Rising sea levels Coastal flooding affects property and infrastructure, displacing people and economic activity. Swiss Re’s collaboration with scientists to quantify the effects of climate change on coastal flood damage extends our expertise in measuring loss.
Sharing potential loss exposure Public-private partnerships can help protect against the financial impact of large catastrophes. Reinsurers provide capacity, taking on some of the risks that would otherwise burden urban society.
Cities are complex environments, with many interconnected, cumulative and uninsured risks that an ever-growing urban population faces.
Net premiums earned and fee income by region (Total earned CHF 25.5 billion)
1 Return on equity is calculated by dividing annualised net income attributable to common shareholders by average common shareholders’ equity.
Swiss Re –9.9 –0.8 Swiss Market Index 2.6 18.3 Dow Jones STOXX 600 Insurance –3.2 12.6
Swiss Re is a leading and highly diversified global (re)insurance company. We deliver both traditional and innovative offerings in Property & Casualty and Life & Health that meet our clients’ needs. A pioneer in insurance-based capital market solutions, we combine financial strength and unparalleled expertise for the benefit of our clients. IFC Key highlights
Corporate governance 84 Overview 86 Group structure and shareholders 88 Capital structure 92 Board of Directors 107 Executive management 110 Shareholders’ participation rights 111 Changes of control and defence measures 112 Auditors 114 Information policy
Compensation 118 Report from the Compensation Committee 119 The compensation environment 120 Compensation policy 125 Compensation decisions by the Compensation Committee 132 Performance of multi-year compensation plans
General information 256 Cautionary note on forward looking statements 257 Note on risk factors 261 Glossary 267 Business contact information 268 Corporate calendar
The challenges Swiss Re faced in the early part of 2009 are well known. The impact of the decisions we made on asset allocation in 2007 and 2008 as well as the problems that resulted from developing activities that were too far from our core business obscured the outstanding performance of our Property & Casualty and Life & Health businesses over the same period.
In our first year as Chairman and CEO, we committed to focus our activities on the core business. We strove to regain capital strength by de-risking assets on our balance sheet and exiting non-core business activities. We also promised to achieve significant cost reductions by gaining economies of scale in support functions while advancing our client franchise. It was critical that we took every step necessary to restore Swiss Re’s reputation and to regain our position as the leading innovator in the industry.
This regained capital strength not only increases confidence about our ability to redeem the CPCI but also provides the necessary flexibility to grow the business when market conditions allow. We are well positioned to support our clients with traditional reinsurance products and Admin Re® capital relief transactions should the insurance industry go through a period of consolidation or need to improve solvency, ahead of the change to economic models such as Solvency II.
Legacy issues substantially reduced In Legacy, we succeeded in significantly reducing risk without impairing Swiss Re’s capital position. We terminated substantially all of the exposures in the Portfolio CDS and selectively sold assets
De-risking significantly progressed In Asset Management, we reduced our exposure to private equity, hedge funds and securitised products. We increased the allocation to government securities and reduced our corporate credit hedging, increasing our exposure to high grade corporate bonds in the third quarter of 2009. We will continue to adjust our hedging programme as credit market conditions stabilise.
Our de-risking was not limited to Asset Management and, as part of our priority to focus on core business, we reduced our exposure in Credit & Surety. In Life & Health, we discontinued writing variable annuity business and we also re-priced US Life “XXX” business.
Taking all of these steps together, we have more than achieved our target to internally generate CHF 1 billion in capital savings.
Cost efficiency programme ahead of plan We are well on track towards achieving a reduction in the Group’s running costs of CHF 400 million by the end of 2010. As of the end of 2009, net savings, after restructuring costs, were CHF 205 million, well above the original target of CHF 100 million for the year.
Strong core business results driven by focus on profitability The Group returned to profit in 2009, reporting net income of CHF 506 million, compared to a loss of CHF 864 million in the prior year. Our shareholders’ equity also rose substantially to CHF 26.2 billion, compared to CHF 20.5 billion at the end of 2008, an increase of CHF 5.7 billion. This was partly driven by the capital injection from Berkshire Hathaway, but the
Our underwriting performance, our ability to innovate, and our ability to provide the capacity to conduct large transactions: these are the strengths on which we build our competitive advantage
Our Property & Casualty unit achieved excellent technical results despite continued pressure on rates. Disciplined underwriting, supported by lower natural catastrophe claims compared to 2008, resulted in operating income of CHF 3.8 billion and a combined ratio of 88.3%.
Given the regained capital strength of the Group, we propose to increase the dividend to CHF 1.00. This is the first step in returning to normal dividend policy.
Acknowledgements Effective 1 May 2009, the Board of Directors appointed Agostino Galvagni as Chief Operating Officer and Member of the Executive Committee to support our efforts in building a leaner and more efficient organisation. Agostino’s focus on delivering results has already proven instrumental in improving our cost efficiency and in reshaping our global office network to further improve our client servicing capabilities.
We also thank our clients, who have remained loyal to us. We are confident that innovation and increased client focus will not only create value for them but also drive the earnings power in the current year and achieve attractive returns for you, our shareholders.
Staying on course Offshore construction projects require huge investments. Financing increasingly depends on guaranteed future earnings used to repay loans. Investors seek (re)insurance protection against material damage and its financial consequences, enabling revenues to be generated on schedule.
Safe arrival A comprehensive view of the stakeholders involved in offshore projects is key to efficient transportation and logistics. Our marine reinsurance experts analyse the suitability of transport routes, methods and schedules, focusing on safety and loss prevention.
Pandemic preparedness Sophisticated epidemiological modelling lets us assess the capital our clients and we need to withstand the mortality shock of a pandemic.
Focusing on mortality, longevity and selected health reinsurance programmes, we share in the risks undertaken by writers of individual and group insurance cover in all major life insurance markets to help manage their exposures and capital efficiently.
Scriptographer Plugin Measuring risk Our medical experts and actuaries gauge the health risks from rising obesity rates. Their analyses guide our medical underwriting practice, available to clients in LifeGuide, Swiss Re’s Life and Health Underwriting Manual.
Changing weather patterns Low yields from adverse weather can be mitigated through index insurance products that pay farmers directly after they are hit.
Building robust communities Any nation, developed or developing, needs to take a holistic view of the risks facing its agriculture sector. Public-private partnerships covering multiple perils, from floods to epidemics, can help make rural communities more resilient.
We provide tailor-made solutions through traditional reinsurance or insurance-based capital market instruments. At the core of our expertise is the costing, pricing and diversification of non-life and life risks.
Creates incentives for risk-adequate behaviour By selecting and putting a price tag on risks, (re)insurers act as an early warning system and create incentives for risk-adequate behaviour.
Fosters economic progress By sharing risks, (re)insurers protect investments and stabilise balance sheets, enabling companies to grow.
Based on resilient funding model (Re)insurers’ business activities are funded by up-front premium payments, and therefore do not rely on short-term funding.
Invests long-term (Re)insurers can hold assets until maturity and are less affected by short-term market fluctuations.
Diversifies risks Claims payouts are triggered by hazardous events, which are typically uncorrelated with each other and financial market events.
We provide traditional reinsurance as well as insurance for corporate clients. Combining global expertise and local knowledge, we provide clients with financially sound risk transfer solutions in all lines of business.
̤ reduced exposure in Credit & Surety, Casualty, and Directors’ & Officers’ (D & O) liability insurance
̤ substantially reduced risk in our balance sheet by selling selected assets, particularly in private equity, hedge funds and securitised products
̤ optimised Client Service Offices that are focused on servicing markets and relocated support functions
̤ concentrated expertise and support functions in Global Offices, regional Hubs and low cost Global Shared Service Centres
Create a lean and efficient organisation through worldwide office consolidation and streamlined processes
Net reduction in expenses of CHF 100 million in 2009 (after restructuring charges); and total reduction in expenses run-rate of CHF 400 million by 2010 (relative to 2008)
Generate capital saving of CHF 1 billion by the end of the first quarter of 2010
Despite the scale of the financial crisis, the insurance and reinsurance industries performed as expected, meeting claims obligations fully and without delay.
Recession and low interest rates challenge profitability During the first quarter of 2009, insurance companies continued to suffer declines in asset values, causing an additional drain on shareholders’ capital. As financial markets recovered through the remainder of the year, companies were able to recoup large parts of the unrealised asset and capital losses by the end of 2009.
Reinsurers grow moderately and benefit from benign hurricane season The fall in premiums was not as marked for reinsurers because several primary insurers under pressure for capital sought reinsurance relief. Life reinsurance premiums also continued to grow, despite the drop in demand for primary life products. This is because reinsurance primarily covers mortality and disability risks, which are less sensitive to capital market returns than the savings products offered by primary insurers.
Non-life reinsurance profited from a benign hurricane season, despite costly winter storms in the US, France, and Spain, summer hailstorms in Switzerland and Austria, as well as devastating typhoons in South East Asia. These storms generated total industry losses of more than USD 9 billion.
̤ Increased government spending on infrastructure projects, particularly in Asia, should support property and engineering reinsurance demand.
Estimated global real insurance premium growth 2009 Source: Swiss Re Economic Research & Consulting
Regulatory responses to the crisis The financial crisis prompted calls for regulatory reforms in Europe and the US. The EU introduced a new supervisory system that establishes “macro-prudential” supervision through the European Systemic Risk Board (ESRB). Proposals for a similar system and the creation of a national insurance office are being discussed in the US Congress. These reforms are designed to make the financial system more resilient by identifying risks to financial stability and making recommendations on potential sources of systemic risk.
Property & Casualty Underwriting discipline and below average natural catastrophe claims led to exceptional results, despite declining investment income and slightly lower premium volume.
Business development Active cycle management and portfolio steering remained pivotal elements of our strategy in 2009. We continued to shift capacity to those segments where we expect the most attractive returns on capital. We reduced our exposure in Credit and Casualty, and redeployed the capital released in Property and Specialty. We allowed Casualty premium to shrink while maintaining our ability to support clients when markets improve.
Growth resumed in the insurance-linked securities (ILS) market, as new collateral solutions with minimal investment risk attracted new investors and sponsors.
During the January 2010 renewals, terms for Property and Specialty lines experienced only a modest weakening, mainly from US natural catastrophe. Casualty terms, particularly underlying primary market prices, continued to weaken in some segments, and we therefore reduced parts of our portfolio in line with our cycle management approach.
Mexico led the way in using the new World Bank platform, transferring USD 290 million of earthquake and hurricane risk to the capital markets in October 2009. This insurance-linked securitisation, for which Swiss Re acted as co-lead manager, is the first to combine earthquake and hurricane risk based on parametric triggers. If the strength of an earthquake on the Richter scale, or the atmospheric pressure in a hurricane reaches pre-determined levels – the parametric triggers – the insured sum is compensated immediately.
Providing longevity risk protection to life insurers and corporate clients is a strategic priority in Life & Health. Swiss Re is well positioned for this growing market thanks to its leading position in mortality risk reinsurance and its well diversified balance sheet.
Operational performance Our Life & Health segment posted operating income of CHF 746 million in 2009 – an increase of 7% from the prior year. The benefit ratio improved 3 percentage points to 82.4%. These solid results benefited from the financial markets rally in the second half of the year, a one-time gain from an arbitration award, and favourable mortality experience, partly offset by a shortfall from the discontinued variable annuity business.
̤ 55% Americas ̤ 35% Europe (including Middle East and Africa) ̤ 10% Asia-Pacific
Increase in shareholders’ equity in CHF billions (Total: CHF 26.2 billion)
Reduction in exposures: ̤ Asset exposures CHF 3.3 billion ̤ Notional liability exposures CHF 22.3 billion
Asset Management We focused on managing our core business assets and reducing portfolio risk.
Business development We sharpened the focus of our Asset Management function on its primary mandate of managing the assets generated through our (re)insurance activities. Other activities have been curtailed or integrated into Property & Casualty and Life & Health product development units.
Operational performance Return on investments was 1.8% compared to 4.7% in the prior year. This decrease results from the hedging of the corporate bond portfolio, although more than offset by gains in shareholders’ equity reflected in the balance sheet, and foreign exchange movements. The lower return on investments was also due to lower net investment income as proceeds from net sales and principal repayments in the credit portfolio were primarily allocated to lower yielding bonds, shorter term investments and cash equivalents.
Swiss Re has now further enhanced Magnum, providing clients with additional benefits. These include the new end-to-end business processing capacity and access to greater data insights from the Swiss Re Magnum team. The system can be fully customised to clients’ own underwriting philosophy, distribution needs and product range.
Magnum provides the facts needed for real-time analysis, allowing clients to maximise the value of their underwriting data. Combined with access to Swiss Re’s expertise, this enables clients to benefit from insights into their risk profile and steer their portfolio as it is being written.
at a gain of CHF 221 million. Financial Guarantee Re exposure was significantly reduced by the commutation of CHF 9.2 billion notional protection. We expect a further significant reduction in the remaining Legacy exposures by the end of 2010.
We also expect the longevity market in the UK to remain active, eventually spreading to other major markets and creating opportunities for more longevity transactions in 2010. The sale of life insurance policies will depend on the strength of the economic recovery in the current year. In the longer term, sales of pension and protection products are likely to increase in mature markets, as government-sponsored benefits decrease in view of the public debt.
Monetary tightening in the second half of 2010 could mean that volatility returns to the financial markets. We will closely monitor market development and seize opportunities as they arise to further optimise our asset allocation.
Swiss Re’s most important asset is its expertise: the unequalled knowledge, skills, and experience of its people. In a challenging global business environment, we strive to maintain and support that expertise, providing our staff with continuous opportunities to learn in a diverse enterprise that offers a wide range of experiences and challenges.
Our clients rely on our experience: they expect to be served by a team that has personal, in-depth knowledge of their changing needs, the business throughout its cycle, and the dynamics of the financial markets. A long view is particularly essential in the current business environment given the volatility in the capital markets. The high average length of service of our employees in core functions demonstrates that our employees can contribute both the necessary skills and the experience to the benefit of our clients.
Investing in our people Swiss Re has a long tradition of investing in its people through development programmes, training, as well as networking. In 2009, we intensified mentoring and job rotations to create additional learning opportunities. We continued to review our talent development to ensure that it remains aligned with the company’s strategic goals and that it gives staff all the tools they need to take on bigger and broader responsibilities (see “Talent development programmes” box on page 25). A regular review process identifies and assesses our employees’ potential.
The Graduates Programme We continue to hire outstanding graduates from top universities, training them in the technical skills of our industry and offering them an opportunity to gain extensive experience to build up their expertise. The Graduates Programme gives a unique opportunity to discover the world from Swiss Re’s perspective and learn what it is like to work in a market-leading global company.
Over 150 graduates attended the programme in 2009, averaging 35 days of class-based technical training. A 16 – 20week job rotation forms an integral part of the programme, giving graduates a chance
Employees by region As of 31 December 2009 27% America 64% Europe 9% Asia Pacific
“Having completed two of the three development programme modules, I have gained invaluable experience of global team leadership, problem solving and project management. In addition, the opportunity to expand my Swiss Re network through interaction with other programme participants continues to be beneficial. Overall, the experience has been extremely positive and I look forward to further utilising the skills I have developed in my career with Swiss Re.” Mark Hallam, London to expand their knowledge in different areas, complementary to their usual responsibilities, thus gaining a broader understanding of Swiss Re as a Group.
Swiss Re Academy Swiss Re Academy, the training arm of Human Resources and Client Markets, expanded further into e-learning – allowing us to provide employees and clients around the globe with new training opportunities. In 2009, 95% of our employees benefited from some form of digital training. In the past, employees generally used e-learning for mandatory compliance training, but this year saw a growing number turning to it for technical training in our core business lines. Moreover, we are developing hybrid programmes to assure the optimum balance between digital and classroom training.
Board structure Swiss Re maintains a dual board structure. It thus distinguishes clearly between the Board of Directors as the supervisory body and executive management (Executive Committee).
The Board of Directors met 14 times during 2009 and consisted of: ̤ one Chairman ̤ one Vice Chairman ̤ seven other Board members
On the same occasion, Kaspar Villiger resigned as member of Swiss Re’s Board of Directors, and Thomas W. Bechtler’s and Benedict G. F. Hentsch’s terms expired. Thomas W. Bechtler and Benedict G. F. Hentsch did not seek re-election.
From left: John R. Coomber John R. Coomber was elected to Swiss Re’s Board of Directors in 2006. He also serves as Chief Executive Officer of Pension Insurance Corporation Limited, and is a director of MH (GB) Limited, Parhelion Capital Ltd, telent Ltd, and Qatar Insurance Services.
Rajna Gibson Brandon Rajna Gibson Brandon was elected to Swiss Re’s Board of Directors in 2000. She is professor of finance at the University of Geneva, Director of the Geneva Finance Research Institute and a Director of Research of the Swiss Finance Institute.
Hans Ulrich Maerki Hans Ulrich Maerki was elected to Swiss Re’s Board of Directors in 2007. He is also a member of the Boards of ABB Ltd, Mettler-Toledo International and the Menuhin Festival AG Gstaad.
Walter B. Kielholz Chairman Walter B. Kielholz joined Swiss Re in 1989. He was Swiss Re’s Chief Executive Officer from 1997 – 2002 and has been a Board member since 1998. He was nominated Chairman as of 1 May 2009. He has also been a member of the Board of Directors of Credit Suisse Group since 1999 and served as Chairman of the bank’s Board of Directors from 2003 to 2009.
Raymund Breu Raymund Breu was elected to Swiss Re’s Board of Directors in 2003. He was Chief Financial Officer of the Novartis Group and a member of that company’s Executive Committee until January 2010. He also serves on the Swiss Takeover Board.
Jakob Baer Jakob Baer was elected to Swiss Re’s Board of Directors in 2005. He also serves on the Boards of Directors of Adecco S.A., Rieter Holding AG, Allreal Holding AG, Stäubli Holding AG, and two small-sized companies.
A seminal study – Shaping climate-resilient development: a framework for decisionmaking – co-authored by Swiss Re found that between 40 and 68% of the currently projected GDP loss from climate change between now and 2030 could be averted through cost-efficient adaptation measures.
Integrating sustainability is a key element in our business. Apart from reducing our own environmental footprint and promoting dialogue, we focus on developing product solutions to address sustainability issues, and on incorporating sustainability in our risk management.
Product solutions We develop custom insurance and capital market solutions addressing climate change and a lack of insurance cover in emerging markets. A key challenge will be to improve emerging markets’ ability to adapt to more frequent and severe natural catastrophes expected as a result of climate change.
In 2009, Swiss Re was chosen as co-lead manager and joint bookrunner of the USD 290 million MultiCat Mexico transaction, a catastrophe bond that provides the Mexican government with insurance cover from the capital markets for both hurricane and earthquake risks. It was the first transaction within the MultiCat Program developed by the World Bank’s International Bank of Reconstruction and
Swiss Re Group CO2 emissions per employee (FTE)1 2003 2008 2009 Change from base year 2003 in %kg/FTE kg/FTE kg/FTE
Building on the insights we gained through this SBR process, we introduced a comprehensive, formal framework in 2009 for assessing sustainability and ethical risks. It includes a number of sector- and issue-specific policies with clear, pre-defined criteria and qualitative standards; if any of these criteria are met, a mandatory SBR review is triggered. We will also continue to exclude certain countries or businesses, where circumstances warrant it.
The strong fall in overall CO2 emissions in 2009 mainly came from the decrease in business travel as a result of the difficult economic conditions that prevailed in the fist half of the year.
–59% Reduction in Swiss Re Group CO2 emissions from power consumption Change since base year 2003 per employee
Swiss Re shares its expertise to help society create effective responses to the perils we face
Walter Bell, Chairman of Swiss Re America Holding, speaks about micro-insurance in Ethiopia at the Clinton Global Initiative meeting in September 2009
Sheana Tambourgi, World Economic Forum Head of the Global Risk Network, speaks at the Centre for Global Dialogue in March 2009
Risk landscapes change constantly. But we always need to provide effective cover to our clients. In order to absorb risks on their behalf, we have to anticipate, identify and understand the developments that shape the world in which we operate. We rely not just on our knowledge to achieve this, but on continuous dialogue with clients, outside experts, and opinion leaders worldwide.
We exchange ideas and insights through strategic partnerships, memberships in international organisations, and links to academia. Our Centre for Global Dialogue acts as a forum for such conversations, encouraging Swiss Re experts and their guests to share expertise.
Engaging with the world allows us to find more robust solutions to common perils. There are limits to what the insurance industry can achieve alone; some risks will require a broader approach involving international and public institutions. We share our expertise to help society create effective responses.
Developing new risk-transfer solutions with international financial institutions We are working together with international financial institutions such as the World Bank, the Inter-American Development Bank, and the International Monetary Fund to develop new solutions for transferring large risks. By collaborating with institutions such as these, we jointly work on approaches to make societies more resilient to the negative impacts of global climate change, and encourage governments in emerging markets to assess their total climate risk exposure.
We are a pioneer in developing new approaches for disaster risk financing, such as public-private partnership-based solutions, or in promoting the concept of country risk management to assess a country’s overall risk exposure.
Swiss Re was listed for the first time as one of the World’s Most Ethical Companies for 2009 by Ethisphere, a leading international think tank.
heads of government, under the guidance of the World Bank and with financial support from international donors. Similarly, in October 2009, Swiss Re joined with the World Bank and Mexico to develop a single risk-transfer solution for earthquake and hurricane risks. This marks the first transaction in the World Bank's MultiCat Program, linking governments with capital markets.
Global partnerships Swiss Re is a strategic partner of the World Economic Forum (WEF), participating in its Global Risk Network to exchange views with experts from the political, economic, and scientific community. We regularly contribute to the WEF’s Global Risk Report and attend its Annual Meeting in Davos to discuss risk issues with top political and corporate figures.
US President Bill Clinton, CGI brings together a broad range of participants from charitable foundations, governments and corporations – all determined to meet global challenges through concrete commitments and projects. In 2009, Swiss Re joined forces with Oxfam America, the Rockefeller Foundation, and Columbia University’s International Research Institute to expand its successful 2008 commitment to protect small-holding farmers in a drought-prone area of Ethiopia against weather risk. Weather risk micro-insurance programmes, such as this, may serve as a model for other poor communities affected by climate change in how to increase household food security and make them more resilient to the effects of climate change.
Swiss Re‘s ReSource Award for Sustainable Watershed Management Year Country, Region Award project 2002 Guatemala, Sierra de las Minas Water users as biosphere conserves 2002 Brazil, São Paulo region Financing mechanism for water resources 2002 Nepal, Galaundo Pokhare watershed Community-based resources enhancement 2003 Vietnam, Quang Nam Province Reforms in the A’Voung watershed 2003 People’s Republic of China, Anhui Province A native grass for the Dabie Mountains 2004 Ecuador, Tomebamba watershed Improving water quality 2004 People’s Republic of China, Yunnan Province Eco Sanitation 2005 Bolivia, Camacho Province Reintroducing of Andean practices 2005 Philippines, Peñablanca Municipality Compensating local people 2005 Cameroon, Northwest Province Protecting a fragile water area 2007 Jamaica, Rio Grande watershed Eliminating river poisoning 2007 Ethiopia, Borana Zone Rainwater harvesting 2008 Solomon Islands, Chivoko Community Watershed forest preservation 2008 People’s Republic of China, Yunnan Province Implement participatory community watershed management 2009 Afghanistan, Bamiyan Province Management of degraded watersheds to prevent downstream flood damage
As of July 2009, almost 5 000 youths had been enrolled for training in 50 projects, with a pass rate of over 90% and a long-term employment rate after training of over 70% – in real jobs, paying a decent wage. The programme also assisted 358 new enterprises and provided business development services for 458 existing enterprises, helping create 1 120 new jobs.
In Indonesia, the frequency of natural catastrophes increases the urgency to build houses for a fast growing population. Employees from our Asian offices joined Habitat for Humanity to work alongside members of the host community in building much needed, affordable housing in Batam, Indonesia.
Swiss Re Singapore employees volunteer to build houses for a community in Batam, Indonesia
Key events 5 February Warren Buffett to invest CHF 3 billion in Swiss Re via Berkshire Hathaway Inc. Swiss Re announced that it intends to raise CHF 3 billion of capital from Berkshire Hathaway Inc. The Group has also agreed to enter into an adverse development cover with Berkshire Hathaway on the Group’s total Property & Casualty reserves.
12 February Stefan Lippe appointed new Chief Executive Officer Swiss Re’s Board of Directors accepted the resignation of Jacques Aigrain as Chief Executive Officer, and appointed Stefan Lippe, up to that point Deputy Chief Executive Officer and Chief Operating Officer, as his successor.
19 February Net loss reported for 2008 Swiss Re reported a net loss for 2008 of CHF 864 million and a return on equity of –3.4%.
9 March Walter B. Kielholz appointed Chairman Peter Forstmoser announced his resignation from the Board of Directors as of 1 May 2009. The Board of Directors nominated Walter B. Kielholz as new Chairman, and Mathis Cabiallavetta as new Vice Chairman.
Completed new carrier structure in Europe Provided longevity risk cover to UK local government pension fund 13 March 145th Annual General Meeting Shareholders approved the creation of conditional capital to secure the necessary underlying shares for the convertible perpetual capital instrument to be issued to Berkshire Hathaway Inc. Jakob Baer and John R. Coomber were re-elected to the Board for a three-year term.
14 July Swiss Re in Europe – completion of new carrier structure Swiss Re Europe S.A. and Swiss Re International SE replace more than 20 former Swiss Re risk carriers or branches in the European Union.
The quick read / Key events 201029 July Swiss Re transfers USD 200 million hurricane risk through Parkton Re Program Swiss Re closed a USD 200 million insurance-linked securities offering of hurricane risk in North Carolina through Parkton Re Ltd.
5 August Swiss Re further improves capital strength in the second quarter of 2009 Swiss Re estimated that its excess capital at the AA level improved to CHF 4.5 billion. The Group also made significant progress in de-risking in Legacy. Solid underlying earnings in the core business were offset by mark-to-market losses on hedges and impairments, resulting in a net loss of CHF 381 million for the second quarter of 2009.
25 September Swiss Re, Oxfam America, Rockefeller Foundation and Columbia’s IRI expand joint initiative in Tigray, Ethiopia This collaboration expands on the joint 2008 commitment which focused on using risk reduction and risk transfer skills to improve financial and food security for farmers within the drought-prone village of Adi Ha, Tigray Regional State, Ethiopia.
3 November Swiss Re reports net income of CHF 334 million for the third quarter of 2009 During the third quarter of 2009, Swiss Re continued to improve its financial flexibility through a combination of strong underlying performance in its core business and continued de-risking in Legacy. During the first nine months of 2009, Swiss Re’s excess capital at the AA level improved to over CHF 6 billion.
15 December Swiss Re announces first public-private longevity transaction, providing longevity risk cover to UK local government pension fund With this transaction, Swiss Re will provide the UK’s Royal County of Berkshire Pension Fund with protection against the uncertainty associated with longevity risk on CHF 1.7 billion of pension liabilities.
18 February Swiss Re reports net income of CHF 506 million for 2009 Excess capital was estimated at CHF 9 billion above AA capital requirements as of year end. The Board of Directors will propose a dividend of CHF 1.00 per share. The Group also announced that it intends to change its reporting currency from CHF to USD as of the first quarter of 2010.
The strong market recovery from spring 2009 eased pressure on balance sheets, improving companies’ financial flexibility. Much of the previous drop in capital base during 2008 was regained by the end of 2009.
USD 3.5 billion in insured losses. A July hailstorm in Switzerland and Austria cost insurers another USD 1.25 billion. In the US, a winter storm and two tornadoes produced total insured losses of approximately USD 3.5 billion; in South East Asia, three devastating typhoons cost about 1 800 lives and caused an aggregated insured loss of approximately USD 1 billion.
Underwriting results deteriorated in many markets, despite apparently satisfactory combined ratios. This was particularly the case for US calendar year combined ratios: thanks to large reserve releases, unusually low hurricane losses and a significant decline in losses from financial and mortgage guaranty business, the industry expects a combined ratio of 100% for the financial year 2009, compared with 105% in 2008. Without these extraordinary contributions, however, it is clear that continued softening of casualty rates is leading to increased claims ratios on an accident-year basis.
Property and casualty reinsurance The reinsurance industry faced many of the same challenges as primary insurers, including low profitability from low-yielding investments and reduced premium income. Higher asset leverage ratios, however, meant that reinsurers experienced greater volatility in their capitalisation as asset values fluctuated. Although average capitalisation declined 20% during 2008, reinsurers benefited strongly from resurgent financial markets in 2009.
The 2009 reinsurance renewals produced a moderate hardening of rates, with average increases of 2–3% on the renewed books. Standard property and casualty lines remained stable, while specialty lines like marine, aviation, and trade credit showed some improvement. There were also signs of firming in segments requiring large capacities, such as US national property, US natural catastrophe, and Europe multi-territory catastrophe.
The largest European markets all showed a drop in underwriting profitability, with motor insurance producing the most significant declines. The German Insurance Association (GDV) expects a combined ratio of 97.0%, compared to 94.6% in 2008. Preliminary results for the United Kingdom, France, and Italy also point to higher combined ratios for 2009 than for 2008. In France, winter storm Klaus was the most important single factor driving down underwriting results for non-life insurance.
A sharp drop in sales of investment-linked (or unit-linked) products contributed to the weakness in emerging Asia’s life insurance sector in 2008 and early 2009. This loss of business was partly made up by increased sales of protection products. New business, however, recovered quickly in the second half of 2009, in the wake of accelerated economic growth. Premium growth slowed in the Middle East but remained robust in Latin America.
Impact of collective redress Swiss Re’s Focus report, “The globalisation of collective redress: Consequences for the insurance industry”, published in May 2009, examines the global trend towards the introduction of mechanisms that allow groups to seek redress as an alternative to individual pursuits. The report assesses both the risks and the opportunities that this development carries, with an emphasis on implications for insurers. Its publication coincides with increased activity at the European Commission level, as two Directorates General – Competition and Consumer Affairs – are moving toward the introduction of collective redress mechanisms across the 27 EU member states.
Collective action (or class action as it is known in the US) is widely seen as an instrument to make access to legal redress easier and economically viable for individuals in situations where pursuing an individual claim might not be efficient. Experience has demonstrated, however, that without safeguards against potential abuse, collective redress systems can give rise to claims without merit and may result in increasing litigation costs for society as a whole. For the insurance industry and insurance consumers, disproportionate litigation can also have negative repercussions for insurance costs and availability.
The broad trend towards the spread of collective action also presents opportunities for insurers, however. Economic sectors likely to be at risk of litigation from collective redress are customer segments with potential for increased demand. This presents opportunities to the insurance industry to provide products and services for liability coverage, such as directors’ and officers’ liability, competition abuse claims or professional liability.
Financial year / Market environment of the 27 member states. The ESRB will monitor potential threats to financial stability and will issue early risk warnings. This “macro-prudential” supervision will be complemented by a “micro-prudential” element, the European Supervisory Authorities (ESA), which comprises three separate sector-specific supervisory authorities. The EU insurance industry will be represented by a new European Insurance and Occupational Pensions Authority (EIOPA). The ESA aims to facilitate harmonisation of prudential rules, and is empowered, if necessary, to resolve conflicts among member states’ supervisory authorities.
Given the insurance industry’s demonstration of its resilience during the financial market crisis, Swiss Re believes that the imposition of the reforms needed in the banking sector is not only inappropriate but unwarranted for the insurance industry. The reforms could mean increased levels of required capital and broader regulatory disclosure.
Regulation affecting the US reinsurance market Independently of the financial crisis, the National Association of Insurance Commissioners (NAIC) adopted the Reinsurance Regulatory Modernization Framework, designed to modernise US state-based reinsurance regulation and address collateral requirements for non-US reinsurers. The new framework, which would need to be passed by the US Congress, could benefit non-US reinsurance groups by reducing or eliminating required collateral for intra-group retrocessions, but might require collateral for obligations to US domestic ceding insurers.
Basic book value per share was CHF 67.72 at the end of December 2009, compared to CHF 67.63 at the end of September 2009. Book value per share is based on total shareholders’ equity, excluding the convertible perpetual capital instrument (CPCI), divided by the closing number of common shares outstanding.
Net investment income was CHF 6.2 billion, a 10% decrease from the previous year, reflecting the repositioning of the investment portfolio by lowering the allocation to corporate bonds and securitised products.
In 2009, the Group progressed significantly in de-risking its asset exposures. Within Legacy, substantially all exposures in Structured and Portfolio CDS were terminated. Financial Guarantee Re exposure was significantly reduced by the commutation of CHF 9.2 billion notional protection during the year.
Life & Health benefits increased 3% to CHF 9.3 billion, or 7% at constant foreign exchange rates, mostly attributable to the impact of the improved financial markets on the underlying funds in Admin Re® with-profit business, partially offset by the effects of a favourable outcome of an arbitration panel ruling in the health line of business.
Return credited to policyholders reflects the investment performance on the underlying assets, mainly backing unit-linked and with-profit policies, which is passed through to contract holders. In 2009, policyholders benefited from investment gains of CHF 4.8 billion, mainly driven by the recovery of equity markets, compared to a loss of CHF 2.8 billion in the prior year.
 22% Property  18% Casualty  14% Specialty  2% P&C non-traditional  31% Life  9% Health  4% Admin Re®
Interest expense was CHF 1.1 billion, a decrease of 27% from the prior year period. The decrease reflects generally lower interest rates and a reduced level of borrowing in 2009.
Income reconciliation The income reconciliation table reconciles the income from Swiss Re’s segments and the operations of the company’s Corporate Centre with the Group’s consolidated net income/loss before tax. Net realised gains or losses on certain financial instruments, certain currency exchange gains and losses and other income and expenses – such as indirect taxes, capital taxes and interest charges – have been excluded from the assessment of each segment’s performance.
Fee income from policyholders 808 916 13 Proprietary net investment income 6 865 6 168 –10 Net investment income from unit-linked and with-profit business 1 016 767 –25 Proprietary net realised investment gains/losses –4 689 –3 021 36 Net realised investment gains/losses from unit-linked and with-profit business –4 793 3 754 – Other revenues 270 193 –29
Expenses Claims and claim adjustment expenses –10 007 –9 083 –9 Life and health benefits –9 065 –9 348 3 Return credited to policyholders 2 822 –4 823 – Acquisition costs –5 366 –4 883 –9 Administrative expenses –2 832 –2 511 –11 Other expenses –379 –687 81 Interest expenses –1 501 –1 094 –27
Deferred acquisition costs and other intangible assets 10 450 10 284 –2
12% Asia 41% Americas 47% Europe (including Middle East and Africa)
In Property, premium volume for 2009 rose, thanks to good reinsurance renewal terms and strong client demand for capital relief solutions. In Casualty, though, reinsurance conditions remained difficult which led us to further limit our participation in the segment. Some lines of business have shown the impact of the global recession: reduced payrolls and revenues resulted in lower aggregate premium volumes, marine cargo suffered from the drop in shipments of goods, and Engineering was affected by lack of investment in large-scale infrastructure projects.
Insurance-linked securities (ILS) continue to be an important element in our client offering as well as a component of our own hedging strategy. The ILS market largely absorbed the impact of the financial crisis: collateral solutions with minimal investment risk have attracted new investors and sponsors, and growth has resumed.
This transaction is a further example of how partnerships between the public and private sectors can increase local and regional food security. Swiss Re concluded a number of agriculture-related, public-private business transactions including the provision of weather insurance, based on satellite data, to purchase animal feed to maintain livestock in Mexico, and weather derivatives, based on a rainfall index, to cover extreme drought risks affecting maize production in Malawi.
and Casualty to redeploy the capital released into more profitable markets and segments, including shorter-tailed Property and Specialty lines. In Casualty, we have chosen to allow premiums to shrink while sustaining acceptable margins on the business we accept, thus avoiding potential future reserving deficits while maintaining our ability to support clients when markets improve.
We have continued to reduce our exposure to Directors’ and Officers’ (D&O) liability and other lines of business potentially exposed to the financial crisis. Given the usual time lag between economic events and related claims emergence, we will continue to be cautious in this area for the near future.
Renewals 2010 Terms for Property and Specialty lines of business, including natural catastrophe covers, remained firm or experienced a slight weakening. As a result, overall renewal success for this segment was similar to 2009. In Casualty, terms in some segments continued to weaken further from a level that we already considered as insufficient overall. In line with our consistent cycle management approach, we reduced parts of our portfolio, in some markets sizeably.
Performance Operating income increased 39% to CHF 3.8 billion in 2009 from CHF 2.7 billion in 2008. The main drivers for this strong improvement were excellent underwriting results and a lower cost base following our cost efficiency programme. Net investment income decreased 6% to CHF 2.5 billion in 2009 compared to 2008, due to the development in the underlying reserve base and the low interest rate environment, largely offset by the absence of realised investment losses.
2009 results benefited from benign natural catastrophes, with the full-year impact 4 percentage points lower than expectations, but also from continued disciplined underwriting. The underwriting result before investment income increased by CHF 1.1 billion year-on-year.
 entered into agreement to provide catastrophe reinsurance coverage for Beijing’s government-subsidised agricultural insurance scheme
 received a licence from Bank Negara Malaysia to write Retakaful (Islamic cooperative risk-bearing) business, and opened a dedicated Retakaful operation in Kuala Lumpur
 provided a comprehensive reinsurance package for a North Sea offshore wind farm
 concluded the first UK First Party Bodily Injury treaty covering injuries sustained by insureds themselves
Premiums earned for non-traditional business were slightly higher at CHF 562 million compared to CHF 493 million in 2008.
The balance between proportional and non-proportional business experienced a modest change in 2009. The share of proportional business in the overall book was 44% in 2009, compared to 41% in 2008, due to an increase in quota share business written for clients looking for solvency relief.
Combined ratio The combined ratio for traditional business improved to 88.3% in 2009 from 97.9%
The discount of Property & Casualty reserves, applied following the acquisition of GE Insurance Solutions in 2006, was further amortised in 2009, increasing the combined ratio by 1.8 percentage points in 2009. Excluding this unwind, the combined ratio of traditional business was 86.5%.
Property Net premiums earned increased by 9% in 2009, reflecting successful 2009 renewals, partly offset by higher retroceded premium.
The combined ratio improved to 70.1% in 2009, mainly due to the low level of natural catastrophes, from 76.6% in 2008.
Casualty Net premiums earned decreased 14% in 2009, reflecting the effect of our commitment to active cycle management and increased retroceded volume.
Specialty lines Net premiums earned for the Specialty lines of business decreased 8% to CHF 3.5 billion, largely due to higher retroceded premium and selective underwriting in Credit.
Credit reinsurance business continued to be impacted by difficult economic conditions. Nevertheless, the combined ratio improved
largely due to the absence of reserve strengthening, and favourable premium updates for prior years.
The other specialty combined ratio increased to 87.7% in 2009 from 83.2% in 2008. This increase was mainly due to higher claims in Aviation & Space in the first half of 2009, partly offset by continued good experience in the other lines, including the low level of natural catastrophes.
Non-traditional business Operating income in non-traditional business decreased to CHF 41 million in 2009 from CHF 123 million in 2008. 2008 benefited from a favourable prior-year loss experience, including favourable commutation effects.
Property & Casualty results CHF millions 2008 2009 Change in %
Expenses Claims and claim adjustment expenses –9 857 –8 686 –12 Acquisition costs –2 730 –2 394 –12 Other expenses –1 562 –1 505 –4 Total expenses –14 149 –12 585 –11
Acquisition costs –623 –609 –265 –136 –484 –488 –2 605 –125 –2 730 Other expenses –463 –471 –117 –103 –87 –187 –1 428 –134 –1 562 2009 CHF millions
Current prices in many Casualty segments do not meet our profitability targets. Though there is little sign of general improvement yet, there are individual markets where the industry has been forced to react with improved terms, including several European Motor markets. Nonetheless the pressures
for a broader global improvement are building, and may be accelerated if some industry participants’ prior-year reserve releases are no longer sufficient to support current profits.
We aspire to outperform the market frequently, based on our cycle management and portfolio steering capabilities. Our ability to deliver strong client-specific solutions allows us to create value for our clients, while our continued focus on sound underwriting is key to creating economic profit for shareholders.
The H1N1 influenza pandemic had a very modest impact on mortality, but it highlighted the exposure of primary life insurers to mortality shock events. We conducted extensive research on this topic in recent years and published an in-depth report in 2007. The H1N1 outbreak spurred increased interest in pandemic cover. While
we have been reluctant to write short-term covers for this risk, we are talking with our clients about more sustainable long-term solutions.
Changing economic conditions, in particular low interest rates, and the increased cost of funding collateral for regulatory reserves have prompted us to adjust our approach to “Regulation XXX” term coinsurance. We were among the first to raise rates and reprice existing treaties, which led to an expected reduction in new “XXX“
One of our key strategic priorities is to provide longevity risk protection for life companies and corporate clients. This is a very active market in the UK and attracts growing interest elsewhere. We are well positioned to participate in this market, thanks to our leading position in mortality risk reinsurance and our diversified balance sheet. We are also participating actively in industry efforts to create capital market products to cover longevity and mortality risk.
Our clients in mature markets are increasingly focusing on making their products easier for the consumer to purchase by streamlining their processes. We are closely involved in these efforts to speed up the underwriting process through Magnum, our point of sale underwriting system.
 longevity swap transactions in Australia and the UK, including the first UK longevity swap for a local authority pension fund, via our Windsor Life subsidiary
To further improve our client services, Life Guide – our global underwriting manual – was launched in Portuguese and is now available in ten languages.
The H1N1 influenza pandemic has highlighted the exposure of primary life insurers to mortality shock events and spurred increased interest in pandemic cover
Life & Health results CHF millions 2008 2009 Change in %
Net realised investment gains/losses –5 022 3 209 – Other revenues –
Return credited to policyholders 2 822 –4 823 – Acquisition costs –2 626 –2 488 –5 Other expenses –958 –844 –12
Operating result, excluding non-participating net realised investment gains/losses 926 1 291 39
Net investment income – unit-linked 767 601 –22 Net investment income – with-profit business 249 166 –33 Net investment income – non-participating 2 632 2 678 2 Net realised investment gains/losses – unit-linked –4 052 3 457 – Net realised investment gains/losses – with-profit business –741 297 – Net realised investment gains/losses – non-participating –229 –545 –
Management expense ratio in % 6.6 5.9 Benefit ratio2 in % 85.5 82.4 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.
One of our key strategic priorities is to provide longevity risk protection for life companies and corporate clients
Benefit and expense ratios The Life & Health benefit ratio improved 3.1 percentage points to 82.4%, reflecting the effects of the favourable outcome of the arbitration panel ruling related to
Operating result, excluding non-participating net realised investment gains/losses 335 543 48 926 Benefit ratio2 in % 85.5
Operating income/loss 40 852 –146 746 Operating result, excluding non-participating net realised investment gains/losses 611 640 40 1 291 Benefit ratio2 in % 82.4 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.
The management expense ratio declined 0.7 percentage points to 5.9%, reflecting lower incurred expenses primarily as a result of the Group’s efficiency programme.
Performance Life & Health operating income increased to CHF 746 million in 2009 from CHF 697 million in 2008. Improvement in the financial markets, a one-time gain recorded related to an arbitration award which rescinded a 2001 disability income reinsurance treaty with Lincoln National Reinsurance Company (Barbados) Ltd, as well as good mortality experience were partially offset by unfavourable results from the discontinued variable annuity business.
Traditional life premiums and fees were CHF 7.7 billion, compared to CHF 7.8 billion in 2008. At constant foreign exchange rates, premiums and fees increased 1.6%, reflecting new business written in all regions.
The geographical distribution of premiums and fees earned remained stable during 2009.
Net investment income for 2009 was CHF 3.4 billion, down 5.6% from 2008. Excluding foreign exchange movements, net investment income increased 6.8%. Investment income generated on unit-linked contracts are passed straight through to contract holders as returns credited to policyholders, and therefore do not directly
We see continued demand for capital relief through reinsurance in 2010, particularly in Europe, where companies are using structured reinsurance as a way to relieve some of their Solvency I capital requirements. We expect the demand for capital relief driven reinsurance to change with the introduction of Solvency II in 2012, as higher levels of risk transfer will be required to obtain regulatory capital relief.
We expect to see more longevity transactions with life insurers and pension funds in the course of 2010. Most of these opportunities will likely arise in the UK, but we are also focused on several other markets.
This was partially offset by an increase in the fair value of embedded derivatives associated with certain funds-withheld life reinsurance treaties of CHF 171 million, which was driven by narrowing credit spreads on the underlying cedent investment portfolios. Mortality experience was favourable in the period, predominantly within the US segment, and, overall, slightly less favourable than the results experienced in the prior year. Lapse experience was higher than expected as economic conditions remained uncertain. In addition, higher lapses are expected on certain US term life insurance products as they reach the end of the fixed premium-paying period resulting in lower operating income.
Traditional health Operating income from the traditional health business rose CHF 559 million, or 191% to CHF 852 million. This was mainly due to the recording of a one-time gain of CHF 342 million related to the arbitration award which rescinded a 2001 disability income reinsurance agreement, together with proceeds from the commutation of certain personal accident treaties.
In addition, unrealised gains of CHF 57 million were reported from an increase in the fair value of embedded derivatives associated with certain funds-withheld health treaties, which were driven by narrowing credit spreads on the underlying cedent investment portfolios. Morbidity experience was moderately favourable as compared to expectations for the year, compared to better than expected experience and termination rates reported in 2008.
Admin Re® Admin Re® operating income fell CHF 414 million to a loss of CHF 146 million. The 2009 operating income includes unrealised losses of CHF 196 million related to a decline in the fair value of embedded derivatives associated with certain treaties that are ceded by Swiss Re on a fundswithheld basis. The Admin Re® segment benefited from the full year inclusion of the Barclay’s Life transaction as well as higher fee income and lower amortisation of the present value of future profits (PVFP) related to the improvement in the equity markets. US mortality was in line with expectations for the year, compared to better than expected experience reported in 2008.
Strategy and priorities To maintain our competitive position in a time of market turbulence, we re-focused our Asset Management function on its primary mandate: managing the assets that Swiss Re generates through its core business using a clear, robust asset-liability management framework. Other activities have been curtailed or, as in the case of insurance-linked securitisations, integrated into product development. We also sold our Conning Asset Management division as a non-core operation.
 50% USD  19% EUR  17% GBP  6% CAD  3% CHF  5% Other
Credit and securitised products have suffered significant stress during the prolonged market turmoil. In our effort to de-risk our investment portfolio, we materially reduced our exposure to these asset classes when we saw prudent opportunities to do so, and outsourced the management of the remainder to BlackRock.
We also reduced our exposure to alternative investments, specifically to private equity and hedge funds. We will continue to manage our existing portfolio in these areas, but will seek further opportunities to adjust our portfolios when the market environment allows. During the fourth quarter of 2009, we realised a mark-tomarket gain on Atradius N.V., a leading credit insurer.
Improved operational efficiency 2009 saw substantial change in Asset Management’s organisation, processes, and systems, cutting direct costs significantly.
 Removed a total of CHF 20.9 billion in risk from the balance sheet, reducing exposure to selected markets and financial instruments while focusing on maintaining economic value.
 Maintained an active hedging programme, managing credit spreads and equity exposure. Its ultimate purpose was to protect capital, but it retained some potential for gain. This asymmetrical arrangement proved favourable as equity markets rebounded.
 Started to optimise the risk-return profile of Swiss Re’s asset allocation, taking advantage of market opportunities and within a robust asset-liability framework.
We simplified our operating platform, having consigned a wide range of activities to Legacy. At the same time we significantly upgraded our systems for investment management analytics and straight-through processing, and are moving to a more stable, more reliable platform.
Asset Management’s investment portfolio increased to CHF 154.1 billion at the end of 2009, compared to CHF 150.6 billion at the end of 2008, excluding unit-linked and with-profit businesses. The increase in the portfolio was mainly due to net mark-to-market gains and foreign exchange movements.
Investment and operating expenses decreased by CHF 256 million, or more than 35%, mainly due to a reduction in variable expenses.
We rededicated our Asset Management function to its primary mandate: managing the assets that Swiss Re generates through its core business using a clear, robust assetliability management framework
In summary, we see reasons to be cautiously optimistic about financial markets in 2010 from a “top-down” perspective. Nevertheless, anticipated monetary tightening, likely to occur in the second half of 2010, will mean that reflation is slowly but surely coming to an end. Thus, in our view the biggest risk in 2010 is to be too complacent about the financial market outlook.
Legacy manages specified products that Swiss Re no longer offers and which are separately reported. Legacy consists of Structured CDS, Portfolio CDS, Financial Guarantee Re (FG Re) and former trading activities, including credit correlation, collateralised fund obligations, bonds trading, swaps in trust, total return swaps relating to insurance-linked securities, natural gas and other non-core activities.
Performance Legacy generated net operating income of CHF 139 million in 2009 compared to a net operating loss of CHF 5.9 billion in 2008. Operating income was primarily driven by gains from the unwind of substantially all of the Portfolio CDS and the liquidation of several positions from the former Structured CDS, as well as from sales of investments included in former trading activities. These gains were offset by losses in FG Re, where there was a significant reduction in exposure due to commutations.
FG Re reported an operating loss of CHF 353 million in 2009, compared to an operating loss of CHF 128 million in 2008. The loss in 2009 was mainly driven by commutation expenses and additions to technical reserves. During 2009, CHF 9.2 billion of notional exposure was commuted. From year-end 2008, total notional exposure was reduced by 68% and exposure to structured finance by 92%.
Former trading activities, which includes the Structured CDS and Portfolio CDS, reported operating income of CHF 492 million in 2009 compared to an operating loss of CHF 5.8 billion in 2008. The 2009 operating income was primarily driven by realised gains from the unwind of several transactions in the former Portfolio CDS and gains on the liquidation and auction of investments related to one of the former Structured CDS portfolios. These gains were partially offset by impairments of CHF 447 million, primarily in Legacy securitised products. During 2009, corporate bond and securitised product positions in Legacy were reduced by CHF 3.3 billion net, mainly as a result of net sales and maturities.
1 Swiss Re’s ADR are not listed but traded over-the-counter; one ADR corresponds to one Swiss Re share.
Swiss Re shares Swiss Re had a market capitalisation of CHF 18.5 billion on 31 December 2009, with 370.7 million shares outstanding. Swiss Re shares are listed on the main board of the Swiss Exchange (SIX) and are traded under the ticker symbol RUKN. The shares are also traded over-the-counter in the form of an American Depositary Receipt (ADR) level I programme (OTC symbol SWCEY).
In 2009, Swiss Re’s share price was more volatile than the index of European insurers, particularly during the first five months of the year. Swiss Re’s share price decreased by 0.8% during 2009, while the Dow Jones STOXX 600 Insurance index rose by 12.6% and the broader index of Swiss blue chips (SMI) increased by 18.3%. Swiss Re shares have increased by 71% since the publication of its first quarter results in May 2009.
Share trading The average daily trading volume for 2009 was 2.9 million shares on-exchange and 0.1 million shares off-exchange. Trading volume peaked at 20.1 million shares on 5 February 2009 when Swiss Re announced it expected a loss for financial year 2008. Early May 2009 also saw a significant volume of shares change hands as the market reacted positively to Swiss Re’s first quarter results and the communication of clear priorities. Daily volumes from June to December were lower than in the first five months of 2009 as stability returned to Swiss Re’s news flow.
Dividends The Board of Directors will propose a dividend of CHF 1.00 per share for 2009. Swiss Re pays its dividend annually, three working days after the Annual General Meeting; as of that day, the share price is ex-dividend.
Weighting in indices As of 31 December 2009 Index weight (in %)
Swiss Re share price and trading volume in 2009 Volume in millionsClosing price in CHF
2 Dividend divided by year-end share price of corresponding year. 3 Calculated by dividing net income by the weighted average number of common shares outstanding. 4 Based on shareholders’ equity (excluding convertible perpetual capital instrument) divided by the number of external common shares entitled to dividend. 5 Based on shares outstanding.
In 2009, we restored our capital strength by increasing available capital and mitigating the impact of higher market volatility. We de-risked our asset portfolio and reduced both insurance and credit risk.
We manage our capital, liquidity and risk through an integrated approach that ensures the reliability of Swiss Re as a business partner for our clients and optimises our flexibility to benefit from attractive business opportunities. In order to assure the financial strength of Swiss Re, we maintain capital levels that we believe are sufficient to absorb unexpectedly high levels of loss. At the same time, we seek to maintain access to liquid assets so that payments can be made when they are due, even under stressed conditions.
We actively manage our capital to ensure that the Group and all its subsidiaries are adequately capitalised at all times. The level of capitalisation and the capital structure are determined by regulatory capital requirements (both for the Group and individual legal entities), rating agency requirements, as well as management’s view of risks and opportunities arising from our business operations. The management of these different capital constraints has become an even more important task given the challenging financial market and economic environment.
At Group level and for legal entities domiciled in Switzerland, Swiss Re provides regulatory solvency reporting to FINMA under the rules of Solvency I and the Swiss Solvency Test (SST). Solvency I is based on the accounting balance sheet of the firm and applies linear factors to profit and loss and balance sheet figures. The SST is based on an economic view. We calculate available and required capital under SST with our internal capital adequacy model. The ratio, however, differs from our internal view (described on page 72) due to differences in the definition of required and available capital. The minimum ratio for Solvency I and SST is 100%; the SST minimum ratio will become legally binding in 2011. Swiss Re comfortably exceeds both ratios.
> CHF 9 bn excess of AA requirement > 200 % > 200 %1 1 The SST is based on a projection for mid-2009 to mid-2010 and is subject to approval by FINMA
We continue to play a key role in shaping Solvency II via technical discussions with expert groups from the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and also contribute to the consultation process through industry bodies such as the CRO Forum, the CFO Forum and the European insurance and reinsurance federation (CEA).
We have largely completed the simplification of our legal entity structure in Europe, the US, Canada and Asia, resulting in increased capital efficiency through optimised local capital levels. We will continue these efforts to further enhance our efficiency, and respond to regulatory developments and client needs.
Standard & Poor’s A+ Stable 18 February 2009 Moody’s A1 Negative 23 February 2009 A. M. Best A Stable 27 February 2009
̤ Increase in retained earnings of approximately CHF 1 billion to CHF 20.1 billion. Information on Swiss Re’s annual profit for 2009 is provided in the financial year section of this annual report.
In addition, we managed capital requirements through: ̤ De-risking: In 2008, we placed specific discontinued business, such as Structured CDS and Financial Guarantee Re, into Legacy. In 2009, we significantly de-risked Legacy and Asset Management exposures through sales and commutations with only a modest impact on the profit and loss account.
̤ Reserve protection: We purchased an adverse development cover, protecting against deterioration in property and casualty claims reserves relating to accident years 2008 and prior.
We also continue to actively manage the interest rate exposure in our asset-liability position considering the potential impact of future rate changes on various capital adequacy measures, including the divergent effect on our US GAAP and economic balance sheets. In 2009, this led us to take a short position against economic liabilities, increasing our economic-based capital requirement but protecting our US GAAP balance sheet and Solvency I position against the risk of rising interest rates.
̤ Swiss Re’s long-term liquidity needs are taken into account as part of our asset-liability management approach used to control financial market risk.
Liquidity management actions In 2009, we implemented a range of measures to manage and support Swiss Re’s liquidity position: ̤ We established a Group Asset-Liability
Committee (ALCO). The responsibilities of the ALCO include proposing funding plans, deciding funds transfer pricing and reviewing contingency funding plans.
In addition to spot liquidity, a sizeable portfolio of other unencumbered assets is held within the central liquidity pool. The estimated total liquidity sources available over a one-year horizon within the central liquidity pool amounted to CHF 29.2 billion as of 31 December 2009, compared to CHF 25.6 billion on the same date in 2008.
We target holding unencumbered assets (including spot liquidity) that can be pledged or sold, at a sufficient level to fund the liquidity requirements stemming from an aggregate extreme loss event corresponding to 99% Tail VaR (see page 77). In addition to the cash and collateral requirements resulting from such a loss, the scenarios assume a two-notch ratings downgrade within 90 days and a four-notch downgrade within one year. The stress tests also assume that funding from assets is subject to conservative haircuts (discounts), that intra-Group funding is not available if it is subject to regulatory approval, that no new unsecured funding is available, and that funding from new reinsurance business is reduced. There is a risk that Swiss Re’s liquidity position could be impaired if the Group were unable to access the capital markets over a one-year time horizon following the occurrence of such an extreme loss event.
Composition of spot liquidity in the central liquidity pool as of 31 December 2009 Total CHF 22.6 billion
Our risk management aims to ensure controlled risk-taking. This requires a strong and independent risk management organisation and comprehensive risk management processes to identify, assess and control the Group’s risk exposures. We base our risk management on four guiding principles which 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.
̤ Open risk culture: Risk transparency, knowledge-sharing and responsiveness to change are integral to our risk control process.
Risk governance The Board of Directors is ultimately responsible for the Group’s governance principles and policies, including approval for our overall risk tolerance. The Board mainly deals with risk management through two committees: ̤ The Finance and Risk Committee 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 is responsible for overseeing internal controls and compliance procedures.
Risk Management Function Identification, assessment, control and reporting of insurance, financial market, credit, operational, liquidity and other risks
Our risk management is based on controlled risk-taking, clear accountability, independent risk controlling and an open risk culture
̤ The Group Asset-Liability Committee oversees the management of Swiss Re’s balance sheet, in particular its liquidity, capital and funding positions and related policies. This committee was newly established in 2009.
Senior managers of business and corporate units are responsible for managing operational risks in their area of activity, based on a centrally coordinated methodology. The self-assessments are reviewed and challenged by operational risk specialists in each of the dedicated risk management units. In addition, risk management experts review our underwriting decision processes.
Our Group Internal Audit department carries out independent, objective assessments of the adequacy and effectiveness of internal control systems. It evaluates the execution of processes within Swiss Re, including those within Risk Management.
Swiss Re’s risk landscape Our risk landscape comprises core quantified risks as well as operational and other risks that arise as a result of doing business. We provide definitions of these various risk categories in the following sections and discuss risk management related to liquidity on pages 73 – 74.
Diversification effect –9.2 –9.9 Swiss Re Group 14.9 16.0 7 1 Credit comprises credit default and credit migration risk.
In 2009, Swiss Re’s overall risk increased by 7%, as higher financial market risk was partly offset by reducing property and casualty and credit risk.
Swiss Re uses 99% Tail VaR (see box on page 80) to measure the Group’s capital requirement, as well as for defining insurance limits and liquidity stress tests. According to the Group’s internal risk model, Swiss Re’s overall risk exposure based on 99% Tail VaR increased by 7% over the past year from CHF 14.9 billion to CHF 16.0 billion. Alternative risk measures are 99% and 99.5% VaR based on which our risk increased by 10% to CHF 12.3 billion and CHF 14.2 billion, respectively.
̤ Life and health risk increased by 6% to CHF 5.5 billion due to exchange rate effects and increases in the portfolio. The risk-reducing impact of the transfer to Berkshire Hathaway of a closed block of US individual life business, announced on 18 January 2010, is not taken into account.
̤ Financial market risk increased by 31% to CHF 10.5 billion, mainly due to a significant increase in the market volatility of asset-backed securities. We partly mitigated this effect by actively de-risking our asset portfolio throughout the year. Interest rate exposure also increased, as we took a short position against economic liabilities to protect our US GAAP balance sheet and Solvency I position against the risk of rising interest rates.
̤ Credit risk decreased marginally to CHF 2.9 billion due to reductions in Legacy and in Credit and Surety exposure.
Natural catastrophes Atlantic hurricane –3.5 –3.2 –9 Californian earthquake –3.9 –3.2 –18 European windstorm –2.1 –2.7 29 Japanese earthquake –1.7 –1.9 12
Risk developments The table on page 78 shows that Swiss Re’s exposure to a severe lethal pandemic increased slightly in 2009.
Management The limit framework for life and health business includes an aggregate Group limit governing the acceptance of all life and health risks. There are also separate individual limits for mortality and longevity exposures. Local business units can write reinsurance within their allocated capacity and within clearly defined boundaries, such as per life retention limits for individual business. Market exposure limits are in place for catastrophe and stop loss business. We pay particular attention to accumulation risk in areas of high population density and apply limits based on expected maximum loss for individual buildings. All large, complex or unusual transactions are reviewed and require approval from each of the Client Markets, the Products Underwriting and the Risk Management functions.
In addition, we use insurance-linked securities as a means to reduce peak exposures. The Vita bonds, for example, were issued to provide protection against extreme mortality events.
Financial market and credit risk The management of financial market and credit risk comprises the Group-wide identification, assessment and controlling of risks inherent in the financial and credit markets and includes monitoring of compliance with risk management standards.
Market scenarios CHF billions, as of 31 December 2008 2009 Change in %
100bp increase in credit spreads –3.4 –2.9 –15 30% fall in global equity markets –2.5 –2.5 – 15% fall in global real estate markets –0.6 –0.6 – 100bp parallel increase in global yield curves 0.1 1.0 900
Risk developments The table above shows the pre-tax impact of various market scenarios on available economic capital. Unlike the Tail VaR figures shown on page 77, these scenarios show Swiss Re's sensitivity to specific market movements regardless of the current market environment.
Risk Management defines risks using a regularly updated classification of risk factors. The Risk Management function is also responsible for monitoring aggregations of financial market risk in accordance with our risk management standards; the results are stored in a single system, which is also used for risk modelling and risk reporting.
Weekly Group-level reports are provided on risks and investment limits monitored. These reports track exposures and document limit usage, which is independently monitored by Risk Management. The business unit heads receive limits and seek to optimise their portfolios within those limits, using cash and derivative instruments to do so if necessary.
Risk developments The table on page 81 shows Swiss Re’s exposure to a defined credit default stress situation. This is based on historical corporate default data from Moody’s and assumes that a combination of the worst default frequencies observed over a 12-month period for all credit rating categories occur in a single year. The lower exposure is primarily due to reducing the Credit and Surety portfolio.
Risk Management monitors and reports credit exposure and limits weekly. 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 necessary transparency to implement specific exposure management strategies for individual counterparties, industry sectors and geographic regions.
Reputation Swiss Re’s continued business success depends on maintaining our reputation with clients, investors, employees and other stakeholders. Environmental, social and ethical reputation risks may arise from individual business transactions and our reputation could also be damaged by operational failures.
Credit stress test CHF billions, as of 31 December 2008 2009 Change in %
In 2009, Swiss Re was once again rated as the insurance sector leader in the Dow Jones Sustainability Index. Swiss Re was also listed as one of the world’s most ethical companies by Ethisphere, a leading international think-tank.
Climate change, for example, is a core issue for Swiss Re, as it might strongly affect the number and severity of natural catastrophes in different locations, hence affecting the entire insurance industry. In the context of our thought leadership activities in 2009, we made an important contribution to the report on “Shaping Climate-Resilient Development”, which was published by the Economics of Climate Adaptation Working Group.
Swiss Reinsurance Company Ltd, the parent company of Swiss Re Group, is listed in the main segment of the SIX Swiss Exchange. Its corporate governance is therefore assessed under the Swiss Code of Best Practice for Corporate Governance (Swiss Code), issued by economiesuisse in July 2002, and its 2007 appendix concerning recommendations on the process for setting compensation. Swiss Re fully adheres to the principles set out in the Swiss Code and is also compliant with the SIX Directive on Information relating to Corporate Governance (including its annex), issued by the SIX Swiss Exchange, effective since 1 July 2002 and most recently amended with effect from 1 July 2009 (SIX Directive). Moreover, Swiss Re conforms with the provisions on corporate governance, risk management and internal control systems, issued by the Swiss Financial Market Supervisory Authority (FINMA) on 1 January 2009. Finally, Swiss Re’s corporate governance complies with the applicable local rules and regulations of all the jurisdictions in which it conducts business.
Corporate governance / Overview 2009 Focus areas Asset management and balance sheet One of the focus areas in 2009 was asset management. The Investment Committee, established at the Board level at the end of 2008 to oversee the Group’s asset management activities, became fully operational in 2009.
Products Underwriting ̤ Property & Specialty ̤ Casualty ̤ Life & Health
Under the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA), anyone holding shares in a company listed on the SIX is required to notify the company and the SIX if their holding reaches, falls below or exceeds the following thresholds: 3%, 5%, 10%, 15%, 20%, 25%, 33⅓%, 50% or 66⅔% of the voting rights entered into the commercial register, whether or not the voting rights can be exercised (that is, notifications must also include certain derivative holdings such as options or similar instruments). Following receipts of such notification, the company has the obligation to inform the public. The following provides a summary of the disclosure notifications pertaining to the holdings of significant shareholders (in alphabetical order). In line with the SESTA requirements, the percentages indicated below were calculated in relation to the share capital reflected in the commercial register at the time of the respective notification. The full text of the notifications can be found in the financial statements of Swiss Reinsurance Company Ltd on page 248.
Shares held by Swiss Re 28 629 654 7.7 1 without Swiss Re’s holdings.
Swiss Re has no cross shareholdings in excess of 5% of capital or voting rights with any other company.
As of 31 December 2009, the fully paid-in share capital of Swiss Reinsurance Company Ltd, the parent company of Swiss Re Group, amounted to CHF 37 070 116.80. It was divided into 370 701 168 registered shares, each with a nominal value of CHF 0.10.
The following table provides an overview of the issued, conditional and authorised capital of Swiss Reinsurance Company Ltd. Please also refer to the section below Conditional and authorised capital in particular, and section Changes in capital on page 89.
Conditional capital As of 31 December 2009, the conditional capital of Swiss Reinsurance Company Ltd consisted of the following categories: Conditional capital for bonds or similar instruments Conditional capital of CHF 839 479.20 was available to settle conversion rights and warrants for bonds or similar instruments issued by the company or Group companies. Shareholders’ subscription rights are excluded. Shareholders’ preemption rights may be restricted or excluded by decision of the Board of Directors in order to finance or re-finance the acquisition of companies, parts of companies or holdings, or new investments planned by the company, or in order to issue convertible bonds and warrants on the international capital markets. If preemption rights are excluded, then (1) the bonds are to be placed at market conditions, (2) the exercise period is not to exceed ten years from the date of issue for warrants and twenty years for conversion rights and (3) the conversion or exercise price for the new shares is to be set at least in line with the market conditions prevailing at the date on which the bonds are issued.
Conditional capital for employee participation Conditional capital of CHF 602 494.70 was available to settle warrants or subscription rights granted to employees, including members of the Board of Directors, of Swiss Reinsurance Company Ltd or Group companies. The new registered shares may be issued at a price below the current market price and shareholders’ subscription rights are excluded.
Changes in 2009 On 13 March 2009, the Annual General Meeting approved the creation of conditional capital of CHF 16 000 000 to secure the necessary underlying shares for the convertible perpetual capital instrument issued in favour of Berkshire Hathaway Inc. and certain of its subsidiaries. Further information on this instrument can be found in the section Convertible bonds and options on page 91.
The Annual General Meeting also approved the creation of authorised capital with shareholders’ subscription rights of CHF 18 000 000.
The company issued 725 shares from conditional capital for employee participation purposes.
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 SESTA.
Convertible bonds As stated in note 6 to the Group financial statements, on pages 174 – 177, the following convertible bonds are outstanding: a. Holders may convert the bond, due in 2021 and issued in denominations of USD 10 000 principal amount and integral multiples thereof, into registered shares of Swiss Reinsurance Company Ltd at any time prior to the close of business on 21 November 2011, at a conversion price of CHF 207.19 per share and a fixed exchange rate of USD 1 = CHF 1.6641. The exercise of this convertible bond will not affect Swiss Re’s capital, as Swiss Reinsurance Company Ltd purchased a call option to hedge the underlying shares. If bond holders convert the bond, Swiss Re will exercise the hedge option to obtain the necessary shares. A full conversion of the USD 1 150 000 000 convertible bond would theoretically result in a delivery of around 9.2 million shares under the call option Swiss Re purchased.
Options For details on stock options granted to Swiss Re employees, see note 13 to the Group financial statements, on pages 195 – 197.
Tenor Instrument Currency Nominal (millions) Terms of conversion 2001– 2021 Convertible bond USD 1 150 see a. below 2009 –* Convertible perpetual capital instrument CHF 3 000 see b. below * For further details, see paragraph b. below.
The Board of Directors consisted of the following members as of 31 December 2009: Independence Swiss Re requires a majority of the Board of Directors to be independent. To be considered independent, a director may not be, and may not have been in the past three years, employed as an executive officer of the Group. In addition, he or she must not have a material relationship with any part of the Group – directly or as a partner, director or shareholder of an organisation that has a material relationship with the Group. Based on Swiss Re’s independence criteria, all directors qualified as independent in 2009.
Information about managerial positions and significant business connections of non-executive directors All members of the Board of Directors are non-executive. John R. Coomber was a member of Swiss Re’s executive management and Chief Executive Officer until 31 December 2005. Walter B. Kielholz, Chairman of the Board of Directors since 1 May 2009, was Swiss Re’s Chief Executive Officer from 1 January 1997 to 31 December 2002. Of the other seven non-executive directors, none has ever held a management position in the Group.
Skills, experience and expertise The Board aims to attain among its members the requisite balance of skills, knowledge, and tenure for today’s business needs. Potential new candidates are assessed against Board approved selection criteria including integrity, skill, qualifications, experience, communication capabilities and community standing. In addition to their managerial skills and expertise, Swiss Re’s Board members collectively represent a mix of backgrounds and a mix of experience or expertise in key areas such as accounting, legislation, insurance/
Walter B. Kielholz Swiss 58 Chairman of the Board 1998 2010 Chairman of the CGC
Mathis Cabiallavetta Swiss 64 Vice Chairman of the Board 2008 2011 Chairman of the IC Member of the CGC and CC
Jakob Baer Swiss 65 Chairman of the AC 2005 2012 Member of the CGC and FRC
In addition, Walter B. Kielholz is a member of the European Financial Roundtable, a member (president 2006 and 2007) of the International Monetary Conference, and a member of the Board of the Institute of International Finance. Walter B. Kielholz is also a member and former Chairman of the Board of Trustees of Avenir Suisse. From 2003 to 2009 he was a member of the Board and the Committee of economiesuisse. In 2005, he was elected to the Insurance Hall of Fame, which honours individuals who have exercised substantial influence on the insurance industry for the benefit of society.
Mathis Cabiallavetta, a Swiss citizen born in 1945, graduated from the University of Montreal with a bachelor’s degree in economics.
Mathis Cabiallavetta is a member of the Board of Philip Morris International and BlackRock, Inc. He is also a member of the Executive Advisory Board of General Atlantic Partners (GAP) in New York and a Senior Advisor of Marsh McLennan Companies, Inc. (MMC).
He was Vice Chairman of the MMC Board of Directors from November 2001 to November 2004. Prior to joining MMC in 1999, Mathis Cabiallavetta was Chairman of the Board of Directors of UBS AG, having held several senior positions in the company since 1971. He became President of the Group Executive Board in 1996 and was elected Chairman of UBS AG in 1998.
Jakob Baer began his career in the legal department of the Federal Finance Administration. In 1975, he joined Fides Trust Company. Following the successful planning and execution of a management buyout of Fides’ advisory business, he became a member of the Management Board of KPMG Switzerland in 1992. He was appointed Chief Executive Officer of KPMG Switzerland in 1994 and a member of KPMG’s European and international Management Boards. He retired from KPMG in September 2004, having reached the statutory retirement age.
Jakob Baer was elected to Swiss Re’s Board of Directors in May 2005. He also serves on the Boards of Directors of Adecco S. A., Rieter Holding AG, Allreal Holding AG, Stäubli Holding AG and two small-sized companies.
Raymond K. F. Ch’ien, a Chinese citizen born in 1952, studied at Rockford College and the University of Pennsylvania, graduating with a PhD in economics in 1978.
John R. Coomber, a British citizen born in 1949, graduated in theoretical mechanics from Nottingham University in 1970.
Rajna Gibson Brandon, a Swiss citizen born in 1962, studied business and economics at the University of Geneva, graduating with a BA in 1982 and a PhD in economics and social sciences in 1987.
Rajna Gibson Brandon is professor of finance at the University of Geneva and Director of the Geneva Finance Research Institute. She was a professor of financial economics at the University of Zurich from March 2000 until July 2008 and was previously a professor of finance at the University of Lausanne.
She is also a Deputy Director of the National Centre of Competence in Research (NCCR) “Financial Valuation and Risk Management” research network, Director of Research of the Swiss Finance Institute (SFI) and an advisor to scientific councils of various educational institutions. She was a member of the Swiss Federal Banking Commission until the end of 2004. Rajna Gibson Brandon was elected to Swiss Re’s Board of Directors in June 2000.
The Board of Directors has decided to nominate the following Board members for re-election: ̤ Walter B. Kielholz, for a three-year term; ̤ Robert A. Scott, for a two-year term, in consideration of the fact that Mr Scott will reach the statutory retirement age in January 2012.
The Board has further decided to nominate the following candidates for first-time election to the Board: ̤ Malcolm D. Knight, Canadian citizen, born in 1944. Malcolm D. Knight has been a Vice
̤ Jean-Pierre Roth, Swiss citizen, born in 1946. Jean-Pierre Roth was the Chairman of the Governing Board of the Swiss National Bank from 2001 to 2009. He joined the Swiss National Bank in 1979 and became a member of its Governing Board in 1996. From 2006 until 2009 he was chairing the Board of Directors of the Bank for International Settlements.
Please refer to the information provided in each director’s biography on pages 93 – 96.
Term The regular term of office of a directorship is three years, based on the decision taken at the Annual General Meeting of 18 April 2008. It usually begins with the date of election by a General Meeting of shareholders and ends on the third subsequent Annual General Meeting. Members whose term has expired are immediately eligible for re-election.
Nominations for election at the Annual General Meeting of 7 April 2010
Members who reach the age of 70 during a regular term of office shall tender their resignation at the Annual General Meeting following the attainment of that age. The Board can exempt a member from this age limit under exceptional circumstances.
The term of office of a committee member is one year, beginning with the Board meeting following the Annual General Meeting and ending with the Board meeting following the subsequent Annual General Meeting.
The organisation of the Board of Directors is set forth in the Corporate Bylaws, which define the responsibilities of the Board of Directors, its committees and the executive management, as well as the reporting procedures. The Corporate Bylaws are reviewed periodically by both the Chairman’s and Governance Committee and the full Board with regard to expediency as well as compliance with domestic and applicable international laws, regulations and best practice standards.
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 has the right to attend the meetings of the Executive Committee and receives the documentation and minutes of all the meetings. He facilitates reporting to the Board by executive management. He is also responsible, with the Chairman of the Audit Committee, for overseeing Group Internal Audit and appoints its head, subject to confirmation by the Audit Committee.
In addition, he convenes meetings of the Board and its committees and makes preparations for, and presides at, Board meetings. He coordinates the activities of Board committees and ensures the Board is kept informed about their activities and findings. In cases of doubt, he makes decisions regarding the authority of the Board or its committees and about the application and interpretation of the Corporate Bylaws.
Audit Committee Responsibilities The Audit Committee assists the Board in fulfilling its oversight responsibilities as they relate to the integrity of the Group’s financial statements and exercises supervision of legal, regulatory and compliance related matters. It reviews the annual financial accounts of the parent company and the Group and approves interim accounts. The committee also reviews the Group’s accounting principles and practices, the adequacy of the financial reporting process and the efficacy of the system of internal controls. Furthermore, it evaluates the external auditor, approves the audit plans of Group Internal Audit and the external auditor, and discusses their findings with them.
Members Jakob Baer, Chair Thomas W. Bechtler (until 13 March 2009) Raymund Breu Raymond K. F. Ch’ien (as of 1 May 2009) John R. Coomber (as of 1 May 2009) Bénédict G. F. Hentsch (until 13 March 2009) Robert A. Scott (until 30 April 2009)
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 have a thorough understanding of finance. At least one member must have the attributes qualifying him/her as an Audit Committee Financial Expert, as determined by the Board. Furthermore, the Corporate Bylaws require that Audit Committee members should not serve simultaneously on audit committees of more than two other listed companies. Members shall pre-advise the Chairman prior to accepting any further invitation to serve on the audit committee of another listed company. No member of the Audit Committee held more than two additional audit committee mandates in 2009.
Members Robert A. Scott, Chair Thomas W. Bechtler (until 13 March 2009) Mathis Cabiallavetta Raymond K. F. Ch’ien (until 30 April 2009) Hans Ulrich Maerki
Finance and Risk Committee Responsibilities The Finance and Risk Committee annually reviews the Group Risk Policy and recommends it for approval to the Board, reviews risk and capacity limits approved by the executive management as well as their usage, and reviews the Risk Control Framework. It reviews the most important risk exposures in all major risk categories as well as new products or strategic expansions of the Group’s areas of business. In terms of risk and economic performance measurement, it reviews critical principles used in internal risk measurement, valuation of assets and liabilities, capital adequacy assessment und economic performance management. It also reviews the capital adequacy and the treasury strategy of the Group.
The members of the Board of Directors receive a list of the agenda items for the Board and committee meetings approximately ten days before each meeting. They also receive written documentation on the items for discussion. Board members who are unable to attend Board or committee meetings give their views on the agenda items to the chairperson before the meeting, whenever possible.
The Board has an assessment process in place, giving the members the opportunity to assess the effectiveness of the Board and its committees on an annual basis.
Audit Committee The Audit Committee held seven regular meetings and two extraordinary meetings in 2009. On average, the meetings lasted 2.5 hours. Average attendance was 97.8% at the meetings throughout the year. Besides the committee members and the Company Secretary, the Chief Executive Officer, the Chief Financial Officer, the Head of Group Internal Audit, the Head of Legal, the Head of Compliance, the Chief Accounting Officer and the two lead auditors representing the external auditor were invited to attend Audit Committee meetings in an advisory capacity. The Head of Group Internal Audit and the two lead auditors of the external auditor are normally present in executive sessions of the Committee.
The Board of Directors exercises the ultimate authority of the Group. It has delegated the responsibility for managing the Group’s operations to the Executive Committee (see section Executive management as of page 107).
The Board of Directors, among other things, ̤ defines the Group’s guiding principles, adopts the strategy of the Group and approves a consolidated medium- and short-term Group business plan; ̤ determines the risk tolerance level of the Group, monitors risk development and establishes the methods and applicable standards for accounting, budgetary control and financial planning; ̤ determines the structure of the Group and defines its Global Functions; ̤ reviews and approves annual reports and financial statements of the parent company and the Group prior to their submission to the Annual General Meeting; ̤ reviews periodic business status reports as well as reports on major business transactions and events, and decides on transactions of a strategic nature and high-limit transactions in alternative investments and Admin Re®; ̤ has overall responsibility for corporate governance matters; ̤ reviews the Group’s adherence to legal, regulatory and compliance standards, as well as the status of significant legal, regulatory or compliance matters; ̤ nominates Board member candidates for election or re-election by the General Meeting, elects the Chairman of the Board, the Vice Chairman and the chairpersons and members of the Board committees, and assesses the performance of the Board and its committees; ̤ appoints the Chief Executive Officer and the other members of the Executive Committee and assesses the performance of the Chief Executive Officer; ̤ approves the compensation principles of the Group and share-based employee compensation plans; ̤ determines the compensation of the members of the Board, the compensation of the Chief Executive Officer, the total amount available for compensation of the other members of the Executive Committee and the overall incentive pool for the company; ̤ approves material transactions with any of the Group’s significant shareholders; ̤ makes preparations for and convenes General Meetings of shareholders and executes the resolutions of General Meetings.
The Executive Committee, among other things, ̤ submits proposals to the Board relating to all matters within the Board’s responsibility, such as the Group strategy, the Group business plan, the Group’s organisational structure, the Group’s risk tolerance, accounting principles and high-limit transactions; ̤ approves the strategies, structures and business plans of the Global Functions; ̤ establishes the performance targets for the Group and the Global Functions, monitors performance and takes any necessary action; ̤ decides on individual debt issuances, bank facilities and similar instruments; ̤ establishes the principles for intra-Group transactions and funding; ̤ establishes the principles for external retrocession and the balancing of Group-wide catastrophe and accumulated risks; ̤ defines the underwriting authorities of the Group committees and the Global Functions and decides on individual reinsurance transactions exceeding these authorities; Definition of areas of responsibility of the Board of Directors and the Executive Committee
̤ is responsible for the assessment of the existence and effectiveness of the Group’s system of internal control; ̤ oversees the implementation of Group compliance procedures, monitors remediation of identified regulatory and compliance deficiencies and ensures that appropriate risk management committees are constituted; ̤ assumes responsibility for personnel planning and management development of the Group, subject to the authority of the Board of Directors; ̤ develops the Group’s communications policy.
Swiss Re maintains effective and consistent control of executive management through the Board of Directors. The Board of Directors has a number of controlling and information gathering mechanisms in place to monitor the handling of responsibilities it has delegated to the executive management.
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 Committee. The Chairman of the Board and the Vice Chairman always receive the meeting documentation and minutes.
Involvement of executive management in meetings of the Board of Directors As a matter of principle, all members of the Executive Committee are invited to all meetings of the Board of Directors. The entire Executive Committee was present at all regular Board meetings in 2009, with the exception of two Executive Committee members who were absent from one meeting each.
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.
Duty to inform about extraordinary events As soon as the Executive Committee becomes aware of significant extraordinary business developments or events, it is obliged to inform the Board of Directors immediately, even if the Board is not in session.
Special investigations Each Board committee is entitled to undertake or commission special investigations at its own discretion into any matters within its respective scope of responsibility. Each committee may also enlist assistance from independent legal advisers, auditors or other experts if deemed necessary.
Authority is granted for full, free and unrestricted access to any and all of the Group’s property and personnel relevant to any function under review. All employees are required to assist GIA in fulfilling its duty. GIA has no direct operational responsibility or authority over any of the activities it reviews.
GIA applies a risk-based approach to auditing the Group’s control systems, performing its own risk assessment and making use of risk assessments performed by the risk management and other assurance functions in the Group after reviewing the quality of the assurance work performed. The GIA Audit Plan is determined annually and updated on a quarterly basis. The results of the audits are reported to the executive management and the Audit Committee. Formal quarterly updates are provided to the Audit Committee on the findings, resources and skills within GIA and on the changes in tools and methodologies GIA uses. In addition, GIA prepares for the Board of Directors the Assurance Report, which provides a summary of the assurance activities of Operational Risk Management, Business Risk Review, GIA, and Compliance.
He was appointed deputy member of the Board in 1988 and a full member of the Board in 1991, when he assumed general responsibility for the company’s operations in the German-speaking area. In 1993, he became Chairman of the Board of Management of Bavarian Re. Since 2001, he has been Chairman of the Board of Directors of the renamed Swiss Re Germany Holding AG.
Stefan Lippe was appointed a member of Swiss Re’s Executive Board in 1995, as Head of the Bavarian Re Group. In 2001, he was assigned as Head of the Property & Casualty Business Group and appointed a member of the Executive Committee. In September 2008, he took over as Chief Operating Officer and was also appointed Deputy Chief Executive Officer. In February 2009, he was appointed Chief Executive Officer.
He joined Swiss Re in 2008 and was appointed Head of Asset Management and a member of the Executive Committee.
Stefan Lippe German 54 Chief Executive Officer David J. Blumer Swiss 41 Chief Investment Officer Agostino Galvagni Italian 49 Chief Operating Officer Brian Gray Canadian 47 Chief Underwriting Officer Michel M. Liès Luxembourg 55 Chief Marketing Officer George Quinn British 43 Chief Financial Officer Raj Singh US 47 Chief Risk Officer
After undertaking various activities in the fields of underwriting and marketing as well as project work, he moved to New York in 1998, structuring and marketing insurance-linked securities. He returned to Bavarian Re in 1999 as Member of the Board of Management. In 2001, he joined Swiss Re, Zurich, as Head of the Globals Business Unit and member of the Europe Division Executive Team. He was appointed to the Executive Board with effect from September 2005 to head the Globals & Large Risks division (now renamed Insurance & Specialty) within Client Markets and was appointed Chief Operating Officer and member of the Executive Committee as of May 2009.
Brian Gray became a member of the Executive Board in September 2005 as Head of Property and Specialty. In September 2008, he was appointed to the Executive Committee as Chief Underwriting Officer.
Michel M. Liès, a citizen of Luxembourg born in 1954, gained a degree in mathematics from the Swiss Federal Institute of Technology (ETH) in Zurich in 1974.
In 1978, Michel M. Liès joined the Life department of Swiss Re in Zurich and was mainly active in the Latin American market. From 1983 to 1993, he was responsible for France and the Iberian peninsula and coordinated Swiss Re’s life strategy across the European Community.
He started his career at KPMG in London where he held a number of positions as adviser and consultant to insurance and reinsurance companies. He joined Swiss Re in 1999 as Chief Accounting Officer, based in Zurich. In 2003, he was appointed Chief Financial Officer for the Financial Services Business Group. He moved to New York in 2005 as Regional Chief Financial Officer for Swiss Re Americas. On 1 March 2007, George Quinn became Chief Financial Officer of Swiss Re Group.
Raj Singh, a US citizen born in 1962, holds a Bachelor of Science degree from the Winona State University, Minnesota, and an MBA from the Thunderbird American School for International Management, Arizona, from 1984.
Until 31 December 2009, the Executive Committee was supported by the larger Executive Board comprising a group of senior executives. With effect from 1 January 2010, the new Group Management Board was formed. It comprises the Executive Committee and 13 senior executive officers holding key positions in the Group. The members, with the exception of the members of the Executive Committee, are appointed by the Chief Executive Officer. The Group Management Board acts as a sounding board and advises the Chief Executive Officer with respect to design, implementation and monitoring of the Group’s strategy and operation.
The Board of Directors announces the agenda. Shareholders with voting power whose combined holdings represent shares with a nominal value of at least CHF 100 000 may, no later than 45 days before the date of the meeting, demand that matters be included in the agenda. Such demands must be in writing and must specify the items and the proposals to be submitted.
Swiss Re has not taken any defence measures against takeover attempts. The Board of Directors is of the opinion that the best protection is a fair valuation of the shares. It believes in the efficiency of a free market rather than relying on defence measures that normally have a long-term negative effect on the share price development.
PricewaterhouseCoopers AG (PwC), formerly known as Revisuisse Price Waterhouse AG, were elected as Swiss Re’s auditors at the Annual General Meeting of 25 November 1991 and, since then, have been re-elected annually. At the Annual General Meeting of shareholders on 13 March 2009, based on the proposal of the Audit Committee and a recommendation of the Board of Directors, PwC were re-elected as Swiss Re’s statutory auditors and auditors of the consolidated financial statements for a term of one year.
The following summarises fees (excluding VAT) for professional services for the year ended 31 December 2009.
Cooperation and flow of information between the auditor and the Audit Committee The Audit Committee liaises closely with the auditor. The lead auditors participate as advisers in all meetings of the Audit Committee. For more information about the meetings of the Audit Committee see page 103.
The Committee reviews and approves the planned audit services of the auditor and approves in advance non-audit services anticipated to be provided by the auditor. It discusses the results of the annual audits with the auditor, in particular their reports on
Corporate governance / Auditors the financial statements, necessary changes to the audit plans and critical accounting issues. The auditor shares with the Audit Committee its findings on the adequacy of the financial reporting process and the efficacy of the system of internal controls. It informs the Audit Committee about differences in opinion between the auditor and management encountered during the audits or in connection with the preparation of the financial statements.
Qualification The auditor is requested to submit to the Audit Committee, at least annually, a report describing the auditor’s own quality control procedures, and any material issues raised by the most recent internal reviews, or inquiries or investigations by governmental or professional authorities within the preceding five years and any steps taken to deal with any such issues.
Swiss Re maintains a close relationship with the financial community and the broader public by using all available communication channels. Comprehensive information about the Group is provided on Swiss Re’s website. Important corporate news is announced on an ad hoc basis and made available on the Group’s website. Swiss Re’s ad hoc disclosures and other corporate news can be subscribed electronically via Swiss Re’s news service on the website at www.swissre.com/subscription. For Swiss Re’s contact details see Business contact information on page 267.
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 2009, Swiss Re held an investors’ day on its cycle management and portfolio steering as well as on risk management. Presentations and conference call recordings are made available to the public on the Group’s website.
Swiss Re is strongly committed to treating all investors equally. The Group prevents selective disclosure by observing ad hoc publicity rules and a policy of restrictions for the close period, during which quarterly and annual financial results information is finalised. Swiss Re subjects all employees globally to the corresponding trading restrictions in Swiss Re securities. The close period commences on a given date preceding the official publication of the financial information and ends after a cooling-off period following public release.
Date News Method of dissemination 28 January Swiss Re’s Employer Stop Loss News release product offers US companies cost savings for self-funded health insurance plans 5 February Swiss Re announces preliminary News release and press and analysts’ and unaudited 2008 results and telephone conference investment of CHF 3 billion in Swiss Re by Berkshire Hathaway Inc. 12 February Swiss Re’s Board of Directors News release appoints Stefan Lippe as new Chief Executive Officer 19 February Annual results 2008 News release, press conference and analysts’ meeting in Zurich (including telephone conference and web cast) 19 February Swiss Re’s 145th Ordinary General News release Meeting on 13 March 2009 4 March Kaspar Villiger resigns as a member News release of Swiss Re’s Board of Directors with effect from 13 March 2009
Corporate governance / Information policy 9 March Peter Forstmoser to resign from News release and press conference the Board of Directors – in Zurich Board of Directors nominates Walter B. Kielholz as new Chairman – Mathis Cabiallavetta nominated as new Vice Chairman 13 March Terms of the convertible perpetual News release capital instrument to be issued to Berkshire Hathaway finalised 13 March 145th Annual General Meeting Meeting in Zurich and news release 2 April Swiss Re appoints Agostino News release Galvagni as Chief Operating Officer 7 May First quarter 2009 results and News release and press and EVM 2008 results analysts’ telephone conference 9 June Swiss Re enters Lead Umbrella News release marketplace in the US, offering net capacity for large corporate accounts 5 August Second quarter 2009 results News release, press conference and analysts’ telephone conference in Zurich 7 September “Les Rendez-Vous de Septembre News release and press and analysts’ 2009”, (re)insurance industry event conference in Monte Carlo 8 October Swiss Re acquires Retakaful licence, News release sets up Retakaful operation in Kuala Lumpur 23 October Swiss Re heads to Baden-Baden News release and press with a strong appetite for high- telephone conference quality business 3 November Third quarter 2009 results News release and press and analysts’ telephone conference 24 November Swiss Re obtains USD 75 million of News release extreme mortality risk protection through new Vita Capital programme 1 December Swiss Re’s Economic Forum 2009 News release, press conference in London 9 December Investors’ Day 2009 News release, press and analysts’ conference in Zurich
In 2009, the Compensation Committee conducted a comprehensive review of the Group’s compensation approach – focusing on alignment of employee and shareholder interests, avoiding incentives for undue risk taking, and ensuring that Swiss Re remains in a position to attract and retain highly skilled performers.
118 Report from the Compensation Committee 119 The compensation environment 120 Compensation policy 125 Compensation decisions by the Compensation Committee 132 Performance of multi-year compensation plans
In 2009, financial services companies had to deal with the effects of one of the most severe financial crises in generations. A widely held point of view was that inappropriate compensation practices may have been a major contributor to the problems. In this changed environment the Compensation Committee of Swiss Re embarked during 2009 on a further review of compensation practises within the firm. Our goal was to ensure that our compensation plans meet the needs of the business and are consistent with shareholder interests. We also reviewed our practices against the guidance emerging from our various regulatory bodies, in particular our principal regulator, the Swiss Financial Market Supervisory Authority (FINMA).
The Compensation Committee is satisfied that this report represents an accurate and comprehensive view of Swiss Re’s key performance and reward practices in 2009. The activities of the Compensation Committee were performed in accordance with the Compensation Committee Charter and Working Instructions.
During the course of the year, the Compensation Committee examined in detail the proposed regulatory frameworks that would affect the Group’s business. This assessment suggests that Swiss Re’s overall compensation structure meets the regulators’ requirements. In particular, the Group’s deferred variable compensation elements – the Value Alignment Incentive and Long-term Incentive plans – are consistent with the regulators’ view that there should be no reward for taking inappropriate risk. The Compensation Committee remains vigilant and will continue to closely monitor the evolving regulatory frameworks as they come into force to ensure full compliance.
In addition to adjustments to the governance structure driven by regulatory initiatives, the Compensation Committee performed a number of appraisals of existing compensation practises during 2009 and launched several important initiatives. As a result, the company’s Compensation Policy was re-aligned in cooperation with executive management. The Compensation Committee also undertook a global benefit review. The fee structure for the Chairman and Vice Chairman of the Board of Directors was revised by introducing a new performance share plan with shareholder-aligned performance criteria. Furthermore, the Compensation Committee mandated the design and implementation of new stock ownership guidelines for Executive Committee members, which became effective as of 1 January 2010.
Guiding principles Swiss Re’s remuneration structure is designed to attract, motivate, and retain the qualified talent the Group needs to succeed globally. The aim is to provide remuneration that is competitive in the local labour markets and supports the Group’s core values, while ensuring that employees focus on the delivery of outstanding results without taking inappropriate risks.
A range of incentive programmes have been designed to reflect the long-term dynamics of the business. Both the Value Alignment Incentive plan and the Long-term Incentive plan aim to reward sustained achievement as opposed to short-term results. The use of share- based arrangements ensures a direct link between shareholder and employee interests. A significant portion of senior management’s compensation is tied to the organisation’s long-term performance.
Compensation governance The Board of Directors appoints the members of the Compensation Committee, who are independent directors as defined by the Company Bylaws. The committee members are familiar with compensation plans, risk-related issues in plan design, and employee evaluation and remuneration practices.
The Compensation Committee acts on behalf of the Board of Directors in reviewing and approving proposals to ensure that they comply with the Group’s compensation principles and relevant regulations. The Compensation Committee also ensures that proposals: ̤ meet the overall objectives of the compensation approach; ̤ keep compensation in line with company and individual performance; ̤ provide a linkage between compensation and the Group’s values and long-term strategy; ̤ allow for competitive levels of compensation in cases of high performance; ̤ ensure alignment with shareholder interests; and ̤ discourage inappropriate risk taking.
The primary authority lies with the Compensation Committee under its powers delegated from the Board of Directors. Certain powers are retained by the full Board of Directors, as illustrated in the following table: Composition of the Compensation Committee The Chairman, the Chief Executive Officer, and the Head Human Resources are normally invited to attend the meetings of the Compensation Committee. Other members of senior management may attend parts of the meetings, as the Committee deems appropriate. No individual may attend any part of a meeting where his or her own compensation is discussed.
Individual compensation of the members of the Executive Committee (excl. CEO) CEO
The following illustration shows a summary of the compensation elements, which are explained in the section below: Base salary and benefits Base salary represents the regular payments made to an employee as compensation for carrying out a job or role.
Total compensation, of which base salary is an element, is regularly reviewed against the market to ensure that it remains competitive. Base salary is primarily determined by the employment markets in which Swiss Re competes for talent – but we also consider factors such as individual expertise when making salary-related decisions.
Swiss Re also aims to provide a package of employee benefits appropriate to local employment market conditions, to recruit, motivate and retain talent. The primary purpose is to provide a proper degree of security for employees and their dependents in managing the costs of old age, health matters, disability, and death.
̤ Measured against prior-year development ̤ Applies above a certain threshold ̤ Paid after three years
When the variable compensation level for an employee exceeds a pre-defined amount, the variable pay is delivered through two components: a cash incentive payment (cash API) and a deferred Value Alignment Incentive (VAI).
Long-term Incentive The purpose of the Long-term Incentive plan (LTI) is to provide increased incentive for Swiss Re’s senior management to make significant contributions to shareholder value and to ensure that Swiss Re continues to attract and retain individuals of exceptional skill. LTI is a forward-looking instrument focusing on incentivising top executives to take decisions that are in the long-term interest of shareholders.
The LTI is a discretionary grant for Group Management Board members and a select group of key executives at Managing Director level, over and above their annual cash remuneration. The intention is to: ̤ focus participants’ energies on growth and capital efficiency, both of which are critical to long-term shareholder value creation; ̤ achieve competitive total compensation for top executive talent by giving the participant a long-term incentive; and ̤ assist with the retention of key managers.
Overall Annual Performance Incentive pools Management makes a proposal to the Compensation Committee based on the Group’s overall performance for the year. The Compensation Committee considers these proposals and recommends a total compensation pool to the Board of Directors for approval. Within this overall pool, the Compensation Committee also proposes a separate pool for the Executive Committee and an individual award for the Chief Executive Officer.
Overall Long-term Incentive pools Unlike API, the LTI is a forward-looking award. Its purpose is to build a long-term stake in the success of the Group for top executives. The size of the LTI pool is not correlated to the Group’s financial performance in the prior year.
CHF million Economic value at grant Accrued economic value Fair value mark-up for 2009 Total US GAAP
In accordance with its governance framework, the Compensation Committee submits its proposal for the CEO’s compensation to the Board of Directors for approval, along with the aggregate sum of API and LTI awards proposed for the remainder of the Executive Committee.
The CEO and the other Executive Committee members have standard employment contracts without severance payment agreements. There are no specific “change in control” or retention agreements in place with members of the Executive Committee, aside from those provisions applicable to all Swiss Re employees. Executives are covered by the standard defined-contribution pension plan of the Company in Switzerland. The Swiss legal cap of CHF 820 800 on insurable salaries applies; no additional provisions have been made.
(Extract from Note 6 to the Financial statements of Swiss Reinsurance Company Ltd) CHF thousands 2008 2009
Amounts reported under VAI reflect the awards granted in the current year plus an additional mark-up element of 25% which assists with retention and compensates for time value of money.
Amounts reported under Shares relate to incentive shares and restricted stock units granted. Like all Swiss Re employees, the CEO and Executive Committee members may receive a combination of cash and incentive shares as part of their API; the shares granted are subject to a one-year blocking period.
The members of the Executive Committee participate in a defined-contribution pension scheme. The funding of pension benefits shown in the table above reflects the actual employer contributions.
Base salary and allowances 1 334 1 720 Cash variable pay for performance 825 2 500
Value Alignment Incentive (VAI)2 844 3 125 Long-term Incentive plan grant (LTI) 2 500 5 000
Weighted average share price in CHF as of grant date 86.24 16.74 David J. Blumer, Chief Investment Officer 54 000 149 342 Raj Singh, Chief Risk Officer 4 000
Weighted average strike price in CHF as of grant date 110.44 Stefan Lippe, Chief Executive Officer 99 000 Brian Gray, Chief Underwriting Officer 18 200 Michel M. Liès, Chief Marketing Officer 128 000 George Quinn, Chief Financial Officer 46 600
Total mortgages and loans to members of the Executive Committee 6 699 Highest mortgages and loans to an individual member of the Executive Committee: Raj Singh, Chief Risk Officer 3 647 Total mortgages and loans not at market conditions to former members of the Executive Committee 7 354
In recognition of the difficulties faced by the company in the financial year 2008, Walter B. Kielholz elected to reduce his 2009 fee by 50% of his compensation for 2008.
Long-term Incentive For each LTI plan year, final payment, if any, occurs at the end of the respective three-year performance measurement period. The plan includes a payout factor which can vary between 0 and 2, driven by average RoE and EPS growth over the vesting period. The final payment in respect of each plan year will depend on whether performance targets, expressed by average RoE and EPS growth, have been achieved over the plan period and the share price at conclusion. The 2009 LTI plan will be settled in Swiss Re shares.
The original LTI grant from 2006 expired in March 2009 and resulted in nil value as LTI plan performance targets had not been achieved. Similarly, the LTI awarded in 2007 will expire in 2010 without payment. The likelihood is only small that the 2008 LTI plan might result in a payment based on the performance triggers in place for this plan year which were also set prior to the financial markets crisis. This historic LTI performance reflects the direct alignment of the award with shareholder interests and company performance.
The peer group, selected in consultation with Mercer, the Compensation Committee’s external advisor, comprises Ace, Allianz, Allstate, Aviva, Axa, Credit Suisse, Generali, Hannover Re, ING, MetLife, Munich Re, Prudential Financial, UBS, and Zurich Financial Services.
Status of LTI awards LTI plan year Period elapsed as of 31 December 2009 Likelihood of payment 2006 entire 3 years expired without value 2007 2 years 10 months nil 2008 1 year 10 months minimal 2009 10 months intact
174 Note 6 Debt 178 Note 7 Unpaid claims and claim adjustment expenses 180 Note 8 Reinsurance information 182 Note 9 Financial guarantee reinsurance 183 Note 10 Earnings per share 185 Note 11 Income taxes 188 Note 12 Benefit plans 195 Note 13 Share-based payments 198 Note 14 Compensation, participations and loans of members of governing bodies 199 Note 15 Commitments and contingent liabilities 201 Note 16 Information on business segments 208 Note 17 Subsidiaries, equity investees and variable interest entities 218 Note 18 Restructuring provision 219 Note 19 Risk assessment 220 Note 20 Subsequent events 221 Report of the statutory auditor 223 Swiss Reinsurance Company Ltd 223 Annual Report 227 Income statement 228 Balance sheet 250 Proposal for allocation of disposable profit 251 Report of the statutory auditor
Expenses Claims and claim adjustment expenses 8, 16 –10 007 –9 083 Life and health benefits 8, 16 –9 065 –9 348 Return credited to policyholders 16 2 822 –4 823
Income/loss before income tax expense –1 350 954 Income tax expense/benefit 11 486 –231 Net income/loss –864 723
Short-term investments, at amortised cost which approximates fair value (including 0 in 2008 and 696 in 2009 subject to securities lending and repurchase agreements) 5 802 10 487
Cash and cash equivalents (including 2 477 in 2008 and 4 460 in 2009 subject to securities lending) 17 268 28 749
Premiums and other receivables 12 446 12 170 Reinsurance recoverable on unpaid claims and policy benefits 8 11 934 11 631 Funds held by ceding companies 11 230 9 929
Acquired present value of future profits 5 6 139 6 259
Liabilities Unpaid claims and claim adjustment expenses 7 75 510 70 721 Liabilities for life and health policy benefits 3, 8 39 911 41 292
Income taxes payable 769 629 Deferred and other non-current taxes 1 329 959
Additional paid-in capital 10 776 11 156 Treasury shares, net of tax –1 640 –1 574 Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax –2 407 –1 437 Cumulative translation adjustments, net of tax –4 854 –4 599 Accumulated adjustment for pension and post-retirement benefits, net of tax –529 –469
Common shares Balance as of 1 January 37 36 Issue of common shares 1 1 Cancellation of shares bought back –2 Balance as of period end 36 37
Foreign currency translation, net of tax Balance as of 1 January –2 554 –4 854 Other changes during the period –2 300 255 Balance as of period end –4 854 –4 599
Net income/loss –864 723 Interest on convertible perpetual capital instrument –217 Dividends on common shares –1 331 –34 Cumulative effect of adoption of FSP SFAS 115-23 355 Cumulative effect of adoption of EITF 07-52 189 Cumulative effect of adoption of SFAS 158 –31 Cumulative effect of adoption of SFAS 159 –7 Deferred income tax on cross-border business transfer5 –408 Balance as of period end 19 071 20 087
1 These balances represent the premium from the conversion of mandatory convertible bonds that matured in December 2008 and June 2009, respectively. 2 The Group adopted a new accounting pronouncement, EITF 07-5, as of 1 January 2009, which resulted in a change in accounting principle for some types of instruments and embedded features linked to Swiss Re’s own shares. The cumulative impact upon adoption resulted in a net increase in retained earnings of CHF 189 million, a decrease in treasury shares of CHF 64 million, an increase in other invested assets of CHF 303 million and a tax income of CHF 50 million.
Cash paid/received for acquisitions/disposals of reinsurance transactions, net 170 103 Net purchases/sales/maturities of other investments –757 1 367 Net cash provided/used by investing activities 18 819 15 546
Total net cash provided/used 5 820 12 155 Effect of foreign currency translation –83 –674 Change in cash and cash equivalents 5 737 11 481 Cash and cash equivalents as of 1 January 11 531 17 268 Cash and cash equivalents as of 31 December 17 268 28 749
The Swiss Re Group, which is headquartered in Zurich, Switzerland, comprises Swiss Reinsurance Company Ltd (the parent company, referred to as “Swiss Re Zurich”) and its subsidiaries (collectively, the “Swiss Re Group” or the “Group”). The Group provides reinsurance and other related products and services to insurance companies, direct clients and others worldwide through reinsurance brokers and a network of offices in over 20 countries.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and comply with Swiss law. The Group’s financial statements are stated in Swiss francs (CHF), the currency of the country in which Swiss Re Zurich is incorporated. All significant inter-company transactions and balances have been eliminated on consolidation.
The fair value of the majority of the Group’s financial instruments is based on quoted prices in active markets or observable inputs. These instruments include government and agency securities, commercial paper, most investment-grade corporate debt, most high-yield debt securities, exchange traded derivative instruments, most mortgage-backed and asset-backed securities and listed equity securities. In markets with reduced or no liquidity, spreads between bid and offer prices are normally wider compared to spreads in highly liquid markets. Such market conditions affect the valuation of certain asset classes of the Group, such as some asset-backed securities as well as certain derivative structures referencing such asset classes.
The Group’s investments in fixed income and equity securities are classified as available-forsale (AFS) or trading. Fixed income securities AFS and equity securities AFS are carried at fair value, based on quoted market prices, with the difference between original cost and fair value being recognised in shareholders’ equity. Trading fixed income and equity securities are carried at fair value with unrealised gains and losses being recognised in earnings.
The cost of equity securities AFS is reduced to fair value, with a corresponding charge to realised investment losses if the decline in value, expressed in functional currency terms, is other than temporary. Subsequent recoveries of previously recognised impairments are not recognised.
If the derivative is designated as a hedge of the fair value of assets or liabilities, changes in the fair value of the derivative are recognised in earnings, together with changes in the fair value of the related hedged item. If the derivative is designated as a hedge of the variability in expected future cash flows related to a particular risk, changes in the fair value of the derivative are reported in other comprehensive income until the hedged item is recognised in earnings. The ineffective portion of the hedge is recognised in earnings. When hedge accounting is discontinued on a cash flow hedge, the net gain or loss remains in accumulated other comprehensive income and is reclassified to earnings in the period in which the formerly hedged transaction is reported in earnings. When the Group discontinues hedge accounting because it is no longer probable that a forecasted transaction will occur within the required time period, the derivative continues to be carried on the balance sheet at fair value, and gains and losses that were previously recorded in accumulated other comprehensive income are recognised in earnings.
The acquired present value of future profits (PVFP) of business in force is recorded in connection with the acquisition of life and/or health operations. The initial value is determined actuarially by discounting estimated future gross profits as a measure of the value of business acquired. The resulting asset is amortised on a constant yield basis over the expected revenue recognition period of the business acquired, generally over periods ranging up to 30 years, with the accrual of interest added to the unamortised balance at the earned rate. The carrying value of PVFP is reviewed periodically for indicators of impairment in value. Adjustments to reflect impairment in value are recognised in earnings during the period in which the determination of impairment is made.
The excess of the purchase price of acquired businesses over the estimated fair value of net assets acquired is recorded as goodwill, which is reviewed periodically for indicators of impairment in value. Adjustments to reflect impairment in value are recognised in earnings in the period in which the determination of impairment is made.
Amounts assessed against policyholders for mortality, administration and surrender are shown as fee income. Amounts credited to policyholders are shown as interest credited to policyholders. Investment income and realised investment gains and losses allocable to policyholders are included in net investment income and net realised investment gains/ losses.
Property and casualty reinsurance premiums are recorded when written and include an estimate for written premiums receivable at period end. Premiums earned are generally recognised in income over the contract period in proportion to the amount of reinsurance provided. Unearned premiums consist of the unexpired portion of reinsurance provided. Life reinsurance premiums are earned when due. Related policy benefits are recorded in relation to the associated premium or gross profits so that profits are recognised over the expected lives of the contracts.
The Group has a long-term incentive plan, a fixed option plan, a restricted share plan, and an employee participation plan. These plans are described in more detail in Note 13. The Group accounts for share-based payment transactions with employees using the fair value method. Under the fair value method, the fair value of the awards are recognised in earnings over the vesting period.
Treasury shares are reported at cost in shareholders’ equity. Treasury shares also include stand-alone derivative instruments indexed to the Group’s shares that meet the requirements for classification in shareholders’ equity.
Subsequent events for the current reporting period have been evaluated up to 12 March 2010. This is the date on which the financial statements were issued.
In February 2008, the FASB issued an accounting standard (FASB Staff Position (FSP) No. FAS 140-3) that provides guidance on accounting for a transfer of a financial asset and a repurchase financing that was entered in to contemporaneously with or in contemplation of the initial transfer. The Group adopted the new standard as of 1 January 2009 for new transactions entered into from that date forward.
In May 2008, the FASB issued a new standard (SFAS No. 163) regarding accounting for financial guarantee insurance contracts. As required by the standard, the Group adopted as of 30 September 2008 disclosure requirements about risk management practices and exposures that have experienced credit deterioration. The remaining requirements regarding measurement and disclosures for financial guarantee insurance contracts became effective for the Group as of 1 January 2009. Refer to Note 9 for further information.
On 9 April 2009, the FASB issued an accounting standard (FSP FAS 157-4) that provides additional guidance for estimating fair value of assets and liabilities when the volume and level of activity for the asset or liability have significantly decreased. The early adoption of the new standard as of 1 January 2009 did not have a material impact on the Group’s financial statements. The new disclosure requirements are reflected in Note 3.
Also on 9 April 2009, the FASB issued an accounting standard (FSP FAS 107-1 and APB 28-1) that requires disclosures about the fair value of financial instruments for all interim reporting periods. The Group adopted the new standard as of the second quarter of 2009. Fair values of financial instruments are disclosed in Note 2, 3 and 6.
In August 2009, the FASB issued a new accounting standard (ASU No. 2009-5 “Measuring Liabilities at Fair Value” an update to Topic 820 – Fair Value Measurements and Disclosures) that provides additional guidance on how the fair value of liabilities should be determined and how the fair value levels should be applied. Swiss Re adopted this new standard as of the fourth quarter of 2009. The adoption did not have a material impact on the Group’s financial statements.
In September 2009, the FASB issued a new standard (ASU No. 2009-12 “Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent)” an update to Topic 820 – Fair Value Measurements and Disclosures) regarding the fair value measurements and disclosures for investments in certain entities that calculate net asset value per share (or its equivalent). The Group adopted the new standard as of the fourth quarter of 2009 and it did not have a material impact on the Group’s financial statements. The related disclosures are included in Note 3.
Realised gains and losses for fixed income, equity securities and other investments (including unit-linked and with-profit business) were as follows: Investment income
Equity securities 767 543 Policy loans, mortgages and other loans 541 449 Investment real estate 232 200 Short-term investments 275 45 Other current investments 409 100 Share in earnings of equity-accounted investees –944 228 Cash and cash equivalents 332 85 Deposits with ceding companies 595 676
Investment expenses –732 –619 Interest charged for funds held –382 –290
The approach for measurement and recognition of other-than-temporary impairments changed in the first quarter of 2009 as a result of the Group’s election for early adoption of recognition and presentation of the corresponding standard. Under the new accounting guidance, other-than-temporary impairments for debt securities are bifurcated between credit and non-credit components, with the credit component recognised through earnings and the non-credit component recognised in other comprehensive income. The Group has implemented new methodologies to measure the credit component of other-than-temporary impairments, defined as the difference between a security’s amortised cost basis and expected cash flows. Methodologies for measuring the credit component of impairment are aligned to market observer forecasts of credit performance drivers which management believes are representative of median market expectations.
A reconciliation of the other-than-temporary impairment related to credit losses recognised in earnings during 2009 was as follows: Impairment on fixed income securities relating to credit losses
Unit-linked realised gains/losses –4 052 3 457 With-profit realised gains/losses –741 297
Amortised cost or cost, estimated fair values and other-than-temporary impairments of fixed income securities classified as available-for-sale were as follows: Investments available-for-sale
Mortgage-backed and asset-backed securities 34 368 319 –4 377 30 310 Fixed income securities available-for-sale 106 216 5 234 –8 012 103 438 Equity securities available-for-sale 675 184 –26 833
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 26 827 272 –964 26 135 States of the United States and political subdivisions of the states 59 2 –4 57
As of 31 December 2008 and 2009, securities of CHF 10 707 million and CHF 15 007 million, respectively, were pledged as collateral in securities lending transactions and repurchase agreements. The associated liabilities of CHF 4 465 million and CHF 5 174 million, respectively, were recognised in accrued expenses and other liabilities.
A real estate portfolio with a carrying amount of CHF 292 million serves as collateral for short-term senior operational debt of CHF 650 million.
Debt securities issued by governments and government agencies 11 266 864 867 236 12 133 1 100
Debt securities issued by governments and government agencies 30 200 1 617 993 91 31 193 1 708
As of 31 December, investments in mortgages and other loans and real estate comprised the following: As of 31 December 2008 and 2009, the Group’s investment in mortgages and other loans included CHF 200 million and CHF 193 million, respectively, of loans due from employees and CHF 444 million and CHF 414 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
As of 31 December 2008 and 2009, investments in real estate included CHF 9 million and CHF 7 million, respectively, of real estate held for sale.
Policy loans, mortgages and other loans 6 611 6 611 5 795 5 795
Financial statements / Notes to the Group financial statements 3 Fair value disclosures
As of 1 January 2008, the Swiss Re Group adopted the Fair Value Measurements and Disclosures Topic ASC 820. This topic 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.
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 (eg 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.
Exchange-traded derivative instruments typically fall within level 1 or level 2 of the fair value hierarchy depending on whether they are considered to be actively traded or not.
Quoted prices in active markets for identical assets and liabilities (Level 1)
Total assets at fair value 27 249 124 409 27 607 –36 040 143 225
Liabilities for life and health policy benefits –494 –494 Accrued expenses and other liabilities –607 –58 –665 Total liabilities at fair value –1 023 –24 912 –18 410 33 615 –10 730 1 The netting of derivative receivables and derivative payables is permitted when a legally enforceable master netting agreement exists between two counterparties. A master netting agreement provides for the net settlement of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default or on the termination of any one contract.
Debt securities issued by US government and government agencies 23 704 2 566 26 270 Debt securities issued by non-US governments and government agencies 33 831 84 33 915
Equity securities backing unit-linked and with-profit life and health policies 19 119 43 19 162 Equity securities held for proprietary investment purposes 644 843 176 1 663
Total assets at fair value 44 095 82 176 11 399 –9 264 128 406
As of 31 December 2008 and 31 December 2009, the reconciliation of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs were as follows: Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
Realised/unrealised gains/losses: Included in other comprehensive income –2 689 19 –248 –2 918
Realised/unrealised gains/losses: Included in net income –376 –7 074 –7 450 Included in other comprehensive income 10 10
Purchases, issuances, and settlements –760 145 –615 Transfers in and/or out of level 3 14 34 48 Impact of foreign exchange movements –16 94 –9 69
Closing balance as of 31 December 2008 –494 –17 916 0 –18 410
Realised/unrealised gains/ losses: Included in other comprehensive income –16 303 187 17 –3 196 –26 40 698
Liabilities Balance as of 1 January 2009 –494 –17 916 –18 410
The private equity direct portfolio consists of proprietary investments and co-investments alongside partner funds primarily in the financial services industry.
Gains/losses included in net income for the period –5 334 200 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date –3 605 1 733
Real estate funds 137 90 non-redeemable3 na 1 The redemption frequency varies from monthly to up to three years. 2 Cash distribution can be delayed for up to three years depending on the sale of the underlyings. 3 One exception is a real estate fund that can be redeemed annually based on a 90 day notice period.
This redeemable fund had a fair value of CHF 16.6 million at the end of 2009.
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.
Fair value changes from fixed income securities trading (CHF 128 million) and equity securities trading (CHF 387 million) are reported in net realised investment gains/losses. Fair value changes from the GMDB reserves (CHF 191 million) are shown in life and health benefits.
Assets and liabilities measured at fair value pursuant to election of the fair value option
Amount offset Where a right of setoff exists –6 694 6 694 Due to cash collateral3 –2 570 417
Total net amount of derivative financial instruments4 4 112 –6 383 –2 271 1 The notional amounts of derivative financial instruments give an indication of the Group’s volume of derivative activity. 2 The Group has revised the presentation of the fair values of foreign exchange derivative assets and liabilities. The revision has no impact on balance sheet items, shareholders’ equity or net income. Fair values of foreign exchange derivative assets and liabilities under the same contract with the same underlyings, terms and counterparties are presented on a net basis. In prior quarters these were presented on a gross basis.
The Group primarily uses derivative financial instruments for risk management and trading strategies. For the year ended 31 December 2009, gains and losses of derivative financial instruments not designated as hedging instruments were as follows: The Group designates certain derivative financial instruments as hedging instruments. The designation of derivative financial instruments is primarily used for overall portfolio and risk management strategies. As of 31 December 2009, the following hedging relationships were outstanding: Fair Value Hedges The Group entered into interest rate and foreign exchange swaps to reduce the exposure to interest rate and foreign exchange volatility for certain of its issued debt positions. These derivative instruments were designated as hedging instruments in qualifying fair value hedges.
For the year ended 31 December 2009, the gains and losses attributable to the hedged risks were as follows: Hedges of the net investment in foreign operations The Group designates non-derivative monetary financial instruments as hedging the foreign currency exposure of its net investment in certain foreign operations.
Derivatives not designated as hedging instruments1 Interest rate contracts –104 Foreign exchange contracts 5 Equity contracts –1 025 Credit contracts –2 944 Other contracts 804 Total gain/loss recognised in income –3 264 1 Gains and losses of derivative financial instruments not designated as hedging instruments are recorded in net realised investment gains/losses.
Fair value hedging relationships1 Interest rate contracts –662 748 Foreign exchange contracts 100 –27 Total gain/loss recognised in income –562 721 1 Gains and losses of derivative financial instruments designated as fair value hedging instruments are recorded in net realised investment gains/losses.
Certain derivative instruments held by the Group contain provisions that require its debt to maintain an investment grade credit rating. If the Group’s credit rating were downgraded or no longer rated, the counterparties could request immediate payment, guarantee or an ongoing full overnight collateralisation on derivative instruments in net liability positions.
The total fair value of derivative financial instruments containing credit-risk-related contingent features amounted to CHF 4 104 million as of 31 December 2009, for which the Group posted collateral of CHF 417 million. In the event of a reduction of the Group’s credit rating to below investment grade, it would be required to post additional collateral with a fair value of CHF 3 687 million. This equals the amount needed to settle the instruments immediately as of 31 December 2009.
The following tables show the fair values and the maximum potential payout of the credit derivatives written/sold as of 31 December 2008 and 31 December 2009, categorised by the type of credit derivative and credit spreads, which were 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.
Total credit derivatives written/sold –16 603 112 744 49 819 5 572 168 135 1 The maximum potential payout is based on notional values of the credit derivatives. 2 Including Portfolio CDS which consists predominantly of large investment grade and SME corporate loans. 3 Including Structured CDS.
As of 31 December 2009 CHF millions 0 – 5 years 5 – 10 years Over 10 years
The percentage of PVFP which is expected to be amortised in each of the next five years is 7%, 6%, 6%, 6%, 6%.
Interest accrued on unamortised PVFP 330 142 Effect of foreign currency translation –718 –1 143 123 121 Effect of change in unrealised gains/losses –95 13 Closing balance as of period end 4 311 6 139 4 025 6 259
Financial statements / Notes to the Group financial statements 6 Debt
The Group’s debt as of 31 December 2008 and 2009 is presented in the following table. Certain debt positions were reclassified in the current period from senior operational long-term debt to senior operational short-term debt as they are unconditionally callable by the creditor at short notice. Balance sheet classification and interest expense, including comparatives, were adjusted accordingly. As of 31 December 2008, senior operational long-term debt was reduced from CHF 9 467 million to CHF 7 127 million and senior operational short-term debt was increased from CHF 5 085 million to CHF 7 425 million. The cash flow statement was not affected by the reclassification.
The Group uses debt for general corporate purposes and to fund discrete pools of operational 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. Certain debt positions are limited recourse, meaning the debtors’ claims are limited to assets underlying the financing. As of 31 December 2008 and 2009, operational leverage and financial intermediation liabilities amounted to CHF 34.2 billion (thereof CHF 5.2 billion limited recourse) and CHF 29.3 billion (thereof CHF 6.2 billion limited recourse), respectively.
Long-term debt – financial and operational debt 18 113 19 831 1 Fair values for all short- and long-term debt positions are disclosed on a quarterly basis due to newly issued FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments”. At the same time, the fair value disclosure for year-end 2008 was revised. The revision has no impact on total revenues, net income or net equity.
As of 31 December 2008 and 2009, long-term debt as reported above had the following maturities: Maturity of long-term debt 1 Balance was reclassified to short-term debt.
Maturity Instrument Issued in Currency Nominal in millions Interest rate Book value in CHF millions 2013 Credit-linked note 2008 USD 2 3M Libor + 50bp 2016 Credit-linked note 2007 USD 475 1M Libor 491 2032 Principal protected structured note coupon
Total subordinated debt as of 31 December 2009 11 053 Total subordinated debt as of 31 December 2008 10 571
In May 2009, the Group issued EUR 1 billion under the EMTN programme, with a three-year maturity and a coupon of 6% and EUR 600 million with a five-year maturity and a coupon of 7%.
In September 2009, the Group issued USD 750 million senior notes under the EMTN programme, with a four-year maturity and a coupon of 4.13%. Further, the Group issued a senior note of CHF 50 million in a private placement under the EMTN programme, with a coupon of 2.94% and a five-year maturity.
Reinsurance recoverable –5 041 –4 701 Deferred expense on retroactive reinsurance –723 –540
Amortisation of deferred expense on retroactive reinsurance and impact of commutations 125 64
Due to the inherent uncertainties and assumptions on which these estimates are based, however, the Group cannot exclude the need to make further additions to these provisions in the future.
At the end of 2009 the Group carried net reserves for US asbestos, environmental and other long-latent health hazards equal to CHF 2 328 millions. During 2009, the group paid net against these liabilities CHF 362 million. Incurred net losses were nil as adverse development was offset by the adverse development cover with Berkshire Hathaway.
Financial statements / Notes to the Group financial statements 8 Reinsurance information
Ceded –117 –117 –89 –89 Total fee income from policyholders 808 808 916 916
Change in unpaid claims and claim adjustment expenses; life and health benefits, gross 3 813 2 928 6 741 3 940 2 005 5 945 Change in unpaid claims and claim adjustment expenses; life and health benefits, retro –168 –1 196 –1 364 –365 –256 –621 Change in unpaid claims and claim adjustment expenses; life and health benefits, net 3 645 1 732 5 377 3 575 1 749 5 324
Claims and claim adjustment expenses; life and health benefits –10 007 –9 065 –19 072 –9 083 –9 348 –18 431
Life and health policy benefits 39 911 39 911 41 292 41 292
The Group reinsured monoline insurers against the risk of default on insured financial obligations. It has stopped writing new business in this area and the current business is in run off. The Group’s exposure encompasses public finance and structured finance exposures. In total, the notional exposure as of 31 December 2009 amounted to CHF 5 018 million, of which 5% is attributable to structured finance. Compared to the amounts recognised as of 31 December 2008, notional exposures decreased CHF 10 839 million due to the commutation of two cedent portfolios. The main driver of the Group’s exposure is the credit risk of the underlying insured obligation.
As of 31 December 2009, total technical provisions for financial guarantee reinsurance amounted to CHF 104 million, which includes unpaid claims and claim adjustment expenses of CHF 24 million and unearned premiums of CHF 80 million.
The impact of adopting the recognition and measurement guidance on retained earnings was immaterial.
Financial statements / Notes to the Group financial statements 10 Earnings per share
In March 2009, Swiss Re Zurich issued to National Indemnity Company, a subsidiary of Berkshire Hathaway Inc, a convertible perpetual capital instrument. The instrument has an aggregate face value of CHF 3 000 000 000, with a fixed coupon at a rate of 12% per annum. The coupon can be settled in cash or shares/warrants in lieu of cash at the option of Swiss Re. The instrument may be redeemed, in whole or in part, for cash, for an amount equal to 120% of the value of the instrument at the option of Swiss Re on or after the second anniversary of issuance of the instrument. The instrument may be converted, at the option of the holder, in whole or in part, into Swiss Re shares at the rate of CHF 25 per share on or after the third anniversary of the issuance of the instrument, subject to certain adjustments and exceptions. The instrument ranks junior to senior securities of Swiss Re Zurich and ranks pari passu among themselves and with parity securities.
Diluted earnings per share Net income assuming debt conversion and exercise of options 506 Weighted average common shares outstanding 342 389 798 Net income/loss per share in CHF –2.61 1.48
At the Annual General Meeting of 13 March 2009, the shareholders approved an increase in conditional capital. This allows the share capital of the Swiss Re Group to be increased by an amount not exceeding CHF 16 000 000 through the issue of a maximum of 160 000 000 registered shares payable in full, each with a nominal value of CHF 0.10, through the exercise of conversion rights granted in connection with a convertible bond or a similar financial instrument issued by the company or one of its subsidiaries. These shares are available for issuance in connection with the convertible perpetual capital instrument.
Income tax at the Swiss statutory rate of 21.0% –284 200 Increase (decrease) in the income tax charge resulting from: Foreign income taxed at different rates 384 –115 Impact of foreign exchange movements –30 –18 Disallowed expenses 9 11 Tax exempt income/dividends received deduction –39 –47 Change in valuation allowance 604 70 Basis differences in subsidiaries –517 39 Change in statutory tax rates –21 20 FIN 48 including interest and penalties –88 121 Business restructuring –250 Life tax adjustments –79 –6 Other, net –175 –44
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 2009 was approximately CHF 3 489 million. It is not practicable to estimate the amount of additional tax that might be payable if such earnings were not reinvested indefinitely.
Deferred tax assets Income accrued/deferred 509 688 Technical provisions 651 950 Unrealised losses on investments 650 491 Pension provisions 264 244 Benefit on loss carryforwards 4 396 4 123 Currency translation adjustments 574 537
Deferred tax liabilities Present value of future profits –1 586 –1 574 Income accrued/deferred –147 –643 Bond amortisation –223 –231 Deferred acquisition costs –724 –649 Technical provisions –840 –1 692 Unrealised gains on investments –169 –96 Untaxed realised gains –99 –463 Foreign exchange provisions –666 –534 DFI losses –389 –132 Other –1 462 –583
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 856 million and CHF 994 million at 1 January 2009 and 31 December 2009, respectively. Interest and penalties related to unrecognised tax benefits are recorded in income tax expense. Such benefit for the period ending 31 December 2009 was CHF 23 million. As of 1 January 2009 and 31 December 2009, CHF 268 million and CHF 245 million, respectively, were accrued for the payment of interest (net of tax benefits) and penalties. The accrued interest balance as of 31 December 2009 is included within the deferred and other non-current taxes section reflected above and in the statement of financial position.
The balance of gross unrecognised tax benefits as of 31 December 2009 presented in the table above is less than the FIN 48 liability reflected in the deferred and other non-current taxes section due to the impact of tax positions which offset loss carryforwards (CHF 164 million) and the removal of interest expense (CHF 245 million). Unrecognised tax benefits which have created certain loss carryforwards are net, whereby the statement of financial position does not reflect a deferred tax asset for the attribute or a liability for the unrecognised tax benefit.
In June 2008, the Group communicated its intention to change the structure of its Swiss other post-retirement benefits plan. The change was effective as of 1 July 2009 and resulted in a decrease of the accumulated benefit obligation of CHF 130 million in 2008.
Amounts recognised in the balance sheet in 2009 consist of: Swiss plans pension benefits
Acquisitions/disposals/additions 6 1 Effect of curtailment and termination benefits –20 –27 –69 –2 Effect of foreign currency translation –440 56 –13 –2 Benefit obligation as of 31 December 2 827 2 779 1 642 1 980 325 315
Amounts recognised in accumulated other comprehensive income, gross of tax, in 2009 consist of: The components of pension and post-retirement cost for the years ended 31 December 2008 and 2009, respectively, were as follows: Other changes in plan assets and benefit obligations recognised in other comprehensive income consist of: Components of net periodic benefit cost
Assumed medical trend rates at year end Medical trend – initial rate 7.2% 6.9% Medical trend – ultimate rate 4.5% 4.8% Year that the rate reaches the ultimate trend rate 2015 2015
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.
For a description of the different fair value levels and valuation techniques see note 3 Fair value disclosures.
Residential mortgage-backed securities 160 160 Commercial mortgage-backed securities 8 8 Agency securitised products Other asset-backed securities 32 32
Equity securities: Equity securities held for proprietary investment purposes 809 612 1 421
Realised/unrealised gains/losses: Relating to assets still held at the reporting date 1 –28 –27 Relating to assets sold during the period
CHF millions Swiss plans pension benefits Foreign plans pension benefits Other benefits
Financial statements / Notes to the Group financial statements 13 Share-based payments
As of 31 December 2008 and 2009, the Group had the share-based compensation plans described below.
Stock option plans include the long-term equity award programme, the fixed-option plan and an additional grant to certain members of executive management. No options were granted under these plans from 2007 onwards and the long-term equity award programme fully vested in the course of 2009.
The long-term equity award programme was provided to members of the Executive Board and certain members of management. Under the scheme, the beneficiary was allowed to choose between the fixed-option plan and a restricted-share plan.
A summary of the activity of the Group’s stock option plans is as follows: The following table summarises the status of stock options outstanding as of 31 December 2009: All stock options outstanding are also exercisable and the status of these exercisable options is reflected in the table above.
Options sold 86 –64 550 Options forfeited or expired 157 –595 578
In 2009, the Group introduced a performance share plan for the Chairman and Vice Chairman of the Board of Directors. The plan has a requisite service period of three years and is paid out in shares. The plan is measured based on Swiss Re’s total shareholder return against a selected peer group. The grant date fair value was CHF 36.00 and the final number of shares to be released upon vesting can vary between 0% and 150% of the original grant. 111 111 units were issued under this plan in 2009.
Starting in 2006, the Group annually grants a Long-term Incentive plan (LTI) to selected employees with a three-year vesting period. The requisite service periods as well the maximum contractual term for each plan is three years. LTI grants made in 2009 may lead to a payment subject to the company’s reported financial performance for the periods covered by each plan. For each LTI plan year, final payment, if any, occurs at the end of the respective three-year performance measurement period. The plan includes a payout factor, which can vary between 0 and 2, driven by average return on equity (ROE), and earnings per share compound annual growth (EPS CAGR) over the vesting period. The final payment in respect of each plan year will depend on whether the performance targets, expressed by average ROE and EPS growth, have been achieved over the plan period, and the Swiss Re share price at the conclusion of the plan. The LTI grant from 2006 vested in March 2009 and there was no payout as LTI plan performance targets were not achieved.
Plans granted prior to 2009 are expected to be settled in cash. Their fair value is based on a risk neutral approach that uses the current share price as the best estimate of the share price at the end of the vesting period. Three-year average ROE and EPS CAGR used to determine fair value are based on the Group’s three-year plan.
The Group’s employee participation plan consists of a savings scheme lasting two or three years. Employees combine regular savings with the purchase of either actual or tracking options. The Group contributes to the employee savings over the period of the plan.
Financial statements / Notes to the Group financial statements 14 Compensation, participations and loans of members of governing bodies
The disclosure requirements under Swiss Company Law in respect of management compensation to the members of the Board of Directors and of the Executive Committee of the Group, as well as to closely related persons, are detailed on pages 237 to 244 of the annual report of Swiss Reinsurance Company Ltd.
Financial statements / Notes to the Group financial statements 15 Commitments and contingent liabilities
The allocation of investment result to Property & Casualty and Life & Health is determined based on US GAAP (re)insurance liabilities. The allocation 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.
Financial statements / Notes to the Group financial statements a) Business segment results For the years ended 31 December
Other expenses –1 562 –958 –561 –130 –3 211 Interest expenses –1 501 –1 501
Net realised investment gains/losses 45 32 77 –49 28 Other revenues 38 38
Expenses Claims and claim adjustment expenses –2 524 –3 356 –2 179 –8 059 –627 –8 686 Acquisition costs –807 –765 –746 –2 318 –76 –2 394 Other expenses –403 –670 –308 –1 381 –124 –1 505
Financial statements / Notes to the Group financial statements c) Life & Health business segment – by line of business For the years ended 31 December
Net realised investment gains/losses –93 212 3 090 3 209 Other revenues
Financial statements / Notes to the Group financial statements 17 Subsidiaries, equity investees and variable interest entities
Method of consolidation f full e equity 1 Net asset value instead of share capital
Malta Swiss Re Finance (Malta) Ltd., Mriehel 742 100 f Swiss Re Treasury (Malta) Limited, Mriehel 742 100 f
Switzerland European Reinsurance Company of Zurich Ltd, Zurich 312 100 f Horizon21 Private Equity Holding AG, Pfaeffikon 23 32 e Tertianum AG, Zurich 10 20 e
Australia Swiss Re Australia Ltd, Sydney 19 100 f Swiss Re Life & Health Australia Limited, Sydney 144 100 f
The assessment if the Group is the primary beneficiary is reviewed whenever circumstances qualify as a reconsideration event under the Variable Interest Entities section of the Consolidation Topic. These events include: ̤ the VIE’s governing documents or contractual arrangements are changed in a manner
Modified coinsurance agreement The Group assumes insurance risk via a modified coinsurance agreement from a direct insurer, which qualifies as a VIE. The Group takes the majority of the mortality risk, which makes the Group the primary beneficiary. Consequently, the Group will incur losses if mortality risk develops unfavourably.
Investment vehicles Investment vehicles include private equity limited partnerships and hedge funds, in which the Group invested as part of its investment strategy. The Group’s variable interests arise through an ownership interest in the vehicle. To determine if the Group is the primary beneficiary or holds a significant portion of the variable interests, the Group assesses its ownership share in relation to the total equity outstanding. The Group is exposed to losses when the values of the investments held by the vehicles decrease. The maximum exposure to loss equals the carrying amount of the ownership interest.
The Group did not provide financial or other support to any VIEs in 2009 that it was not previously contractually required to provide.
Premiums and other receivables 15 Reinsurance recoverable on unpaid claims and policy benefits 10 Acquired present value of future profits
Additional paid-in capital 241 234 Net unrealised investment gains/losses, net of tax –187 –329 Cumulative translation adjustments, net of tax 1 204 –346 Retained earnings –31 1 199 Total liabilities and shareholders’ equity 10 114 9 714
The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs in which the Group holds a significant variable interest as of 31 December 2009: The following table shows the total assets of VIEs in which the Group holds a significant variable interest for periods ended 31 December 2008 and 2009.
The liabilities of CHF 179 million as of 31 December 2009 for insurance-linked and credit-linked securitisations represent the negative fair value of the total return swaps the Group has entered into with the securitisation vehicles. The negative fair value is caused by a decrease in value of some of the assets held as collateral by the vehicles.
The liabilities for the debt financing and the other categories represent the decline in value of VIE assets which are guaranteed by the Group. For VIEs where the variable interests consist of an equity stake, a loss is recognised in the income statement rather than a liability being set up when the net asset value declines. As of 31 December 2009, the liabilities for the other categories amounted to CHF 437 million.
As of 31 December 2009, the consolidation of the VIEs resulted in a minority interest in the balance sheet of CHF 409 million (31 December 2008: CHF 420 million). The minority interest is included in accrued expenses and other liabilities. The net minority interest in income was CHF 10 million and CHF 2 million net of tax for the years ended 31 December 2008 and 2009, respectively. The income statement impacts are generally included in the relevant segment with the underlying movement in income or expenses.
Reconsideration events under the Variable Interest Entities section of the Consolidation Topic required the review of the consolidation assessment of certain VIEs. As a result, the Group consolidated and deconsolidated some VIEs in the first quarter of 2009. The resulting effect on the financial statements is immaterial.
Financial statements / Notes to the Group financial statements 18 Restructuring provision
The Asset Management business segment increased the provision by CHF 93 million, mostly for leaving benefits associated with current de-risking activities.
Release of provision –22 –3 –6 –31 Costs incurred –86 –41 –70 –197
The Board of Directors is ultimately responsible for the Group’s governance principles and policies, including approval for Swiss Re’s overall risk tolerance. The Board mainly deals with risk management through two committees: ̤ The Finance and Risk Committee is responsible for reviewing the Group Risk Policy
and capacity limits, as well as monitoring risk tolerance, and reviewing top risk issues and exposures.
insurance risk capacity, for approving investment risk limits, and for determining changes to the internal risk and capital methodology.
Financial statements / Notes to the Group financial statements 20 Subsequent events
Opinion In our opinion, the consolidated financial statements for the year ended 31 December 2009 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.
The after-tax profit for the 2009 financial year amounted to CHF 1 070 million, compared to CHF 15 million in the previous year.
The total reinsurance result improved substantially to a gain of CHF 2.5 billion, compared to a gain of CHF 1.8 billion in 2008.
Gross premiums earned decreased from CHF 24.3 billion to CHF 14.8 billion. The 2008 premium peak was mainly driven by the initial premium consideration of CHF 7.8 billion received at inception of a life and health portfolio from the Bermuda branch of a Swiss Re Group subsidiary. Excluding this impact, life and health gross premiums earned increased slightly and amounted to CHF 4.6 billion in 2009. Property and casualty gross premiums earned decreased 17% to CHF 10.2 billion, which mainly is the result of portfolio transfers on 1 October 2008 from the Company‘s European branches to a Luxembourg based reinsurance carrier of the Swiss Re Group.
The development of life and health claims and claim adjustment expenses, as well as life and health benefits, was strongly impacted by portfolio transactions with Swiss Re Group companies. The previous year positions reflect the initial recognition of the technical provision assumed at inception of a portfolio and offset the premium peak described above. In addition to this one-off transaction, the current year improvement was primarily driven by the favourable mortality experience and a reduction in liabilities related to the positive outcome of an arbitration award. A further reduction in the liabilities for life and health policy benefits was driven by the portfolio transaction with the Company’s life and health subsidiaries in connection with the US individual life retrocession transaction with Berkshire Hathaway Inc.
The investment result amounted to a loss of CHF 0.4 billion, compared to a loss of CHF 0.7 billion in the previous year.
Lower valuation adjustments on fixed income securities, private equity investments and own shares, as well as the absence of losses from structured credit default swaps reported in the previous year, led to a positive result before the allocation of investment return. This effect was to a large extent offset by the lower dividend income from the Company’s subsidiaries.
Included in investment income is a value re-adjustment of CHF 1.1 billion on hedged derivative financial instrument liabilities. This income is compensated by valuation adjustments and realised losses in the amount of CHF 1.3 billion on the respective hedge positions.
The decrease in fixed income securities was mainly due to reducing the risk profile through an increased allocation to higher quality issuers, short-term investments and cash equivalents.
The convertible perpetual capital instrument with a face value of CHF 3.0 billion issued to National Indemnity Company, a subsidiary of Berkshire Hathaway Inc., is reported under “Debentures”.
As of 31 December 2008, shareholders’ equity amounted to CHF 17.1 billion before allocation of the disposable profit. After the dividend payment of CHF 34 million for 2008, the creation of new shares from the conditional capital for the conversion of a mandatory convertible bond, the issuance of new shares from the conditional capital in connection with employee participation programmes and the inclusion of the profit for the 2009 financial year, shareholders’ equity increased to CHF 18.7 billion at the end of 2009.
Reserve for own shares 1 446 1 446 Other legal reserves 650 650
Retained earnings brought forward 61 43 Profit for the financial year 15 1 070
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 to a currency fluctuation provision.
Loans to subsidiaries and affiliated companies, mortgages and other loans are carried at nominal value. Value adjustments are recorded where the expected recovery value is lower than the nominal value.
Other current assets are carried at nominal value after deduction of known credit risks if applicable.
Premiums written relating to future periods are stated as unearned premiums and are normally calculated by statistical methods. The accrual of commissions is determined correspondingly and is reported under “Deferred acquisition costs”.
The initial set up of assets and liabilities in respect of property and casualty retroactive treaties with Group external counterparties is accounted for as a balance sheet transaction.
Claims paid and claim adjustment expenses –19 677 4 364 –15 313 –18 165 –1 921 –20 086
Other reinsurance income and expenses 139 –25 114 132 –37 95
Financial statements / Swiss Reinsurance Company Ltd 2. Investment result 3. Assets from reinsurance
Income from investment real estate 100 103 Income from subsidiaries and affiliated companies 1 790 466 Income from equity securities 17 14 Income from fixed income securities, mortgages and other loans 892 632 Income from short-term investments 47 25 Income from alternative investments 6 35 Income from investment services 64 68 Income from intragroup profit allocation agreement 795 – Valuation re-adjustments on investments – 1 060 Realised gains on sale of investments 5 771 1 190
Investment management expenses –225 –231 Valuation adjustments on investments –6 196 –856 Realised losses on sale of investments –2 586 –1 831
Liabilities for life and health policy benefits 14 504 –954 13 550 13 887 –2 232 11 655
Equalisation provision 550 – 550 550 – 550 Funds held under reinsurance treaties 392 1 935 2 327 302 3 383 3 685 5. Shareholders’ equity
The section below is in line with articles 663bbis and 663c para. 3 of the Swiss Code of Obligations, which require disclosure of the elements of compensation paid to Swiss Re Group’s Board of Directors and Executive Committee, as well as their shareholdings and loans.
The performance share plan is measured against total relative shareholder return. For 2009 the performance shares were granted at a reference price of CHF 36.00 prevailing at the time the Board approved the award. The final number of shares to be released after three years can vary between 0% and 150% depending on the relative total shareholder return against a peer group. For further information on this performance plan see page 132, Compensation.
The shares received by the remaining members of the Board of Directors have a four-year deferral period. The share price as of 29 February 2008 of CHF 84.10 and the share price as of 15 May 2009 of CHF 36.00 were used for calculating the number of shares awarded based on the amount of the fee received in shares. There was one additional fee granted in September 2008 where the share price of CHF 64.00 was used to calculate the number of shares awarded.
Total compensation for the members of the Board of Directors was: Compensation for acting members of governing bodies
During 2009, Walter B. Kielholz, who was formerly the Vice Chairman of the Board of Directors, was nominated Chairman of the Board of Directors with effect as of 1 May 2009. Mathis Cabiallavetta, who joined the Board of Directors in 1 September 2008 as a member was nominated Vice Chairman of the Board of Directors as of 13 March 2009. Individual compensation for the Chairman and the Vice Chairman of the Board of Directors was: In recognition of the difficulties faced by the company in the financial year 2008, Walter B. Kielholz elected to reduce his 2009 fee by 50% of his compensation for 2008.
Individual compensation of the remaining members of the Board of Directors for 2008 was: CHF thousands
Jakob Baer, Chairman of the Audit Committee 480 320 800 Thomas W. Bechtler, Member 195 130 325 Raymund Breu, Member 325 325 Raymond K.F. Ch’ien, Member1 137 91 228 John R. Coomber, Chairman of the Finance and Risk Committee 395 260 655 Rajna Gibson Brandon, Member 195 130 325 Bénédict G.F. Hentsch, Member 195 130 325 Hans Ulrich Maerki, Member 195 130 325 Robert A. Scott, Chairman of the
Amounts reported under shares relate to restricted stock units granted. Executive Committee members may elect the split between cash and incentive shares, and the shares granted are subject to a one-year blocking period.
Jakob Baer, Chairman of the Audit Committee 480 320 800 Raymund Breu, Member 365 365 Raymond K.F. Ch’ien, Member 219 146 365 John R. Coomber, Chairman of the Finance and Risk Committee 419 276 695 Rajna Gibson Brandon, Member 207 138 345 Hans Ulrich Maerki, Member 325 325 Robert A. Scott, Chairman of the
Thomas W. Bechtler, Former member1 38 26 64 Peter Forstmoser, Former Chairman2 550 550 Bénédict G.F. Hentsch, Former member1 64 64 Kaspar Villiger, Former member3 38 26 64 1 Term of office expired as of 13 March 2009 and member did not stand for re-election. 2 Resigned from the Board of Directors as of 1 May 2009. Amounts include 50% of 2009 fee foregone. 3 Resigned from the Board of Directors as of 13 March 2009.
In 2008, David J. Blumer, Chief Investment Officer, was the highest paid member of the Executive Committee. In 2009, the highest paid member was Stefan Lippe, Chief Executive Officer. Their respective compensation was: Highest paid member of the Executive Committee
Base salary and allowances 854 Cash variable pay for performance 1 500 Total cash 2 354
During 2009, there were no compensations paid to former members of governing bodies. In 2008, a residual payment of CHF 10 000 was paid to a former member.
The numbers of shares held as of 31 December were: Compensation of former members of governing bodies
Mathis Cabiallavetta, Vice Chairman 1 961 1 961 Jakob Baer, Chairman of the Audit Committee 14 141 23 030
Funding of pension benefits 252 1 Amounts shown for 2008 reflect the remuneration paid to Stefan Lippe in his role as Chief Operating Officer. 2 Includes 25% mark-up on nominal value, which will be paid out at vesting after three years.
Swiss Re grants restricted shares on an ad hoc basis which are subject to a vesting period with a risk of forfeiture during the vesting period. Restricted shares granted to Raj Singh, Chief Risk Officer, have a three-year vesting period, and shares granted to David J. Blumer, Chief Investment Officer, have a three-year stepped vesting period.
Stefan Lippe, Chief Executive Officer1 55 371 66 121 David J. Blumer, Chief Investment Officer 27 000 Agostino Galvagni, Chief Operating Officer2 10 735 Brian Gray, Chief Underwriting Officer 3 207 15 912 Michel M. Liès, Chief Marketing Officer 51 482 62 931 George Quinn, Chief Financial Officer 17 145 19 703 Raj Singh, Chief Risk Officer Jacques Aigrain, Former Chief Executive Officer3 249 620 Andreas Beerli, Former Head of Associated Units and Special Projects4 38 178 1 Appointed Chief Executive Officer on 12 February 2009. 2 Appointed to the Executive Committee on1 May 2009. 3 Retired from the Executive Committee on 12 February 2009. 4 Retired from the Executive Committee on 30 June 2009.
Weighted average share price in CHF as of grant date 82.85 Peter Forstmoser, Former Chairman 5 000
The following vested options were held by members of governing bodies as of 31 December: Performance shares
Number of options Members of the Board of Directors 2008 2009
Weighted average strike price in CHF as of grant date 82.85 Walter B. Kielholz, Chairman 20 000 John R. Coomber, Chairman of the Finance and Risk Committee 70 000 Peter Forstmoser, Former Chairman 20 000
The following loans were granted to members of governing bodies as of 31 December: All credit is secured against real estate or pledged shares. The terms and conditions of loans and mortgages are the same as those available to all Swiss Re Group employees in the respective locations. Fixed-rate mortgages have a maturity of five years and interest rates that correspond to the five-year Swiss franc swap rate plus a margin of 10 basis points. Adjustable-rate mortgages have no agreed maturity dates. The basic preferential interest rates equal the corresponding interest rates applied by the Zurich Cantonal Bank minus one percentage point. To the extent that fixed or adjustable interest rates are preferential, such values were factored into the compensation sums given to the governing body members.
Total mortgages and loans to members of the Executive Committee 6 004 6 699 Highest mortgages and loans to an individual member of the Executive Committee
Total mortgages and loans not at market conditions to former members of the Executive Committee 4 528 7 354
In addition, as a component of the Group’s financing structure, Swiss Reinsurance Company Ltd has guaranteed CHF 7 735 million (2008: CHF 4 798 million) of debt issued by certain of its subsidiaries and letter of credit facilities benefiting various subsidiaries of which an amount of CHF 3 094 million (2008: CHF 4 537 million) was drawn as of the balance sheet date.
In mid 2007, a Swiss Re subsidiary commenced an arbitration proceeding against Lincoln National Reinsurance Company (Barbados) Ltd. (“Lincoln”), seeking relief from an individual disability income indemnity retrocessional agreement of 1 October 2001. In late January 2009, the arbitration panel awarded Swiss Re total rescission of the affected treaty and retained limited jurisdiction to resolve any interim disputes between the parties regarding the implementation of the panel’s award. In early February 2009, Swiss Re filed a petition to confirm the arbitral award in the United States District Court for the Northern District of Indiana, Ft. Wayne Division. Lincoln has opposed Swiss Re’s petition to confirm the arbitral award on procedural grounds. In July 2009, Lincoln sought clarification of the arbitral award to require Swiss Re to return to Lincoln an amount equal to the original ceding commission, plus interest. By order dated 25 September 2009, the panel denied Lincoln’s request for clarification and reaffirmed its order dated 24 January 2009, granting Swiss Re’s request for total rescission of the affected treaty. On 15 December 2009, the District Court granted Swiss Re’s Petition and entered an order confirming the panel’s arbitration ruling.
As a participant in limited investment partnerships, Swiss Reinsurance Company Ltd commits itself to making available certain amounts of investment funding, callable by the partnerships for periods of up to 10 years. As of 31 December 2009, total commitments remaining uncalled were CHF 1 587 million (2008: CHF 2 309 million). These commitments were assumed in the context of the absorption of a subsidiary in 2008.
Total off-balance sheet commitments from operating leases for the next five years and there after are as follows: CHF millions 2008 2009
These commitments pertain to the non-cancellable contract periods and refer primarily to office and apartment space rented by the Company.
In addition, a financial lease of IT hardware is recognised on the balance sheet. The corresponding asset and liability of CHF 15 million (2008: CHF 27 million) are included in tangible assets and other liabilities, respectively.
As of 31 December 2009, securities of CHF 5 347 million (2008: CHF 5 479 million) were lent under securities lending agreements, with the right to be sold or pledged by the borrowing entity. CHF 4 362 million (2008: CHF 4 601 million) of these was lent to Group companies. The securities which were held and lent by investment funds are excluded. The prior year amounts have been revised to reflect securities lent to a Swiss Re Group company which had not been previously included.
As of 31 December 2009, fixed income securities of CHF 2 998 million (2008: CHF 1 811 million) and no equity securities (2008: CHF 2 million) were held in investment funds, which are owned by Swiss Re Group companies. The securities in these funds and their revenues are reported in the corresponding asset category.
As of 31 December 2009, the following public placed debentures were outstanding: Instrument
a. Swiss Reinsurance Company Ltd, Mythenquai 50/60, P. O. Box, 8022 Zurich, Switzerland, held a total of 28 629 654 registered Swiss Re shares or 7.72% of its share capital.
As of 31 December 2009, Swiss Reinsurance Company Ltd employed a worldwide staff of 3 485 (2008: 3 568). Personnel expenses for the 2009 financial year amounted to CHF 909 million (2008: CHF 892 million).
In connection with the integration of GE Insurance Solutions, restructuring charges of CHF 59 million were recognised in 2006. In 2009, the restructuring provision was fully released (as of 31 December 2008: CHF 1 million).
In 2009, management expenses of CHF 153 million (2008: CHF 173 million) were recharged to Group companies and third parties. These recharges were reported net under “Operating costs”, “Investment expenses” and “Other expenses”.
The identification, assessment and control of risk exposures of the Swiss Reinsurance Company Ltd on a stand-alone basis are integrated in and covered by the Swiss Re’s Group risk management organisation and processes.
The Company has amended its valuation principles for liabilities under certain reinsurance contracts classified as derivative financial instruments. This amendment allows for the recognition of decreases in liability amounts prior to contract expiration in cases where the contract liabilities are hedged. As a result in 2009, valuation re-adjustments of derivative financial instrument liabilities in the amount of CHF 1 060 million have been recognised as income which otherwise would have been deferred until contract expiration. This income is offset by valuation adjustments and realised losses of total CHF 1 264 million on the respective hedge positions.
Claims paid and claim adjustment expenses 1 633 –1 701 –68 Change in unpaid claims –408 – –408 Life and health benefits –1 225 1 701 476
Details on the Swiss Re Group’s subsequent events are disclosed on page 220, which might have similar impacts for Swiss Reinsurance Company Ltd.
The Annual General Meeting, to be held in Zurich on 7 April 2010, has at its disposal the following profit: in CHF 2008 2009
Profit for the financial year 15 441 566 1 070 068 181
The Board of Directors proposes to the Annual General Meeting to allocate the disposable profit as follows: in CHF 2008 2009