, in partnership with the Swiss Red Cross. Honduras is not only the third poorest country in Latin America, but also strongly exposed to natural catastrophes, which can set back development by years. Focusing on the communities of San Esteban, Olancho, the project aims to increase the risk awareness of the local population and authorities and to improve living conditions. Measures include the mapping of risk zones, education and strengthening of village committees, reforestation and protection of water resources, and training of Red Cross volunteers in community-based first aid.
In the past year, both Myanmar and Sichuan Province in China were hit by devastating natural disasters – a massive tropical cyclone and the strongest earthquake in the country for 30 years respectively. Our donation of CHF 300 000 to UNICEF and the Red Cross was split between the two countries and used to provide safe drinking water and food as well as to arrange urgent medical care.
Many of our locations carry out their own community initiatives. In Armonk, for example, we started a partnership with the local Girl Scouts in support of their efforts to promote environmental stewardship. Employees
Working with Oxfam America In cooperation with Oxfam America, Swiss Re recently launched a new risk management initiative to help poor communities most vulnerable to the impacts of climate change. As part of the initiative, we set up a pilot project funded by our corporate citizenship programme. This project focuses on introducing weather risk insurance for a staple cereal crop in the Ethiopian village of Adi Ha, which is highly drought-prone. Taking a holistic approach, the project also examines risk reduction measures such as seasonal forecasting and improved agricultural practices.
The new initiative was presented as a joint “Commitment to Action” at the annual meeting of the Clinton Global Initiative (CGI), which strives to tackle major global issues through a focus on concrete action. We are one of the CGI’s original sponsors and have previously made successful commitments such as the European Clean Energy Fund, the COYou2 Programme and the Climate Adaptation Development Programme.
Life & Health operating income reflected ̤ difficult market conditions but improved benefit ratio of 85.5%.
Return on investments, excluding Legacy, ̤ was 4.7%. Total invested assets were CHF 124.8 billion.
Economy and financial markets The collapse of the US subprime mortgage market in 2007 brought major turmoil to global financial markets. Demand for securitised credit virtually disappeared, producing a systemic banking crisis. The situation worsened sharply in 2008: the banking system collapsed, world stock markets plunged, and most major economies went into recession. The insurance industry’s investment activities suffered as a result of these developments. However, in contrast to the banking system, which is central to the supply of credit to the economy and which is exposed to a short-term liquidity risk (ie a bank run), the insurance industry is not facing a systemic crisis or causing systemic problems for the economy.
After a slight devaluation of the US dollar and the British pound against the other major currencies in the first half of 2008, foreign exchange rates showed high volatility during the second half. By the end of the year, the Swiss franc had gained in value against the Euro (+6%), the US dollar (+9%), and the British pound (+31%), and had lost in value against the very strong Japanese yen (–16%).
The reinsurance sector reported positive underwriting results overall with a combined ratio of around 97%, reinforcing the continued robust state of reinsurance markets. Nevertheless, underwriting profitability declined in 2008 against 2007. The main reasons were: higher property losses stemming from natural catastrophes, most notably hurricanes ̤ Gustav and Ike. An unusually high proportion of the losses were carried by primary insurance companies as a result of extraordinarily high retentions; however, the loss burden was significant, in particular for most Bermudian reinsurance companies; a number of costly man-made disasters totalling USD 5 billion; ̤ mounting losses in financial guarantee and credit reinsurance due to the financial crisis; ̤ and general softening of rates and underwriting terms and conditions, leading to a gradual ̤ decrease in underwriting profitability.
Insurance in emerging markets Swiss Re’s sigma study on “Insurance in emerging markets: overview and prospects for Islamic insurance“, published in December 2008, explores the latest developments in the insurance sector of emerging market economies, with a special focus on the growing market for takaful, a form of shariah-compliant insurance.
The first half of the study covers the latest developments in the insurance industry in emerging markets. Since the turn of the century, growth in the insurance industry has been solid in emerging markets, with double-digit annual growth rates. South and East Asia are clearly leading in both consistency and pace. The financial crisis, however, has clouded the near-term outlook. Insurance in emerging markets is therefore expected to grow at a slower pace in 2009, although the longer-term perspective remains positive.
The second half of the study is devoted to a discussion of takaful, a form of financial protection based on mutual assistance and joint risk bearing that is widely accepted by Islamic scholars.
Five markets are analysed in detail: Bahrain, Indonesia, Malaysia, Saudi Arabia and the United Arab Emirates. The two takaful markets with the largest growth potential are Saudi Arabia and Malaysia, although their insurance markets are at very different stages of development. Commercial lines of business and non-life insurance dominate the market in the Middle East; in Malaysia, however, life assurance and personal lines of business are the most prevalent.
Takaful is set to grow in popularity because populations of Muslim countries are growing rapidly and because shariah scholars agree that Muslims should refrain from buying conventional insurance if a takaful operator is selling the same product and offering similar benefits and services. Between 2004 and 2007, the average annual growth rate for takaful was estimated at 25% (adjusted for inflation), compared to 10.2% in the conventional market. Many companies – global, regional and local – have set up new takaful operations over the past five years and retakaful capacity is also expanding.
This sigma study can be downloaded electronically or ordered as a print copy in English, German, French, Spanish, Italian and Chinese at www.swissre.com.
Life insurance The worsening economic outlook and continuing financial crisis will have an impact on the life and health sector, weakening life insurers’ balance sheets and eroding capital. Nevertheless, the industry appears to be weathering the financial storm without major solvency problems, thanks to the very strong capital positions it built up prior to the crisis and to sound risk management.
The marked slowdown in sales will reduce life industry profitability, especially since the other main driver of profitability, investment returns, declined sharply in 2008. Falling equity markets, widening credit spreads and exposure to subprime and Alt-A investments have caused significant losses for some life insurers. Additionally, the low availability and high cost of capital have impacted financing of XXX/AXXX business in the US. As a result, term rates have stabilised and an upward trend is expected.
The study highlights two solutions: variable annuities and long-term care insurance (LTCI). Variable annuities, where payouts are linked to the performance of an investment portfolio, are newer products that have grown in popularity in the US and Japan, and have recently been introduced in other Asian countries and Europe. LTCI, a solution designed to help people cope with the costs of nursing homes and other types of long-term care, is still in the early stages of development but has vast market potential. Sales of hybrid products that combine LTCI with life insurance are expected to contribute to LTCI’s popularity.
Net loss of CHF 0.9 billion and earnings per share of CHF –2.61 were driven by lower investment performance. Property & Casualty continued to deliver a solid underwriting result. Life & Health performed in line with expectations. The fourth quarter of 2008 was impacted by impairment losses of CHF 2.2 billion.
In the fourth quarter of 2008, net income was CHF –1.7 billion, compared to CHF 170 million in the prior year period. Significant impairment losses of CHF 2.2 billion were partially offset by a good underwriting performance. Earnings per share for the quarter were CHF –5.34.
The following discussion reflects changes in Swiss Re’s financial reporting segmentation due to the realignment of the Group’s Asset Management activities. Further, the methodology for the allocation of the investment return to underwriting activities changed. Property & Casualty and Life & Health segments received a benchmark investment return based on their reinsurance reserves and risk-free rates. The changes are reflected in both years presented.
In 2008, premiums earned decreased 19% to CHF 25.5 billion. Property & Casualty premiums declined 24% to CHF 14.4 billion, reflecting the quota share arrangement with Berkshire Hathaway, disciplined underwriting and foreign currency effects. Financial Guarantee Reinsurance, which was formerly part of Property & Casualty, is now included in the newly created Legacy segment. In the Life & Health segment, premiums and fee income from policyholders decreased 13% to CHF 11.9 billion, mainly due to foreign currency movements. At constant foreign exchange rates, premiums and fees declined 2% mainly due to the sale of the new business operations of Tomorrow (formerly GE Life UK) to LV= in December 2007 and lower fee income in 2008.
Net investment income was CHF 6.9 billion, a 29% decrease from the previous year. This was mainly due to a decline in running yield following a shift in allocation from corporate bonds to government securities, generally lower interest rates, and losses on private equity and hedge fund participations, accounted for at equity.
Net realised investment losses for 2008 were CHF 4.7 billion, mainly driven by mark-tomarket losses as well as impairments and realised losses on the sale of the equity portfolio. In addition, the 2007 result benefited from the one-off gain of CHF 268 million from the sale of Swiss Re’s London office building.
Life and health benefits decreased 18% to CHF 9.1 billion, or 9% at constant foreign exchange rates, reflecting more favourable morbidity experience in the health segment, partially offset by higher benefit reserves driven by a decline in policyholder account values in the current market environment.
Changes in financial reporting segmentation In 2007, the Group realigned its Asset Management activities, integrating them into the Client Markets and Products Underwriting functions.
During the course of 2008, the Group created a new unit, Legacy, which encompasses non-core activities that have been discontinued. This unit is managed separately from Asset Management.
Acquisition costs decreased 17% to CHF 5.4 billion. The acquisition cost ratio was 21.0% in 2008 compared to 20.5% in 2007.
Other expenses were CHF 3.2 billion in 2008, a decrease of 21% from 2007, mainly driven by lower variable compensation.
Return on equity decreased to –3.4% from 13.5% in 2007, resulting from lower earnings compared to the strong results in 2007.
Net investment income 469 575 23 Net realised investment gains/losses 300 459 – Foreign exchange gains/losses –476 743 – Financing costs –1 814 –1 501 –17 Other income/expenses –174 –126 –28
For 2007, the foreign exchange remeasurement for investment is included in the foreign exchange gains/losses line item. The presentation is consistent with 2008.
Expenses Claims and claim adjustment expenses –12 065 –10 007 –17 Life and health benefits –11 112 –9 065 –18 Return credited to policyholders –2 120 2 822 – Acquisition costs –6 499 –5 366 –17 Other expenses –4 077 –3 211 –21 Interest expenses –1 814 –1 501 –17 Total expenses –37 687 –26 328 –30
Income/loss before income tax expense/benefit 5 187 –1 350 – Income tax expense/benefit –1 025 486 – Net income/loss 4 162 –864 –
Changes in shareholders’ equity CHF millions 2007 2008 Change in %
Purchase/sale of treasury shares and shares issued under employee plans –1 268 –533 –58 Other changes in equity 711 –893 –
Liabilities Unpaid claims and claim adjustment expenses 88 528 75 510 –15 Liabilities for life and health policy benefits 50 026 39 911 –20
Income taxes payable 679 769 13 Deferred and other non-current taxes 3 817 1 329 –65
Summary of cash flow statement CHF millions 2007 2008 Change in %
On 1 January 2008, Swiss Re entered into a proportional reinsurance contract with Berkshire Hathaway. Under this quota share arrangement, Berkshire Hathaway assumes a 20% share of all Swiss Re’s new or renewed property and casualty business (excluding credit reinsurance business) for five years.
During the first three quarters of 2008, downward price pressure continued in most markets and business segments. The turmoil in the financial markets, however, created market opportunities in the fourth quarter of 2008 as capacity for peak catastrophe exposures reduced significantly. This allowed us to write certain catastrophe excess of loss covers as private placements at very attractive terms.
In late-2008, most property and casualty lines reached a turning point in the business cycle. Rates had been relatively flat or slightly lower with stable terms and conditions during the first half of the year. Global economic pressures have since produced an increase in demand and a flight to solid capital, however, prompting a market upturn. We expect that our disciplined underwriting approach and nimble cycle management will allow us to deploy the Group’s capital where economic value is the most attractive.
The premiums earned by regions in 2008 were similar to 2007, Asia increased by 1% which was offset in the Americas.
Lines of business Active cycle management and a diversified business mix contributed to strong underwriting results in 2008.
Casualty Net premiums earned decreased 30.3% in 2008, reflecting both the quota share arrangement with Berkshire Hathaway and the effect of strict underwriting in a softening market.
The motor combined ratio decreased to 92.0% in 2008 from 94.4% in 2007, mainly due to more favourable claims development.
Property & Casualty 41% Americas 47% Europe (including Middle East and Africa)
12% Asia 2008 net premiums earned by region Total CHF 14.4 billion
Specialty lines Net premiums earned for the specialty lines of business decreased 18.8% to CHF 3.8 billion, due to the quota share arrangement with Berkshire Hathaway and strict underwriting.
New business volumes in the UK declined due to lower sales of life and critical illness protection policies linked to mortgages in the primary insurance market. Sales did not fall as low as new mortgage approvals, however, which suggests that financial advisers and insurance companies have been successful in increasing sales of policies not linked to mortgages.
New business volumes in continental Europe rose in 2008 – primarily in France, Italy and the Nordic countries. Cession rates remained stable and profitability satisfactory.
Having started Swiss Re Healthcare Services Pvt. Ltd. in India in 2007, we continued to expand into Asian medical insurance by establishing a third-party administrator in China. Traditional life reinsurance maintained strong premium growth in Asia. Our life and health business in Australia continued to expand, with a strong contribution from enhanced insured benefits provided within superannuation funds, and with the completion of our first longevity reinsurance transaction in the region.
Clients around the world are increasingly seeking to release the capital committed to their in-force portfolios through structured reinsurance solutions. We completed several significant transactions during the year, primarily in Europe and Asia.
We completed the GBP 762 million acquisition of Barclays Life Assurance Company Ltd on 31 October 2008. The transaction provides further scale and infrastructure for our Admin Re® business in the UK and confirms our role as a leading player in the origination, transfer and trading of insurable risks.
1 The figures for 2008 and 2007 are presented consistently with the organisational structure adopted in 2007, and include part of the insurance-linked securities (ILS) business as well as the variable annuity business. The allocation of the investment return to the segments was modified in 2008 and is now based on a benchmark applied to the technical reserves and other information including duration of the underlying liabilities.
The geographical distribution of premiums and fees earned remained stable during 2008.
Benefit and expense ratios The overall Life & Health benefit ratio declined 1.5 percentage points to 85.5%, reflecting more favourable morbidity experience and the net positive effect of commutations of certain personal accident treaties in our health business. The benefit ratio of 85.5% includes approximately 3.8 percentage points of negative experience due to higher benefit reserves underlying the guaranteed minimum death benefit (GMDB) products, driven by a decline in policyholder account values in the current market environment.
Life & Health results CHF millions 2007 2008 Change in %
Return credited to policyholders –2 120 2 822 – Acquisition costs –2 665 –2 626 –1 Other expenses –1 313 –958 –27 Total expenses –17 210 –9 827 –43
(CHF 208 million) compared to a gain in 2007, the pre-2000 GMDB contracts (CHF 163 million) and from a decline in the fair value of embedded derivatives associated with treaties structured on a modified coinsurance and funds withheld basis (CHF 297 million). Our hedging for expected variable annuity cash flows performed within expected parameters given market circumstances, but certain non-economic risk margins required under GAAP are not hedged – and these margins increased as market conditions deteriorated. The change in the fair value of the embedded derivatives represents a non-cash, unrealised loss and arose due to widening credit spreads on the investment portfolios underlying certain funds withheld life reinsurance treaties. Overall, mortality experience remained steady year on year and in line with expectations. Less favourable mortality experience in the US and Canada in 2008 was offset by strong results in Europe.
Traditional health Operating income from the traditional health business fell CHF 55 million, or 15.8%, to CHF 293 million. This was mainly due to unrealised losses from a decline in the fair value of embedded derivatives associated with certain funds withheld health treaties CHF 243 million, driven by widening credit spreads on the underlying cedent investment portfolios. This was partially offset by gains arising from the commutation of certain personal accident treaties, better-than-expected morbidity levels and improved termination rates. Our 2007 result included a one-off boost from our change in UK claims assumptions.
Operating result, excluding non-participating net realised investment gains/losses 554 413 –1 966 Benefit ratio2 in % 87.0
The focus of the Asset Management mandate is centred on core-asset-liability-matching techniques. The primary goal is to match Swiss Re’s investment portfolio to the benchmark set by our insurance liabilities. Second, Asset Management is expected to seek absolute returns to generate additional economic value while rigorously adhering to the risk limits set by Swiss Re.
Return on investments in %1 4.7 1 The return on investments includes currency exchange rate remeasurements and designated trading portfolios. The designated trading portfolios comprise trading fixed income securities denominated in foreign currencies, which back certain liabilities denominated in foreign currencies. The overall impact of the currency exchange remeasurements was CHF 7 million in 2007 and CHF 1 338 million in 2008.
Total invested assets were CHF 124.6 billion at the end of December 2008, compared to CHF 159.9 billion at the end of December 2007. The decrease was mainly due to net sales and maturities in the fixed income portfolios, liquidation of the global equity portfolio, declines in market values and the impact of changes in foreign currency valuation. We also increased our allocation to cash and cash equivalents. At the end of 2008, Swiss Re’s overall gross asset allocation was 31% in credit, 61% in rates, and 8% in equities and alternative investments.
Third-party assets under management decreased to CHF 76.8 billion at the end of 2008 from CHF 92.8 billion at the end of 2007 as a result of a sale in the third-party asset management business.
Net investment loss and a net realised loss was CHF 1.3 billion in 2008 compared to net investment income and a net realised gain of CHF 2.0 billion in 2007, resulting from a decline in market values of the underlying assets in private equity and hedge funds, and realised losses on the sale of the global equity portfolio.
Expenses which are included in net investment income increased CHF 108 million, mainly due to an increase in variable expenses.
Financial Guarantee Re (FG Re) FG Re was formerly included in Property & Casualty as part of the Credit segment in Specialty. FG Re reported an operating loss of CHF 128 million in 2008 compared to an operating loss of CHF 2 million in 2007, due to an increase in reported and expected claims of CHF 134 million. FG Re has been in run-off since the beginning of 2008 and no new business was written in the year. As a result, the combined ratio was 500.0% for 2008 compared to 109.1% for 2007.
Net unrealised loss in shareholders’ equity increased to CHF 433 million at the end of 2008, compared to CHF nil at the end of 2007. The decrease was mainly due to credit spread widening and reclassification of assets from trading to available-for-sale.
Expenses Expenses of CHF 78 million in 2008 are included in net investment income and mainly represent investment expenses and variable compensation.
Total invested assets Total net assets were CHF 3.8 billion at the end of December 2008, compared to CHF 6.2 billion at the end of December 2007. The decrease was mainly due to net sales and maturities, the decline in market values and the impact of changes in foreign currency valuation.
We have an underweight exposure to directors’ and officers’ liability and to professional indemnity business, which we have reduced since 2004, particularly in regard to financial institutions. We are managing any remaining subprime, liquidity or credit crisis risks through terms, conditions and pricing. This allows us the flexibility to capitalise on other liability opportunities that offer more attractive returns. Lower interest rate yields reinforce the need for increased technical underwriting margins, particularly in long-tail lines of business. Thanks to Swiss Re’s strong business position and established underwriting discipline, we believe we are well positioned to benefit from a hardening market.
We also expect a slowdown in primary insurance sales in the mature markets of Western and Northern Europe, but growth should continue in developing markets in Eastern Europe, the Middle East, and Latin America. Cession rates are likely to remain stable or even increase, because many primary insurers will have less capital available for risk retention.
Life companies around the world face significant challenges; their capital bases have been depleted by investment losses and the difficult capital markets environment has made it increasingly difficult to raise funds. We therefore expect an increasing need among clients to release capital from their in-force portfolios through Admin Re® or other structured reinsurance solutions.
We expect increased demand for reinsurance of variable annuity products, both from existing markets in the US and Japan, and new markets in Europe and Asia. The current cost of hedging financial market risk, however, makes certain guarantees prohibitively expensive in retail products. We are working actively with clients to make products more affordable through redesigning guarantee structures. We are also seeing increased interest in transferring longevity risk among life companies and pension funds.
Asset Management We expect 2009 to be marked as a year of transition. The economic outlook remains challenging with the fall-out from the global credit crisis taking its toll on the real economy. In January 2009, this challenging outlook prompted the International Monetary Fund to revise their global GDP projections sharply from 2.2% to 0.5%. With the advanced economies facing what is possibly their deepest recession in the post-war period, the financial market outlook is likely to lack certainty for some time. In this environment, investors may well remain averse to taking risk.
A cautious investment approach is appropriate while global markets continue to suffer the effects of unwinding leveraged positions. The markets’ flight for safety is unlikely to slow down until the macro economic picture starts to brighten, particularly in the US housing market, and until financial market stress begins to ease. Global policy efforts, in particular future actions by the US Treasury and the Federal Reserve, could also be instrumental in driving the markets towards the start of a recovery, perhaps as soon as in the second half of 2009.
Swiss Re’s shares declined 37.6% in 2008, in line with the Swiss blue chip index (SMI). In contrast, the index of European insurers fell 52.6%.
Swiss Re shares Swiss Re had a market capitalisation of CHF 18.3 billion on 31 December 2008, with 363.5 million shares outstanding. Swiss Re shares are listed on the main board of the SIX Swiss Exchange (SIX) and are traded on SWX Europe in its EU regulated segment under the ticker symbol RUKN. Swiss Re shares are also traded over-the-counter in the form of an American Depositary Receipt (ADR) level I programme (OTC symbol SWCEY).
Share buy-back programme Swiss Re initially announced a share buy-back programme of up to CHF 6 billion on 1 March 2007 and on that date repurchased CHF 16.7 million of its shares from General Electric Company (GE) that GE held as a result of Swiss Re’s acquisition of GE Insurance Solutions. Swiss Re set up a second trading line on 10 August 2007 to enable a tax efficient buy-back.
On 23 January 2008, following the announcement of the quota share reinsurance contract with Berkshire Hathaway, the share buy-back programme was extended. This reinsurance contract brought additional capital relief to the Group allowing the extension of the buy-back programme by CHF 1.75 billion to CHF 7.75 billion. The buy-back continued until 4 November 2008 when we decided to suspend it due to the unprecedented capital market conditions. By this date, CHF 4 billion worth of shares had been repurchased, representing 51.2% of the total buy-back programme. Authorisation for the second line buy-back remains until April 2010.
Additional shares held in nominee form (within Share Register) 20.6 5.7
Index representation In addition to its relevant industry indices, Swiss Re is also represented in various global, European and Swiss indices – including the SMI, FTSEurofirst 300 Insurance and the Dow Jones STOXX 600 Insurance. The composition of these indices is usually based on free-float market capitalisation. Swiss Re is also a member of various sustainability indices, including the Dow Jones Sustainability and FTSE4Good index families.
Sustainability indices Dow Jones Sustainability World 0.26 Dow Jones Stoxx Sustainability 0.58 FTSE4Good Global 0.19 KLD Global Climate 100 1.03
Group capital requirement measured ̤ by 99% Tail VaR decreased 10% to CHF 14.9 billion, as higher financial market and credit risk was more than offset by lower insurance risk.
Enhanced our limit framework to ̤ strengthen the alignment of business capacity to our Group Risk Policy.
Strengthened our liquidity management ̤ framework and proactively managed the Group’s liquidity position in a difficult market environment.
Swiss Re’s risk and capital management aims to ensure controlled risk taking as well as adequate liquidity and capitalisation, in order to maintain the financial flexibility to benefit from attractive business opportunities.
Our risk management is based on four guiding principles that we strive to apply consistently across all risk categories throughout the Group:
Controlled risk taking: Financial strength and sustainable value creation are central to ̤ Swiss Re’s value proposition. As a result, we operate within a clearly defined risk policy and risk control framework.
Clear accountability: Our operations are based on the principle of delegated and clearly ̤ defined authority. Individuals are accountable for the risks they take on, and their incentives are aligned with Swiss Re’s overall business objectives.
Independent risk controlling: To avoid conflicts of interest, dedicated specialised units ̤ monitor our risk-taking activities.
Open risk culture: Risk transparency and responsiveness to change are integral to our risk ̤ control process. Swiss Re has institutionalised knowledge-sharing processes at all levels.
Risk management view of the financial crisis The unprecedented turbulence in the global financial markets has provided important lessons on risk management for the financial services industry. First and foremost, recent events have confirmed once again the importance of a strong and independent risk management function, as well as the need for an integrated, company-wide approach to assessing and controlling risks. In addition, risk management must be practised as a dynamic process, in which scenarios, models and their parameters are continually adapted to changes in the environment. This means that the results of quantitative controls should be supported by a sound qualitative assessment of the underlying risks and assumptions.
We have learnt from the recent crisis and enhanced our risk management in several key areas: More robust governance processes for risk taking: In response to market developments, ̤ we have implemented a single Group-wide approval process, with greater accountability and increased Risk Management involvement in reviewing and approving transactions. Increased oversight: Risk Management has intensified its interaction with management ̤ and the Board, including more detailed and frequent reporting on modelling results, limit status and risk issues.
Enhanced liquidity management: We responded to the tightening funding environment ̤ by strengthening spot liquidity, optimising funding across regulated carriers and increasing stress testing for projected liquidity intervals (see pages 79 – 80).
Risk management organisation The Board of Directors is ultimately responsible for the Group’s risk management principles and policies, as well as for approving our overall risk tolerance. The Board committees dealing with risk management include: The Finance and Risk Committee, which is responsible for reviewing the Group Risk Policy ̤ and capacity limits, as well as monitoring risk tolerance, and reviewing top risk issues and exposures.
The Audit Committee, which is responsible for overseeing internal controls and compliance ̤ procedures.
The Executive Committee is responsible for implementing the risk management framework through two further committees: The Group Risk and Capital Committee has responsibility for allocating capital and capacity, ̤ approving investment risk limits, and deciding changes to the internal risk and capital methodology.
The global Risk Management function is organised by risk categories, with dedicated departments for property and casualty risk, life and health risk, and credit and financial market risk. Each of these units is entrusted with Group-wide responsibility for identifying, assessing and controlling their allocated risks, including operational risks which arise in their area of control. They also work closely with other risk management units on transaction reviews and issues which affect multiple risk categories. These units are supported by the Operational Risk & Control Management department, which is responsible for maintaining our operational risk framework, developing appropriate tools and training, and driving internal and external dialogue on operational risk issues. In addition, the Business Risk Review department conducts independent quality assessments of underwriting and pricing quality on a transactional level, and also reviews authority processes and contract wordings.
In 2008, the insurance risk units were realigned to include both risk management and actuarial functions. This combined expertise will strengthen independent review of large transactions, new products, business plans, pricing accuracy and portfolio quality.
The Group Risks & Analytics department has global responsibility for risk reporting, risk models, the validation of valuation models and risk infrastructure. In addition, it is responsible for capital adequacy and liquidity risk management, as well as for the overall risk governance framework. Sustainability & Emerging Risk Management manages environmental, social, and political risks as well as the systematic detection, assessment and business application of emerging and existing, but potentially underestimated, risks. Finally, the Group Regulatory Affairs department steers our regulatory activities and positions, and leads the implementation of major regulatory developments.
Financial market risk is the risk that assets or liabilities may be negatively affected by ̤ movements in financial market prices or rates, such as equity prices, interest rates, credit spreads, foreign exchange rates or real estate prices.
Reputational risk is the risk that a particular event or behaviour damages stakeholders’ ̤ perception of Swiss Re, thus impairing our ability to operate effectively. Liquidity risk is the risk that Swiss Re, though solvent, either does not have sufficient ̤ resources available to meet its obligations when they fall due, or can secure them only at excessive cost.
In addition to the assessment of known risks, we have a systematic framework to capture, evaluate and mitigate emerging threats and opportunities across Swiss Re’s risk landscape, including potential surprise factors that might affect known loss potentials. The framework also comprises the Rapid Risk Research process, which provides a fast and flexible way to investigate emerging issues and establish an initial estimate of their impact on Swiss Re (see page 21).
Integrated risk modelling We use a proprietary integrated risk model to determine the capital required to support the risks on our books, as well as to allocate risk-taking capacity to the different lines of business. This internal model is based on two important principles. First, it applies an asset-liability management (ALM) approach, which measures the net impact of risk on the economic value of both assets and liabilities. Second, it adopts an integrated perspective, recognising that a single risk factor can affect different sub-portfolios and that different risk factors can have mutual dependencies.
The model generates a probability distribution for the Group’s annual economic profit and loss, specifying the likelihood that the profit or loss will fall within any given range. From this distribution, we derive a base capital requirement that captures the potential for severe, but rare, aggregate losses over a one-year time horizon. We monitor our capital adequacy by comparing the ratio of available capital to required capital with the target ratio set by the Board of Directors.
The SST is an important step on the path towards a consistent, principles-based solvency regime. It fosters sound risk management and governance across the insurance industry – and thus helps to establish better risk and capital insight. We strongly support this direction and are actively participating in the development of Solvency II. Thanks to our experience in implementing the SST, we are well prepared for future changes in European and global solvency regulation.
Group capital requirement Frequently used measures for summarising the risk distribution and defining the base capital requirement are 99% value at risk (VaR), 99.5% VaR and 99% Tail VaR (expected shortfall). 99% VaR measures the level of loss likely to be exceeded in only one year out of one hundred, while 99.5% VaR measures the loss likely to be exceeded in only one year out of two hundred. 99% Tail VaR estimates the average annual loss likely to occur with a frequency of less than once in one hundred years.
According to the Group’s internal risk model, Swiss Re’s overall risk exposure based on 99% VaR was CHF 11.2 billion compared to CHF 12.9 billion for 99.5% VaR. This represents a decrease of 3% and 6% respectively since the end of 2007. Over the same period, 99% Tail VaR decreased 10% to CHF 14.9 billion at the end of 2008. Swiss Re uses the more conservative 99% Tail VaR measure for assessing the Group’s capital requirements internally, as well as for liquidity stress testing (see pages 79 – 80).
Our internal model considers the level of correlation and diversification between individual risks. The benefits of diversification can be seen in the table above, where the base capital requirement for the Group’s overall portfolio is lower than the sum of the base capital requirements for individual sub-portfolios. We strive to diversify the risks to which we are exposed, not only to limit the impact of any single source of risk, but also to ensure that positive developments in some businesses balance out potential negative developments in others.
Our risk tolerance represents the amount of risk we are willing to accept within the constraints imposed by our capital resources, strategy and risk appetite, as well as the regulatory and rating agency environment within which we operate. Risk tolerance and appetite at Group level are defined by a set of limits approved by the Executive Committee and the Board of Directors. In 2008, we further enhanced our limit framework to consistently break down our Group Risk Policy to all risk categories. The framework applies an iterative process to test our annual business plan, and thus aims to ensure that the resulting limits and business capacity reflect our Group-wide policies on capital adequacy and risk accumulation.
CHF billions, as of 31 December 2007 2008 Change in %
Property & casualty 8.6 7.9 –9 Life & health 5.9 5.2 –12
Limits to prevent excessive exposure to any individual policy, or to the same underlying risk factor, are monitored on a Group-wide basis. In addition, each underwriter is assigned an underwriting authority per treaty programme and single risk. We have a well-defined escalation process at various levels up to the Group Products and Limits Committee. Large individual transactions that could materially impact Swiss Re Group must be independently reviewed by Risk Management before they can be authorised.
The global Products Underwriting function plays a major role in managing property and casualty risks by proposing the annual renewal strategy and closely monitoring renewal business. Underwriting systems across the Group provide timely reporting on risks assumed and capacity committed. Where appropriate, we also use insurance-linked securities, industry loss warranties, retrocession and risk swaps to optimise Swiss Re’s risk and return profile.
Estimated economic impact of each single loss event in CHF billions as of 31 December 2007 2008
Atlantic hurricane (200-year return period) –3.7 –3.5 European windstorm (200-year return period) –2.2 –2.1 California earthquake (200-year return period) –2.8 –3.9 Japanese earthquake (200-year return period) –2.0 –1.7
Life and health insurance risk Swiss Re takes on life and health risk in the form of mortality (death), longevity (survivorship) and morbidity (illness and disability) covers as well as through the acquisition of run-off business (Admin Re®). The Group Life & Health Risk Standards and Group Risk Management Guideline establish the governance framework for life and health risk taking by our business units. These guidelines include detailed guidance on referral procedures and approval bodies. L & H Risk & Actuarial Management is responsible for independent oversight of life and health risk taking.
Our new limit framework introduces an aggregate Group limit governing the acceptance of all life and health risks. Within this limit, our specific limit for mortality risk still applies. Local business units can write reinsurance within their capital plans and within clearly defined boundaries, such as per life retention limits for individual business. In addition, maximum market exposure limits are in place for life and health catastrophe business. We pay particular attention to accumulation risk in areas of high population density and apply limits based upon expected maximum loss for exposures in individual buildings. Group limits are also in force to control and monitor business with exposure to long-tailed longevity risk. Any transaction that falls outside our specified limits requires individual approval under our risk governance framework. All large and complex transactions are subject to independent review by the central Products Underwriting team as well as by Risk Management.
Since the end of 2007, we have implemented a new longevity risk model which incorporates our previously established longevity capital calculation and allocation methodologies, and captures – among other sources of uncertainty – the impact of changes in mortality trends. The model is calibrated by underlying cause of death, including the possibility of an extreme reduction in deaths from cardiovascular disease and cancer.
We have increased the frequency of our risk reporting in response to the high market volatility. Risks at Group level and limits for investment activities are now monitored and reported on a weekly basis, while capital markets trading relies on a combination of daily and weekly reporting. These reports are the primary tools for tracking exposures and documenting limit usage, which is independently monitored by Financial Risk Management. The limits are reported to the heads of the business unit, who seek to optimise their respective portfolios within their limits, including the use of cash and derivative instruments.
The table above shows the pre-tax impact of Swiss Re’s market scenarios on available economic capital. The decline in major equity markets – all of which lost over 30% throughout 2008 – and the sharp corrections in many real estate markets have confirmed that these scenarios provide a realistic prediction of exceptional conditions. Since the end of 2007, the potential loss from a 30% fall in global equity markets has decreased by a third to CHF 2.5 billion, as a result of a significant reduction in our equity portfolio as well as increased hedging. The equity scenario includes traded equities, equity derivatives, alternative investments, guaranteed minimum death benefit products (including variable annuities) and funding obligations arising from equity holdings in Swiss Re pension funds. As our assets are closely matched to our liabilities, shifts in interest rates only have a minor impact.
Credit risk Credit risk arises directly from our investment activities as well as from liabilities underwritten by our business units. We distinguish between three types of credit exposure: the risk of issuer default from instruments in which Swiss Re invests or trades, such as through corporate bonds; counterparty exposure in a direct contractual relationship, such as retrocession or overthe -counter (OTC) derivatives; and risk assumed by Swiss Re through reinsurance contracts, such as trade credit and surety reinsurance business. All contribute to an overall credit risk portfolio governed by the Group Credit & Financial Market Risk Guideline that is approved by the Group Risk and Capital Committee. Financial Risk Management is responsible for Groupwide monitoring and reporting of credit risks.
The guideline requires the assignment of aggregate credit limits by business unit, limits for corporate counterparties and limits by country. These limits are based on a variety of factors, including the prevailing economic environment, the nature of the underlying credit exposures and, in the case of corporate counterparties, a detailed assessment of the counterparty’s financial strength, industry position and qualitative factors. The counterparty assessment generates an internal counterparty-specific rating in one of 20 categories. We regularly monitor counterparty credit quality and exposures, and compile watch lists of cases that merit close attention.
Credit exposure and limits are monitored and reported on a weekly basis. The reporting process is supported by a Group-wide credit exposure information system that contains all relevant data, including counterparty details, ratings, credit risk exposures, credit limits and watch lists. All key credit practitioners in the Group have access to this system, thus providing the transparency required for the successful implementation of active exposure management strategies for specific counterparties, industry sectors and geographic regions.
In 2008, credit risk measured by 99% Tail VaR rose 6% to CHF 3.0 billion, mainly due to deterioration in credit quality. This was partly offset by a reduction in credit exposure from trading activities as well as by our efforts initiated in early September to hedge our corporate bond portfolio.
Estimated economic impact in CHF billions as of 31 December 2007 2008
In 2008, we took two important steps to refine our approach to ORM: We further integrated the management of key operational risks into the overall risk ̤ management framework. ORM experts are now based within the risk management units with responsibility for core business activities. This ensures even greater focus on maintaining the excellence of core processes such as pricing, accumulation control, claims settlement, asset management and project management.
We achieved significant risk control synergies by combining our Sarbanes Oxley and ORM ̤ responsibilities, as well as by establishing a shared process for audit and management assurance planning.
We mitigate potential reputational risk through clear corporate values, robust internal controls and active dialogue with external stakeholders. All employees are required to commit to and comply with the values and rules of behaviour defined in the Group’s Code of Conduct. These values are supported by processes that enable early identification of potential problems. Transactions that could potentially compromise our values or impair Swiss Re’s reputation are submitted to the Sensitive Business Risks process (for more information, see page 31). In 2008, this process became part of a wider reputational risk framework comprising industry policies and specific country exclusions. In addition, potential reputational impact is a key factor in assessing and controlling operational issues within our ORM framework.
Our liquidity risk management aims to ensure that Swiss Re is able to meet its financial obligations efficiently when they fall due.
We put into run-off all financial market activities that did not directly support Swiss Re’s core reinsurance or insurance business. Our Treasury unit enlarged the portfolio of liquid assets that are earmarked for liquidity purposes. This included increasing the amount of cash held centrally, while ensuring that these cash holdings were diversified across a group of core issuers and types of cash instruments.
During 2008, we entered into a USD 1.5 billion long-term letter of credit facility with JP Morgan to meet US regulatory collateral requirements on existing life reinsurance business. Our acquisition of Barclays Life on 31 October 2008 was partly financed by external funding at attractive rates.
additional collateral requirements associated with a potential ratings downgrade ̤ of Swiss Re Group. In the case of a financial market crisis, a one-notch downgrade is assumed.
further contingent funding requirements related to asset downgrades and existing ̤ commitments to extend credit or funding, based on a probabilistic assessment. other large committed payments, such as expenses, commissions, and tax. ̤
Swiss Re’s liquidity stress tests are reviewed on a regular basis and their main assumptions are approved by the Group Risk and Capital Committee.
Swiss Re also maintains a variety of other committed facilities not reflected in the above liquidity stress tests. As of 31 December 2008, Swiss Re had a total of CHF 2.1 billion of unutilised credit facilities and a further CHF 1.9 billion of unutilised committed repurchase agreement facilities.
Liquidity risk management 11% Other developed market government and supranational bonds 22% Agency and municipal bonds 31% G7 and Swiss government bonds 36% Cash and bank deposits
Composition of spot liquidity in the SRZ liquidity pool as of 31 December 2008 Total CHF 17.3 billion
With the introduction of the SST, Switzerland became one of the first countries in Europe to implement an economic, principles-based approach similar to the planned Solvency II regime. Swiss Re implemented the SST in 2008, when all Swiss-based reinsurers were required to submit a first SST calculation. The SST target capital, however, only becomes a binding measure for regulatory solvency from 2011 onwards.
Rating agency capital requirements Rating agencies assign credit ratings to the obligations of Swiss Reinsurance Company Ltd and its rated subsidiaries. The agencies evaluate Swiss Re based on a set of criteria, which include an assessment of our capital adequacy. Each rating agency uses a different methodology for this assessment; for example, Standard & Poor’s and A.M. Best base their evaluation on their own proprietary capital models.
Swiss Re’s internal capital adequacy based on 99% Tail VaR Our internal capital adequacy view aims to maintain Swiss Re’s ability to continue operations following an extremely adverse year of losses from insurance or financial market events. Our target is to have an economic capital adequacy ratio (available capital divided by required capital) in the 175% – 200% range at least.
At the end of 2008, our internal capital adequacy ratio was 207%. Despite the significant financial markets event of 2008, which resulted in the substantial decline of invested assets, our internal ratio remains in excess of our target range.
Major legal entity simplification projects continue in Europe, the US, Canada and Asia, with an expected combined statutory capital relief of around CHF 2.5 billion.
In Europe, our simplification of the legal entity structure is well advanced. The project benefits from recent regulatory and legal developments that have allowed us to simplify our entity structure in the EU (excluding Admin Re®) into two companies: a reinsurance and a direct insurance carrier based in Luxembourg with branch operations in other EU countries. During 2008, business from a number of entities and branches in the UK, Ireland, Denmark, Netherlands, Spain, Italy and France was successfully integrated into the new Luxembourg carriers. At the same time, we consistently maintained our high level of service in all our European markets. Further, our product offerings and financial strength have remained unchanged. Local branches continue to be responsible for client management.
EVM economic net worth EVM economic net worth (ENW) is the difference between the market value of assets and the market value of liabilities.
For liquidly traded assets and liabilities, the market value is obtained from current market prices. For insurance contracts and other assets and liabilities where no reliable market value is available, market-consistent valuation techniques are applied. This means that best estimates of future expected cash flows are replicated using liquidly traded financial market instruments. The market value of this replicating portfolio therefore corresponds to the economic value of future expected cash flows, such as premiums, claims commissions, expenses, taxes and estimated frictional capital costs. Frictional capital costs are required by the shareholder as a compensation for risk and regulatory capital costs.
CHF billions, as of 31 December 2008 internal target range 175% –200%
Outlook Stable Under review for Under review with possible downgrade negative implications
On 18 February 2009, S&P lowered Swiss Re’s financial strength ratings from AA– to A+. The outlook on the ratings is stable.
On 5 February 2009, S&P had placed Swiss Re’s financial strength ratings (AA–) on CreditWatch with negative implications. On the same day, A.M. Best placed Swiss Re’s financial strength ratings (A+) under review with negative implications. On 6 February 2009, Moody’s lowered Swiss Re’s financial strength ratings from Aa2 to Aa3 and placed the ratings under review for possible downgrade. These rating actions followed Swiss Re’s announcement on 5 February 2009 that it expected to report a net loss of approximately CHF 1 billion for 2008 and a reduction in shareholders’ equity of approximately CHF 4 – 5 billion in the fourth quarter of 2008.
On 19 December 2008, A.M. Best affirmed Swiss Re’s financial strength ratings (A+, Superior) and revised the outlook from stable to negative.
In addition to the existing four ̤ committees, the Board of Directors established the new Investment Committee to ensure a stronger contribution to and closer supervision of investment and asset management.
Corporate governance is about more than just fine words. It is about transparency and integrity in everything we do.
Corporate governance is the framework comprising a company’s organisation, structure, management and assurance functions.
Overall context of corporate governance Corporate governance is increasingly linked to corporate sustainability and corporate citizenship. The integration of sustainability principles in core business activities strengthens a company’s ability to protect its assets and create value. The expertise of private sector companies is becoming more important in society’s efforts to tackle sustainability and other key issues. Assuming an active role in society reinforces the effectiveness of internal responses and creates goodwill among various stakeholders. Corporate sustainability and corporate citizenship are therefore important drivers of continued business success, and are firmly embedded in Swiss Re’s corporate responsibility framework, along with corporate governance (for more information, see “Delivering sustainable value”, pages 28 – 33).
Non-listed Group companies Please refer to the Group financial statements, note 18 on “Subsidiaries, equity investees and variable interest entities”, pages 208 – 217.
Executive Board Chief Executive Officer Members of the Executive Committee Members of the Executive Board
Products Underwriting Property & Specialty ̤ Casualty ̤ Life & Health ̤
As of 31 December 2008, there were four shareholders with participation exceeding the 3% threshold of Swiss Re’s share capital.
a. Swiss Reinsurance Company Ltd, Mythenquai 50/60, P. O. Box, 8022 Zurich, Switzerland, held a total of 28 521 789 Swiss Re shares or 7.85% of the share capital. Of these shares, 6 036 987 shares were fully paid-in shares held for general corporate purposes, 11 678 802 shares were paid in only at nominal value and reserved for general corporate purposes, 8 881 000 shares were acquired under the share buy-back programme and subject to cancellation, and 1 925 000 were acquired under the first trading line of the share buy-back programme.
In accordance with the SIX Directive, the following information about Swiss Re’s capital structure is provided for the listed parent company, Swiss Reinsurance Company Ltd.
Please refer to the statement of earnings per share on page 176 of the Group financial statements.
At the Annual General Meeting in 2001, the creation of conditional capital was approved as follows: a maximum nominal amount of CHF 900 000 for conversion rights and warrants granted in connection with convertible bonds or similar financial instruments issued by the Group and CHF 700 000 for employee participation purposes.
No additional conditional capital and no authorised capital was created in 2002 and 2003.
At the Annual General Meeting in 2004, an increase in conditional capital from CHF 900 000 to CHF 2 000 000 was approved, representing a maximum of 20 million registered shares, payable in full, each with a nominal value of CHF 0.10, for the exercise of conversion rights and warrants granted in connection with bonds or similar instruments issued by the Group.
No additional conditional capital and no authorised capital was created in 2005.
The Annual General Meeting in 2007 approved a reduction of the conditional capital as per art. 3a of the Articles of Association reserved for bonds or similar instruments in the maximum nominal amount of CHF 3 100 000 by a nominal amount of CHF 496 072.50, corresponding to 4 960 725 registered shares, each with a nominal value of CHF 0.10, to CHF 2 603 927.50. Furthermore, the 2007 Annual General Meeting approved the cancellation of the conditional capital as per art. 3c of the Articles of Association created in favour of General Electric Company in the maximum nominal amount of CHF 900 000, which corresponds to 9 000 000 registered shares, each with a nominal value of CHF 0.10.
participation purposes 1 The authorised capital created in February 2006 has expired
In 2005, the company’s share capital remained at CHF 32 million. Total reserves increased CHF 952 million to CHF 11.7 billion. The lower profit for the 2005 financial year of CHF 1.1 billion (compared to CHF 1.4 billion in 2004) led to a decrease in disposable profit from CHF 1.5 billion to CHF 1.1 billion. Total shareholders’ equity before allocation of profit increased from CHF 12.2 billion to CHF 12.8 billion. At the Annual General Meeting, shareholders approved a dividend payment of CHF 776 million, compared to CHF 497 million in the previous year. In 2005, the company issued 26 568 shares from conditional capital for employee participation purposes.
In 2006, the company’s share capital increased from CHF 32 million to CHF 37 million, mainly due to shares issued to General Electric (GE) and to capital markets as a result of the acquisition of GE Insurance Solutions. Total reserves increased CHF 4.5 billion to CHF 16.2 billion. The higher profit for the 2006 financial year of CHF 2.1 billion (compared to CHF 1.1 billion in 2005) led to an increase in disposable profit from CHF 1.1 billion to CHF 2.2 billion. Total shareholders’ equity before allocation of profit increased from CHF 12.8 billion to CHF 18.4 billion. At the Annual General Meeting, shareholders approved a dividend payment of CHF 1.2 billion, compared to CHF 776 million paid in the previous year. In 2006, the company issued 100 047 shares from conditional capital for employee participation purposes.
In 2007, the company’s fully paid-in share capital remained roughly unchanged at CHF 37 million. Total reserves increased CHF 1.0 billion to CHF 17.2 billion. The profit for the 2007 financial year of CHF 1.7 billion (compared to CHF 2.1 billion in 2006) led to a decrease in disposable profit from CHF 2.2 billion to CHF 1.8 billion. Total shareholders’ equity before allocation of profit increased from CHF 18.4 billion to CHF 19.0 billion. At the Annual General Meeting, shareholders approved a dividend payment of CHF 1.4 billion, compared to CHF 1.2 billion paid in the previous year. The company issued 451 724 shares from conditional capital for employee participation purposes, bringing the total of shares issued for employee participation purposes to 956 123, from a total of 7 000 000 shares available.
In addition, the 2007 Annual General Meeting authorised the Board of Directors to buy back the company’s own shares up to a total value of CHF 4.2 billion within a three-year period by way of a second trading line. Any shares repurchased via the second trading line are intended to be cancelled. As of 31 December 2007, the company had repurchased a total of 6 005 000 shares since inception of the second trading line in August 2007.
Admissibility of nominee registrations Trustees or nominees who act as fiduciaries of shareholders are entered without further inquiry in Swiss Reinsurance Company Ltd’s share register as shareholders with voting rights up to a maximum of 2% of the outstanding share capital available at the time. Additional shares held by such nominees, which exceed the limit of 2% of the outstanding share capital, are entered in the share register with voting rights only if such nominees disclose the names, addresses and shareholdings of the beneficial owners of the holdings amounting to or exceeding 0.5% of the outstanding share capital. In addition, such nominees must comply with the disclosure requirements of the Stock Exchange Act.
2.4 Shares 2.5 Profit-sharing certificates 2.6 Limitations on transferability and nominee registrations
Convertible bonds As stated in note 7 on “Debt” on pages 168 – 170 of the Group financial statements, the following convertible bonds are outstanding: Tenor Instrument Currency Nominal (millions) Terms of conversion
(ii) Upon closing the acquisition of GE Insurance Solutions, Swiss Re issued CHF 610 million of three-year MCS to General Electric. The MCS issued as a private offering, may, at the option of each holder, be converted into registered shares of Swiss Reinsurance Company Ltd at any time from 18 July 2006 until 4.00 pm CET on the business day before the 20th trading day prior to the maturity date on 8 June 2009. Holders exercising such early conversion right will be entitled initially to receive 1 024.2 shares, subject to adjustment, for each MCS of CHF 100 000 nominal value. Unless previously converted, each MCS will be mandatorily converted on the maturity date into the number of registered shares of Swiss Reinsurance Company Ltd that equals the maturity conversion ratio. The maturity conversion ratio equals the arithmetic average of the 15 conversion ratios calculated on the basis of the closing prices of Swiss Reinsurance Company Ltd’s shares on each of the 15 consecutive trading days ending on the third trading day prior to the maturity date. For the purposes of calculating such arithmetic average, the conversion ratio for a given trading day is determined as follows: (a) if the closing price is less than or equal to the minimum conversion price of CHF 84.90610, the conversion ratio shall be equal to the maximum conversion ratio of initially 1 177.8 shares per MCS of CHF 100 000 nominal value; (b) if the closing price is greater than or equal to the maximum conversion price of CHF 97.64202, the conversion ratio shall be equal to the minimum conversion ratio of initially 1 024.2 shares per MCS of CHF 100 000 nominal value; and (c) if the closing price is greater than the minimum conversion price, but less than the maximum conversion price, the conversion ratio shall be equal to CHF 100 000 divided by the closing price. Based on the closing price, Swiss Re will be required to deliver between 6.2 million and 7.2 million shares created from conditional capital, shares reserved for corporate purposes or other existing shares.
Options For details on stock options granted to Swiss Re employees, see note 14 on “Share-based payments” on pages 186 – 188 of the Group financial statements.
Peter Forstmoser Swiss 65 Chairman of the Board 1990 2010 Chairman of the GC Walter B. Kielholz Swiss 57 Vice Chairman of the Board 1998 2010 Member of the FRC and GC Jakob Baer Swiss 64 Chairman of the AC 2005 2009 Member of the FRC Thomas W. Bechtler Swiss 59 Member of the AC, CC and IC 1993 2009 Raymund Breu Swiss 63 Member of the AC and IC 2003 2011 Mathis Cabiallavetta Swiss 63 Chairman of the IC 2008 2011 Member of the CC Raymond K. F. Ch’ien Chinese 56 Member of the CC and IC 2008 2011 John R. Coomber British 59 Chairman of the FRC 2006 2009 Member of the GC Rajna Gibson Brandon Swiss 46 Member of the FRC and IC 2000 2011 Bénédict G. F. Hentsch Swiss 60 Member of the AC and IC 1993 2009 Hans Ulrich Maerki Swiss 62 Member of the CC and FRC 2007 2011 Robert A. Scott British / 66 Chairman of the CC 2002 2010 Australian Member of the AC and FRC Kaspar Villiger Swiss 67 Member of the FRC and GC 2004 2011
AC = Audit Committee FRC = Finance and Risk Committee IC = Investment Committee CC = Compensation Committee GC = Governance Committee
Peter Forstmoser, a Swiss citizen born in 1943, received a doctorate in law from the University of Zurich in 1970, became an attorney-at-law in 1971 and earned a master’s degree in law from Harvard Law School in 1972.
Peter Forstmoser was a law professor at the University of Zurich from 1974 to 2008 and has been a partner of Niederer Kraft & Frey, Attorneys, in Zurich, since 1975. Peter Forstmoser was elected to Swiss Re’s Board of Directors in 1990. His mandate was renewed by the Annual General Meeting of shareholders in 1994, 1998, 2002 and 2006 each time for a further four years. The Board of Directors elected him Chairman on 30 June 2000. He was re-elected as Chairman in 2002 and 2006 for a further four-year term.
Peter Forstmoser is also Chairman of the Board of Directors of Hesta AG and Hesta Tex AG, a member of the Boards of Mikron Holding AG, Ernst Basler AG, Remer Holding AG and Hyos Invest Holding AG, as well as Vice Chairman of Gebert Rüf Stiftung.
Peter Forstmoser is the author of numerous publications on a variety of law disciplines, such as business, company, capital markets and data protection law. In the context of corporate and investment fund legislation, he has been engaged in numerous expert committees, some of which he presided over as Chairman.
At the beginning of 1989, Walter B. Kielholz joined Swiss Re, Zurich. He became a member of the Executive Board in January 1993 and was Swiss Re’s Chief Executive Officer from 1 January 1997 to 31 December 2002. In June 1998, he was elected to Swiss Re’s Board of Directors, which at the same time appointed him Executive Director. Walter B. Kielholz was appointed Executive Vice Chairman with effect from 1 January 2003 and Vice Chairman in 2007. His mandate was renewed in 2002 and 2006 for a further four-year term.
Walter B. Kielholz was elected to the Board of Directors of Credit Suisse Group in 1999. Since 1 January 2003 he has been Chairman of that company’s Board of Directors.
Furthermore, Walter B. Kielholz is Chairman of the Zurich Art Society.
Thomas W. Bechtler, a Swiss citizen born in 1949, received a doctorate in law from the University of Zurich in 1973 and a master’s degree in law from Harvard Law School in 1975.
Thomas W. Bechtler has been Chief Executive Officer of Hesta AG as well as Hesta Tex AG, Zug, since 1982.
Raymund Breu was elected to Swiss Re’s Board of Directors in 2003. He was re-elected in 2007 for a further four-year term. In addition, Raymund Breu serves on the Swiss Takeover Board.
Mathis Cabiallavetta is a member of the Board of Philip Morris International and BlackRock, Inc. He serves as Chairman of Marsh & McLennan Companies, Inc. (MMC) International Advisory Board and is also a member of the Executive Advisory Board of General Atlantic Partners (GAP) in New York.
Raymond K. F. Ch’ien, a Chinese citizen born in 1952, graduated from the University of Pennsylvania with a PhD in economics in 1978. He became a Trustee of the University of Pennsylvania in 2006.
Corporate governance and compensation report 3 Board of Directors addition, Raymond K. F. Ch’ien holds positions in several public service institutions. He is Chairman of the Hong Kong/European Union Business Cooperation Committee, a member of the APEC Business Advisory Council, Hong Kong, and honorary President of the Federation of Hong Kong Industries and a member of the Standing Committee of the Tianjin Municipal Committee of the Chinese People’s Political Consultative Conference.
John R. Coomber was elected to Swiss Re’s Board of Directors at the Extraordinary General Meeting of 27 February 2006 for a term ending at the Annual General Meeting of 2009. John R. Coomber also serves as a member of the supervisory board of Euler Hermes, as a director of Pension Insurance Company Ltd, MH (GB) Limited, Parhelion Capital Ltd, telent Ltd, and Qatar Insurance Services. He is also a trustee of The Climate Group, and a member of the Deutsche Bank Climate Advisory Panel. John R. Coomber is an Honorary Fellow of the Chartered Insurance Institute.
Rajna Gibson Brandon is currently professor of finance at the University of Geneva. She was a professor of financial economics at the University of Zurich from March 2000 until July 2008 and was previously a professor of finance at the University of Lausanne.
Bénédict G.F. Hentsch, a Swiss citizen born in 1948, studied business administration at the University of St. Gallen, Switzerland, graduating in 1972 with a master’s degree in business finance and accounting.
Bénédict G.F. Hentsch was a general partner of Darier Hentsch & Cie, Private Bankers, Geneva from 1985 until 2001. He chaired the Swiss Private Bankers Association from 1998 to 2001. In 2004, he founded Banque Bénédict Hentsch & Cie S. A., a private bank dedicated to global wealth management.
Kaspar Villiger, a Swiss citizen born in 1941, graduated from the Swiss Federal Institute of Technology (ETH) in Zurich with a degree in mechanical engineering in 1966.
As an entrepreneur, Kaspar Villiger co-owned and managed two businesses from 1966 until 1989. Simultaneously, Kaspar Villiger had several political positions, first in the parliament of the canton of Lucerne and, from 1982, in the Swiss Federal Parliament. He became a Federal Councillor in 1989. He initially served as Defence Minister, with responsibility for the Federal Military Department. He then became Finance Minister in 1995 as Head of the Federal Department of Finance until the end of 2003. Kaspar Villiger was President of the Swiss Confederation in 1995 and 2002.
The Board of Directors has decided to nominate the following candidates for re-election to the Board for a further term: Jakob Baer ̤ John R. Coomber ̤
Please refer to the information provided in each director’s biography on pages 95 – 100.
The Governance Committee evaluates candidates for Board membership and makes recommendations to the Board with regard to their nomination for election or re-election. The Board submits nominations for new directors for election at the General Meeting that ensure an adequate size and a well-balanced composition of the Board and comply with the requirement that a majority of the Board is independent. At the General Meeting, each proposed election or re-election is presented by the Chairman and voted upon separately. The Chairman and Vice Chairman of the Board, as well as the chairpersons and members of the Board committees are elected by the Board of Directors.
Chairman of the Board of Directors The Chairman of the Board of Directors exercises ultimate supervision of the executive management on behalf of the Board. He usually attends the meetings of the Executive Committee and Executive Board and receives the documentation and minutes of all the meetings. He ensures adequate reporting to the Board by the Board committees, Executive Committee and Executive Board. He is also responsible, with the Chairman of the Audit Committee, for Group Internal Audit. He appoints the Head of Group Internal Audit, subject to confirmation by the Audit Committee, and determines his or her compensation.
He presides at General Meetings and represents the Group to shareholders.
Vice Chairman The Vice Chairman liaises between the Board and executive management in matters not reserved to the Chairman, supervises management’s preparation and execution of Board resolutions in operational matters as well as management’s development of Group strategies, and oversees management development for the Group’s senior executives.
Each committee is headed by a chairperson. He or she prepares and presides over the committee meetings. Any such committee must keep the Board apprised on a timely basis of actions and determinations.
The Audit Committee serves as an independent and objective monitor of the Group’s financial reporting process and system of internal control, and facilitates ongoing communication between the external auditor, management, Group Internal Audit and the Board with regard to the Group’s financial situation and course of business.
Independence and other qualifications All members of the Audit Committee are non-executive and independent. In addition to the independence criteria applicable to Board members, members of the Audit Committee may not accept any consulting, advisory, or other compensatory fee from the company. All members must be financially literate. At least one member must have the attributes qualifying him/her as an Audit Committee Financial Expert (as defined in the Corporate Bylaws and determined by the Board). Furthermore, the Corporate Bylaws require that Audit Committee
Members of the Compensation Committee Robert A. Scott, Chair Thomas W. Bechtler Raymund Breu (until 18 April 2008) Mathis Cabiallavetta (as of 1 September 2008) Raymond K. F. Ch’ien (as of 18 April 2008) Hans Ulrich Maerki
Members of the Finance and Risk Committee John R. Coomber, Chair Jakob Baer Rajna Gibson Brandon Walter B. Kielholz Hans Ulrich Maerki Robert A. Scott Kaspar Villiger
Governance Committee Responsibilities of the Governance Committee The Governance Committee, among other things, keeps itself informed on corporate governance developments, measures the Group’s ̤ governance against relevant best practice standards and informs the Board of its findings and emerging trends; evaluates Board member candidates and makes recommendations to the Board with ̤ regard to their nomination for election or re-election at a General Meeting, while ensuring an adequate size and a well-balanced composition of the Board as well as the independence of the majority of the Board; evaluates proposals of the Chief Executive Officer for the appointment and removal of ̤ members of the Executive Committee and the Executive Board; ensures the effectiveness of executive succession and emergency planning processes; ̤ reviews compliance with corporate governance disclosure requirements; ̤ periodically reviews the company’s Articles of Association and the Corporate Bylaws, and ̤ informs the Board of its findings and proposals; reviews the Group’s communication policy; ̤ periodically reviews the Group’s guiding principles, as well as corporate citizenship and ̤ corporate sustainability activities; monitors Investor Relations activities and the relationship with rating agencies; ̤ examines how public reports are perceived, especially with regard to whether they fulfil the ̤ needs and expectations of international investors; monitors the shareholder structure; ̤ has initial responsibility for assessing any merger and take-over proposals submitted to the ̤ Group; has initial responsibility for reviewing material transactions with any of the Group’s ̤ significant shareholders.
Members of the Investment Committee Mathis Cabiallavetta, Chair Thomas W. Bechtler Raymund Breu Raymond K. F. Ch’ien Rajna Gibson Brandon Bénédict G. F. Hentsch
The Board and its committees meet at the invitation of the Chairman of the Board as often as business requires. The Board has six regular two-day meetings a year. The first day is usually reserved for the committees; on the second day, the full Board meets for as long as necessary, mostly the whole day.
a. General work methods of the Board of Directors and its committees Extraordinary meetings are called at short notice if and when required. Board members can also join such meetings by video or telephone conference. A quorum is constituted when at least half the members of the Board or the Board committee are present in person or participate using some alternative means of communication.
In addition to the regular and extraordinary meetings, the Board and its committees can make decisions in writing. These resolutions by written agreement have equal validity to decisions made in regular or extraordinary meetings. Resolutions by written agreement of the Board of Directors may be adopted if no Board member calls for discussion of the motion. A quorum is
The Chairman of the Board is responsible for defining the agendas for the meetings of the Board and its committees in close cooperation with the chairpersons of the committees and in consultation with the Chief Executive Officer. A number of recurring issues are discussed periodically at the regular meetings.
In 2008, there were eight regular and three extraordinary Board meetings, and the Board made three decisions in writing. The Board meetings lasted 6.5 hours on average. Between one and 14 agenda items were discussed per meeting, with an average of eight items per meeting. The average attendance rate was 97.9% at the regular meetings throughout the year. Average attendance including extraordinary meetings, which were often called at short notice, was 96.4%. Whenever possible, Board members who are unable to attend an extraordinary meeting give their views on the agenda items to the Chairman before the meeting.
The two lead auditors representing the external auditor are also invited to Audit Committee meetings. The Head of Group Internal Audit and the two lead auditors of the external auditor are normally present in executive sessions of the committee.
d. Specific work methods of the Compensation Committee The Compensation Committee normally holds four regular meetings per year. The main purpose of the January and February meetings is to set the total amount for bonus payments in the organisation, including bonuses for Executive Board members, as well as to allocate benefits from the long-term incentive plans. The October meeting is to review the compensation principles and instruments. In December, the Committee undertakes an initial assessment of Executive Board members’ performance for the pending bonus allocation and decides on any amendments to the compensation system for the following year.
In 2008, there were four regular meetings of the Compensation Committee. There were no extraordinary meetings and five resolutions by written agreement. The meetings lasted on average three hours. Between six and nine agenda items were discussed per meeting, with an average of eight items. Attendance was 100% during the reporting year.
f. Specific work methods of the Governance Committee The Governance Committee normally holds four regular meetings per year. The Committee usually spends its first meeting of the year discussing developments in corporate governance and reviewing the Articles of Association, Corporate Bylaws and the corporate governance section of the Annual Report. The Committee’s other meetings address the media and investor response to the annual results, the Group’s Guiding Principles, social commitment, approach to sustainability, the activities of Investor Relations and shareholder structure. In 2008, one meeting was dedicated to an initiative which aims at improving the search for and promotion of talent as well as internal collaboration.
Besides the committee members and the company secretary, selected individuals are invited to attend Governance Committee meetings in an advisory capacity. In 2008, the following people exercised an advisory role on the Committee: Jacques Aigrain, Chief Executive Officer ̤ George Quinn, Chief Financial Officer ̤
In 2008, there were four regular and one extraordinary meetings of the Governance Committee. There were no resolutions by written agreement. On average, the meetings lasted 1.5 hours. Between two and six agenda items were discussed per meeting, with an average of five items. Attendance was 100% during the reporting year.
The Executive Committee holds, as a rule, two meetings per month. In 2008, the Executive Committee held 20 regular meetings plus numerous ad hoc telephone conferences.
The Executive Committee is supported by the larger Executive Board comprising 20 senior executive officers (including the eight members of the Executive Committee). All members of the Executive Board are appointed by the Board of Directors upon recommendation of the Chief Executive Officer and after consultation with the Governance Committee. The Executive Board supports the Executive Committee as a sounding forum. It held four regular meetings in 2008 and one extended meeting lasting several days and devoted to strategic issues. Several telephone conferences were held in addition at regular intervals.
Swiss Re maintains effective and consistent control of executive management through the Board of Directors. The Board of Directors has a number of controlling and informationgathering mechanisms in place to monitor the handling of responsibilities it has delegated to the executive management.
a. Participation of Board members at executive management meetings Both the Chairman of the Board and the Vice Chairman are invited to all meetings of the executive management and the Executive Board; effectively, the Board of Directors was represented at 18 of the 20 regular Executive Committee meetings and three of the four regular Executive Board meetings in 2008. The Chairman of the Board and the Vice Chairman always receive the meeting documentation and minutes.
c. Involvement of executive management in Board committee meetings At the meetings of the Board committees, executive management members participate in an advisory capacity. For a detailed listing of Executive Committee member participation in Board committee meetings, as well as the number of meetings and the meeting cycle, see the relevant sections in 3.5.3.
d. Periodic reporting by executive management At each regular Board meeting, the “Executive Report” is a standard agenda item, comprising a comprehensive report on the business development, including major business transactions, claims, corporate development issues and key projects.
In addition, specific written reports focusing on issues such as risk exposure and risk management activities of the Group, economic results, investment operations, compliance, legal aspects and economic outlook are provided to the members of the Board of Directors on a regular basis.
e. Management Information System Several times a year, Board members receive a printed “Business Update”, which measures Swiss Re’s performance against its strategic and financial objectives. The content of this report is extracted from Swiss Re’s Management Information System (MIS), a web-based tool providing an in-depth quantitative and qualitative analysis of the current performance of the Group as well as detailed business information for all fields of activity. The MIS covers, besides performance figures, a wide variety of aspects, such as capital adequacy, business renewals, deal pipeline, investment results, claims development, costs, workforce, strategic initiatives, project portfolio, findings of Group Internal Audit, compliance, competitors and shareholding structure.
f. Risk management Risk Management provides regular risk reports to the Board of Directors, which are discussed by the Finance and Risk Committee. These reports cover Swiss Re’s compliance with the Group’s risk tolerance criteria, major changes in risk and capital adequacy measures and a description of the Group’s main risk issues, including related risk management actions and recommendations. In addition, the Board of Directors received the Assurance Report 2008, which provides a qualitative summary of assurance activities.
Jacques Aigrain, a Swiss and French citizen born in 1954, received a PhD in economics in 1981 from the Sorbonne in France and a master’s degree in economics from Paris-Dauphine University.
He started his career with J. P. Morgan in 1981 and had various functions in investment banking in London, Paris and New York. Immediately prior to joining Swiss Re, he was a Managing Director and a member of J.P. Morganʼs Investment Banking Management Committee, where he was Co-head of client coverage.
In June 2001, he joined Swiss Re as Head of the Financial Services business group and member of the Executive Committee. In August 2004, the Board of Directors appointed him Deputy Chief Executive Officer in addition to his Financial Services role, a task that included a number of coordination functions across the firm, in particular regulatory affairs. He was appointed Chief Executive Officer effective as of 1 January 2006.
In October 1983, he joined Bavarian Re as a team member of a business analysis project. From 1985, he was involved in the casualty department’s operations in the German-speaking area. In 1986, he became Head of the non-proportional underwriting department.
He joined Swiss Re in 2008 and was appointed Head of Asset Management and member of the Executive Committee.
His commitments to organisations outside Swiss Re include his membership of the Forum of Young Global Leaders at the World Economic Forum (WEF).
Brian Gray, a Canadian citizen born in 1962, has a degree in economics from Wilfrid Laurier University and an MBA from the University of Toronto, and is a Fellow of the Insurance Institute of Canada.
He joined Swiss Re in 1985 and worked in a variety of underwriting and marketing roles in Toronto. In 1994, he moved to Zurich where he held positions in the former Asia-Pacific/Africa division, as well as corporate integrated risk management functions. In 1997, he returned to Canada where he assumed responsibility for Underwriting, Claims and Special Lines activities. He was appointed President and Chief Executive Officer of Swiss Re Canada in March 2001.
Changes in the course of the 2008 business year In April, it was announced that David J. Blumer would join Swiss Re as Head of Asset Management and member of the Executive Committee on 1 May 2008. He succeeded Roger Ferguson, who left Swiss Re to assume a senior position at a major financial institution.
Additional information on the Compensation Committee can be found in sections 3.5.2 (responsibilities, members) and 3.5.3 (work methods).
Compensation philosophy and guiding principles Philosophy To attract, motivate and retain the qualified talent necessary for its success, Swiss Re, as a global company, aims to provide remuneration that is competitive in the labour markets in which it operates.
While the variable portion of the total compensation increases as an individual progresses in the organisation, virtually all employees have at least some of their compensation directly correlated with the company’s success, to sharpen the focus on performance and reinforce teamwork and collaboration.
Swiss Re’s incentive programmes are designed to reflect the long-term dynamics of its business and are applied across all hierarchical levels. A significant portion of higher management’s compensation is tied to the organisation’s long-term performance, ensuring that compensation is given for solid, sustainable achievement as opposed to short-term annual results. The Long-term Incentive plan (LTI) and in particular the Value Alignment Incentive plan (VAI), as described further, support this goal.
Performance management in Swiss Re is multidimensional. An employee’s individual performance is determined by: performance in the current position, based on a set of objectives, and assessed in terms of ̤ timeliness, quality and quantity of achievement; ability to build trust and confidence, as well as to coach and transfer knowledge to enable ̤ others to succeed in broader positions; demonstration of competencies in the areas of thought, results, people and personal ̤ leadership.
Measured against prior-year development ̤ Applies above a certain threshold ̤ Paid after three years ̤
The cash API for a year’s service is paid after the publication of the Group’s result, in March of the following year.
When the variable compensation level for an employee exceeds a pre-defined amount, the variable pay is delivered through two components: a cash payment and a VAI.
The VAI has now been in place for three years and supports the company’s aims by providing a “claw-back” mechanism.
Long-term Incentive The LTI is a discretionary grant for all Executive Board and Executive Committee members and a select group of key executives at Managing Director level, over and above their annual cash remuneration. The intention is to: achieve competitive total compensation for top executive talent by offering the participant ̤ a long-term incentive opportunity; focus participants on growth and capital efficiency, both of which are critical to long-term ̤ shareholder value creation; assist with retention. ̤
The LTI is based on a three-year rolling financial plan approved by the Board, and focuses on the achievement of three-year goals for return on equity and growth in earnings per share. A performance scale around a pre-defined target for both measures determines the level of reward earned at the end of each three-year performance cycle.
Employee benefits Swiss Re aims to provide an appropriate package of employee benefits for each distinct operating environment. Employee benefits are one component in Swiss Re’s total reward offering and should contribute to achieving competitive advantage, relative to general local market employment conditions, in order to recruit, motivate and retain talent. The primary purpose is to establish a level of security for the employee and their dependents in respect of major events in their lives in the areas of age, health, disability and death.
Summary of compensation at Board level The members of the Board of Directors receive a fixed honorarium of CHF 325 000 per annum. The Chairman and Vice Chairman of the Board, as well as the chairpersons of Committees, receive a higher compensation to reflect their increased responsibilities and engagements. Unlike the API for the Executive Committee, which is determined in arrears based on the results of the performance year, the honorarium is determined in advance at the start of the financial year. The honorarium is reviewed to ensure that it remains appropriate going forward. A minimum of 40% of the honorarium must be taken in Swiss Re shares with a four-year deferral period.
Compensation, participations and loans of the members of the Board of Directors (extract from note 15 to the Financial statements) CHF thousands 2007 2008
Raymund Breu, Member 325 325 325 Mathis Cabiallavetta, Chairman of the Investment Committee1 200 133 333 Raymond K. F. Ch’ien, Member2 137 91 228 John R. Coomber, Chairman of the Finance and Risk Committee 587 395 260 655 Rajna Gibson Brandon, Member 325 195 130 325
Hans Ulrich Maerki, Member 227 195 130 325 Robert A. Scott, Chairman of the Compensation Committee 425 255 170 425 John F. Smith, Jr., Former member3 325 48 48 96 1 Elected to the Board of Directors at the Annual General Meeting of 18 April 2008, with effect as of 1 September 2008 2 Elected to the Board of Directors at the Annual General Meeting of 18 April 2008 3 Retired from the Board of Directors at the Annual General Meeting of 18 April 2008
Summary of compensation at Executive Committee level The members of the Executive Committee are remunerated under the same scheme as all other Swiss Re employees. The members of the Executive Committee are paid a fixed base salary in cash. Furthermore, Executive Committee members receive a variable API, which totalled CHF 12.34 million for 2008 (compared to CHF 25.33 million in 2007). As explained above, a material part of the API is deferred through the VAI for three years, while the remaining API can be taken either in cash or in bonus shares. All Executive Committee members also participate in the LTI.
Honorariums are set at the beginning of each year and as such are not subject to the performance of the company. In recognition of the difficulties faced by the company in the current financial environment, the Chairman and the Vice Chairman have each elected to forego 50% of their 2008 honorarium in 2009.
Value Alignment Incentive (VAI)1 4 875 Long-term Incentive plan grant (LTI)2 5 000 5 000
Compensation of members of the Executive Committee (extract from note 15 to the Financial statements)
Compensation due to member leaving 2 280 Contractual commitments due to new members 9 124 Funding of pension benefits 1 494 1 084
5.2 Transparency of compensations, shareholdings and loans pertaining to issuers domiciled abroad
There is no statutory rule on the deadline for registering shareholders in connection with the attendance of the General Meeting. In recent years, Swiss Re acknowledged the voting rights of shares which were registered at least two working days before the General Meeting. In 2008, the qualifying date for the Annual General Meeting held on Friday, 18 April 2008 was Wednesday, 16 April 2008.
6.1 Voting right restrictions and representation 6.2 Statutory quorums 6.3 Convocation of the General Meeting of shareholders 6.4 Agenda 6.5 Registrations in the share register 6 Shareholders’ participation rights
There are no statutory rules on “opting up” or “opting out”. “Opting up” is a statutory rule based on which the triggering threshold would be lifted to a higher percentage than 33⅓% of all voting rights, while “opting out” is a statutory rule waiving the legal duty to submit an offer when reaching the threshold of 33⅓% of all voting rights. Should a shareholder reach the threshold of 33⅓% of all voting rights, then, under the Swiss Stock Exchange Act, the shareholder would be required to submit a general take-over offer.
The following summarises fees (including VAT) for professional services for the year ended
Audit-related fees comprise, among other things, amounts for letters of comfort, accounting advice, information systems reviews and reviews of internal controls.
In addition to the fees described above, aggregate fees of CHF 2.5 million were billed by PricewaterhouseCoopers AG during the year ended 31 December 2008, primarily for the following: Income tax compliance and related tax services CHF 0.4 million ̤ Other fees CHF 2.1 million ̤ Other fees include permitted advisory work related to a range of projects including due ̤ diligence.
8.1 Duration of the mandate and term of office of the lead auditors 8.2 Auditing honorarium 8.3 Additional honorarium 8.4 Supervisory and control instruments vis-à-vis the external auditor
The Investor Relations unit at Swiss Re is responsible for managing all contacts with investors and analysts. Meetings are held regularly with institutional investors and analysts to discuss important corporate news or specific topics. These meetings can also be followed by private shareholders via telephone conference or on the Swiss Re website. In 2008, Swiss Re held an investors’ day on its Life & Health business and at the same time gave an update on market exposures. Presentations and conference call recordings are made available to the public on the Group’s website.
23 January Berkshire Hathaway acquires News release a 3% stake in Swiss Re 29 February To extend its leading influence in News release the risk transfer industry, Swiss Re continues to sharpen its business
10 July Swiss Re names Stefan Lippe as News release Deputy CEO and Chief Operating Officer and Brian Gray as Chief Underwriting Officer; Andreas Beerli to retire in 2009 5 August Second quarter 2008 results News release, press conference in Zurich and analystsʼ telephone
Notes to the Group financial 141 Note 1 Organisation and summary of significant accounting policies statements
167 Note 6 Deferred acquisition costs (DAC) and acquired present value of future profits (PVFP)
Fixed income securities: Available-for-sale, at fair value (including 9 045 in 2007 and 8 188 in 2008 subject to securities lending and repurchase agreements) (amortised cost: 2007: 105 995; 2008:
Short-term investments, at amortised cost which approximates fair value 8 786 5 802
Liabilities Unpaid claims and claim adjustment expenses 8 88 528 75 510 Liabilities for life and health policy benefits 9 50 026 39 911
Income taxes payable 679 769 Deferred and other non-current taxes 12 3 817 1 329
Additional paid-in capital 11 208 10 776 Treasury shares –1 540 –1 640 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of deferred taxes 3 119 –2 407 Cumulative translation adjustments, net of deferred taxes –2 554 –4 854 Accumulated adjustment for pension and post-retirement benefits, net of deferred taxes –115 –529
Common shares Balance as of 1 January 37 37 Issue of common shares 1 Cancellation of shares bought back –2 Balance as of period end 37 36
Foreign currency translation Balance as of 1 January –205 –2 554 Change during the period –2 349 –2 300 Balance as of period end –2 554 –4 854
Adjustment for pension and other post-retirement benefits Balance as of 1 January –724 –115 Change during the period 609 –414 Balance as of period end –115 –529
Securities purchased/sold under agreement to resell/repurchase, net 7 935 –8 214 Net cash provided/used by operating activities –3 330 –6 089
Cash flows from financing activities Issuance of long-term debt 4 342 1 327 Issuance/repayment of short-term debt 2 057 –5 354 Equity issued 38 1 Purchase/sale of treasury shares –2 303 –1 553 Dividends paid to shareholders –1 162 –1 331 Net cash provided/used by financing activities 2 972 –6 910
Separate account assets are carried at fair value. The investment performance (including interest, dividends, realised gains and losses and changes in unrealised gains and losses) of separate account assets and the corresponding amounts credited to the contract holder are offset to zero in the same line item in earnings.
External direct costs of materials and services incurred to develop or obtain software for internal use, payroll and payroll-related costs for employees directly associated with software development and interest cost incurred while developing software for internal use are capitalised and amortised on a straight-line basis through earnings over the estimated useful life.
Investment contracts are long-duration contracts that do not incorporate significant insurance risk if there is no mortality and morbidity risk, or the mortality and morbidity risk associated with the insurance benefit features offered in the contract is of insignificant amount or remote probability. Amounts received as payment for investment contracts are reported as policyholder account balances. Related assets are included in general account assets.
In September 2006, the Financial Accounting Standards Board issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires an employer to recognise the overfunded or underfunded status of a defined benefit post-retirement plan as an asset or liability and to recognise changes in that funded status in the year in which the changes occur through comprehensive income. The Group adopted the provisions of SFAS 158 for the year ended 31 December 2006 except for the provision to measure plan assets and benefit obligations as of the date of the employers’ fiscal year end statement of financial condition. The Group adopted the final provision as of 1 January 2008. Refer to Note 13 for further information.
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157 “Fair Value Measurements” (SFAS 157). SFAS 157 establishes a new definition and frame work for determining fair value and expands the required disclosures for assets and liabilities recorded at fair value. This statement applies to all assets and liabilities measured at fair value which are required or allowed by other standards with limited exceptions. The Group adopted SFAS 157 as of 1 January 2008. Refer to Note 3 for further information.
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 enables entities to elect to measure specified financial assets and liabilities at fair value on an instrument-by-instrument basis and expands the ability to use fair value measurements with financial instruments and certain other items for which fair value measurement was not previously permitted. The Group adopted SFAS 159 and applied the fair value option as of 1 January 2008. Refer to Note 3 for further information.
In April 2007, the Financial Accounting Standards Board issued FSP FIN 39-1 “Amendment of FASB Interpretation No. 39” (FIN 39-1). FIN 39-1 impacts master netting arrangements, which are part of derivative transactions, by allowing net derivative positions to be offset against the fair value of amounts (or amounts that approximate fair value) recognised as the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements. The Group adopted FIN 39-1 as of 1 January 2008. Refer to Note 4 for further information.
In May 2008, the Financial Accounting Standards Board issued SFAS No. 163 “Accounting for Financial Guarantee Insurance Contracts”. This standard changes the measurement and disclosure requirements for financial guarantee insurance contracts. It has become effective for the Group on 1 January 2009. As required by the standard, the Group adopted for the third quarter 2008 disclosure requirements about risk management practices and exposures that have experienced credit deterioration. Refer to Note 10 for further information.
On 10 October 2008, the Financial Accounting Standards Board issued FSP FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS No. 157 “Fair Value Measurements” in a market that is not active. FSP FAS 157-3 is effective upon issuance. The Group has reviewed FSP FAS 157-3 and concluded that it is consistent with the valuation guidance applied by the Group. Refer to Note 3 for further information.
Equity securities 888 767 Policy loans, mortgages and other loans 604 541 Investment real estate 221 232 Short-term investments 494 275 Other current investments 539 409 Share in earnings of equity-accounted investees 448 –944 Cash and cash equivalents 351 332 Deposits with ceding companies 777 595
Net realised investment gains/losses include income on unit-linked and with-profit business, which are credited to policyholders.
Equity securities available-for-sale: Gross realised gains 1 714 927 Gross realised losses –159 –1 250
Other-than-temporary impairments –647 –2 868 Net realised investment gains/losses on trading securities –917 –2 689 Change in net unrealised investment gains on trading securities 298 –5 712 Other investments: Gross realised/unrealised gains/losses 356 1 799 Foreign exchange gains/losses –1 335 1 338 Net realised investment gains/losses –739 –9 482
Amortised cost or cost and estimated fair values of investments in fixed income and equity securities classified as available-for-sale were as follows: Investments availablefor -sale
States of the United States and political subdivisions of the states 1 417 46 –11 1 452
Fixed income securities available-for-sale 105 995 3 263 –1 448 107 810 Equity securities available-for-sale 9 039 2 205 –485 10 759
States of the United States and political subdivisions of the states 45 –4 41
Fixed income securities available-for-sale 106 216 5 234 –8 012 103 438 Equity securities available-for-sale 675 184 –26 833
As a reaction to the current unprecedented market turmoil, Swiss Re revised its business strategy and therefore its related investment strategy. Under the revised strategy, the majority of the fixed income securities classified as trading are no longer held for the purpose of selling or repurchasing over the short term. To reflect this change, as of 1 October 2008, the Group transferred CHF 22 441 million of fixed income securities from the trading into the availablefor -sale category.
The amortised cost or cost and estimated fair values of investments in fixed income securities available-for-sale by remaining maturity are shown below. Fixed maturity investments are assumed not to be called for redemption prior to the stated maturity date. As of 31 December 2007 and 2008, CHF 5 169 million and CHF 8 648 million, respectively, of fixed income securities available-for-sale were callable.
Debt securities issued by governments and government agencies 14 738 9 026
As of 31 December 2008, securities of CHF 10 707 million are pledged as collateral in securities lending transactions and repurchase agreements. The associated liabilities of CHF 4 465 million are recognised in accrued expenses and other liabilities.
The Group has revised the presentation of collateral, which can be sold or repledged, for 2007. The revision has no impact on balance sheet items, shareholders’ equity or net income.
The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position, as of 31 December 2007 and 2008. A continuous decline in the value of equity securities available-for-sale for longer than twelve months is considered other-than-temporary and recognised as net realised investment gains/ losses in the income statement. Therefore, as of 31 December 2007 and 2008, the gross unrealised loss on equity securities available-for-sale of CHF 485 million, respectively, and CHF 26 million relates to declines in value for less than 12 months.
performance and outlook for the economic environment and industry in which the issuer operates; (c) review of the financial performance and outlook for the issuer compared to industry peers; and (d) analysis of any other factors, including credit rating, that may adversely affect the Group’s intent and ability to hold the investment long enough to allow for any anticipated recovery. Considering these factors, the Group deems the unrealised loss of CHF 8 012 million on fixed income securities available-for-sale to be temporary, as it has the ability and the intent as of 31 December 2008 to hold these securities until recovery of fair value. Other-than-temporary declines in the value of equity and fixed income securities available-for-sale are recognised as net realised investment gains/losses in the income statement.
The Group may sell available-for-sale equity or fixed income securities at a loss in subsequent periods having previously asserted the intent and ability to hold such securities until recovery. Such sales may only take place in response to changes in market conditions or other circumstance that occur after the balance sheet date. As a result, the Group recognises the associated realised losses in the period in which the decision to sell the securities is taken.
As of 31 December 2007 and 2008, investments in real estate included CHF 64 million and CHF 9 million, respectively, of real estate held for sale.
Policy loans, mortgages and other loans 7 414 7 414 6 611 6 611
As of 1 January 2008, the Swiss Re Group adopted SFAS No.157 “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It requires disclosures of the Group’s assets and liabilities that are measured at fair value.
SFAS 157 requires all assets and liabilities that are measured at fair value to be categorised within the fair value hierarchy. This three-level hierarchy is based on the observability of the inputs used in the fair value measurement. The levels of the fair value hierarchy are defined as follows: Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the Group has the ability to access. Level 1 inputs are the most persuasive evidence of fair value and are to be used whenever possible.
Level 2 inputs are market-based inputs that are directly or indirectly observable but not considered level 1 quoted prices. Level 2 inputs consist of (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical assets or liabilities in non-active markets (e.g. markets which have few transactions and prices are not current or price quotations vary substantially); (iii) inputs other than quoted prices that are observable (eg interest rates, yield curves, volatilities, prepayment speeds, credit risks and default rates); and (iv) inputs derived from, or corroborated by, observable market data.
Total assets at fair value 27 249 175 912 28 238 –88 174 143 225
Liabilities for life and health policy benefits –494 –494 Accrued expenses and other liabilities –607 –58 –665 Total liabilities at fair value –1 023 –76 416 –19 041 85 750 –10 730 1 FIN 39 permits the netting of derivative receivables and derivative payables when a legally enforceable master netting agreement exists between two counterparties. A master netting agreement provides for the net settlement of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default or on the termination of any one contract.
The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) for the twelve months ended 31 December 2008 were as follows: Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
Liabilities Opening balance as of 1 January 2008 –102 –10 200 –170 –10 472
Purchases, issuances, and settlements –1 391 145 –1 246 Transfers in and/or out of Level 3 14 34 48 Impact of foreign exchange movements –16 94 –9 69
The Group elected the fair value option for positions in the following line items in the balance sheet: Fixed income securities trading In the second quarter of 2008, the Group elected the fair value option for specific investments acquired within a transaction. These securities are classified as debt securities under the Group’s accounting policies. Upon election of the fair value option the securities are classified as trading, with changes in fair value recorded in earnings. The primary reason for electing the fair value option is to mitigate volatility in earnings as a result of using different measurement attributes.
Equity securities trading As of 1 January 2008, the Group elected the fair value option for an investment previously classified as available-for-sale within other invested assets in the balance sheet. The Group economically hedges the investment with derivative instruments that offset this exposure. The changes in fair value of the derivatives are recorded in earnings. Electing the fair value option eliminates the mismatch previously caused by the economic hedging of the investment and reduces the volatility in the income statement. According to the nature of the investment, the Group revised the presentation in the current period and included it in equity securities held for trading.
The initial adoption of the fair value option for existing transactions had a one-time effect on the corresponding balance sheet positions and retained earnings. The following table shows the adjustment for each balance sheet item as of 1 January 2008: The net impact on retained earnings from the fair value elections described above was an increase of CHF 33 million and a decrease of CHF 40 million, respectively.
Cumulative effect due to initial adoption of the fair value option
Interest rate contracts Forwards and futures 88 –396 –308 253 –333 –80
According to FIN 39-1, the fair value amounts recognised for the right to reclaim cash collateral or the obligation to return cash collateral that have been offset are CHF 2 748 million for assets and CHF 2 548 million for liabilities as of 31 December 2007, and CHF 6 189 million for assets and CHF 3 765 million for liabilities as of 31 December 2008, respectively. The fair value amounts that have not been offset are CHF 302 million and nil as of 31 December 2007 and 31 December 2008, respectively.
The maximum potential loss assuming non-performance by all counterparties, and based on the market replacement cost as of 31 December 2007 and 31 December 2008, approximated CHF 6 713 million and CHF 14 032 million, respectively. These values are net of amounts offset pursuant to rights of set-off and qualifying master netting arrangements with various counterparties.
As of 31 December 2007 and 31 December 2008, other invested assets included derivative financial instruments with a fair value of CHF 6 168 million and CHF 8 022 million, respectively.
The Group designates non-derivative monetary financial instruments as hedging the foreign currency exposure of its net investment in certain foreign operations.
The table below shows the fair values and the maximum potential payout of the written/sold credit derivatives as of 31 December 2008, categorised by the type of the credit derivative and credit spreads which are based on external market data. The fair values represent the gross carrying values, excluding the effects of netting under ISDA master agreements and cash collateral netting. The maximum potential payout is based on the notional values of the derivatives and represents the gross undiscounted future payments the Group would be required to make, assuming the default of all credit derivatives’ underlyings.
Maximum potential payout (time to maturity)1 Total maximum potential payoutCHF millions 0 – 5 years 5 –10 years Over 10 years
The fair values of the credit derivatives written/sold do not represent the Group’s effective net exposure, as the ISDA master agreement and the cash collateral netting are excluded.
The purchase price has been allocated based on the fair value of assets acquired and liabilities at the date of acquisition. The allocation of the purchase price included adjustments to the following assets and liabilities: Allocation of purchase price
Net assets acquired 688 Adjustments to assets acquired and liabilities assumed
Transaction cost 3 5 Total cost of investment 765 1 444
The Group has not recognised any restructuring provision related to the acquisition.
The unaudited pro forma financial information as of 31 December 2008 is presented to illustrate the effect on the Group’s income statement of the acquisition.
The unaudited pro forma result is based on the estimated revenues and net income of the acquired business in 2007 and 2008 and includes estimates for the impact of purchase accounting. This pro forma information is not necessarily indicative of what would have occurred had the acquisition and related transactions been made on the dates indicated, or of future results of the company.
Net income/loss 4 237 –810 Net income/loss per share in CHF – basic 12.17 –2.45 Net income/loss per share in CHF – diluted 11.42 –2.45
The Group enters into long- and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines short-term debt as debt having a maturity at the balance sheet date of less than one year and long-term debt as having a maturity of greater than one year. Interest expense is classified accordingly. The Group’s debt as of 31 December 2007 and 2008 was as follows: As of 31 December 2007 and 2008, long-term debt as reported above had the following maturities: The Group uses debt for general corporate purposes and to fund discrete pools of oper ational leverage and financial intermediation assets. Operational leverage and financial intermediation are subject to strong asset and liability matching, resulting in little to no risk that the assets will be insufficient to service and settle the liabilities. Debt used for operational leverage and financial intermediation is treated as operational debt and excluded by the rating agencies from financial leverage calculations. As of 31 December 2007 and 2008, operational leverage and financial intermediation liabilities amounted to CHF 52.4 billion (thereof CHF 9.8 billion non-recourse) and CHF 34.2 billion (thereof CHF 5.2 billion nonrecourse ), respectively.
Long-term debt – financial and operational debt 23 337 20 453 1 A mandatory convertible bond matured in December 2008, which converted to Swiss Re shares using the conversion rate of CHF 95.6. This balance now includes one other mandatory convertible bond issued in June 2006, due in June 2009, with a book value of CHF 610 million.
50bp 2 2016 Credit-linked note 2007 USD 621 3M Libor 1 769 2028 Senior note2 2005 GBP 100 1M Libor 153 2032 Principal protected structured note
Total senior debt as of 31 December 2008 9 882 Total senior debt as of 31 December 2007 9 441 1 Assumed in the acquisition of GE Insurance Solutions.
Subordinated perpetual loan note 2006 EUR 1 000 5.25% 2 016 1 471 Subordinated perpetual loan note 2006 USD 752 6.85% 2 016 800 Subordinated perpetual loan note 2007 GBP 500 6.30% 2 019 761 2 subordinated perpetual loan notes
In May 2008, the Group issued a structured EMTN of USD 280 million, due in 2010, bearing interest of three-month USD Libor, and a EUR 25 million EMTN with a three-year maturity and a coupon of 4.73%.
Financial statements / Notes to the Group financial statements 8 Unpaid claims and claim adjustment expenses
Amortisation of deferred expense on retroactive reinsurance and impact of commutations 92 125
Foreign exchange –2567 –6 527 Effect of acquisitions, disposals, new retroactive reinsurance and other items 300 578
At the end of 2008 the Group carried net reserves for US asbestos, environmental and other long-latent health hazards equal to CHF 2 280 million. During 2008, the Group incurred net losses of CHF 137 million and paid net against these liabilities CHF 266 million.
Claims development on prior years was favourable during 2008. Adverse developments in America were balanced by favourable development in Europe and the rest of the world.
Reserves for asbestos and environmental pollution claims in the US were increased slightly during 2008. Experience on the workers’ compensation line of business again showed adverse development for which the Group strengthened its reserves. Financial Guarantee Re also showed adverse development during 2008.
The favourable development arose mostly from Property, Marine, Engineering and Aviation from 2001 and subsequent years.
Claims and claim adjustment expenses; life and health benefits –12 065 –11 112 –23 177 –10 007 –9 065 –19 072
CHF millions Non-Life Life & Health Total Non-Life Life & Health Total
For reporting periods ending on or after 1 January 2009, the Swiss Re Group will fully adopt SFAS No. 163 “Accounting for Financial Guarantee Insurance Contracts” (SFAS 163) as per the Statement requirements. For the reporting period ended 31 December 2008, SFAS 163 requires selected disclosures about financial guarantee reinsurance business based on existing accounting policies. The disclosures relate to risk management practices and exposures that have experienced credit deterioration.
The Group maintains a watch list based on the information provided by the cedents and the Group’s internal monitoring activities. Obligations with credit deterioration are split into two categories. Category 1 (Special mention) encompasses transactions that are still currently performing, but where indicators point to an increased risk of default. Category 2 (Workout) includes insured financial obligations that are characterised as non-performing and a reserve has been reported by the cedent. A default may have occurred or is seen as likely to occur in the future. As of 31 December 2008, the notional exposures and claims liabilities allocated to categories 1 and 2 were as follows:
Financial statements / Notes to the Group financial statements 11 Earnings per share
Dividends are declared in Swiss francs. For the years ended 31 December 2007 and 2008, the Group’s dividends per share were CHF 3.40 and CHF 4.00, respectively.
The effects of debt conversion and the issuance of employee options have not been included in the 2008 earnings/losses per share. The resulting change of 26 887 844 shares for the year ended 31 December 2008 was anti-dilutive.
At the company’s 144th Ordinary General Meeting held on 18 April 2008, the shareholders approved the cancellation of 17.3 million shares with a total value of CHF 1.45 billion. These shares were repurchased under the share buy-back programme agreed at the 2007 Ordinary General Meeting. The shares were cancelled in accordance with Article 733 of the Swiss Code of Obligations.
Basic earnings per share Income/loss available to common shares 4 162 –864 Weighted average common shares outstanding 348 214 512 331 024 378 Net income/loss per share in CHF 11.95 –2.61
Effect of dilutive securities Change in income available to common shares due to convertible bonds 143 Change in average number of shares due to convertible bonds and employee options 35 261 146
Diluted earnings per share Net income assuming debt conversion and exercise of options 4 305 Weighted average common shares outstanding 383 475 658 Net income/loss per share in CHF 11.23 –2.61
The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: The following table reconciles the expected tax expense at the Swiss statutory tax rate to the actual tax benefit in the accompanying income statement: Tax rate reconciliation
Current tax expense 482 560 Deferred tax expense/benefit 543 –1 046 Income tax expense/benefit 1 025 –486
Income tax at the Swiss statutory rate of 21.0% 1 089 –284 Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates 247 384 Impact of foreign exchange movements –125 –30 Disallowed expenses 75 9 Tax exempt income/dividends received deduction –141 –39 Change in valuation allowance –41 604 Basis differences in subsidiaries –21 –517 Change in statutory tax rates –170 –21 FIN 48 including interest and penalties 83 –88 Business restructuring 45 –250 Life tax adjustments –15 –79 Other, net –1 –175
The components of deferred and other non-current taxes were as follows: Deferred taxes have not been recognised on the undistributed earnings of certain foreign subsidiaries to the extent the Company considers such earnings as being indefinitely reinvested abroad and does not expect to repatriate these earnings in the foreseeable future. The amount of such earnings included in consolidated retained earnings as of 31 December 2008 was approximately 6 769 million CHF. It is not practicable to estimate the amount of additional tax that might be payable if such earnings were not reinvested indefinitely.
As of 31 December 2008, the Group had CHF 14 231 million net operating tax loss carryforwards, including mark to market losses, expiring as follows: CHF 25 million in 2009, CHF 28 million in 2010, CHF 45 million in 2011, CHF 14 million in 2012, CHF 1 484 million in 2013, CHF 6 931 million after 2013 and CHF 5 704 million do not expire. The Group also had capital loss carryforwards of CHF 453 million, expiring as follows: CHF 113 million in 2009, CHF 46 million in 2011, CHF 17 million in 2012, CHF 275 million in 2013, and CHF 2 million never expire. Net operating losses of CHF 726 million were utilised or expired during the period ended 31 December 2008.
Income taxes paid in 2007, as revised from prior report, and through 31 December 2008 were CHF 376 million and 147 million, respectively.
A reconciliation of the beginning and ending amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows:
The amount of gross unrecognised tax benefits within the tabular reconciliation that, if recognised, would affect the effective tax rate were approximately CHF 1 535 million and CHF 856 million as of 1 January 2008 and 31 December 2008, respectively. Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such expense for the period ending 31 December 2008 was CHF 63 million. As of 1 January 2008 and 31 December 2008, CHF 240 million and CHF 268 million, respectively, has been accrued for the payment of interest (net of tax benefits) and penalties. The 31 December 2008 accrued interest balance is included within the deferred and other non-current taxes section reflected above and in the statement of financial position.
During the year, the Group had met the effectively settled definition within FIN 48 for various tax positions and audits in Switzerland, the United Kingdom and the United States.
Financial statements / Notes to the Group financial statements 13 Benefit plans
Effective as of 1 January 2007, Swiss Re Group has changed the structure of its Swiss pension plan to a defined contribution scheme. The plan will continue to be accounted for as a defined benefit plan under US GAAP.
The measurement date of these plans is 30 September (except for one UK pension plan with a measurement date as of 31 December) for the year 2007, and 31 December for the year 2008.
Effect of curtailment and termination benefits 15 –2 –27 Effect of foreign currency translation –80 –440 –12 –13 Benefit obligation as of 31 December 2 743 2 827 2 212 1 642 462 325
Amounts recognised in accumulated other comprehensive income, gross of tax, in 2008 consist of: Components of net periodic benefit cost and other amounts recognised in other comprehensive income consist of: Other changes in plan assets and benefit obligations recognised in other comprehensive income consist of: Components of net periodic benefit cost
Net gain/loss 610 177 –22 765 Prior service cost/credit –130 –130 Amortisation of: Exchange rate gain/loss recognised during the year –54 2 –52 Total recognised in other comprehensive income, gross of tax 601 117 –125 593 Total recognised in net periodic benefit cost and other comprehensive income, gross of tax 647 165 –114 698
Pension plans with an accumulated benefit obligation in excess of plan assets consist of: Principal actuarial assumptions
Accumulated benefit obligation 981 3 512 Fair value of plan assets 784 3 149
Assumed medical trend rates at year end Medical trend – initial rate 7.1% 7.2% Medical trend – ultimate rate 4.6% 4.5% Year that the rate reaches the ultimate trend rate 2015 2015
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 2008: The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2007 and 2008, are as follows: Actual asset allocation is determined by a variety of current economic and market conditions and considers specific asset class risks.
The Group’s pension plan investment strategy is to match the maturity profiles of the assets and liabilities in order to reduce the future volatility of pension expense and funding status of the plans. This involves balancing investment portfolios between equity and fixed income securities. Tactical allocation decisions that reflect this strategy are made on a quarterly basis.
Effect on total of service and interest cost components 2 –2 Effect on post-retirement benefit obligation 34 –27
As of 31 December 2007 and 2008, the Group had the share-based compensation plans described below.
Options exercised 68 –10 000 Options sold 105 –94 700 Options forfeited or expired 147 –850 492
The status of stock options exercisable as of 31 December 2008 is summarised as follows: The Group introduced a restricted-share plan during 2004 to complement the fixed-option plan. In 2007 and 2008, nil and 772 248 restricted shares were issued under this plan, respectively. In addition, restricted bonus shares were issued during 2007 and 2008 of
A summary of shares relating to outstanding awards granted under the above-mentioned plans as of 31 December 2008 is presented below: The weighted average fair value of restricted shares, which equals the market price of the shares on the date of the grant, was CHF 108 and CHF 84 in 2007 and 2008, respectively.
In 2006, the Group issued 3 million stock appreciation rights (SAR) as an extraordinary grant following the Insurance Solutions acquisition. The plan will be settled in cash. The requisite service period is 2 years, which vested in June 2008, while the maximum contractual term is 5 years. The fair value of the appreciation rights are estimated at date of grant using a binomial option-pricing model and is revised at every balance sheet date until exercise.
As of 31 December 2008, the total unrecognised compensation cost (net of expected forfeitures) related to non-vested, share-based compensation awards was CHF 15 million and the weighted average period over which that cost is expected to be recognised was 2.1 years.
The number of shares authorised for the Group’s share-based payments to employees was 1 204 155 and 649 773 as of 31 December 2007 and 2008, respectively.
For the Groups outstanding LTI plans, the unrecognised compensation costs are based on the fair value that is revised at every balance sheet date. Based on the calculated fair value as at 31 December 2008, the Group does not expect to recognise further compensation costs related to outstanding LTI plans.
Financial statements / Notes to the Group financial statements 15 Compensation, participations and loans of members of governing bodies
Article 663bbis of the Swiss Code of Obligations requires disclosure of total compensation paid to members of the Board of Directors and the Executive Committee. Compensation to members of the Board of Directors and the highest paid member of the Executive Committee are shown by individual. For a description of the elements of this compensation, please see page 118 in the corporate governance and compensation report.
Total compensation of the members of the Board of Directors was as follows: Individual compensation of the Chairman and the Vice Chairman of the Board of Directors for 2007 was as follows: Compensation for acting members of governing bodies
Individual compensation of the remaining members of the Board of Directors for 2007 was as follows: Individual compensation of the Chairman and the Vice Chairman of the Board of Directors granted in 2008 was as follows: Honorariums are set at the beginning of each year and as such are not subject to the performance of the company. In recognition of the difficulties faced by the company in the current financial environment, the Chairman and the Vice Chairman have each elected to forego 50% of their 2008 honorarium in 2009.
Jakob Baer, Chairman of the Audit Committee 392 393 785 Thomas W. Bechtler, Member 195 130 325 Raymund Breu, Member 325 325 John R. Coomber, Chairman of the Finance and Risk Committee 354 233 587 Dennis D. Dammerman, Former member1 59 39 98 Rajna Gibson Brandon, Member 163 162 325 Bénédict G.F. Hentsch, Member 195 130 325 Hans Ulrich Maerki, Member2 227 227 Robert A. Scott, Chairman of the
Jakob Baer, Chairman of the Audit Committee 480 320 800 Thomas W. Bechtler, Member 195 130 325 Raymund Breu, Member 325 325 Mathis Cabiallavetta, Chairman of the Investment
Amounts reported under shares relate to bonus shares and restricted stock units granted. The bonus plan stipulates that Executive Committee members decide on the split between cash and bonus shares and the shares granted are subject to a one-year blocking period.
In 2007, Jacques Aigrain, Chief Executive Officer, was the highest paid member of the Executive Committee. In 2008, the highest paid member was David J. Blumer, Head of Asset Management. Their respective compensation was as follows: The compensation of former members of the Executive Committee relates to residual payments made to a former member.
Base salary and allowances 1 475 1 486 Cash variable pay for performance 2 600
Mathis Cabiallavetta, Chairman of the Investment Committee 1 961 Raymond K.F. Ch’ien, Member 1 086 John R. Coomber, Chairman of the Finance and Risk Committee 113 541 116 633 Rajna Gibson Brandon, Member 11 440 12 986
Average strike price in CHF as of grant date 87.12 82.85
Average strike price in CHF as of grant date 92.95 93.51 Jacques Aigrain, Chief Executive Officer 150 000 100 000 Stefan Lippe, Deputy Chief Executive Officer and Chief Operating
Brian Gray, Chief Underwriting Officer 3 000 Michel M. Liès, Head of Client Markets 42 000 15 000 George Quinn, Chief Financial Officer 25 000 10 000
Walter B. Kielholz, Vice Chairman 337 950 230 000 John R. Coomber, Chairman of the Finance and Risk Committee 207 000 256 000
Average strike price in CHF as of grant date 123.53 114.94 Jacques Aigrain, Chief Executive Officer 90 000 140 000 Stefan Lippe, Deputy Chief Executive Officer and Chief Operating Officer 86 400 112 400 Andreas Beerli, Head of Associated Units and Special Projects 103 600 101 200 Brian Gray, Chief Underwriting Officer 16 200 Michel M. Liès, Head of Client Markets 104 000 123 000 George Quinn, Chief Financial Officer 24 600 39 600 Christian Mumenthaler, Former Chief Risk Officer 2 000
As part of its normal business operations, the Group enters into a number of lease agreements. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: The following schedule shows the composition of total rental expenses for all operating leases as of 31 December (except those with terms of a month or less that were not renewed): 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 2008 were
As a reaction to the current unprecedented market turmoil, Swiss Re had to reassess its business strategy with respect to its Asset Management function and the way this impacts its reportable segments.
Following the new structure, the Group presents four operating business segments: Property & Casualty, Life & Health, Asset Management and Legacy. Items not allocated to these four business segments are included in the “Group items” column.
The Property & Casualty segment consists of the following sub-segments: Property traditional, Casualty traditional, Specialty traditional and non-traditional business. The Specialty traditional sub-segment includes certain parts of the former Credit Solutions business, Credit Reinsurance, Bank Trade Finance, and Credit securitisations. Certain parts of the former Financial Markets unit are included in the Property & Casualty business segment, including Property & Casualty insurance-linked securities.
The Life & Health segment continues to consist of the following sub-segments: Life traditional, Health traditional and Admin Re®. Certain parts of the former Financial Markets unit are now included in the Life & Health business segment, including variable annuity business.
Non-core activities have been consolidated into the new segment Legacy. These activities, which have been in run-off since November 2007, are managed separately from the Asset Management division. Legacy includes Financial Guarantee Re business, SCDS, PCDS and further assets in the former Group’s trading book including Credit Correlation, Collateralised Fund Obligations and other non-core activities.
The allocation of investment result to Property & Casualty and Life & Health is determined based on US GAAP reinsurance liabilities. The new methodology applies a risk-free return to the nominal net reserves at the end of the prior quarter. The risk-free interest rate applied to the reserves is determined by currency and duration of the underlying Property & Casualty and Life & Health reserves. The Allocation column eliminates the calculated investment result allocated to either the Property & Casualty or the Life & Health business segments.
Net realised investment gains/losses –283 799 427 –1 506 –176 –739
Net realised investment gains/losses –145 –5 022 480 –5 997 1 202 –9 482
b) Property & Casualty business segment – by line of business
Expenses Claims and claim adjustment expenses –2 800 –6 634 –2 077 –11 511 –538 –12 049
Expenses Claims and claim adjustment expenses –2 654 –4 545 –2 367 –9 566 –291 –9 857
c) Life & Health business segment – by line of business
Expenses Claims and claim adjustment expenses; life and health benefits –6 226 –2 239 –2 647 –11 112 Return credited to policyholders 255 –2 375 –2 120 Acquisition costs –1 697 –596 –372 –2 665 Other expenses –684 –159 –470 –1 313
Benefit ratio2 in % 87.0 1 Operating revenues exclude net investment income and net realised investment gains/losses from unit-linked and with-profit business as these are passed through to contract holders and therefore do not have an impact on the operating result. Operating revenues also exclude net realised investment gains/losses from non-participating business.
Acquisition costs –1 663 –453 –510 –2 626 Other expenses –480 –179 –299 –958
Operating result, excluding non-participating net realised investment gains/losses 335 543 48 926
Net realised investment gains/losses –1 045 1 472 427 Other revenues 125 125
Net realised investment gains/losses 807 –327 480 Other revenues 80 –8 72 Total revenues 7184 –1272 5912
Financial statements / Notes to the Group financial statements e) Net premiums earned and fees income from policyholders by country
Denmark Swiss Re Denmark Holding ApS 0 100 f Swiss Re Denmark Reinsurance A/S 0 100 f
France Frasecur Société d’Investissement à Capital Variable 1 170 99 f Protegys Assurance 37 34 e
Germany ROLAND Partner Beteiligungsverwaltung GmbH 0 20 e Swiss Re Frankona Rückversicherungs AG 74 100 f Swiss Re Germany AG 67 100 f Swiss Re Germany Holding GmbH 38 100 f
Switzerland European Reinsurance Company of Zurich 312 100 f SR Institutional Funds 1 0 0 f Tertianum AG 10 20 e
United Kingdom Admin Re UK Ltd 112 100 f Banian Investments UK Ltd 1 100 f Calico Leasing (GB) Ltd 54 100 f Cyrenaic Investments (UK) Ltd 918 100 f Dex Name Ltd 18 100 f European Credit and Guarantee Insurance PCC Ltd 9 100 f NM Insurance Holdings Ltd 201 100 f NM Life Group Ltd 229 100 f NM Life Ltd 145 100 f NM Pensions Ltd 230 100 f PRO Insurance Solutions Ltd 1 100 f Reassure UK Life Assurance Company Ltd 590 100 f SR Delta Investments (UK) Ltd 15 100 f SRNY Ltd 51 100 f Swiss Re BHI Ltd 0 100 f Swiss Re Capital Markets Ltd 64 100 f Swiss Re Financial Services Ltd 11 100 f Swiss Re Frankona LM Ltd 11 100 e Swiss Re GB Plc 977 100 f Swiss Re Life & Health Ltd 0 100 f Swiss Re Services Ltd 4 100 f Swiss Re Specialised Investments Holdings (UK) Ltd 2 100 f Swiss Re Specialty Insurance (UK) Ltd 28 100 f Swiss Reinsurance Company UK Ltd 0 100 f The Mercantile & General Reinsurance Company Ltd 29 100 f The Palatine Insurance Company Ltd 11 100 f Windsor Life Assurance Company Ltd 402 100 f XSMA Ltd 23 100 f
Canada Swiss Re Holdings (Canada) Inc. 101 100 f Swiss Re Life & Health Canada 98 100 f Swiss Reinsurance Company Canada 0 100 f
Cayman Islands Ampersand Investments (UK) Ltd 918 100 f Cobham Funding Ltd 0 100 f Dunstanburgh Finance (Cayman) Ltd 0 100 f Epping Funding Ltd 0 100 e Kilgallon Finance Ltd 0 100 f Swiss Re Alternative Financing I SPC 0 100 f Swiss Re Alternative Financing II SPC 0 100 f SR Cayman Holdings Ltd 0 100 f SR York Ltd 77 100 f Swiss Re Strategic Investments (UK) Ltd 0 100 f
United States Conning & Company 0 100 f Core Insurance Holdings Inc. 0 100 f Facility Insurance Corporation 0 100 f Facility Insurance Holding Corporation 0 100 f First Specialty Insurance Coporation 5 100 f Industrial Risk Insurers 0 100 f North American Capacity Insurance Company 4 100 f North American Elite Insurance Company 4 100 f North American Specialty Insurance Company 5 100 f Reassure America Life Insurance Company 3 100 f Rialto Re I Inc. 151 100 f SR IS North America Group 7 100 f SR PA Finance Inc. 280 100 f Swiss Re America Holding Corporation 0 100 f Swiss Re Atrium Corporation 1 100 f Swiss Re Capital Markets Corporation 0 100 f Swiss Re Financial Products Corporation 0 100 f Swiss Re Financial Services Corporation 0 100 f Swiss Re Solutions Holding Corporation 9 100 f Swiss Re Life & Health America Holding Company 5 100 f Swiss Re Life & Health America Inc. 4 100 f Swiss Re Partnership Holding, LLC 392 100 f Swiss Re Treasury (US) Corporation 0 100 f Swiss Reinsurance America Corporation 12 100 f Washington International Insurance Company 9 100 f Westport Insurance Corporation 7 100 f
Australia Swiss Re Australia Ltd 15 100 f Swiss Re Life & Health Australia Ltd 115 100 f
South Africa Swiss Re Africa Ltd 1 100 f Swiss Re Life & Health Africa Ltd 0 100 f
The party that will absorb the majority of the expected losses, receive the majority of the expected residual return, or both, is considered the primary beneficiary according to FIN46(R). To determine the primary beneficiary of a VIE, a qualitative analysis is performed in which the nature and design, capital structure, contractual terms and relationships among the variable interest holders are evaluated. When the qualitative analysis is not conclusive, a quantitative analysis is performed. For this, the Group determines under various probabilityweighted scenarios the cash flows that the variable interest holders will receive based on the explicit and implicit variable interests they hold. Swiss Re Group consolidates a VIE when it is the primary beneficiary.
Modified coinsurance agreement Swiss Re Group assumes insurance risk via a modified coinsurance agreement from a direct insurer, which qualifies as a VIE. Swiss Re Group takes the majority of the mortality risk, which makes the Group the primary beneficiary. Consequently, Swiss Re Group will incur losses when mortality risk develops unfavourably.
The securitisation vehicle generally retains the issuance proceeds as collateral. To determine if Swiss Re Group is the primary beneficiary or has a significant variable interest, the Group considers the insurance or credit risk assumed by the bondholders of the vehicles, the investment risk of the securities held as collateral, and any derivative contracts or other guarantees Swiss Re Group has entered into with the VIE. Typically, the variable interests held by the Group arise through ownership of insurance-linked and credit-linked securities, or through protection provided for the value of the collateral held.
Debt financing vehicles Debt financing vehicles issue preference shares or loan notes to provide the Group with funding. Swiss Re Group is partially exposed to the asset risk by holding equity rights or by protecting some of the assets held by the VIEs via guarantees or derivative contracts. The assets held by the VIEs consist of investment grade securities, structured products, hedge fund units and others.
The Group did not provide financial or other support to any VIEs during the year that it was not previously contractually required to provide.
The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs of which the Group is the primary beneficiary: For investment vehicles, the assets and liabilities above are presented net of minority interest.
The total assets of VIEs of which the Group is the primary beneficiary, but does not hold a majority voting interest for periods ended 31 December 2007 and 2008, respectively, were as follows: As of 31 December CHF millions 2008
The liabilities of CHF 213 million for the debt financing and the other categories represent the decline in value of VIE assets which are guaranteed by Swiss Re Group. For VIEs where the variable interests consist in an equity stake, a loss is recognised in the income statement rather than a liability is set up when the net asset value declines.
In 2008, the Property & Casualty and the Life & Health business segments set up provisions of CHF 72 million and CHF 19 million, respectively, related to the German offices and alignment of IT activities. The Property & Casualty business segment released provisions of CHF 24 million, mostly related to the business acquired from Insurance Solutions, and utilised CHF 14 million related to IT activities.
The Asset Management business segment increased the provision by CHF 46 million following the realignment of the former Financial Markets unit announced in 2007. Costs of CHF 39 million were charged against the provision.
The Board of Directors is ultimately responsible for the Group’s risk management principles and policies, as well as for approving Swiss Re’s overall risk tolerance. The Board committees dealing with risk management include two committees: The Finance and Risk Committee, which is responsible for reviewing the Group Risk Policy, ̤ monitoring risk tolerance and capacity limits, and reviewing top risk issues and exposures. The Audit Committee, which is responsible for overseeing internal controls and compliance ̤ procedures.
The Chief Risk Officer is a member of the Executive Committee. He leads the global Risk Management function, which is responsible for risk controlling across the Group.
Report of the statutory auditor on the Consolidated Financial Statements As statutory auditor, we have audited the consolidated financial statements of Swiss Re Group, which comprise the income statement, balance sheet, statement of shareholders’ equity, statement of comprehensive income, statement of cash flow and notes (pages 135 to 220), for the year ended 31 December 2008.
Opinion In our opinion, the consolidated financial statements for the year ended 31 December 2008 present fairly, in all material respects, the financial position, the results of operations and the cash flows in accordance with accounting principles generally accepted in the United States of America (US GAAP) and comply with Swiss law.
Swiss Reinsurance Company Ltd, domiciled in Zurich, Switzerland, performs a dual role within the Swiss Re Group as both a reinsurance company and a holding company. The assessment of the market position, profitability and financial strength of Swiss Re’s worldwide organisation must focus primarily on the consolidated financial statements.
In 2008, the Company reported an after-tax gain of CHF 15 million, compared to a gain of CHF 1.7 billion in the previous year.
The reinsurance business continued to perform well and delivered a gain of CHF 1.8 billion. The investment result, however, suffered from the current financial markets crisis.
Furthermore, the termination of the Group’s Bermuda operations led to the assumption of a considerable life and health reinsurance portfolio by the Company.
In 2008, the Swiss franc increased significantly against the US dollar, the British pound and the euro. The currency fluctuations markedly affect the comparison of year-on-year reported income statement and balance sheet figures.
Net premiums earned increased slightly to CHF 20.3 billion. Property and casualty premiums decreased mainly due to a quota share arrangement with Berkshire Hathaway, which had an impact on both the retroceded premiums and the premiums assumed from the Swiss Re Group companies via quota share agreements. In addition, the transfer of the business from the European branches of the Company to a Luxembourg carrier led to a considerable reduction in premiums earned. This decrease was offset by the initial premium consideration received at inception of a life and health portfolio being recorded as a written premium.
In addition, higher valuation adjustments were necessary on the alternative investments and on own shares. Furthermore, a CHF 1.8 billion valuation adjustment on a subsidiary was recognised to reflect losses from the structured credit default swaps. Realised losses increased due to the substantial reduction of the equity portfolio, as well as sales of fixed income securities.
These negative effects were partly offset by a compensation received on the basis of an intragroup profit allocation agreement. The agreement stipulates the compensation for Swiss Re Group entities participating in the trading, structuring and treasury operations of Swiss Re’s Asset Management division, based on the residual profit split method.
The increase in other expenses is mainly due to losses assumed in the context of the merger with a Swiss Re Group subsidiary. Furthermore, administrative expenses which cannot be directly allocated to reinsurance or investment operations are newly reported under “Other expenses”.
Total assets decreased by 2% to CHF 103.3 billion. At constant foreign exchange rates total assets would amount to CHF 110.9 billion.
During 2008, the Company substantially reduced its equity portfolio. Loans to subsidiaries and affiliated companies increased due to intragroup financing transactions. Increased volume of the assets in derivative financial instruments is mainly driven by the foreign currency swaps. Furthermore, the Company absorbed a subsidiary holding the majority of the Group’s alternative investments. The corresponding assets, composed mainly of investments in hedge funds and private equity investments, are reported under the new line item “Alternative investments”.
Total liabilities remained at the previous year level and amounted to CHF 86.2 billion. The technical provisions decreased by 8% to CHF 60.2 billion mainly due to the weakening of the US dollar, the British pound and the euro against the Swiss franc. The movement in the provision for currency fluctuation reflects considerable foreign exchange rate fluctuations in 2008. The liabilities from derivative financial instruments increased mainly driven by the foreign currency swaps and the derivatives in connection with the variable annuity business.
Other reserves decreased by CHF 364 million to CHF 14.9 billion in 2008, due to the net result of the increase of the reserve for own shares, the allocation of the profit for the 2007 financial year, the cancellation of shares from the share buy-back programme, the creation of new shares for the conversion of a mandatory convertible bond and newly issued shares from options being exercised.
The nominal share capital of the Company decreased slightly due to the net effect from the cancellation of 17 349 000 shares, based on a 2008 General Meeting resolution, the creation of 10 460 076 new shares from the conditional capital for the conversion of a mandatory convertible bond, and 18 205 newly issued shares from the conditional capital in connection with employee participation programmes. As of 31 December 2008, the nominal share capital amounted to CHF 36 million.
Income statement Swiss Reinsurance Company Ltd For the years ended 31 December
Claims and claim adjustment expenses –13 663 –13 331 Life and health benefits 77 –3 382 Change in equalisation provision –300 –
Allocated investment return –1 326 –1 136 Investment result –64 –661
Other income and expenses Other interest income 348 313 Other interest expenses –524 –554 Other income 226 213 Other expenses –297 –848 Result from other income and expenses –247 –876
Current assets Premiums and other receivables from reinsurance 3 9 615 8 322 Funds held by ceding companies 3 20 115 21 292
Liabilities for life and health policy benefits 4 11 053 13 550
Non-technical provisions Provision for taxation 179 191 Provision for currency fluctuation 948 2 040 Other provisions 518 363 Total non-technical provisions 1 645 2 594
Retained earnings brought forward 65 61 Profit for the financial year 1 697 15
Assets and liabilities denominated in foreign currencies are translated into Swiss francs at year-end exchange rates. Participations are maintained in Swiss francs at historical exchange rates.
All exchange rate differences arising from the revaluation of the opening balance sheet, the adjustments from application of year-end or average rates and foreign exchange transactions are booked via a corresponding provision.
The following assets are carried at cost, less necessary and legally permissible depreciation: Investment real estate ̤ Investments in subsidiaries and affiliated companies ̤ Equity securities ̤ Fixed income securities ̤ Investments in funds ̤ Short-term investments ̤ Alternative investments ̤ Assets in derivative financial instruments ̤
These assets are generally not subject to revaluation. The valuation rules prescribed by the Swiss Financial Market Supervisory Authority FINMA are observed.
Assets in derivative financial instruments include reinsurance contracts or features embedded in reinsurance contracts that fulfil the characteristics of derivative financial instruments.
Deferred acquisition costs consist principally of commissions and are related to the production of new reinsurance business. Deferred acquisition costs for short duration contracts are amortised in proportion to premiums earned. Deferred acquisition costs for long duration contracts are amortised over the life of the underlying contracts.
Other assets include deferred expenses on retroactive reinsurance policies, which are amortised through earnings over the expected claims-paying period.
Claims paid and claim adjustment expenses –8 276 1 684 –6 592 –19 677 4 364 –15 313
Income from investment real estate 93 100 Income from subsidiaries and affiliated companies 2 109 1 790 Income from equity securities 817 17 Income from fixed income securities, mortgages and other loans 905 892 Income from short-term investments 56 47 Income from alternative investments – 6 Income from investment services 88 64 Income from intragroup profit allocation agreement – 795 Realised gains on sale of investments 1 369 5 771
Investment management expenses –235 –225 Valuation adjustments on investments –2 432 –6 196 Realised losses on sale of investments –1 508 –2 586
Funds held under reinsurance treaties 403 2 446 2 849 392 1 935 2 327 5. Shareholders’ equity
From other allocations 299 299 Shareholders’ equity on 31 December after allocation of profit 17 594 17 045
In addition, as a component of the Group’s financing structure, Swiss Reinsurance Company Ltd has guaranteed CHF 4 798 million (2007: CHF 7 069 million) of debt issued by certain of its subsidiaries and letter of credit facilities benefiting various subsidiaries of which an amount of CHF 4 537 million (2007: CHF 4 980 million) was drawn as of the balance sheet date.
Currently the Company or one of its subsidiaries expect to provide funding of USD 1.5 billion to a Swiss Re Group subsidiary in 2009 under the terms of a guarantee.
On 27 February 2008, a putative securities class action complaint was filed in the United States District Court for the Southern District of New York against Swiss Re Zurich and certain executive officers alleging false and misleading statements in connection with the two credit default swaps in violation of the antifraud provisions of the U.S. securities laws. The original complaint purports to be brought on behalf of U.S. purchasers of our stock between 8 May 2007 and 19 November 2007. On 28 July 2008, the court appointed Plumbers’ Union Local No. 12 Pension Fund as the lead plaintiff for the class action. On 10 September 2008, an amended complaint was filed which, among other things, seeks to expand the class period to 1 March 2007 through 19 November 2007. On 10 November 2008, Swiss Re Zurich filed a motion seeking to dismiss the amended complaint on legal grounds. The lead plaintiff filed its response to the motion on 9 January 2009, and Swiss Re Zurich’s reply brief is due in February 2009. We intend to vigorously defend against the action.
In addition, a financial lease of IT hardware is recognised on the balance sheet. The corresponding asset and liability of CHF 27 million (2007: CHF 13 million) are included in tangible assets and other liabilities, respectively.
To secure the technical provisions on the 2008 balance sheet date, securities with a value of CHF 11 646 million (2007: CHF 10 428 million) were deposited in favour of ceding com panies, of which CHF 7 519 million (2007: CHF 5 839 million) was to Group companies.
As of 31 December 2008, securities of CHF 878 million (2007: CHF 5 845 million) were lent under securities lending agreements, with the right to be sold or pledged by the borrowing entity. In 2008, no securities were lent to Group companies (2007: CHF 4 154 million). The securities which were held and lent by the investment funds are excluded.
As of 31 December 2008, the insurance value of tangible assets, comprising the real estate portfolio and other tangible assets, amounted to CHF 2 515 million (2007: CHF 2 508 million).
Other liabilities include CHF 6 million (2007: CHF 7 million) payable to the employee pension funds.
Details on the Swiss Re Group‘s subsidiaries are disclosed on pages 208 to 217.
As of 31 December 2008, the Group held 16 973 828 treasury shares (2007: 12 334 212). In the year under report, 25 495 057 treasury shares (2007: 25 277 897) were purchased at an average price of CHF 77.18 (2007: CHF 101.41) and 20 855 441 treasury shares (2007: 13 231 309) were sold at an average price of CHF 84.03 (2007: CHF 99.19).
Deposit arrangements generated the following balances, which are included in: CHF millions 2007 2008
Reinsurance result –76 50 Premiums and other receivables from reinsurance 677 570 Funds held by ceding companies 162 211 Funds held under reinsurance treaties 403 392 Reinsurance balances payable 644 484
Premiums and other receivables from reinsurance 3 353 3 665 Funds held by ceding companies 13 830 18 035
As of 31 December 2008, Swiss Reinsurance Company Ltd‘s total conditional capital outstanding amounted to CHF 2 160 487 (2007: CHF 3 208 316). CHF 1 557 920 was reserved for the exercise of conversion rights and warrants granted in connection with bonds and similar instruments and CHF 602 567 for employee participation purposes.
In the year under report, no net undisclosed reserves on investments and on provisions were released (2007: no net release).
As of 31 December 2008, there were four shareholders with a participation exceeding the 3% threshold of Swiss Reinsurance Company Ltd’s share capital.
d. Franklin Resources, Inc., 500 E. Broward Blvd., Ft. Lauderdale, FL, USA, known as Franklin Templeton Investments, notified Swiss Reinsurance Company Ltd on 6 December 2008 that it holds as of 4 December 2008, through an acquisition by a number of its Group companies, in the capacity of investment manager for mutual funds and clients, 10 970 364 registered Swiss Re shares. Franklin Templeton Investments now holds 3.11% of the voting rights of Swiss Reinsurance Company Ltd.
In connection with the integration of GE Insurance Solutions, restructuring charges of CHF 59 million were recognised in 2006. As of 31 December 2008, a respective restructuring provision of CHF 1 million (2007: CHF 4 million) remained on the Company’s books.
Article 663b lit.12 of Swiss Company Law requires disclosure of information on the performance of a risk assessment.
On 1 January 2008, the reinsurance business of the Company’s German branch was integrated into the German branch of a Luxembourg based reinsurance carrier of the Swiss Re Group by way of a portfolio transfer. Both assets and liabilities of CHF 1.0 billion were transferred.
On 1 October 2008, the Company contributed its French, Italian and Spanish branch to the respective branch operations of a reinsurance carrier based in Luxembourg by way of contribution in kind. The final aggregate value of these contributions has been determined as of 30 September 2008 at EUR 301 million. Both assets and liabilities of CHF 9.0 billion were transferred.
The Annual General Meeting, to be held in Zurich on 13 March 2009, has at its disposal the following profit: in CHF 2007 2008
For the financial year 2008: – eligible for dividend 335 665 775 33 566 578
If the Board of Directors’ proposal for allocation of profit is accepted, a dividend of CHF 0.10 per share will be paid.
After deduction of Federal Withholding Tax of 35%, the dividend will be paid from 18 March 2009 by means of dividend order to shareholders recorded in the Share Register or to their deposit banks.
Report of the statutory auditor on the Financial Statements As statutory auditor, we have audited the financial statements of Swiss Reinsurance Company Ltd, which comprise the income statement, balance sheet and notes (pages 227 to 239), for the year ended 31 December 2008.
We further confirm that the proposal for allocation of profit complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved.
Expenses Claims and claim adjustment expenses –9 333 –12 153 –16 266 –14 485 –14 898 –13 853 –14 758 –11 799 –12 065 –10 007
Liabilities for life and health policy benefits 23 279 29 300 41 370 37 269 37 244 43 239 31 081 44 899 50 026 39 911
Earnings/losses per share in CHF 8.55* 10.39* –0.57 –0.29 5.48 8.00 7.44 13.49 11.95 –2.61 * Adjusted by 20-for-1 share split ¹ Numbers are based on the Group’s previous accounting standards ² Trading revenues are included in net investment income; long-term debt also includes debt positions from former Financial Markets
Market risk As a result of the extreme and unprecedented volatility and disruption in the global financial markets, the Group is exposed to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices and foreign currency exchange rates, which may adversely impact the Group’s financial condition, results of operations and liquidity.
The Group’s exposure to interest rate risk is primarily related to the market price and cash flow variability associated with changes in interest rates. Exposure to credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads. With widening of credit spreads, the net unrealised loss position of the Group’s investment portfolio has increased, as have other-than-temporary impairments. With respect to equity prices, the Group is exposed to changes in the level and volatility of equity prices, as they affect the value of equity securities themselves as well as the value of securities or instruments that derive their value from a particular equity security, a basket of equity securities or a stock index. Exposure to foreign exchange risk arises from exposures to changes in spot prices, forward prices and volatilities of currency rates.
Counterparty risks In the current financial crisis and in view of the impact it is having, or may have, on market participants, the Group’s general exposure to counterparty risk is heightened and this risk could be exacerbated to the extent defaults, or concerns about possible defaults, by certain market participants trigger more systemic concerns about liquidity. Losses due to defaults by counterparties, including issuers of investment securities (which include structured securities) or derivative instrument counterparties, could adversely affect the Group. In addition, trading counterparties, counterparties under swaps and other derivative contracts and financial intermediaries may default on their obligations due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons, which could also have a material adverse impact on the Group.
The Group could also be adversely affected by the insolvency of, or other credit constraints affecting, counterparties in its reinsurance operations.
Risks relating to credit rating downgrades Ratings are an important factor in establishing the competitive position of reinsurance companies, and market conditions could increase the risk of downgrade. Third-party rating agencies assess and rate the financial strength of reinsurers and insurers, such as Swiss Re. These ratings are intended to measure a company’s ability to repay its obligations and are based upon criteria established by the rating agencies. The Group’s ratings have come under pressure due to the additional asset write-downs it recorded for the fourth quarter of 2008 and the resulting impact on the Group’s capital position.
As claims paying and financial strength ratings are key factors in establishing the competitive position of reinsurers, a decline in ratings alone could make reinsurance provided by the Group less attractive to clients relative to reinsurance from competitors with similar or stronger ratings. A decline in ratings could also cause the loss of clients who are required by either policy or regulation to purchase reinsurance only from reinsurers with certain ratings. A further decline in ratings could also obligate the Group to provide collateral or other guarantees in the course of its reinsurance business or trigger early termination of funding arrangements. Any rating downgrades could also have a material adverse impact on the Group’s costs of borrowing and limit its access to the capital markets. Further negative ratings action could also impact reinsurance contracts.
Insurance and operational risks As part of the Group’s ordinary course operations, the Group is subject to a variety of risks, including risks that reserves may not adequately cover future claims and benefits, risks that catastrophic events may expose the Group to unexpected large losses, competitive conditions, cyclicality of the industry, risks related to emerging claims and coverage issues, risks arising from the Group’s dependence on policies, procedures and expertise of ceding companies, and risks related to the failure of operational systems and infrastructure. In addition, the occurrence of future risks that the Group’s risk management procedures fail to identity or anticipate could have a material adverse effect on the Group.
A number of lawsuits have been filed against financial service firms raising claims tied to the unprecedented market turmoil. Swiss Re is already subject to one such action, which is a putative securities class action filed in the United States District Court for the Southern District of New York in February 2008 against it and certain of its executive officers alleging false and misleading statements in connection with the mark-to-market loss, announced on November 19, 2007. The Group cannot predict whether it could be subject to further claims arising out of the market turmoil.
Arrangement by which a number of insurers and/or reinsurers share a risk.
Section of cover in a non-proportional reinsurance programme in which total coverage is divided into a number of consecutive layers starting at the retention or attachment point of the ceding company up to the maximum limit of indemnity. Individual layers may be placed with different (re)insurers.
Liability insurance cover which protects professional specialists such as physicians, architects, engineers, lawyers, accountants and others against third-party claims arising from activities in their professional field; policies and conditions vary according to profession.
Financial transaction, in which future cash flows from assets (or insurable risks) are pooled, converted into tradeable securities and transferred to capital market investors. The assets are commonly sold to a special-purpose entity, which purchases them with cash raised through the issuance of beneficial interests (usually debt instruments) to third-party investors.
Premiums earned less the sum of claims paid, change in the provision for unpaid claims and claim adjustment expenses and other expenses (acquisition costs and other operating costs and expenses).
7 May GlobeCat transaction named Deal of the Year “Energy Risk” magazine named Swiss Re’s USD 85 million GlobeCat transaction, covering windstorm events in the US and earthquakes in California and Central America, Deal of the Year 26 May Swiss Re recognised as admitted reinsurer in Brazil Swiss Reinsurance America Corporation and Swiss Reinsurance Company Ltd recognised as admitted reinsurers with the ability to sell reinsurance in the newly de-regulated Brazil marketplace 11 June Joint operations for electronic data exchange in accounting and settlement launched Swiss Re and global insurance broker Guy Carpenter successfully implemented joint operations for electronic data exchange in accounting and settlement
General information / Key events 30 June USD 150 million in natural catastrophe protection Swiss Re obtained USD 150 million protection against North Atlantic hurricane, European windstorm, Californian earthquake and Japanese typhoon through a natural catastrophe protection programme named Vega Capital Ltd 5 August Second quarter 2008 results Net income of CHF 0.6 billion for the second quarter (EPS: CHF 1.70)
26 September Swiss Re and Oxfam America launched joint risk management initiative for farmers in Tigray, Ethiopia Swiss Re and Oxfam America announced a joint Commitment to Action at the Clinton Global Initiative 2008 meeting in New York. The collaboration is aimed at helping communities most vulnerable to climate variability and change 30 September Swiss Re entered into partnership with CelsiusPro Partnership with CelsiusPro, the first Europebased weather derivative online sales platform, to offer weather risk transfer solutions. Swiss Re provides risk capacity and expertise to support CelsiusPro’s online platform 31 October GBP 762 million acquisition of Barclays Life Assurance Company Ltd completed The transaction, announced on 5 August 2008, received all the required regulatory approvals. The transaction provides further scale and infrastructure for Swiss Re’s Admin Re® business in the United Kingdom 4 November Third quarter 2008 results Net loss of CHF 304 million for the third quarter (EPS: CHF –0.93)
5 February Swiss Re announced preliminary and unaudited 2008 results – Warren Buffett to invest CHF 3 billion in Swiss Re via Berkshire Hathaway Inc. Swiss Re Group announced that it expected to report a net loss for the full year 2008 of approximately CHF 1 billion. The Group is raising CHF 3 billion of capital from Berkshire Hathaway Inc. and will consider further equity raising of up to CHF 2 billion, both of which are subject to shareholder approval 12 February Swiss Re’s Board of Directors appointed Stefan Lippe as new Chief Executive Officer Swiss Re’s Board of Directors announced that it had accepted the resignation of Jacques Aigrain as Chief Executive Officer, and had appointed Stefan Lippe as his successor
̤ Best Global Reinsurance Company Best Reinsurance Company for Life ̤
“Swiss Re remains one of the most innovative in the business and embodies the convergence of the industry with the capital markets through its Swiss Re Capital Markets division.(…) In 2008, Swiss Re demonstrated that it too is committed to being disciplined when it comes to rates and terms and conditions.” (“Reactions” magazine, August 2008)
“With 11 offices across the region, Swiss Re has continued to understand and stay close to client and market needs. (...) The reinsurer takes the honour for its customer focus, innovation in the area of parametric covers and claims, and contribution towards India’s medical insurance market.” (“Asia Insurance Review”, November 2008)
“Philanthropy is rarely an innovator in capitalism but it is sometimes a by-product. In the case of global reinsurer Swiss Re, the attention of the panel was captured by the ability of its environmental and commodities markets (ECM) arm to combine these two philosophies, leading it once again to being voted Weather House of the Year for 2008.” (“Energy Risk magazine”, June 2008)
“At the end of 2007, Swiss Re Capital Markets launched a catastrophe bond with a difference – not only was it the first cat bond to offer protection against earthquakes in Central America, it was also the blueprint for a new concept allowing charities or governments to leverage donations to pay for the coupon of the bond.” (“Energy Risk”, Spring 2008)
Photographs: JWT International (cover, back cover) Marc Wetli (pp 2, 10, 94) Glowimages; John Foxx; Alan Schein/zefa/Corbis (p 8, left to right) Keystone; Belinda Lawley/Panos Pictures; Thomas Northcut (p 13 top to bottom) Gettyimages; Glowimages; Keystone/STR (p 15 top to bottom) Sigrid Olsson/Getty Images (p 17) Swiss Re, Gerrit Fokkema (p 18 –19) Yva Momatiuk & John Eastcott, Minden/Geographic Image Collection, Chris Hondros/Gettyimages, Winfield Parks/National Geographic Image Collection (p 21 top to bottom) Swiss Re, Reza Estakhrian/Gettyimages, Swiss Re (p 25 top to bottom) Swiss Re (p 27) Andres Leighton/Keystone; Jon Hrusa/Keystone; DEZA (p 29 top to bottom) K tembien pictures/Oxfam America (p 33) Todd France, Swiss Re, Jeannette Seifert (p 258 left to right)
The web version of the 2008 Annual Report is available at: www.swissre.com/annualreport
Bogotá Carrera 7 No. 71– 21, Torre B, Piso 15 Bogotá, D.C.
Swiss Reinsurance Company Ltd Mythenquai 50/60 P.O. Box 8022 Zurich Switzerland www.swissre.com