Swiss Re’s Munich office. Working as a global community, Swiss Re employees leverage the Group’s expertise in risk and capital management to drive performance for clients and shareholders.
¹ 2006 and 2005 figures are based on US GAAP, and previous years on Swiss GAAP.
Profile 5 Key events 7 Swiss Re at a glance 14 Strategic direction 16 Knowledge and expertise 20 Corporate responsibility
Financial statements 107 Financial statements – Contents 109 Group financial statements 115 Notes to the Group financial statements 171 Swiss Reinsurance Company, Zurich 187 Financial years 1998–2006
Fellow shareholders, colleagues, ladies and gentlemen 2006 was an excellent year for Swiss Re, in which we made significant progress towards our goal of higher earnings, in terms of both absolute results and sustainability. It gives us great pleasure to report net income rising 98% to CHF 4.6 billion, or CHF 13.49 per share, resulting in a return on equity of 16.3%. These excellent results are the outcome of hard work by the entire Swiss Re community to drive our performance by seizing attractive opportunities, leveraging the integration of Insurance Solutions and constantly striving towards our strategic goal of organisational excellence.
Our strategic direction focuses on four key objectives to deliver enhanced sustainable returns for shareholders: Generate economic profit growth Reduce earnings volatility Enlarge market scope Advance organisational excellence
Our executive management team was further strengthened in 2006 with the appointment of Roger Ferguson as Head of Financial Services and member of the Executive Committee, as well as Chairman of Swiss Re America Holding, succeeding Jacques Dubois. Roger’s vision, managerial talent and experience as a former Vice Chairman of the US Federal Reserve are a strong addition to our team. We take this opportunity to thank Jacques, who retired at the end of 2006, for his outstanding contribution to Swiss Re and more recently for the key role he played in the acquisition of Insurance Solutions.
In December, the Group announced that George Quinn will succeed Ann Godbehere as Group Chief Financial Officer (CFO) and member of our Executive Committee as of 1 March 2007. With his strong experience in all financial aspects of Swiss Re, George has already made a significant contribution to the success of our Group. In his recent role as regional CFO for the Americas and CFO of Financial Services, he played a leading role in the integration of Insurance Solutions and helped to make the acquisition a success for Swiss Re. We are gratified to have found the right talent within Swiss Re for this important position. The entire Board of Directors and Executive Board thank Ann for
The executive management can count on the support and also the constructive challenge of an independent, diversified and experienced Board of Directors, including former General Electric Vice Chairman Dennis Dammerman, who was elected to the Board in February 2006. We are pleased that Hans Ulrich Maerki has made himself available to join our Board. His election will be proposed at the Annual General Meeting on 20 April 2007. Mr Maerki is currently Chairman of IBM Europe, Middle East and Africa, and will bring unique business insights to our Board.
Swiss Re’s success is built on superior client services, pro-active capital management, diligent and disciplined underwriting, and dynamic growth through new products and markets. Our focus is to deliver attractive risk-adjusted returns. Our leadership position has been reached thanks to the dedication and teamwork of over 10 000 colleagues in more than 25 countries, and we would like to thank all Swiss Re employees around the world for their invaluable contribution to our success.
We have embarked on 2007 with high confidence and even higher expectations for the continuing success of your company in delivering sustainable and strong earnings per share. With the conversion of our accounts to US GAAP and the adoption of quarterly financial disclosure, we look forward to providing you with a continuous flow of information throughout the year.
Profile 1 Opening of Swiss Re’s Asian training centre 2 Swiss Re commits to Clinton Global Initiative 3 Employees in Kansas City join Swiss Re following the acquisition of GE Insurance Solutions 23 January First credit reinsurance securitisation Swiss Re successfully completed its first credit reinsurance securitisation. The EUR 252 million issue increased Swiss Re’s capital efficiency by trans ferring credit insurance risk to the capital markets.
10 May Swiss Re share offering Swiss Re successfully placed a total of 13.9 million new shares at CHF 92.25 per share on the back of strong shareholder and investor take-up. The proceeds were used to fund part of the GE Insurance Solutions acquisition.
29 June Swiss Re completes sale of Fox-Pitt, Kelton Swiss Re completed the sale of its whollyowned subsidiary Fox-Pitt, Kelton (FPK) to a new company formed by J. C. Flowers & Co. LLC and FPK management. Swiss Re retained an interest in the new company through convertible preferred shares.
11 December Swiss Re to acquire 26% stake in TTK Healthcare Services in India Swiss Re signed an agreement with TTK Group and India Value Funds Advisors to purchase a 26% stake in TTK Healthcare Services Pvt Ltd, one of India’s leading health insurance third-party administrators.
13 February 2007 renewals Swiss Re successfully grew its non-life reinsurance portfolio by CHF 1.3 billion or 14%, reflecting successful renewals of business acquired through the acquisition of GE Insurance Solutions combined with a continued focus on underwriting quality.
Swiss Re’s core values include active engagement with stakeholders, excellence through operational efficiency, sustainability in its economic, environmental and social performance, as well as integrity through its commitment to transparency and ethical principles.
The Group is fully committed to sound corporate governance. Its organisation and structure, as well as its risk and capital management assurance functions are defined by a governance framework that supports the Group’s success, and protects the interests of shareholders and other stakeholders.
Swiss Re is a pioneer and leader in insurance securitisation, transferring natural catastrophe, mortality and other insurance risks to the capital markets to free up capital and to provide a new source of capacity for the industry.
Swiss Re’s success is founded on expertise, sound risk management, and dialogue with clients and other stakeholders.
The Group works closely with clients to design solutions that keep them ahead of the field and solve the issues they face in their business. Swiss Re is committed to developing and implementing best practice standards, and engages closely with industry bodies, regulators and governments, striving for progress that benefits the industry as a whole.
Swiss Re uses risk and capital management to ensure prudent risk taking and corresponding capitalisation. Based on an integrated risk model, Swiss Re’s experts identify, assess and control the Group’s exposures, enabling an efficient allocation of capital and providing the basis for Swiss Re’s financial strength. The Group actively manages compliance risks and ensures full adherence to the laws and regulations of all the countries in which it does business.
Diversification lies at the core of Swiss Re’s value proposition. Spreading risks across geographical regions and lines of business increases the number of mutually independent risks, and ensures a more efficient use of capital. Swiss Re is the largest and most diversified global reinsurer, with more than 90 offices in over 25 countries, allowing for a wide spread of insurance risks, revenues and investments.
21% Property 3% Credit 11% Specialty 15% Liability 7% Motor 4% Accident 2% Non-traditional
Swiss Re’s structure is closely aligned with its business focus on profitable growth, the efficient use of capital and bringing the Group closer to clients.
Swiss Re’s corporate functions deliver efficient shared services to support the business functions. The corporate functions manage Swiss Re’s common resources including: capital, the risk portfolio, brand reputation, information technology, human resources, as well as knowledge and skills.
Various corporate functions fulfil obligations to regulatory authorities and other stakeholders, and ensure the protection of the Group by establishing the corporate governance rules and processes under which Swiss Re operates.
The Client Markets business function is Swiss Re’s interface to clients, delivering optimal client services and expanding client relationships in all lines of business worldwide. Its key activities are geared towards identifying market trends, understanding client needs, and offering products and services to meet those needs.
Building on long-standing, close relationships, Client Markets offers global reach, local knowledge and proven expertise to solve the capital and risk management challenges facing clients.
The Products business function is the driving force behind underwriting excellence, product development and claims management at Swiss Re. It actively promotes innovation and the development of new, superior risk transfer solutions to meet the increasingly complex requirements of clients.
The key mandates of Products include managing the insurance cycle to optimise long-term profit levels, and implementing client-focused claims management standards in all markets and lines of business.
Financial Services provides sophisticated risk management, capital management and structured investment solutions by integrating the Group’s reinsurance and capital markets capabilities. The business function assists Swiss Re and clients in better managing their capital at risk and, where appropriate, transferring business into the capital markets through securitisation. It also provides proprietary and third-party asset management.
143 years of experience and a deep understanding of risk and capital markets allow Swiss Re not just to respond to change, but to actively plot its course toward sustained leadership in the risk transfer industry. The Group’s strategic direction has four key objectives to deliver enhanced sustainable returns for shareholders: generating economic profit growth, reducing earnings volatility, enlarging market scope and advancing organisational excellence.
Economic profit growth also requires disciplined management of the insurance cycle. Swiss Re’s scale and diversification combine with the Group’s sound underwriting principles to mitigate the risks of the cycle. This focus on economic profit secures the quality of the Group’s earnings and makes Swiss Re a strong, dependable partner for clients.
As a client-driven company, Swiss Re focuses both on deepening relationships with existing customers as well as on attracting new ones. The Group is actively pursuing opportunities for growth, for example by increasing its penetration in selected engineering markets and diversifying its client base for credit solutions. Swiss Re is also exploring new markets in life and health by developing variable annuity and longevity products in close cooperation with clients. Geographically, Swiss Re continues to build on its leading position in Asia, most recently through expansion of its services and reinsurance capabilities in India and China. Further, skills and resources the Group has developed, such as risk models, asset management and ILS, have significant commercial value for clients, bringing additional opportunities for growth through cross-selling.
While Swiss Re primarily engages in organic market building, the Group also turns to transactional activity when its criteria of strategic fit and value creation are met. The integration of the most recent acquisition, GE Insurance Solutions, is already delivering substantial synergies.
Swiss Re experts published several indepth studies on emerging risks and industry issues, including such topics as the effects of pervasive computing on the insurance industry or the impact of climate change on European storm damage. The long-running sigma series addressed, among other issues, the opportunities in the securitisation market, the potential implications of the Solvency II
The events were highly interactive, with multidisciplinary breakout groups to discuss high potential client relationships and improved organisational effectiveness. The active involvement of Swiss Re clients in the panel discussions and workshops provided important insights that were subsequently combined with Swiss Re’s own market and product innovation expertise.
After each forum, Swiss Re integrated the feedback collected from clients to identify opportunities for new solutions and improved business methods. This approach has already yielded tangible results in the form of strengthened client relationships and additional, solutions-driven business.
Swiss Re has been raising awareness about climate change for more than ten years Swiss Re factors climate change risks in its risk selection, pricing and capacity deployment Swiss Re has developed innovative solutions related to climate change, such as risk securitisation and weather derivatives Swiss Re is committed to becoming greenhouse neutral by 2013
Swiss Re has been a pioneer in developing the ILS market, having underwritten over USD 10 billion of risks for itself and third parties Swiss Re is a leading structurer and underwriter of bonds for clients, and was the number one underwriter for natural catastrophe bonds in 2006
Nanotechnology is expected to generate a range of new products and applications in many industry sectors The impact of nanotechnology on humans and the environment is unclear due to a lack of long-term statistics and standardised testing methods
The insurance industry is experiencing higher claims, largely due to broader insurance cover and growing value concentrations A viable market for catastrophe risk depends on ensuring adequate pricing models and exposure data as a basic requirement for a sound risk management
Solvency II is an ambitious EU regulatory project to improve solvency rules The new regulation is likely to have a significant impact on the industry by redefining capital requirements Solvency requirements must recognise the global nature of reinsurance, particularly diversification effects, and ensure optimal capital efficiency
Swiss Re supports the introduction of Solvency II: risk-based solvency regimes will improve risk management practices, as well as encourage economic valuation and the use of robust internal models Swiss Re works with regulators and clients to help implement appropriate capital models, and promote the recognition of reinsurance and diversification benefits in solvency requirements
Swiss Re supports existing market solutions and encourages the development of efficient and fairly-priced products to meet society’s need for terrorism cover As the US Terrorism Risk Insurance Act expires at the end of 2007, Swiss Re continues to work with the industry and the US government to find a permanent solution based on risk partnership
Climate change Swiss Re was one of the first companies in the financial sector to recognise the serious implications of climate change and has made it a central topic in its sustainability efforts.
benign. In Swiss Re’s opinion, however, this stemmed from specific seasonal weather patterns rather than from any reversal of underlying long-term trends in natural and man-made climate change. The Group continues to address these trends through its four-pronged strategy of: deepening its understanding of the risk; developing new risk transfer products; reducing its own CO2 emissions; engaging in international risk dialogue.
Swiss Re supports selected research projects at scientific institutions. A study by the Swiss Federal Institute of Technology in Zurich (ETH) combining scientists’ climate projections with Swiss Re’s event models revealed that European winter storm losses are likely to rise in the long term, especially those from less frequent but more severe events. These results were made public and have been incorporated into Swiss Re’s windstorm pricing and Group risk models.
New products can help mitigate the financial consequences of climate change and facilitate efforts to tackle it. Swiss Re has been a leader in the marketing of weather derivatives – in developed and emerging markets – as well as a pioneer in insurance -linked securities. In 2006, the Group closed the first deal for another innovative
product, designed to cover key risks of Clean Development Mechanism (CDM) projects. The CDM is a market-based mechanism introduced under the Kyoto Protocol that allows emitters in industrialised countries to gain Certified Emission Reductions (CERs) for investments in emission-cutting projects in developing countries. Swiss Re’s product provides protection against a failure or delay in the approval, certification or issuance of CERs.
In an effort to reduce its own carbon footprint, Swiss Re pledged in 2003 to become greenhouse neutral within ten years, cutting its own CO2 emissions by 15% and offsetting the remainder. In 2006, the number of Group locations using renewable energy continued to grow and by the end of the year included London, Munich, Paris, Rome, Sydney (all 100%), Zurich (66.6%), Armonk (30%) and Amstelveen (20%). This has helped to cut power-related CO2 emissions by 22.3% from 2003 levels. Emissions from business travel fell slightly in 2006, but were still higher than in 2003.
Solutions for emerging markets Insurance is a vital precondition for economic development, as it provides a reliable mechanism for individuals and companies to assume risks. The development of the insurance industry in emerging economies faces significant challenges, such as low income levels, insufficient market information and regulatory restrictions. Swiss Re sees great promise in public-private partnerships involving governments, non-governmental organisations (NGOs) and multilateral institutions such as the World Bank. In 2006, the Group developed a parametric earthquake insurance solution for the Mexican government that provides an indemnity in the event of an earthquake exceeding a specified intensity. Part of this insured risk was placed in the capital markets through a catastrophe bond.
CO₂ emissions per employee, Swiss Re Group 2003 2006 Change from kg/employee Share in % kg/employee Share in % base year
Emerging risk management A reinsurer must remain constantly aware of emerging risks – developing or changing risks that are difficult to quantify, but may have a major impact on the business. Swiss Re has extended its Systematic Observation of Notions Associated with Risks (SONAR) system into a Group-wide Emerging Risk Management framework with clearly defined responsibilities to detect and assess such risks as well as to identify new threat scenarios from unexpected correlations. Swiss Re is also a driving force in the Chief Risk Officer (CRO) Forum Emerging Risk Initiative, which published its first CRO briefing in 2006, on climate change and tropical cyclones.
Jacques Aigrain describes how Swiss Re drives performance – contributing to clients’ success, enabling global economic growth, and leveraging its expertise and long-standing history to identify future trends and market opportunities.
A reinsurer offers a strong value proposition when it efficiently provides a full range of risk-related solutions. Traditional reinsurance remains our core business; however, our
The best prepared reinsurance companies will be those that are strongly capitalised, have an innovative product offering, and have organisationally adapted to the new reality.
How does the regulatory framework affect industry performance? We secure risk by providing capital. We can do this efficiently only if the regulatory framework allows it: regulators, rating agencies and accounting standards need to use the same economic and risk-based view of a reinsurer’s financial strength. We have seen encouraging progress in this area, particularly in Europe with the positive steps taken under the Solvency II project.
Harmonisation of regulatory oversight and mutual recognition of regulatory bodies make markets more efficient. Improved capital efficiency benefits consumers and economies by providing accelerated risk transfer with increased capacity at lower intrinsic cost. That is why Swiss Re is committed to working with regulators to improve risk management practices and establish a comprehensive regulatory framework consistent with the global realities of today’s reinsurance business.
How does your strategic direction drive Swiss Re’s performance? With the strategic direction introduced last year, we are committing ourselves to gen erating economic profit growth, reducing earnings volatility, enlarging our market scope and advancing our organisational excellence. Each has a vital role in keeping us “best in class” over the long term, building upon the knowledge and commitment of our employees to provide top quality client service and attractive shareholder returns.
Generating economic profit growth demands a focus on quality of earnings. Our scale, diversification and expertise in financial markets provide Swiss Re with a unique advantage in enhancing earnings quality and stability. For instance, the Successor programme for natural catastrophe risks, which we completed in 2006, demonstrated our in-house capability to transfer peak risks to the capital markets, reducing potential earnings volatility and freeing capital to support further economic profit growth in other areas.
At the same time, we are transforming ourselves from being a sole risk taker to a sophisticated risk and capital manager. This opens up new areas of opportunity, but also requires new efforts to capture these fully. The transactions highlighted in this year’s Annual Report show the successful cross-fertilisation of our products, the entrepreneurial spirit and client focus of our teams, and the speed and efficiency of delivery that these new opportunities demand. By serving clients well, we build the foundation of our own success.
We want to build on our high quality client service solutions, such as the Norwich Union life transaction illustrated in this Annual Report. We want to develop promising new markets, as in our recent move into the health business in India through our partnership with TTK Healthcare Services. We were instrumental in the development of the insurance -linked securities market and we expect to create more life securitisations and catastrophe bonds like our own programmes going forward.
Overall, we will build upon our leadership: actively addressing the needs of our clients, seizing attractive opportunities and further developing capital market solutions. Our Group combines a strong reinsurance base with a wide scope of risk-related solutions. Together, these can make Swiss Re a pre-eminent firm, able to provide high quality services for our clients, superior returns for our shareholders and an attractive workplace for the most talented people in financial services.
“By serving clients well, we build the foundation of our own success.”
Swiss Re’s Successor programme provides the Group with a powerful risk management tool and source of capacity. This innovative transaction is based on the combined global expertise of Swiss Re’s traditional reinsurance and capital markets teams. The structure opens continuous access to the capital markets by offering four peak perils (US wind, European wind, California earthquake and Japan earthquake) across a wide range of risk layers, with different trigger options. This flexibility also makes the package attractive to a broad spectrum of institutional investors, thus lowering the overall cost of protection.
“The successful placement is an important milestone in Swiss Re’s strategy to change the business model by transferring risks into the capital markets rather than holding them on the balance sheet.” Dan Ozizmir, Head of Insurance-linked Securities, Capital Management and Advisory, Swiss Re
Performance for Swiss Re Swiss Re completed the largest-ever catastrophe bond, using its new Successor facility to secure USD 950 million of cover across four peak risks.
Performance for our clients A Swiss Re reinsurance solution enabled Norwich Union to improve capital efficiency and increase its rate of return on in-force life business.
Life insurance is a long-term business: the profits for a portfolio of in-force risks typically take many years to emerge. As elsewhere in finance, future profits have a present value; but, for some classes of insurance business, this value is not always recognised by regulators. This prevents life insurers from gaining regulatory relief, therefore tying up their capital.
The transaction shows how Swiss Re’s global expertise and local market knowledge can open up new public-private partnerships and help governments finance rebuilding work in the event of a natural disaster.
The legal and budgetary groundwork as well as the project management for Mexico’s first catastrophe bond were coordinated by the inter-agency group that manages FONDEN, including the Ministry of Finance and Public Credit, the Interior Ministry, and the trustee for FONDEN, Banco Nacional de Obras y Servicios Públicos.
India is going through a period of rapid economic development and social change, in which health is a growing concern. However, state-funded health provision remains very limited; most medical expenses are paid directly by patients and their families, with 85% of the population having no form of health insurance.
In December 2006, Swiss Re set up a partnership with TTK Healthcare Services Pvt Ltd, one of India’s leading health insurance thirdparty administrators. The joint venture will offer insurance companies a full range of services, delivered via an extensive network of hospitals across India. Effective administration, medical claims handling and risk management support, as well as close contact with healthcare providers will enable local insurers to improve their profitability, allowing them to concentrate on growth, distribution and bringing new products to market to meet rising consumer demand.
“The strategic partnership between Swiss Re and TTK heralds a new era for the Indian insurance industry. Swiss Re has a strong reputation for trust, innovation, financial strength and global best practices. Combined with the local expertise and efficient operations offered by TTK, this positions the new partnership to play an important role in the development of the health insurance market in India.” Sandeep Bakhshi, MD & CEO, ICICI Lombard General Insurance Co. Ltd, Mumbai, India
In response to this clear need, the Indian medical insurance market has been growing by 30% annually for the last four years and is expected to continue to expand significantly. However, in order to reach its full potential, the medical insurance industry needs to overcome several challenges, including the poor profitability of group medical business, incomplete medical provider networks, inconsistent disease classification and a fragmented approach to product development, risk management and pricing.
Swiss Re’s entry into the market, through an agreement with TTK Group and the related partnership with TTK Healthcare Services Pvt Ltd, will support the insurance industry in addressing a number of these issues. Swiss Re’s expertise in every link of the medical insurance value chain will enable Indian insurers to develop a sustainable and profitable book of health business.
Financial district of Mumbai, India. Rapid economic development in India is fuelling demand for health insurance.
 United States  United Kingdom  Eurozone  Japan  Switzerland in % Source: Datastream
Financial year Economic environment and industry trends at close to USD 75 per barrel but eased to USD 61 by the end of the year, avoiding a negative impact on worldwide growth.
Interest rates rose moderately throughout 2006: by the end of the year, they were between 30 and 60 basis points higher than 12 months earlier. Inflation and credit spreads between government and corporate bonds remained stable in 2006 at low levels. Stocks developed well, with most of the largest markets posting double-digit growth rates for the year.
The recent sigma study on “Securitisation: new opportunities for insurers and investors ” discusses how insurance-linked securities (ILS) offer insurers a financing vehicle and a means of transferring risks to the capital markets. ILS increase industry capacity, improve insurers’ return on equity, and reduce the volatility of earnings. Structuring costs for such securities are coming down as the market grows rapidly. The total volume of ILS outstanding has grown three-fold over the last five years and is close to USD 23 billion. Of this, two-thirds or USD 15 billion are life bonds, with the remaining USD 8 billion covering non-life risks.
All sigma studies can be downloaded electronically or ordered as a print copy from Swiss Re’s homepage at www.swissre.com in English, German, French, Spanish, Italian, Japanese and Chinese.
New business sales in the largest markets show a mixed picture for 2006. Growth rates reached double digits in the UK and Germany, and were close to ten percent in the US –however, in Spain, Italy and Japan, development was slow or even negative. Annuity and pension business achieved particularly high growth rates, as private customers are increasingly aware of their old age protection gap. Term sales were sluggish in the US and UK, but strong in Southern Europe, where mortgage-related products profited from the continuing buoyancy of the housing market.
Outlook Primary insurance premium volumes in industrialised countries are expected to grow in line with the long-term rise in GDP (between 3% and 4% per year). The demand for risk transfer will continue to increase, although premium rates are showing signs of softening from their current high point in the cycle. Premium increases in emerging markets should outpace overall economic growth. Underwriting results for non-life insurance will remain strong in most segments through 2007. Global life reinsurance premiums are declining, in particular due to lower cession rates in the US and UK, whereas other markets are expected to grow in line with primary market growth.
Swiss Re reported net income of CHF 4.6 billion in 2006, representing a 98% increase compared to the previous year. Earnings per share rose by 81% to CHF 13.49.
Based on average exchange rates for 2006 and 2005, the Swiss franc remained relatively stable against the US dollar (+0.9%), the Euro (+1.5%) and the British pound (+1.8%).
The Property & Casualty business maintained its strict underwriting discipline and reported premiums earned of CHF 17.4 billion, up 7% from 2005. This increase was largely due to the acquisition of GE Insurance Solutions, which was partially offset by reductions due to higher client retentions and lower demand for non-traditional products.
Premiums and fee income in the Life & Health business increased by 13% to CHF 11.9 billion, reflecting the acquisition of GE Insurance Solutions as well as new business written.
Premiums for the Credit Solutions unit of the Financial Services business grew by 21% to CHF 1.1 billion, reflecting successful renewals in 2006.
Trading revenues increased by 89% to CHF 654 million, reflecting growth in Financial Services fee business, particularly in Capital Management and Advisory.
Interest credited to policyholders decreased by 6% to CHF 2.8 billion.
Acquisition costs increased by 3% to CHF 6.1 billion. The acquisition cost ratio was 20.6% in 2006 compared to 22.0% in 2005, partly due to the purchase GAAP adjustment eliminating the historic deferred acquisition cost of GE Insurance Solutions, resulting in less amortisation in the year.
Other operating costs and expenses were CHF 4.1 billion in 2006, an increase of 33% over 2005. This rise was mainly due to the inclusion of GE Insurance Solutions, increased variable compensation reflecting the much higher business performance in 2006, restructuring costs and financing expenses. Overall, the cost ratio was 10.2% in 2006 compared with 8.1% in 2005.
Net cash flows from operating activities decreased by 21% to CHF 1.5 billion, reflecting in part the increased claim payments related to large natural catastrophe events which occurred in the third and fourth quarters of 2005.
Items excluded from the segments: Net realised investment gains/losses –4 –297 >250
Return on equity increased to 16.3% from 10.3% in 2005, reflecting strong earnings in 2006.
Income reconciliation The above table reconciles the income from Swiss Re’s segments and the operations of its Corporate Centre with the Group consolidated net income before tax. Net realised gains or losses on certain financial instruments, certain currency exchange gains and losses and other income and expenses – such as indirect taxes, capital taxes and interest charges – have been excluded in the assessment of each segment’s performance.
Swiss Re continued to deliver strong investment performance with a return on investments of 5.3%.
The investment portfolio grew by 30% over the year, from CHF 125.0 billion to CHF 162.7 billion, including CHF 29.8 billion from the acquisition of GE Insurance
¹ Designated trading portfolios are foreign currency denominated trading fixed income securities, which back certain foreign currency denominated liabilities.
Net realised investment gains on publicly traded equities increased to CHF 850 million from CHF 566 million in 2005 and net unrealised gains on the balance sheet were CHF 2.0 billion at the end of 2006, compared to CHF 1.1 billion at the end of 2005.
The net effect of equity hedges was to reduce Swiss Re’s stress test exposure (based on a 30% fall in traded equity markets with a simultaneous increase in
In September 2006, Horizon 21 and Swiss Re combined their private equity fund of funds businesses. The Group contributed CHF 3.1 billion of assets to the partnership. Swiss Re also became a strategic shareholder of Horizon 21 Private Equity Holding with a 30% stake.
Interest paid on cedant deposits The increase in interest paid on cedant deposits was mainly due to higher interest credited to third parties as a result of the full year impact from securitisation transactions undertaken during 2005 and fund withheld covers acquired as part of GE Insurance Solutions.
The interest rate risk of the Group is managed relative to the minimum risk portfolio. As at 31 December 2006, assets and liabilities were closely matched, resulting in moderate interest rate risk for the Group.
Purchase/sale of treasury shares and shares issued under employee plans 30 –63 <–250
Policy loans, mortgages and other loans 7 305 7 058 –3
Liabilities for life and health policy benefits 31 081 44 899 44
Change in cash and cash equivalents –1 313 5 238 >250
Business developments 2006 was a strong year for property, engineering, marine and aviation lines. Economic growth and development trends, combined with heightened awareness of weather-related risk, kept demand and prices for natural catastrophe exposures at high levels. Combined with below-average claims frequency and severity, this allowed property insurers and reinsurers to achieve strong results. The increased demand attracted additional capacity to the market, stabilising price levels late in the year. Swiss Re continued to manage its natural catastrophe exposure using various hedging instruments to reduce yearto -year claims volatility.
Further positive developments in the US legal landscape suggest a promising trend for the liability environment. Swiss Re welcomes these legislative changes and court rulings, and continues to carefully monitor their effects on the industry to gauge their sustainability, especially as some of them are translating into premature premium reductions – particularly in workers’ compensation.
Despite encouraging steps in the US related to compensation for bodily injury claims, elsewhere motor third party liability claims continue to rise. For example in the UK and France courts recently reopened old claims and insurance companies had to consider late reserving adjustments.
Net investment result increased by 14% to CHF 3.6 billion, reflecting higher interest rates and overall portfolio growth.
Premiums earned Premiums earned increased by 7%, including the contribution of GE Insurance Solutions in the second half of the year, which provided 14% of total premiums. Premiums for non-traditional business fell by 61%, reflecting a general slowdown in demand for these covers. Excluding the impact of GE Insurance Solutions, traditional volumes were affected by a 7% decrease in facultative business and a 4% reduction in treaty business. Treaty renewals during the year were marked by Swiss Re’s move to reduce liability business as well as by stable volume in property.
Combined ratio Strong underwriting performance improved the combined ratio for traditional business from 114.1% in 2005 to 89.6% in 2006. This change was also due to the absence of exceptional natural catastrophe claims experienced in the second half of 2005. Liability experience improved significantly compared to the previous year. Purchase GAAP accounting applied on GE Insurance Solutions accounts at acquisition requires acquired assets and liabilities to be measured at fair value. The resulting discount of Property & Casualty reserves will unwind over the estimated average duration of the reserves. The discount, net of capital cost, increased the combined ratio by 0.8 percentage points in 2006, which is more than offset by the investment returns on the assets backing the liabilities.
Expense ratio The expense ratio rose by 1.5 percentage points to 26.3% in 2006. The increase was mainly due to a rise in profit sharing paid to clients, reflecting the higher profitability of the business.
Lines of business Swiss Re continues to actively manage its mix of business, directing capital to those lines that generate superior returns. All lines of business, except for motor and accident, contributed to the combined ratio improvement, thanks to increased rates and the lower level of natural catastrophes and other large losses.
Premium growth stemmed from all divisions. The increase is mainly due to GE Insurance Solutions’ contribution (13% of premiums), increased rates at 2006 renewals and new business written in the US. Higher retentions by ceding companies in Europe partially offset this increase in volume. The underwriting result improved in all regions, with a major contribution from the UK property business.
After a heavy year in 2005 for large North Atlantic hurricanes, the US benefited from a much lighter burden of large natural catastrophe claims in 2006. Strong recent premium growth in the US demonstrates good cycle management, capturing very attractive rates, terms and conditions.
The increase in premiums earned for the liability business is principally due to the contribution of Insurance Solutions in the second half of the year.
Swiss Re maintained disciplined underwriting to improve the quality of its motor book, which led to a 7% decrease of premiums earned. Operating income was CHF 352 million compared to CHF 246 million in the prior year.
While the underwriting performance was low in 2006, the accident line remained profitable due to the investment income on the claims reserves.
Overall, operating income grew substantially to CHF 945 million compared to CHF 302 million in the previous year, benefiting from the increase in premiums.
Return on operating revenues rose to 10.0%, reflecting solid underlying results. Growth was achieved through both business expansion as well as acquisitions.
In December 2006, Swiss Re successfully completed the acquisition of the GE Life UK business, providing further scale and infrastructure for Swiss Re’s Admin ReSM business in the UK. This acquisition is Swiss Re’s largest Admin ReSM deal to date, increasing assets acquired by over CHF 20 billion.
In January 2007, Swiss Re transferred a further USD 705 million (CHF 885 million) of extreme mortality risk to the capital markets through its Vita Capital securitisation programme. Interest was strong in Swiss Re’s third mortality catastrophe bond, enabling peak mortality exposures to be managed in a sustainable and capital -efficient manner. Part of the issuance has been used to replace cover provided by the first Vita issuance, which expired at the end of 2006.
Business results The operating result, excluding nonparticipating realised gains, rose to CHF 1.5 billion in 2006, an increase of 14%. The business acquired as part of GE Insurance Solutions contributed CHF 66 million to the operating result for 2006. The overall Life & Health return on operating re venues of 10.0% exceeded the previous year’s return of 9.6%, reflecting solid underlying performance in all lines.
The traditional life operating result decreased to CHF 688 million. While 2006 mortality experience was in line with expectations, 2005 benefited from favourable US mortality experience as well as the release of the unused 2004 tsunami provision of CHF 52 million. The traditional health result improved by CHF 182 million to CHF 394 million, mainly due to excellent claims experience in 2006. The Admin ReSM operating result increased by 15% to CHF 435 million.
Net investment income was CHF 3.9 billion in 2006, a decrease of 1% compared to the previous year. The income generated by investments acquired as part of GE Insurance Solutions was offset by the impact of the Admin ReSM securitisations (Queensgate and ALPS transactions) as well as by lower investment income on unit-linked contracts. The Admin ReSM securitisations reduced net investment income by CHF 245 million in 2006, compared to CHF 111 million in 2005, mainly due to the first full year impact of the ALPS transaction in 2006. Unit-linked contracts have no impact on the operating result, as the investment result on such contracts is passed through to contract holders as interest credited to policyholders.
The management expense ratio increased to 6.3% in 2006, partly due to increased variable compensation costs.
Premiums earned and fee income Premiums and fees increased by 13% to CHF 11.9 billion. GE Insurance Solutions contributed CHF 1.0 billion of premiums and fees in 2006. The Admin ReSM securitisations reduced premiums and fees by CHF 384 million in 2006 (compared to a reduction of CHF 181 million in 2005), due to the full year impact of the ALPS securitisation. Excluding the effect of the securitisations, underlying premium and fee growth was 14%.
Claims and claim adjustment expenses; life and health benefits –8 668 –9 594 11
Net realised investment gains – unit-linked 1 396 1 319 –6
Return on operating revenues in % 9.6 10.0 1 Operating revenues exclude net investment income and net realised investment gains from unit-linked business as these are passed through to contract holders via interest credited to policyholders and therefore do not have an impact on the operating result.
The return for traditional life business declined from 9.4% in 2005 to 7.7% in 2006, reflecting stable mortality experience in 2006 compared to favourable mortality experience in the prior year. 2005 also benefited from the release of the tsunami provision.
The Admin ReSM securitisations reduced operating revenues by CHF 630 million, compared to a reduction of CHF 292 million in 2005, due to the first full year impact of the ALPS securitisation.
The Admin ReSM return increased from 10.2% in 2005 to 12.8% in 2006, reflecting good claims experience.
Operating income rose 21% to CHF 460 million with strong performances in Credit Solutions and Capital Management and Advisory.
Business developments In 2006, Credit Solutions extended its leadership position and continued to benefit from a favourable credit environment. The division complements stringent credit underwriting standards with selective hedging, including credit default swaps and risk securitisation. It successfully completed a trade credit reinsurance securitisation in January 2006 – a first in the market. The acquisition of GE Insurance Solutions brought in a strong trade finance portfolio, which helped further diversify Credit Solutions’ structured credit portfolio.
Swiss Re provides asset management services for insurance clients under the Conning Asset Management brand in the US, Canada, Bermuda, UK and Europe. Third-party assets under management increased to CHF 85.4 billion at the end of 2006 from CHF 72.4 billion at the end of 2005.
Business results Continued strong underwriting performance of Credit Solutions, as well as successful trading and structuring in CMA led to an operating income of CHF 460 million, up 21% compared to 2005 which had benefited from a favourable claims settlement agreement.
Premiums earned increased 21%, primarily due to the successful renewals in Credit Solutions throughout the year. The acquisition of the bank trade finance portfolio of GE Insurance Solutions generated additional premiums.
Trading revenues, fees and commissions increased by 40% to CHF 757 million, reflecting strong growth in trading revenue in CMA and continued growth in fees
The Credit Solutions business continued to post very good performance, with a combined ratio of 89.9%. Claims and claim adjustment expenses increased by 50% to CHF 493 million compared to 2005, which had benefited from a favourable claims settlement. Acquisition costs increased 23% to CHF 364 million, reflecting increased premium volume and a rise in profit commissions due to favourable claims experience.
Return on total revenues (in %), excluding proprietary asset management 8.1 26.9
Swiss Re will maintain its focus on economic profit growth, earnings stability and innovative client solutions to seize the full opportunities of the reinsurance and financial services markets.
The January 2007 renewals of Swiss Re’s non-life reinsurance portfolio, including the former GE Insurance Solutions business, grew by 14% with rates up 1%, resulting in overall growth in economic profit of 21%. Since the acquisition in June 2006, 75% of GE Insurance Solutions non-life premiums have been successfully renewed.
The outlook for Financial Services remains positive. The credit market should continue to provide growth with favourable terms and conditions, and Credit Solutions is expected to further extend its leading global position, particularly in Asia. While loss ratios are at historical lows, Swiss Re’s credit hedging strategy is in place to manage volatility, ensuring that Swiss Re’s portfolio is well protected. The insurancelinked securities market will continue to grow rapidly over the coming years and Swiss Re aims to maintain its leading position as structurer and underwriter. Third party asset management should also increase revenues further, building on the excellent track record of Conning Asset Management.
Financial targets Swiss Re maintains its targets of earnings per share growth of 10% and return on equity of 13% over the cycle, reflecting the Group’s commitment to achieving sustainable returns for shareholders.
Risk management principles At Swiss Re, risk management is based on four guiding principles that are applied throughout the Group: Controlled risk taking: financial strength and sustainable value creation are an integral part of Swiss Re’s value proposition. As a result, the Group operates within a clearly defined risk policy and risk control framework. Clear accountability: Swiss Re operates on the principle of delegated and clearly defined authority. Individuals are accountable for the risks they take on and their incentives are aligned with Swiss Re’s overall business objectives. Independent risk controlling function: to avoid conflicts of interest, dedicated specialised units monitor risk-taking activities.
Risk management organisation The Board of Directors is ultimately responsible for Swiss Re Group’s risk
The Executive Committee is responsible for implementing the risk management framework through the following two committees: The Group Capital and Capacity Allocation Committee is responsible for allocating capital and capacity, and approving the investment risk limits, as well as changes to the internal risk and capital methodology. The Group Products and Limits Committee determines the Group’s product policy and standards, grants reinsurance limits and decides on large or non-standard transactions.
The global risk management function is organised by risk categories with dedicated departments for credit and financial market risk, property and casualty risk, life and health risk, and operational risk.
Group Internal Audit monitors the execution of processes within the Group, including those in risk management.
In addition to strategic risks, Swiss Re distinguishes three types of risks: core risks, operational risks and other risks (see Figure 2).
Core risks are split into three broad categories: Insurance risk is the risk of incurring a financial loss as a result of a property, casualty, life or health insurance event.
Financial market risk is the risk of assets and /or liabilities being negatively affected by movements in financial market prices or rates, such as equity prices, interest rates, credit spreads,
foreign exchange rates or real estate prices. Credit risk is the risk of incurring a financial loss due to diminished creditworthiness (eroding credit ratings and, ultimately, counterparty default) among counterparties of Swiss Re and /or third parties.
Operational risk, defined according to the Basel II risk areas, includes potential losses from inadequate or failed internal process-
Funding and liquidity risk may result from larger than expected cash outflows or smaller than expected cash inflows and a restricted ability to raise shortterm funds. In addition, sudden liquidity requirements may arise if covenants are triggered under specific adverse circumstances, requiring the collateralisation of debt obligations and thirdparty guarantees with assets of a specified quality.
Integrated risk modelling Swiss Re has a proprietary internal integrated risk model, which is used to determine the capital required to support the risks on Swiss Re’s books and allocate risk-taking capacity to lines of business. The model is continuously updated to reflect prevailing best practice.
Swiss Re’s risk model is based on two important principles. Firstly, it uses an assetliability management (ALM) approach, measuring the net impact of risk on the economic value of both assets and liabilities. Secondly, it adopts an integrated perspective, recognising that a single risk factor can affect different sub-portfolios and that different risk factors can have mutual dependencies.
One widely used measure for summarising the risk distribution and defining the base capital requirement is the 99% Value at Risk (VaR): a level of loss likely to be exceeded in only one year out of a hundred. In addition to the overall Group 99% VaR, Table 1 shows the 99% VaR for property and casualty, life and health, financial market, credit, and funding and liquidity risks. This clearly demonstrates the diversification effect: the base capital requirement for the entire portfolio is smaller than the sum of the base capital requirements for the individual sub-portfolios.
EU Solvency II and Swiss Solvency Test Discussions on the Solvency II project, which will modernise the existing EU solvency regime, have accelerated in 2006. In Switzerland, a similar approach to risk-based solvency control – the Swiss Solvency Test (SST) – is being implemented. Swiss Re welcomes these developments, as they encourage sound risk management as well as more effective governance structures. The use of internal models – validated by the supervisor – for calculating solvency capital requirements will support a better understanding of insurers’ risk landscapes. Swiss Re continues to contribute actively to developing standards in various regulatory and professional bodies such as the Solvency II related expert groups within the Comité Européen des Assurances (CEA) and the Chief Risk Officer (CRO) Forum.
Swiss Re’s overall risk exposure measured based on 99% VaR increased from CHF 9.9 billion in mid-2005 to CHF 11.3 billion in mid-2006. The main source of this rise was the acquisition of GE Insurance So lutions, which increased the insurance risk within the Group’s portfolio. This was partly mitigated by Successor, the USD 950 million catastrophe bond programme completed in June 2006, as well as by the increased use of industry loss warranties, mainly to reduce Atlantic hurricane exposure. Swiss Re’s financial market and credit risk was reduced by the EUR 252 million Crystal Credit securitisation of January 2006, providing coverage for extreme credit events, as well as by hedging activities to protect Swiss Re’s portfolio in case of falling equity markets and widening credit spreads.
Between mid-2005 and mid-2006, Swiss Re’s property and casualty risk increased by 44%, again largely due to the natural catastrophe risks taken on through the GE Insurance Solutions acquisition. The higher life and health risk also mainly resulted from increased exposure through the business acquired as part of GE In surance Solutions. Swiss Re’s financial market risk declined, however, largely due to increased hedging of tradable equity and credit spread exposures. Credit risk increased by 12%, mainly from the growth of the credit business and the acquisition of GE Insurance Solutions. The exposure to funding and liquidity risk, which reflects risks arising from Swiss Re’s use of letter of credit facilities, was immaterial as Swiss Re’s capital increased between mid-2005 and mid-2006.
In addition to the 99% VaR, Swiss Re also considers other measures, including the 99% Tail VaR (expected shortfall) and the 99.5% VaR. The 99% Tail VaR measures the average annual loss likely to occur with a frequency of less than once in one hundred years, while the 99.5% VaR measures the level of loss likely to be exceeded in only one year out of two hundred. Both the 99% Tail VaR and the 99.5% VaR are more conservative risk capital measures than the 99% VaR. Based on mid-2006 exposure data, the Group’s 99% Tail VaR amounted to CHF 17 billion, a 10% increase compared to mid-2005 and the 99.5% VaR amounted to CHF 14 billion, a 9% increase compared to mid-2005.
Governance Risk and capital management single risk. There is a well-defined escalation process at various levels up to the Group Products and Limits Committee. These procedures and limits define the underwriting process and are laid down in the Group Underwriting Guidelines, which are approved by the Group Products and Limits Committee.
Influenza pandemic modelling Swiss Re has significant exposure to mortality risk through its life and health business; the Group recognises that pandemic influenza is a material risk that has the potential to affect all markets around the world. Swiss Re has developed a sophisticated epidemiological model to improve understanding of the potential range of outcomes from a pandemic, better enabling the Group to hold appropriate capital for this risk.
There were three influenza pandemics in the 20th century. The great Spanish Flu of 1918–19 is believed to have been the worst pandemic in over 400 years, with high mortality rates and a disproportionate impact on young adults. At that time, antibiotics were not yet available to treat secondary infections and the nature of the infectious agent was not understood. Medical progress, as well as weaker underlying disease factors, produced much lower mortality in the 1957 and 1968 pandemics.
Swiss Re’s model incorporates the underlying epidemiological variation shown in these three pandemics, including rate of spread, lethality, and differences in infection rates and lethality between age groups. The model also includes the far more sophisticated pharmaceutical and behavioural interventions available today. Based on these factors, a large number of potential pandemics are generated (“event sets”), taking account of intervention options in today’s environment and thus giving an appropriate range of potential pandemics.
The effect of each potential pandemic produced by this model is estimated for Swiss Re’s portfolio of business by weighting for exposure by country and age group. This produces a complete distribution model of potential additional mortality and the probability of each level. The model includes the possibility of very high additional mortality, but with very low probability. This enables estimation of all relevant statistical measures, such as 99% VaR, 99% Tail VaR and losses for various return periods.
Swiss Re takes on life and health risk through written mortality and morbidity covers as well as acquired run-off (Admin ReSM) business. Local business units can accept business within agreed limits, such as per life retention limits for individual business, maximum market exposures for life and health catastrophe business, and occupational scheme aggregation limits. The Group pays particular attention to accumulation risk in areas of high population density, including individual buildings. Any business that falls outside of specified limits must be approved according to the risk governance framework.
All large and complex transactions are subject to independent review by the central Products team and by Risk Management.
The estimated pre-tax claims for Swiss Re in the life and health scenarios (Table 3) are based on the average sum at risk. The scenarios describe the potential impact of an extreme epidemic in the US, assuming 300 000 excess deaths across the whole country. This is more extreme than the upper end of the World Health Organisation’s scenarios used in their pandemic preparedness planning. The scenario which assumes that excess mortality is evenly spread across the population is more conservative (ie high) because it does not allow for the typically lower mortality experienced among the insured population.
The decreases in expected losses for Swiss Re compared to the previous year’s estimates are mainly due to the decline in value of the US dollar relative to the Swiss franc.
Financial market risk management Financial market risk arises from three main sources: Swiss Re’s Proprietary Asset Management unit (PAM), the interest rate sensitivity of the present value of liabilities, and the capital markets trading activities of the Capital Management and Advisory division (CMA). The overall risk limits framework is defined by the Group Capital and Capacity Allocation Committee. With effect from 1 January 2007, all activities involving financial market risk are subject to one overall limit for each major risk class, expressed in terms of both, VaR and stress testing.
CMA and PAM translate the limits framework for their own activities, incorporating
Table 4 shows the pre-tax impact of market scenarios on available economic capital.
Credit risk management Credit risk exposure within the Group arises directly from Swiss Re’s investment activities as well as its portfolio of assets and liabilities underwritten directly by the business units. Swiss Re distinguishes three kinds of exposure: the risk of issuer default from instruments in which Swiss Re invests or trades, such as corporate bonds; counterparty exposure in a direct contractual relationship, such as retrocession or over-the-counter (OTC) derivatives; in addition, Swiss Re assumes risk with no direct contractual relationship, such as trade credit and surety reinsurance business. All contribute to an overall credit risk portfolio governed by Group Credit & Financial Market Risk Guidelines that are approved by the Group Capital and Capacity Allocation Committee.
The guidelines include credit shortfall limits by business unit and limits by country based on the nature of the exposure and a detailed assessment of the counterparty ’s financial strength, the prevailing economic environment, industry position and qualitative factors. This assessment generates an internal counterparty-specific rating in one of 20 categories. Swiss Re constantly monitors counterparty credit quality and exposures, compiling “watch lists” of those cases that merit particularly close attention.
The reporting process is supported by the Group Credit Risk Exposure Reporting Management and Information Tool that contains all relevant information including counterparty details, ratings, credit risk exposures, credit limits and watch lists. It is accessible by all key credit practitioners
Estimated economic impact of each single loss event in CHF billions as of 31 December 2005 2006 30% fall in global equity markets –2.5 –3.7 100bp parallel increase in global yield curves 0.4 –0.1 15% fall in global real estate markets –0.7 –0.7
The figures in Table 5 report the estimated pre-tax impact of credit scenarios on available economic capital. For instance, the default scenario shows estimated additional (unexpected) losses due to adverse default rate changes. The scenarios are based on a credit environment development similar to 2001, which was the worst credit experience in the past ten years. The increase in the combined credit scenario reflects changes in the credit portfolios due to the acquisition of GE Insurance Solutions as well as organic business growth within Credit Solutions and CMA.
In 2006, Swiss Re implemented a common Group-wide operational risk management methodology that emphasises managing operational risks as close to their source as possible. Top-down and bottomup assessments provide comprehensive coverage of the entire operational risk landscape. The top-down process is based on Group-wide input by senior executives. In contrast, the bottom-up assessment is based on more than 300 risk and control self assessments across Swiss Re, supported by a Group-wide management information system. The results from these processes have prompted significant progress in identifying, quantifying and mitigating key operational risk exposures. A formal referral process
Swiss Re actively manages its earnings volatility in order to ensure more consistent returns to shareholders, enhance Swiss Re’s credit quality and lower the Group’s capital costs. The size and technical expertise of Swiss Re enables the Group to be a leader in the use of a wide variety of reinsurance and capital market instruments that are used to manage volatility and diversify risk, including insurance-linked securities, industry loss warranties, retrocession, insurance risk swaps, equity derivatives and credit default swaps.
In USD billions, as of 30 September 2006 Return period Estimated gross claims Claims hedge Net claims 1 For larger claims, Swiss Re has additional protection in place.
Group Internal Audit establishes its priorities using quantified risk landscapes established by the operational risk management function in collaboration with the audit function.
This task takes into account internal economic and accounting views, as well as rating agency and regulatory solvency models.
Capital Management seeks to maintain an optimal Group-wide capital structure, giving Swiss Re financial flexibility at optimal funding costs.
Internal capital adequacy Swiss Re determines the amount of economic capital it has available to cover adverse events based on published shareholders ’ equity and a number of adjustments net of tax. Thus, no allowance is made for potential tax offsets due to future losses arising from adverse experience. The calculation of available capital is shown in Table 6.
Dividing the available capital of CHF 40.6 billion by the capital requirements of CHF 11.3 billion based on 99% VaR gives a capital adequacy ratio (CAR) of 360% at 30 June 2006, compared to 329% on 30 June 2005. This improvement stemmed from the strong increase in available capital, primarily due to positive economic earnings and an increase in pro perty and casualty valuation adjustments resulting from a reassessment of non-life payment patterns. The GE Insurance Solutions acquisition had a neutral effect on the Group’s internal capital adequacy ratio: the additional external funding ef fectively balanced the increase in capital requirements due to the enlarged risk profile.
Rating agency models differ in a number of areas from Swiss Re’s economic balance sheet: for instance, Standard & Poor’s (S & P) does not give full quantitative credit for deferred acquisition costs nor acquired present value of future profits in its capital model.
Credit ratings Standard & Poor’s, Moody’s and A.M. Best rate Swiss Re’s financial strength based on interactive relationships.
Group Treasury activities in 2006 Group Treasury is responsible for managing the cash, liquidity and funding of Swiss Re Group. Its main focus in 2006 was the financing of the GE Insurance Solutions acquisition which closed on 9 June 2006. The funding package was consistent with Swiss Re’s strong capital adequacy and included a well balanced mix of shares, mandatory convertibles, debt and internal funds: In April 2006, a rights offering to existing shareholders, followed by a global offering, resulted in a total of 14.4 million shares placed at CHF 92.25 per share, or CHF 1.3 billion. Existing shareholders subscribed for two thirds of the shares. In addition, Swiss Re issued a total of USD 785 million equivalent of senior notes under its European Medium Term Note (EMTN) programme.
In May 2006, Swiss Re completed the placement of EUR 1 billion of 5.252% perpetual step-up notes and USD 752 million of 6.854% perpetual subordinated step-up preferred securities.
Both fixed income hybrids qualify for favourable capital treatment from regulators and the major rating agencies.
In order to achieve favourable capital treatment, both instruments require Swiss Re, in specified circumstances (which relate to changes in the financial condition of Swiss Re), either to defer interest otherwise payable or to settle such interest through the issue of its shares or certain other types of securities. Any interest that is so deferred can only be settled through the issue of
such shares or other securities. In the unlikely event that the specified circumstances arise on those instruments (other than in circumstances where it is deferring interest or distributions on all its hybrid issues) Swiss Re would use its best endeavours to arrange for the issue or sale of its shares or such other securities so as to raise cash to enable it to settle interest, no later than 30 days after its original due date for payment. Upon closing the acquisition, Swiss Re issued CHF 610 million of three-year mandatory convertible instruments to General Electric. Swiss Re also issued the equivalent of USD 2.4 billion in new shares to General Electric at a price per share of CHF 87.58 which was just below the upper collar set in the transaction agreement.
As additional resources to meet funding requirements, Swiss Re also has access to the US commercial paper market through its USD 1.5 billion programme, as well as back-up credit lines, committed repo lines and letter of credit facilities in place with several major banks.
Swiss Re is committed to meeting the highest standards of corporate governance and fully endorses transparency towards shareholders and other stakeholders.
There is a growing connection between corporate governance, corporate sustainability and corporate citizenship. A company’s integration of sustainability principles across its business operations and its wider role in society are increasingly being perceived as important drivers of continued business success. All three dimensions are firmly embedded in Swiss Re’s corporate responsibility framework, thus enabling the Group to create economic value by improving its environmental and social performance beyond mere compliance with laws and regulations.
1 Group structure and shareholders, page 66 2 Capital structure, page 67 3 Board of Directors, page 73 4 Executive management, page 88 5 Compensation, shareholdings and loans, page 92 6 Shareholders’ participation rights, page 98 7 Changes of control and defence measures, page 99 8 Auditors, page 99 9 Information policy, page 101
Listed Group companies Swiss Reinsurance Company, the Group’s parent company, is a joint stock company, listed on SWX Swiss Exchange, domiciled at Mythenquai 50/60 in 8022 Zurich and organised in accordance with the laws of Switzerland. Please see the chapter on “Swiss Re shares”, pages 103–106, for details on share information. For the other listed Group companies, please refer to the Financial Statements, note 15 on “Subsidiaries, equity investees and variable interest entities”, pages 161–165.
Non-listed Group companies Please refer to the Financial Statements, note 15 on “Subsidiaries, equity investees and variable interest entities”, pages 161–165.
a. General Electric Company, 3135 Easton Turnpike, Fairfield, Connecticut 06828, USA, held, directly or indirectly through group subsidiaries, 33 300 957 Swiss Re shares on 31 December 2006, representing 8.89% of Swiss Re’s voting rights.
Franklin Resources, Inc., 500 E. Broward Blvd., Ft. Lauderdale, FL 33394, USA, known as Franklin Templeton Investments, announced on 20 March 2006 that its aggregate holdings in Swiss Re shares fell below the threshold of 5% of Swiss Re’s voting rights.
At the Annual General Meeting in 2001, the creation of conditional capital was approved as follows: a maximum nominal amount of CHF 900 000 for conversion rights and warrants granted in connection with convertible bonds or similar financial instruments issued by the Group.
No additional conditional capital and no authorised capital was created or approved in 2002 and 2003.
As of 31 December 2005, Swiss Re’s total conditional capital outstanding amounted to CHF 2 659 564.80, consisting of 26 595 648 registered shares. Of these 26 595 648 shares, 20 000 000 shares were reserved for the exercise of conversion rights and warrants granted in connection with bonds or similar instruments and 6 595 648 shares for employee participation purposes. As of 31 December 2005, Swiss Reinsurance Company had no authorised share capital in place.
With regard to the conditional capital for employee participation purposes, shareholders’ subscription rights are excluded. Such shares may be issued at a price below the current market price. The Board of Directors shall specify the precise conditions of issue. Swiss Re issued shares reserved for corporate purposes (“Vorratsaktien”) prior to the 2.1 Capital2.1 Capital 2.2 Authorised and conditional capital2.2 Authorised and conditional capital
As of 31 December 2006, Swiss Re’s total conditional capital outstanding amounted to CHF 4 649 560.10, consisting of 46 495 601 registered shares. Of these 46 495 601 shares, 40 000 000 shares were reserved for the exercise of conversion rights and warrants granted in connection with bonds or similar instruments and 6 495 601 shares for employee participation purposes. As of 31 December 2006, Swiss Reinsurance Company had used a part of the CHF 9 million authorised share capital approved by the EGM; for the number of shares that have been issued in connection with the GE Insurance Solutions transaction, please refer to section 2.3. Authorised capital with shareholders’ subscription rights amounted to CHF 1 105 336.80 at year-end 2006.
In 2003, the company’s share capital remained at CHF 32 million. Total reserves decreased by CHF 195 million to CHF 9.9 billion. The higher profit for the financial year of CHF 1.2 billion (compared to CHF 106 million in 2002) led to an increase of disposable profit from CHF 122 million to CHF 1.2 billion. Total shareholders’ equity before allocation 2.3 Changes in capital2.3 Changes in capital
of profit increased from CHF 10.3 billion to CHF 11.2 billion. At the Annual General Meeting, shareholders approved a dividend payment of CHF 341 million, compared to CHF 310 million in the previous year.
In 2004, the company’s share capital remained at CHF 32 million. Total reserves increased by CHF 795 million to CHF 10.7 billion. The higher profit for the financial year of CHF 1.4 billion (compared to CHF 1.2 billion in 2003) led to an increase of disposable profit from CHF 1.2 billion to CHF 1.5 billion. Total shareholders’ equity before allocation of profit increased from CHF 11.2 billion to CHF 12.2 billion. At the Annual General Meeting, shareholders approved a dividend payment of CHF 497 million, compared to CHF 341 million in the previous year.
In 2005, the company’s share capital remained at CHF 32 million. Total reserves increased by CHF 952 million to CHF 11.7 billion. The lower profit for the financial year 2005 of CHF 1.1 billion (compared to CHF 1.4 billion in 2004) led to a decrease of disposable profit from CHF 1.5 billion to CHF 1.1 billion. Total shareholders’ equity before allocation of profit increased from CHF 12.2 billion to CHF 12.8 billion. At the Annual General Meeting, shareholders approved a dividend payment of CHF 776 million, compared to CHF 497 million in the previous year.
In 2006, the company’s share capital increased from CHF 32 million to CHF 37 million, mainly due to shares issued to General Electric (GE) and to capital markets as a result of the acquisition of GE Insurance Solutions. Total reserves increased by CHF 4.5 billion to CHF 16.2 billion. The higher profit for the financial year 2006 of CHF 2.1 billion (compared to CHF 1.1 billion in 2005) led to an increase of disposable profit from CHF 1.1 billion to CHF 2.2 billion. Total shareholders’ equity before allocation of profit increased from CHF 12.8 billion to CHF 18.4 billion. At the Annual General Meeting, shareholders will vote on the proposal of a dividend payment of CHF 1.2 billion, compared to CHF 776 million paid in the previous year.
Profit-sharing certificates in the sense of the SWX Directive are particular types of nonvoting securities that substitute or complement shares. These do not exist at Swiss Re.
(ii) The Mandatory Convertible Bond (MCS) may, at the option of each holder, be converted into registered shares of Swiss Reinsurance Company at any time from 2 September 2004 until 4.00 pm CET on the business day (as defined in the prospectus) before the 20th trading day (as defined in the prospectus) prior to the maturity date. Holders exercising such early conversion right will be entitled initially to receive 15.796 shares, subject to adjustment as described in the prospectus, for each MCS. Unless previously converted, each MCS will be mandatorily converted on the maturity date into such number of registered shares of Swiss Re as is equal to the maturity conversion ratio. The maturity conversion ratio equals the arithmetic average of the 15 conversion ratios (calculated to five decimal places) calculated on the basis of the CHF closing prices of the shares on the virt-x (“closing price”) on each of the 15 consecutive trading days ending on the third trading day prior to the maturity date. For the purposes of calculating such arithmetic average, the conversion ratio for a given trading day is determined as follows: (i) if the closing price is less than or equal to the minimum conversion price of CHF 80.4140, the conversion ratio shall be equal to the maximum conversion ratio 2.7 Convertible bonds and options2.7 Convertible bonds and options
(iii) The Mandatory Convertible Bond (MCS), issued as a private offering to institutional investors only, may, at the option of each holder, be converted into registered shares of Swiss Reinsurance Company at any time from 24 January 2006 until 4.00 pm CET on the business day before the 20th trading day prior to the maturity date on 15 December 2008. Holders exercising such early conversion right will be entitled initially to receive 871.68759 shares, subject to adjustment, for each MCS of CHF 100 000 nominal value.
closing price is less than or equal to the minimum conversion price of CHF 84.90610, the conversion ratio shall be equal to the maximum conversion ratio of initially 1 177.77168 shares per MCS of CHF 100 000 nominal value; (ii) if the closing price is greater than or equal to the maximum conversion price, of CHF 97.64202, the conversion ratio shall be equal to the minimum conversion ratio of initially 1 024.14923 shares per MCS of CHF 100 000 nominal value; and (iii) if the closing price is greater than the minimum conversion price, but less than the maximum conversion price, the conversion ratio shall be equal to CHF 100 000 divided by the closing price. Based on the closing price, Swiss Re will be required to deliver between 6.25 million and 7.18 million shares created from conditional capital or shares reserved for corporate purposes.
Options For details on stock options granted to Swiss Re employees, please refer to note 12 on “Share-based payments” on pages 150–153 and to note 9 on “Shareholders’ equity”, page 142 of the Financial Statements and section 5.6 on pages 95–96 in the corporate governance chapter.
Abbreviations: AC Audit Committee CC Compensation Committee FRC Finance and Risk Committee GC Governance Committee
of an organisation that has a material relationship with the Group). Based on Swiss Re’s independence criteria, a strong majority of ten of Swiss Re’s twelve directors qualify as independent. Walter B. Kielholz, Executive Vice Chairman, and John R. Coomber, who was Chief Executive Officer until 31 December 2005, may not be considered independent under the applicable criteria.
Information about managerial positions and significant business connections of non-executive directors With the exception of Walter B. Kielholz, all members of the Board of Directors are nonexecutive. One of these 11 non-executive directors, John R. Coomber, was a member of Swiss Re’s executive management and CEO until 31 December 2005. Therefore, he cannot be considered independent although he has a non-executive status. Of the other ten non-executive directors, none has ever held a management position in the Group.
Mr Kielholz’s career began at the General Reinsurance Corporation, Zurich. After working in the US, the UK and Italy, he assumed responsibility for the company’s European marketing. In 1986 he joined Credit Suisse, Zurich, responsible for client relations with large insurance groups in the multinational services department.
At the beginning of 1989, Mr Kielholz joined Swiss Re, Zurich. He became a member of the Executive Board in January 1993 and was Swiss Re’s Chief Executive Officer from
Furthermore, Mr Kielholz is a member of the Society of Zurich Friends of the Arts and chairman of the Zurich Art Society.
Mr Baer, a Swiss citizen born in 1944, became an attorney-at-law in 1971 and graduated from the University of Bern in 1973 with a doctorate in law.
Mr Bechtler joined Swiss Re’s Board of Directors in November 1993. His mandate was renewed in 1997, 2001 and 2005, each time for a further four years. Mr Bechtler also serves on the boards of directors of Credit Suisse Group, Zurich, Bucher Industries, Niederweningen, Sika AG, Baar, and Conzzeta Holding, Zurich. From 1987 to 1999, he served as chairman of “Swisscontact”, a large Swiss development foundation, and from 1987 to 2002 as chairman of the Zurich Art Society. Since 2005 he has been chairman of the Zurich committee of Human Rights Watch.
Mr Breu was elected to Swiss Re’s Board of Directors in 2003 for a four year term of office. He will stand for re-election at the Annual General Meeting of 20 April 2007. Mr Breu is also a member of the board of directors of the SWX Swiss Exchange and its admission panel as well as a member of the Swiss Takeover Board.
Mr Coomber started his career with the Phoenix Insurance Company. He joined Swiss Re in 1973. Having qualified as an actuary in 1974, he first specialised in the company’s life reinsurance. He was Swiss Re (UK)’s appointed actuary from 1983 to 1990. In 1987, he assumed responsibility for the life division and, in 1993, was made head of the company ’s UK operations. Mr Coomber was appointed member of the Executive Board in April 1995, responsible for the Group’s Life & Health Division. In June 2000, he became a member of the Executive Committee. He was Swiss Re’s Chief Executive Officer from 1 January 2003 through 31 December 2005, when he retired after 33 years of employment with Swiss Re.
Dennis D. Dammerman Non-executive and independent director Dennis D. Dammerman Non-executive and independent director
Ms Gibson has been a professor of financial economics at the Swiss Banking Institute of the University of Zurich since March 2000. Ms Gibson was previously a professor of finance at the University of Lausanne. She is also a director of the National Centre of Competence in Research (NCCR) “Financial Valuation and Risk Management” research network, and an adviser to scientific councils of various educational institutions. She was a member of the Swiss Federal Banking Commission until the end of 2004.
Ms Gibson was elected to Swiss Re’s Board of Directors in June 2000. Her mandate was renewed in 2004 for a further four-year term.
Mr Scott joined Swiss Re’s Board of Directors in 2002 for a four-year term. He was re-elected for a further four-year term in 2006. Mr Scott is also chairman of the board of directors of Yell Group plc, and a non-executive director of the Royal Bank of Scotland Group plc and Jardine Lloyd Thompson Group plc. In addition, he is an adviser to Duke Street Capital and Pension Insurance Corporation Holdings LLP.
Mr Smith joined General Motors Corporation, Detroit, in 1961. He became the company’s president in 1992, a position he held until 1998. He served as chief executive officer from 1992 to 2000 and was chairman of the board of directors from 1996 to April 2003.
Mr Smith joined Swiss Re’s Board of Directors in 2003 for a four-year term. He will stand for re-election at the Annual General Meeting of 20 April 2007. Mr Smith is also chairman of Delta Air Lines and a director of The Procter & Gamble Company. In addition, he serves as a member of the chancellor’s executive committee of the University of Massachusetts and as a member of the board of trustees at Boston University.
Mr Villiger joined Swiss Re’s Board of Directors in 2004 for a four-year term. He also serves as non-executive director on the boards of Nestlé SA, Vevey, and the newspaper “Neue Zürcher Zeitung”, Zurich.
Changes in the course of the business year 2006 George L. Farr, who was a non-executive and independent director since 1996, passed away on 5 November 2006. Swiss Re’s Board of Directors and executive management highly appreciated Mr Farr’s outstanding commitment and exceptional contribution to Swiss Re.
The Board of Directors has further decided to nominate the following candidate for first time election to the Board: Hans Ulrich Maerki, a Swiss citizen, born on 15 November 1946, currently Chairman of IBM Europe, Middle East and Africa. Mr Maerki will step down from his executive functions with IBM in the course of the first half 2007.
John F. Smith, Jr. Non-executive and independent director John F. Smith, Jr. Non-executive and independent director
Please refer to the information provided in each director’s biography on pages 74–78.
Cross-involvement refers to interlocking memberships between the boards of directors of two or more listed companies. According to the relevant SWX commentary, the mere fact that a given person holds a seat on the boards of two listed companies is alone sufficient to invoke the obligation to disclose such an interlocking directorate. Pursuant to such definition, the following cross-involvements existed on 31 December 2006: Peter Forstmoser, Chairman, is also a director of Mikron Holding AG.
Walter B. Kielholz, Executive Vice Chairman, is also chairman of the board of directors of Credit Suisse Group.
First election and remaining term of each director Please refer to the table at the beginning of section 3, Board of Directors.
3.2 Other activities and vested interests 3.2 Other activities and vested interests 3.3 Cross-involvement3.3 Cross-involvement 3.4 Elections and term of office3.4 Elections and term of office
a. Allocation of tasks within the Board of Directors Chairman of the Board of Directors The Chairman of the Board of Directors (the “Board”) exercises ultimate supervision of the executive management on behalf of the Board; he usually attends the meetings of the Executive Committee and the Executive Board and receives all related documentation and minutes; together with the Chairman of the Audit Committee, he is responsible for Group Internal Audit; he appoints its head, subject to confirmation by the Audit Committee, and determines his or her compensation; he convenes meetings of the Board and its committees; he makes preparations for, and presides at, the meetings of the Board; he presides at the General Meetings of shareholders; he ensures adequate reporting to the Board by the Board committees, the Executive Committee and the Executive Board; he coordinates the activities of the Board committees; he receives comments from the directors as to the Board’s performance and reports annually to the Board with an assessment of the Board’s performance; he represents the Group in matters involving shareholders; in cases of doubt, he makes decisions concerning the authority of the Board or its committees and about the application and interpretation of the Corporate Bylaws.
Audit Committee Members Jakob Baer, Chair Raymund Breu Rajna Gibson Brandon Robert A. Scott John F. Smith, Jr.
Independence and other qualifications All members of the Audit Committee must be non-executive and independent. In addition to the independence criteria applicable for the Board members, members of the Audit Committee may not accept any consulting, advisory, or other compensatory fee from the company. All members must be financially literate. At least one member must have the attributes qualifying such member as an Audit Committee Financial Expert as determined by the Board. Furthermore, Audit Committee members should not serve on audit committees of more than two other listed companies.
Tasks and responsibilities The central task of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities as they relate to the integrity of the Group’s financial statements, the Group’s compliance with legal and regulatory requirements, the external auditor’s qualifications and independence, and the performance of the Group’s internal audit function and its external auditor.
The Committee serves as an independent and objective monitor of the Group’s financial reporting process and system of internal control, and facilitates ongoing communication between the external auditor, management, Group Internal Audit and the Board with regard to the Group’s financial position and affairs. The Audit Committee reviews its own performance annually.
Independence All members of the Compensation Committee must be non-executive and independent.
Tasks and responsibilities Formerly known as the Compensation and Appointments Committee, the Compensation Committee was renamed in February 2007, when personnel matters were transferred to the Governance Committee (the former Governance and Shareholder Relations Committee ). Its charter of duties was amended accordingly. The tasks and responsibilites outlined below reflect the current status.
The Compensation Committee oversees the development of a set of compensation principles, submits them to the Board for approval, monitors adherence to such principles and regularly discusses their appropriateness; it keeps itself informed of industry and peer compensation practice; it recommends to the Board the remuneration of the members of the Board other than the Chairman and the Executive Vice Chairman; it determines the compensation of the Chairman, the Executive Vice Chairman, the CEO and the members of executive management on the basis of their performance; it determines the total amount for bonus payments, related deferral plans and long-term incentive plans on the basis of achieved performance; it reviews and approves the Group’s compensation and pension plans; it ensures compliance with any remuneration disclosure requirements; it approves employment contracts with the Chairman, the Executive Vice Chairman, the Chief Executive Officer and the members of executive management; it also reviews its own performance annually.
Finance and Risk Committee Members John R. Coomber, Chair (from 1 March 2006, previously Rajna Gibson Brandon) Jakob Baer Dennis D. Dammerman (from 1 March 2006) Rajna Gibson Brandon Walter B. Kielholz Robert A. Scott Kaspar Villiger
In 2006, the following meetings were held: Dates BoD1 AC2 CC3 FRC4 GC5 1 February regular 2/3 February regular regular regular regular 28 February/1 March regular regular regular regular 10 April extra regular 19/20 April regular regular regular regular regular 27 April extra 8/9 June extra 15–17 June regular regular 21 July extra 3 August regular 14/15 September regular regular extra regular 28 September extra 10 November extra 30 November extra 7/8 December regular regular regular regular
¹ Board of Directors 4 Finance and Risk Committee ² Audit Committee 5 Governance Committee ³ Compensation Committee
For every meeting, it is contemplated that an executive session be held for discussions between the Board of Directors and the Chief Executive Officer, discussions involving all members of the Board, or discussions among the independent members of the Board, as the case may be.
3.6 Definition of areas of responsibility3.6 Definition of areas of responsibility
In addition to its overall responsibility for the operational management of the Group, the Executive Committee has, inter alia, the following specific key responsibilities: Submits proposals to the Board of Directors relating to all matters within the Board’s responsibilities, for the Board’s consideration, such as the Group strategy, the business plan, risk tolerances, accounting principles and financial statements; Approves the strategies, structures and business plans of the global functions and divisions; Establishes principles on financing through capital markets, financing Group companies and the allocation of financial resources within the Group; Decides on individual debt issuances and credit facilities; Establishes the performance targets for the Group, the global functions and the divisions, monitors performance and takes any necessary action; Forms Group Committees, delegates to them authorities and responsibilities, and issues binding Group guidelines; Decides on the underwriting authority of the business functions and divisions, and on individual reinsurance transactions exceeding their underwriting authority; Exercises oversight responsibilities in respect of the Group‘s internal control evaluation and certification process; 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, decides on promotions to or removals of Managing Directors, and appoints the Responsible Actuary.
As a matter of principle, all members of the Executive Committee are invited to all meetings of the Board of Directors. At the meetings of the Board committees, executive management members participate in an advisory capacity as follows: 
d. Assurance Framework Swiss Re’s governing bodies recognise the value of a high quality corporate Assurance Framework. As governance and accounting standards continue to evolve, it is essential that Swiss Re’s governing bodies strive to have a best in class system of coordinated assurance functions to rely on. Therefore, the corresponding framework is subject to periodic reviews and improvements as required.
Assurance functions in Swiss Re comprise an internal audit organisation, a dedicated organisation that ensures compliance with legal and regulatory requirements as well as ethical standards, a risk management system designed for the size, complexity and risk profile of the company, and a specially qualified external auditor.
d1. Group Internal Audit Group Internal Audit (GIA) is an independent, objective assurance and consulting function performing activities designed to assess the adequacy and effectiveness of the Group‘s internal control systems, and add value through improving the Group‘s operations. GIA helps the Group accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
GIA staff govern themselves in accordance with the Code of Ethics established by the Institute of Internal Auditors (IIA). The IIA’s “International Standards for the Professional Practice of Internal Auditing” constitute the operating guidance for the department. In addition, GIA adheres to the Group’s guidelines and procedures, as well as to GIA’s own manuals and guidelines governing its organisation and processes.
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 their duty. Documents and information provided to GIA will be handled prudently, respecting their confidentially as defined by the function which has ownership of the information.
GIA performs its internal audit activities with independence and objectivity. Activities are coordinated with the other assurance functions as they are defined in the Assurance Framework. Group Internal Audit has no direct operational responsibility or authority over any of the activities they review.
The scope of GIA encompasses the examination and evaluation of the adequacy and effectiveness of the Group’s internal controls environment, and the quality of performance in carrying out assigned responsibilities to achieve the organisation’s goals and objectives. In fulfilling its responsibilities, GIA
submits audit services plans to the Audit Committee for approval; periodically reports to the Audit Committee; informs the Audit Committee about significant findings during the year; provides any additional information requested by the Audit Committee.
d2. Compliance Compliance at Swiss Re means the upholding of legal, regulatory and ethical standards by all staff and all legal entities throughout the Group. The Compliance function accordingly provides and maintains compliance-related policies, procedures, training and monitoring regimes designed to ensure that established businesses adhere to established internal and external rules – laws, regulations, ethical standards – in each location where Swiss Re operates. The Compliance Officers, who support and advise management in its ultimate responsibility to ensure compliance with laws, regulations and ethical standards, report to the Group Compliance Officer on any instances of non-compliance or other compliance-relevant matters. External regulatory compliance requirements for Swiss Re’s regulated Group companies are addressed by the Head of Legal Entity Compliance. The Group Compliance Officer provides regular compliance reports to the Group Audit Committee and the Executive Committee. Swiss Re has developed a Group-wide Code of Conduct (see: swissre.com/About Us/Corporate governance/Regulations), which lays down the Group’s core principles and values, and offers guidance on how to apply these in all business activities. The Code of Conduct also sets out certain behavioural standards which all Swiss Re employees are expected to maintain. A Group Compliance Programme defines the accountabilities and duties of both management and Compliance Officers at Swiss Re. Training for staff and Compliance Officers is carried out regularly at both local and Group level to ensure ongoing best practice in compliance matters throughout the Group. Within the Group’s Assurance Framework, Compliance takes on a specialist risk controlling and reporting function; accordingly, each Compliance Officer conducts periodic compliance risk assessments and advises management on appropriate compliance control measures. Compliance interacts closely with Group Regulatory Affairs (see below) and various other control functions, typically Operational Risk Management and Group Internal Audit, as well as with many middle office functions.
Mr Aigrain started his career with JP Morgan in 1981 and had various functions in investment banking in London, Paris and New York. Immediately prior to joining Swiss Re, 4.1 Members of the Executive Committee 4.1 Members of the Executive Committee
he was a managing director and a member of JP Morgan‘s investment banking management committee, where he was co-head of client coverage.
In June 2001, he joined Swiss Re as Head of the Financial Services Business Group and member of the Executive Committee. In August 2004, the Board of Directors appointed Mr Aigrain Deputy CEO in addition to his Financial Services role, a task that included a number of coordination functions across the firm, in particular Regulatory Affairs. He was appointed CEO with effect from 1 January 2006.
Ms Godbehere, a Canadian and British citizen born in 1955, qualified as a Certified General Accountant in Canada in 1984 and became a fellow of the Certified General Accountant‘s Association in 2003. She started her career with Sun Life of Canada in 1976 in Montreal, Canada. She joined the Mercantile & General Reinsurance Group in 1981, where she held several management roles, including Senior Vice President and Controller for both the life and health, and property and casualty businesses throughout North America.
On 1 April 2003, Ms Godbehere was appointed Chief Financial Officer of Swiss Re Group and became a member of the Executive Committee. In December 2006, it was announced that she would leave Swiss Re at the end of February 2007.
Ms Godbehere is also a board member of IMD, the Swiss based international business school.
Ann F. Godbehere Chief Financial Officer, Head of Global Finance (until 28 February 2007) Member of the Executive Committee
Christian Mumenthaler Chief Risk Officer, Head of Global Risk Management Member of the Executive Committee
In 1978, he 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.
In October 1983, he joined Bavarian Re as a team member of a business analysis project. He was appointed deputy member of the board of management in 1988 and a full member in 1991, when he assumed general responsibility for the company‘s operations in the German-speaking area. In 1993, he became chairman of the board of management of Bavarian Re. Since 2001, he has been chairman of the board of directors of the renamed Swiss Re Germany Holding AG.
A US citizen born in 1951, Mr Ferguson received a PhD in economics in 1981, a JD in law in 1979 and a BA in economics in 1973, all from Harvard University.
Mr Ferguson joined Swiss Re in June 2006 from the US Federal Reserve Board as Chairman of Swiss Re America Holding. In October 2006, he was appointed Head of Financial Services and a member of Swiss Re’s Executive Committee.
Mr Beerli is the chairman of the Reinsurance Association of America.
Changes in the course of the business year 2006 In April, it was announced that John F. Fitzpatrick would step down with immediate effect as Head of Financial Services and member of the Executive Committee to focus on a new project. Jacques Aigrain took on the role of interim head.
George Quinn, a British citizen born in 1966, joined Swiss Re in 1999 from KPMG, where he led the team that advised Swiss Re on its Swiss GAAP project from 1996 to 1998. He was Chief Accounting Officer from 1999 to 2003. From 2003 to 2005, he was Chief Financial Officer of the Financial Services Business Group. In 2005, Mr Quinn was also appointed Regional Chief Financial Officer for the Americas, based in New York, and played a leading role in the integration of Insurance Solutions.
Mr Quinn is a member of the Institute of Chartered Accountants in England and Wales, and holds a degree in Engineering from the University of Strathclyde. He has represented Swiss Re in the Geneva Association‘s accounting task force and the European Insurance
CFO Forum. He has also served as a member of the International Accounting Standards Board‘s insurance advisory committee.
The VAI has been introduced to support Swiss Re’s philosophy of carrying appropriate reserves. It links the final bonus to be paid to the development of prior year claims over a three-year period. The part of the bonus which is allocated to the VAI is multiplied by a factor that varies between 62.5% and 187.5%. The factor is linked to the surplus or deficiency of the claims provisions set at the end of the current financial year after a three-year development period. The VAI is paid in cash at the end of the three-year period.
4.2 Other activities and vested interests 4.2 Other activities and vested interests 4.3 Management contracts4.3 Management contracts 5.1 Content and method of determining the compensation and shareholding programmes 5.1 Content and method of determining the compensation and shareholding programmes
The Executive Committee’s performance assessment is based on annual objectives involving financial and qualitative elements. The bonuses distributed for a year’s service are paid in March of the following year. All amounts disclosed relate to the performance year 2006 with some elements credited in March 2007.
The disclosure follows the SWX Directive, which requires differentiation between the executive members of the Board of Directors and the Executive Committee in total and the non-executive members of the Board of Directors in total. The 2006 disclosure relates to 9 executive members as opposed to 21 members in 2005. This change to the reporting scope was made to better reflect the spirit of the disclosure requirements and improve comparability with other firms. Therefore, the 2005 compensation figures have been restated in order for them to be comparable to the 2006 figures. This applies to the tables shown on page 94.
9 executive members – 1 Executive Vice Chairman and 8 Executive Committee members CHF millions 2005 2006
¹ The member who left the Executive Committee in 2006 had an expatriate contract which contained tax equalisation provisions between his home country and the country where he resided. The amount is strongly impacted by such tax effects, some of which span over several years.
LTI granted in year at grant value as of 3 March 2006 8.76
LTI granted in year at fair value as of 31 December 20061 14.54
12 non-executive members (2005: 10) – Board of Directors CHF millions 2005 2006
All shares awarded to the Executive Committee are subject to a four-year deferral period. The bonus plan stipulates that Executive Committee members elect a split between cash and shares. The share price of 2 March 2007 will be used to determine the actual allocation of these shares. To reflect the deferred nature of these shares, a discount of 6% per annum was applied, leading to an estimated value of CHF 82.10, which has been used to determine the amount of compensation shown in the table above. This approach coincides with the tax treatment of the shares in Switzerland. At the end of the four-year deferral period the number of shares awarded is uplifted by 25%.
Members of the Board of Directors receive an honorarium, a mandatory 40% of which is in the form of shares; the remainder may be taken either in the form of cash or shares with a four-year deferral period. The share price at 3 March 2006 of CHF 89.90 has been used for calculating the number of shares awarded based upon the amount of the honorarium received in shares. The discounted value of CHF 71.20 at 3 March 2006 has been used to determine the amount of compensation shown in the table above.
The payments made to former members of the Executive Committee relate to periodic services such as representation in boards and associations on behalf of the firm.
Options Swiss Re no longer grants options on an annual basis. The following options were held by members of governing bodies on 31 December 2006.
All options have a four-year vesting period, during which there is a risk of forfeiture, and an exercise period of six years. The exchange ratio is 1:1, ie each option entitles the beneficiary to purchase one share at an unadjustable exercise price.
In addition, 100 000 options with a strike price of CHF 94.00 were granted to an executive member leaving Swiss Re in 2006.
Restricted shares In 2004 and 2005, the beneficiaries of the option programme received, as an alternative to the stock options, the right to opt for restricted shares. The applicable ratio was four to one, ie four stock options equalled one restricted share. The restricted shares vest after four years. During the vesting period, there is a risk of forfeiture.
Executive members Share price in CHF as of date of grant
Non-executive members Share price in CHF as of date of grant
The Articles of Association do not provide for any statutory quorums. Any General Meeting of shareholders passes resolutions by an absolute majority of the votes validly cast, subject to the compulsory exceptions provided by law.
The statutory rules on the convocation of the General Meeting of shareholders correspond with the legal provisions. Accordingly, the General Meeting of shareholders is summoned at least 20 days before the date of the meeting by notice published in the Swiss Official Gazette of Commerce.
There is no statutory rule on the deadline for registering shareholders in connection with the attendance of the General Meeting. In recent years, Swiss Re has acknowledged voting rights of shares which were registered at least two working days before the General Meeting. In 2006, the qualifying dates were 24 February and 19 April for the Extraordinary General Meeting held on Monday 27 February and the Annual General Meeting on Friday 21 April 2006, respectively.
PricewaterhouseCoopers AG, then 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.
The following summarises fees for professional services for the year ended 31 December 2006.
In addition to the fees described above, aggregate fees of CHF 4.2 million were billed by PricewaterhouseCoopers during the year ended 31 December 2006, primarily for the following: Income tax compliance and related tax services CHF 2.5 million Other fees CHF 1.7 million
7.1 Duty to make an offer7.1 Duty to make an offer 7.2 Clauses on change of control7.2 Clauses on change of control 8.1 Duration of the mandate and term of office of the head auditors 8.1 Duration of the mandate and term of office of the head auditors 8.2 Auditing honorarium8.2 Auditing honorarium 8.3 Additional honorarium8.3 Additional honorarium
The Audit Committee liaises closely with the elected external auditor. In particular, it discusses with the auditor significant risks, contingencies or other obligations of the company; it reviews and approves the planned audit services and discusses the audits with the auditor; it approves in advance non-audit services expected to be provided by the auditor, and reviews and approves other non-audit services that have been pre-approved by the Chairman of the Audit Committee between committee meetings; it reviews major changes to the company’s accounting principles and practice; it reviews the adequacy and efficacy of the financial reporting process, the system of internal controls and quality control procedures, as well as any significant findings and recommendations made by the external auditor.
According to its charter, the Audit Committee meets at least annually and in private, with the external auditor to review any significant matters or disagreement between management and the auditor, if and when such disagreements arise. It discusses with the auditor its plan and any necessary changes to it, the findings of the annual audit, the auditor’s proposed report on the financial statements, critical accounting policies, and alternative accounting treatments that have been discussed with management. The Audit Committee ’s discussions include considering the possible consequences of using such alternatives.
8.4 Supervisory and control instruments vis-à-vis the external auditor 8.4 Supervisory and control instruments vis-à-vis the external auditor
One of the core values of Swiss Re’s guiding principles is integrity through uncompromising commitment to transparency and ethical principles. As a result, the Group’s information policy goes beyond legal requirements, aiming to meet best practice standards.
Swiss Re has elected to be listed on the SWX “EU-Compatible” Segment, complying with the requirements of the EU Transparency Directive. The Group has reported its financial performance semi-annually to date, but will adopt quarterly reporting in 2007. Swiss Re announces important corporate news on an ad-hoc basis. Furthermore, the company organises events with investors and analysts, at which specific topics are discussed. In 2006, Swiss Re held an investors’ day on property and casualty reserving and US GAAP, as well as an investors’ meeting on Insurance Solutions and non-life renewals.
In addition to these events, Swiss Re holds frequent meetings with institutional investors and participates in investors’ conferences organised by investment banks. Presentations from conferences are made available to the public on the company’s website.
Life and health European embedded value 2006, conference call 3 April 143rd Annual General Meeting 20 April
Meeting in Zurich (Swiss Re headquarters ) and news release 2 March Annual reporting 2005 News release, press conference and analysts’ meeting in Zurich (including telephone conference and webcast)
News release 7 June Placement of USD 950 million of natural catastrophe protection through Successor programme
Swiss Re’s share price rose 7.7% in 2006. The global rights offering for the acquisition of GE Insurance Solutions was successfully placed at CHF 92.25 per share.
Since 1 February 1996, Swiss Re’s shares are also traded in the form of an American Depository Receipt (ADR) level 1 programme in cooperation with Morgan Guaranty Trust Company of New York.
Swiss Re share price performance Global equity markets continued to rise in 2006. Swiss Re’s main benchmark indices – the Swiss Market Index (SMI) and the Dow Jones EURO STOXX Insurance Index (STOXX Ins. Index) – rose by 15.9% and 17.2% respectively. In the same period, Swiss Re’s share price rose 7.7%, reaching a high for the year of CHF 108.50 on 9 November after a low of CHF 79.60 on 13 June, and recovering by more than 30% from its low point by the end of 2006.
Third quarter 2006: Swiss Re’s shares went up 12.0% in the third quarter, virtually in line with the rise of its benchmark indices. On 4 August, Swiss Re published its half-year results for 2006.
In the US, Swiss Re’s ADRs rose 16.4% year-on-year, reflecting the depreciation of the US dollar against the Swiss franc (exchange rate adjusted: 9.0%).
and 1 million shares off-exchange. The highest volume traded on-exchange in 2006 was on 2 March, when Swiss Re published its annual results for 2005, with 5.7 million shares changing ownership on-exchange and 1.5 million off-exchange. The highest cumulative volume was recorded on 2 May with 32.6 million shares traded, both off- and on-exchange.
Shareholder base The shareholders structure table shows that Swiss Re’s shareholder base is highly diversified, both geographically and between private and institutional investors.
DecemberNovemberOktoberSeptemberAugustJulyJuneMayAprilMarchFebruaryJanuary representing 19% of the shares registered; 91% of these hold fewer than 2 000 shares. The vast majority of Swiss Re’s private shareholders are domiciled in Switzerland.
¹ Swiss Re’s ADR are not listed but traded over-the-counter; one ADR corresponds to one Swiss Re share.
FTSE4Good Global 0.21 including the Dow Jones Sustainability and FTSE4Good index families.
Price per share year low (intraday) 70.10 49.60 66.35 75.10 79.60 101.50
ADR price at year-end (USD) 65.50 67.40 71.80 73.25 85.25 85.25
Group financial statements 109 Income statement 110 Balance sheet 112 Statement of shareholders’ equity 113 Statement of comprehensive income 114 Statement of cash flow 115 Note 1. Organisation and summary of significant accounting policies 123 Note 2. Investments 128 Note 3. Derivative financial instruments 130 Note 4. Acquisitions and dispositions 133 Note 5. Deferred acquisition costs and acquired present value of future profits 134 Note 6. Debt 138 Note 7. Unpaid claims and claim adjustment expenses 140 Note 8. Reinsurance information 142 Note 9. Shareholders’ equity 143 Note 10. Income taxes 145 Note 11. Benefit plans 150 Note 12. Share-based payments 154 Note 13. Commitments and contingent liabilities 156 Note 14. Information on business segments 161 Note 15. Subsidiaries, equity investees and variable interest entities 166 Note 16. Restructuring provision 167 Note 17. Change in accounting basis 169 Report of the Group auditors
Claims and claim adjustment expenses 7, 8, 14 –14 758 –11 799
Equity securities: Available-for-sale, at fair value (including nil in 2005 and 923 in 2006 subject to securities lending and repurchase agreements) (amortised cost: 2005: 7 001; 2006: 8 839) 8 116 10 845
Short-term investments, at amortised cost, which approximates fair value 4 539 9 464
Acquired present value of future profits 5 6 535 7 550
Unpaid claims and claim adjustment expenses 7, 8 71 759 95 011
Change in foreign currency translation (tax: –18 for 2005, and 38 for 2006) 2 272 –1 176
Change in adjustment for pension benefits (tax: –7 for 2005, and 210 for 2006) 25 –665
Fixed income securities: Net purchases/sales/maturities of short-term investments –1 061 –4 760
The Group’s financial statements include the consolidated financial statements of Swiss Re Zurich and its subsidiaries. Entities which Swiss Re Zurich directly or indirectly controls through holding a majority of the voting rights are consolidated in the Group accounts.
Use of estimates in the preparation of financial statements Use of estimates in the preparation of financial statements
Transactions denominated in foreign currencies are remeasured to the respective subsidiary ’s functional currency at average exchange rates. Monetary assets and liabilities are remeasured to the functional currency at closing exchange rates, whereas non-monetary assets and liabilities are remeasured to the functional currency at historical rates. Remeasurement gains and losses on monetary assets and liabilities and trading securities are reported in earnings. Remeasurement gains and losses on available-for-sale securities, investments in consolidated subsidiaries and investments accounted for using the equity method are reported in shareholders’ equity.
The Group’s investments in fixed income and equity securities are classified as availablefor -sale (“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 fixed income and equity securities 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 impairment are not recognised.
Policy loans, mortgages and other loans are carried at amortised cost (effective yield method), net of any allowance for amounts estimated to be uncollectible.
Investment in real estate that the Group intends to hold for the production of income is carried at depreciated cost, net of any write-down for impairment in value. An impairment in value is recognised if the sum of the estimated future undiscounted cash flows from the use of the real estate is lower than its carrying value. Impairment in value, depreciation and other related charges or credits are included in net investment income. Investment in real estate held for sale is carried at the lower of cost or fair value, less estimated selling costs, and is not depreciated. Reductions in the carrying value of real estate held for sale are included in realised investment losses.
Other invested assets include affiliated companies, derivative financial instruments and investments without readily determinable fair value (including limited partnership investments ). Investments in limited partnerships where the Group’s interest equals or exceeds 3% are accounted for using the equity method. Investments in limited partnerships where the Group’s interest is below 3% and equity investments in corporate entities which are not publicly traded are accounted for at estimated fair value with changes in fair value recognised as unrealised gains/losses in shareholders’ equity.
The Group also designates non-derivative monetary financial instruments as hedging the foreign currency exposure of its net investment in certain foreign operations. From the inception of the hedging relationship, remeasurement gains and losses on the designated non-derivative monetary financial instruments and translation gains and losses on the hedged net investment are reported as translation gains and losses in shareholders’ equity.
Acquisition costs, which vary with, and are primarily related to, the production of new insurance and reinsurance business, are deferred to the extent they are deemed recoverable from future gross profits. Deferred acquisition costs consist principally of commissions.
Liabilities for unpaid claims and claim adjustment expenses for property and casualty reinsurance contracts are accrued when insured events occur and are based on the estimated ultimate cost of settling the claims, using reports and individual case estimates received from ceding companies. A provision is also included for claims incurred but not reported, which is developed on the basis of past experience adjusted for current trends and other factors that modify past experience. The establishment of the appropriate level of reserves is an inherently uncertain process involving estimates and judgements made by management, and therefore there can be no assurance that ultimate claims and claim adjustment expenses will not exceed the loss reserves currently established. These
Investment contracts are long-duration contracts that do not incorporate significant insurance risk, i.e. there is no mortality and morbidity risk, or the mortality and morbidity risk associated with the insurance benefit features offered in the contract is of insignificant amount or remote probability. Amounts received as payment for investment contracts are reported as policyholder account balances. Related assets are included in general account assets.
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 uses retrocession arrangements to increase its aggregate underwriting capacity, to diversify its risk and to reduce the risk of catastrophic loss from reinsurance assumed. The ceding of risks to retrocessionaires does not relieve the Group of its obligations to its ceding companies. The Group regularly evaluates the financial condition of its retrocessionaires and monitors the concentration of credit risk to minimise its exposure to financial loss from retrocessionaires’ insolvency. Premiums and losses ceded under retrocession contracts are reported as reductions of premiums earned and claims and claim adjustment expenses. Amounts recoverable for ceded short- and long-duration contracts, including universal life-type and investment contracts, are reported as assets in the accompanying consolidated balance sheet.
For share based compensation plans which are settled in cash, compensation costs are recognised as liabilities, whereas for equity-settled plans, compensation costs are recognised as an accrual to additional paid-in capital within shareholders’ equity.
On 4 December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-Based Payment” (“FAS 123R”). FAS 123R requires share based payments to be accounted for using the fair value method, and eliminates the ability to account for such transactions using the previously allowed intrinsic value method. The Group adopted the provisions of FAS 123R as of 1 January 2006.
On 6 September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans” (“FAS 158”). FAS 158 requires an employer to recognise the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability and to recognise changes in that funded status in the year in which the changes occur through comprehensive income. The Group adopted the provisions of FAS 158 for the year ended 31 December 2006.
Dividends received from investments accounted for using the equity method were CHF 13 million and CHF 14 million in 2005 and 2006, respectively.
Change in net unrealised investment gains /losses on trading securities 51 1 746
States of the United States and political subdivisions of the states 340 46 386
Equity securities available-for-sale 7 001 2 462 –1 347 8 116
Debt securities issued by governments and government agencies: US Treasury and other US government
Due in one year or less 4 762 4 630 5 768 5 804
Due after five years through ten years 16 304 16 733 19 224 19 129
As of 31 December 2005 and 2006, investments (including cash and cash equivalents) with a carrying value of approximately CHF 8 823 million and CHF 17 132 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities.
As of 31 December 2005 and 2006, the fair value of the Government and Corporate bond securities received as collateral, is CHF 2 892 million and CHF 6 502 million, respectively. Of this, the amount that has been sold or repledged as of 31 December 2005 and 2006 is CHF 1 316 million and CHF 5 450 million, respectively, which is used to settle short Government bond positions. The sources of the collateral are highly rated banking market counterparties.
The following table shows the fair value and unrealised losses of the Group’s fixed income securities, aggregated by investment category and length of time that individual securities were in a continuous unrealised loss position, as of 31 December 2005 and 2006. A continuous decline in the value of equity securities available-for-sale for longer than twelve months is considered other-than-temporary and recognised as net realised investment gains/losses in the income statement. Therefore, as of 31 December 2005 and 2006, the gross unrealised loss on equity securities available-for-sale of CHF 1 347 million and CHF 262 million relates to declines in value for less than 12 months.
Less than 12 months 12 months or more Total As of 31 December 2006 CHF millions
As of 31 December 2005 and 2006, investments in mortgages and other loans, real estate comprised the following: As of 31 December CHF millions Carrying value
As of 31 December 2005 and 2006, the Group’s investment in mortgages and other loans included CHF 207 million and CHF 231 million, respectively, of loans due from employees and CHF 396 million and 388 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
As of 31 December 2005 and 2006, investments in real estate included CHF 9 million and CHF 67 million, respectively, of real estate held for sale.
The maximum potential loss assuming non-performance by all counterparties, and based on the market replacement cost at 31 December 2005 and 2006 approximated CHF 2 889 million and CHF 2 220 million, respectively. These values are net of amounts offset pursuant to rights of set-off and qualifying master netting arrangements with various counterparties.
As of 31 December 2005 and 2006, other invested assets include derivative financial instruments with a fair value of CHF 562 million and CHF 718 million, respectively.
Hedges of the net investment in a foreign operation Hedges of the net investment in a foreign operation
Profile Thema 130 Swiss Re 2006 Annual Report 4. Acquisitions and dispositions
On 9 June 2006, Swiss Re completed the acquisition of 100% of the outstanding common shares of GE Insurance Solutions Corporation, excluding its US life and health operation and certain other assets and liabilities, from General Electric Company. The total cost of investment was USD 8.8 billion, including reimbursement of capital injected since November 2005 of USD 1.2 billion and estimated purchase price adjustments. The results of the operations of GE Insurance Solutions have been included in the consolidated financial statements since 9 June 2006. The transaction contributes to Swiss Re’s global diversification. It closely complements the Group’s existing business profile while extending the franchise, client base and product offering. The integration of the acquired operations will streamline the combined organisations.
In addition Swiss Re acquired 100% of the outstanding common shares of GE Life Group Limited, GE Insurance Holdings Limited and GE Life Services Limited for a cash payment of GBP 465 million. Swiss Re has acquired around 400 000 policies with total assets of over GBP 8 billion. The acquisition was completed on 14 December 2006. By acquiring GE Life’s operations Swiss Re will complement the existing Admin ReSM platform.
Fair value of Swiss Re’s common shares delivered to GE 2 916 2 400
2 Swiss Re agreed to pay to General Electric in cash an amount equal to the undistributed proceeds of the redemption of shares of common stock of a GE Insurance Solutions subsidiary. Swiss Re is entitled to the undistributed proceeds. In addition, this includes adjustments to the consideration identified as of 31 December 2006.
Total cost of investment at 31 December 2006 10 750 1 122
The following table presents details of acquired intangible assets subject to amortisation as of the date of acquisition: Amortisation period
The goodwill of CHF 1 537 million relates to the P&C business segment. The goodwill is not expected to be deductible for tax purposes.
Under US GAAP, equalisation reserves are not recognised as a liability. The change to US GAAP reduced the goodwill of CHF 1 909 million published in the interim 2006 financial statements by CHF 458 million.
Property and casualty reserves, both assumed and ceded, have been adjusted based on an estimate of their fair value. This estimate includes the best estimate of the ultimate claims payments and receipts and the timing of those payments. The estimated payments have been discounted and adjusted for the expected cost of holding capital to support the reinsurance assets and liabilities.
Other assets and liabilities have been adjusted to their estimated fair values. For information on the restructuring provision see note 16.
Life and health policy benefits and present value of future profits Life and health policy benefits and present value of future profits
The percentage of the PVFP which is expected to be amortised in each of the next five years is 6%, 6%, 5%, 5% and 5%, respectively.
The Group enters into long- and short-term debt arrangements to obtain funds for general corporate use and specific transaction financing. The Group defines short-term debt as debt having a maturity at the balance sheet date of less than one year and long-term debt of greater than one year. The Group’s debt as of 31 December 2005 and 2006 was as follows: CHF millions 2005 2006
Short-term debt - financial and operational debt 8 232 9 118
Long-term debt - financial and operational debt 10 241 14 738
As of 31 December 2005 and 2006, long-term debt as reported above have the following maturities: CHF millions 2005 2006 1 This balance was reclassified to short-term debt.
Maturity Instrument Issued in Currency Nominal in millions Interest rate… ...first call in
Swiss Re uses debt to finance general corporate purposes but also to fund “Financial services assets and liabilities” (funded business). “Financial services assets and liabilities” are structured with the intention of creating assets and liabilities that generate offsetting foreign exchange and interest rate risks. Debt that is strictly used for funded business is classified as operational debt and is included in financial services liabilities. Operational debt is excluded by rating agencies from financial leverage calculations.
A reconciliation of the beginning and ending reserve balances for non-life unpaid claims and claim adjustment expenses for the periods is presented as follows: CHF millions 2005 2006
Incurred related to: Amortisation of deferred expense on retroactive reinsurance and impact of commutations 66 100
At the end of 2006 the Group carried net reserves for US asbestos, environmental and other long-latent health hazards equal to CHF 2 226 million, which includes an increase of CHF 1 203 million because of acquisitions. During 2006, the net claims paid against these liabilities totalled CHF 244 million.
Change in unpaid claims and claim adjustment expenses; life and health benefits, gross –3 671 –1 166 –4 837 3 720 –1 922 1 798
Life and health policy benefits 31 081 31 081 44 899 44 899
Financial statements Notes to the Group financial statements 9. Shareholders’ equity
Dividends are declared in Swiss francs. For the years ended 31 December 2005 and 2006 the Group’s dividends per share were CHF 1.60 and CHF 2.50, respectively.
Weighted average common shares outstanding 332 771 183 375 236 647
In 2004 Swiss Re purchased 9 236 800 call options to offset the exposure to deliver Swiss Re shares under the convertible bond issued in 2001.
The Group is generally subject to corporate income taxes based on the taxable net income in various jurisdictions in which the Group operates. The components of the income tax charge were: CHF millions 2005 2006
Increase (decrease) in the income tax charge resulting from: Foreign Income taxed at different rates –80 421
Components of the deferred tax attributes table shown above, including valuation allowances, incorporate amounts that were acquired during the year. To the extent it is management ’s assessment that some, or all, of the acquired attributes will not be realised, a valuation allowance has been established in purchase accounting.
Financial statements Notes to the Group financial statements 11. Benefit plans
Benefit obligation as of 1 January 2 454 2 803 1 332 1 712 519 620
Benefit obligation as of 31 December 2 803 2 893 1 712 2 349 620 670
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortised from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are CHF 52 million and CHF 8 million, respectively. The estimated net loss and prior service credit for the other defined postretirement benefits will be amortised from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are CHF 1 million and CHF 8 million respectively.
The accumulated benefit obligation (the current value of accrued benefits excluding future salary increases) for pension benefits was CHF 3 973 million and CHF 4 882 million as of 31 December 2005 and 2006, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets: CHF millions 2005 2006
Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one percentage point change in assumed health-care cost trend rates would have had the following effects for 2006: CHF millions 1 percentage point increase 1 percentage point decrease
The employer contributions expected to be made in 2007 to the defined benefit pension plans are CHF 211 million and to the post-retirement benefit plan are CHF 13 million.
Financial statements Notes to the Group financial statements 12. Share-based payments
Effective 1 January 2006, Swiss Re adopted the fair value recognition provisions of the new US GAAP accounting guidance on share-based payments. The effect of adopting the new guidance is CHF 16 million on net income before taxes and CHF 13 million on net income. The impact on basic earning per share is CHF 0.04 (diluted earning per share: CHF 0.04).
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 or a restricted share plan.
The following table summarises the status of fixed stock options outstanding as of 31 December 2006: Range of exercise price in CHF Number of options
The status of stock options exercisable at 31 December 2006 is summarised as follows: Range of exercise price Number exercisable (vested)
The Group did not recognise compensation expense at fair value for the fixed option plan in 2005. If compensation expense had been recognised at fair value, the Group’s net income and earnings per share in 2005 would approximate the pro-forma amounts in the following table: CHF millions 2005
Add: stock based employee compensation cost, net of related tax effects, included in net income as reported 8
Less: total stock-based employee compensation expenses determined under the fair value method, net of related tax effects –39
The Group introduced a restricted share plan during 2004 to complement the fixed option plan. No new shares were granted under this plan in 2006. In addition, restricted bonus shares were issued during 2005 and 2006.
Under these plans, 361 929 and 122 070 restricted shares were granted in 2005 and 2006. The shares issued vest at the end of the fourth year.
The weighted average fair value of restricted shares. which equals the market price of the shares on the date of the grant, was CHF 83 and CHF 95 in 2005 and 2006 respectively.
The Group has issued 3 million stock appreciation rights as an extraordinary grant following the GE Insurance Solutions acquisition. The plan will be settled in cash. The requisite service period is 2 years while the maximum contractual term is 5 years. The fair value of the appreciation rights is estimated at date of grant using a binomial option-pricing model and is revised at every balance sheet date.
Swiss Re’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. Swiss Re contributes to the employee savings.
As a participant in limited investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnerships for periods of up to 10 years. The total commitments remaining uncalled as of 31 December 2005 and 2006 were CHF 869 million and CHF 891 million, respectively.
On 3 May 2004, a jury found in favour of Swiss Re that the insureds are only entitled to recover a maximum of Swiss Re’s 25% share of one policy limit. On 18 October 2006, the U.S. Court of Appeals for the Second Circuit affirmed the jury’s verdict in favour of Swiss Re. As a result, the Group’s exposure for claims related to the WTC terrorist attack remains consistent with existing loss estimates.
The Group also provided approximately 25% of a USD 1.5 billion excess property insurance program obtained by the Port Authority of New York and New Jersey. The Port Authority is the lessor of the WTC and owns additional property in the vicinity. Its property damage claim was being adjusted in the ordinary course when, in March 2005, the Port Authority indicated that it intended to claim entitlement to two policy limits in connection with the same WTC property that had been leased and separately insured under the USD 3.5 billion program. On 27 September 2005, Swiss Re filed suit against the Port Authority for a declaration that the WTC property insured under the USD 3.5 billion program is not also covered by the Port Authority’s program and that Swiss Re’s liability is limited to a single policy limit. The litigation is in the earliest stages and the parties have yet to appear before the court. The Port Authority has filed a motion to dismiss the case as unripe. No hearing date has been set for the motion.
Financial statements Notes to the Group financial statements 14. Information on business segments
The Group provides reinsurance, insurance and financial services throughout the world through three business segments. The business segments are determined by the organisational structure. The business segments in place are Property & Casualty, Life & Health and Financial Services. The other section includes items which are not allocated to operating segments.The main items are foreign exchange remeasurement, the mark to market of trading portfolios designated to match foreign currency reinsurance net liabilities, financing costs for financial debt and corporate centre expenses. The comparative business segment information is represented accordingly.
Net investment income and realised investment gains are allocated to the business segments based on the net investment income and realised investment gains of the legal entities that are operated by these business segments. Where one entity is utilised by two or more business segments, the net investment income and realised investment gains are allocated to these business segments using technical reserves and other information as a key for the allocation. The Financial Services business segment provides investment management services to the other business segments, and includes the fees charged in net investment income. These fees are based on service contracts.
The accounting policies of the business segments are in line with those described in the summary of significant accounting policies (see Note 1)
Claims and claim adjustment expenses; life and health benefits –11 306 –9 594 –493 –21 393
Other operating costs and expenses –1 373 –961 –646 –1 131 –4 111
Profile Thema 158 Swiss Re 2006 Annual Report b) Property & Casualty business segment – by line of business
Claims and claim adjustment expenses –4 419 –4 486 –1 648 –564 –2 153 –13 270 –1 160 –14 430
Other operating costs and expenses –282 –166 –110 –38 –141 –737 –187 –924
Claims ratio in %, excluding unwind of discount 45.3 80.0 74.6 98.1 55.4 63.3
Operating result, excluding non-participating net realised investment gains 742 212 954 379 1 333
Net realised investment gains - unit-linked 188 188 1 208 1 396
Claims and claim adjustment expenses; life and health benefits –6 081 –1 763 –7 844 –1 750 –9 594
Method of consolidation: f full e equity 1 Net asset value instead of share capital 2 From acquisition of GE Insurance
The securitisation vehicle generally retains the issuance proceeds as collateral. The Group’s variable interests arise through ownership of insurance-linked and credit-linked securities, or through protection provided for the value of the collateral held. The Group’s maximum exposure to loss equals the higher of the carrying amount of the collateral pro-
Financial statements Notes to the Group financial statements tected or the carrying amount of the insurance-linked or credit-linked securities held. The collateral held usually consists of investment grade securities.
Commercial paper conduit vehicles issue commercial paper to finance the purchase of assets. The Group assumes the risks and rewards of a portion of the assets held by the vehicle through a total return swap. The maximum exposure to loss equals the carrying amount of the assets underlying the total return swap.
Debt financing is a loan from a bank which the Group uses to invest in an investment company. The maximum exposure to loss is equal to the credit default of the loan from the bank.
The following table shows the total assets of VIEs of which the Group is the primary beneficiary, but does not hold a majority voting interest: As of 31 December CHF millions 2005 2006
A provision of CHF 104 million has been recognised, for the existing Swiss Re business, for leaving benefits associated with the realignment of the business after the acquistion. A provision of CHF 13 million has been recognised for real estate related expenses for the existing Swiss Re activities. Expenses of CHF 68 million have been charged in 2006 against the provision for the existing Swiss Re activities.
2) US GAAP requires adjustment to unrealised gains and losses which, when realised, would be credited to policyholders. The adjustment affects the PVFP balance, policyholder liabilities and unrealised gains and losses in shareholders’ equity. Under Swiss GAAP, shadow PVFP adjustments are not recognised because available-forsale fixed income securities are carried at amortised cost.
3) Under Swiss GAAP, goodwill is amortised using the straight-line method over periods that correspond to the benefits expected to be derived from the related acquisitions. Under US GAAP, effective 1 January 2002, goodwill is no longer amortised but is tested for impairment annually.
5) Under Swiss GAAP, Swiss Re discounted certain property and casualty reserves, principally provisions which are discounted under US statutory accounting policies. This approach is permitted but not required under US GAAP. Swiss Re has adopted a policy not to discount property and casualty reserves under US GAAP. Purchase GAAP accounting is not affected by this policy and requires acquired assets and liabilities to be recognised at fair value.
7) Under Swiss GAAP, entities generally treated foreign currencies as functional. Under US GAAP, certain entities have now changed to a single functional currency. Non-monetary assets and liabilities, except for those carried at fair value, are remeasured at historical rates. Fixed income and equity securities available-for-sale are remeasured at current rates through unrealised gains/losses in shareholders’ equity.
8) Represents the effect on income tax expense and deferred tax assets/liabilities of the adoption of the new accounting basis.
Report of the Group auditors To the Annual General Meeting of Swiss Reinsurance Company Zurich
In our opinion, the consolidated financial statements give a true and fair view of the financial position, the results of operations and the cash flows in accordance with accounting principles generally accepted in the United States of America and comply with Swiss law.
The following commentary on the 2006 financial year of the parent company therefore complements the review of the financial year of the Swiss Re Group.
The after-tax profit for the financial year based on the Swiss legal accounting regulations amounted to CHF 2.1 billion, compared to CHF 1.1 billion in the previous year.
In the year under report Swiss Re completed the acquisition of GE Insurance Solutions. This transaction had a significant impact on the balance sheet and income statement 2006.
Liabilities increased by CHF 2.5 billion to CHF 73.8 billion reflecting the issuance of mandatory convertible instruments and hybrid debt due to the financing of the GE Insurance Solutions acquisition.
An equalisation reserve of CHF 250 million was established for future claims fluctuations and for large and catastrophe losses.
The nominal share capital of the company amounted to CHF 37 million on 31 December 2006, following the new share issuance.
Liabilities for life and health policy benefits 4 13 153 11 459
The 2006 financial year comprises the accounting period from 1 January to
With the exception of own-use property, tangible assets are carried at cost, less individually scheduled straight-line depreciation over their useful lives. Items of minor value are not capitalised. The same principles apply to the capitalisation of software development expenses as intangible assets.
Swiss Reinsurance Company, Zurich, has revised the classification between certain balance sheet categories. Specifically, short-term investments purchased with an original maturity of three months or less, were reclassified from short-term investments to cash and cash equivalents. Therefore, the previously reported 2005 figures of short-term investments (CHF –2.7 billion) and cash and cash equivalents (CHF +2.7 billion) and the corresponding income statement positions, income from short-term investments (CHF –40 million) and other interest income (CHF +40 million), have been changed accordingly.
Funds held under reinsurance treaties contain mainly cash deposits withheld from retrocessionaires which are stated at redemption value.
Debt and other liabilities are held at redemption value excluding liabilities from short sales, which are stated at the proceeds amount or increased to the higher market value of the underlying security.
Notes Swiss Reinsurance Company, Zurich Additional information on the financial statements 1. Reinsurance result CHF millions Gross Retro
Claims paid and claim adjustment expenses –8 016 886 –7 130 –8 181 1 796 –6 385
Other reinsurance income and expenses –30 –10 –40 150 –69 81
Profile Thema 180 Swiss Re 2006 Annual Report 2. Investment result
Liabilities for life and health policy benefits 14 981 –1 828 13 153 12 449 –990 11 459
¹ Board of Directors’ proposal to the Annual General Meeting of 20 April 2007 subject to the actual number of shares outstanding and eligible for dividend.
Sources of shareholders’ equity (after allocation of profit) CHF millions 2005 2006
Contingent liabilities, mainly towards Group companies, amounted on 31 December 2006 to CHF 3 076 million (2005: CHF 3 027 million). In addition, there were 24 unlimited guarantees; 21 of these are for obligations of Group companies. No payments are expected under these guarantees.
Off-balance sheet commitments from operating leases for the next five years and thereafter totalled in the following amounts: CHF millions 2005 2006
In addition, a financial lease of IT hardware is recognised on the balance sheet. The corresponding assets and liability of CHF 19 million (2005: CHF nil) are included in the positions tangible assets and other liabilities respectively.
Fire insurance value of tangible assetsFire insurance value of tangible assets
In addition, a provision of CHF 37 million (2005: CHF nil) was established as of 31 December 2006 for transitional obligations concerning the change in the pension plan structure from a defined benefit scheme to a defined contribution scheme effective 1 January 2007.
As of 31 December 2006 the following debentures were outstanding: 3¾% interest, CHF 500 million, 2 July 1997–2007. 3¾% interest, CHF 600 million, perpetual from 15 June 1999 but not less than 12 years.
As of 31 December 2006 the Group held 287 624 treasury shares (2005: 206 449). In the year under report, 2 262 854 treasury shares (2005: 2 948 105) were purchased at an average price of CHF 95.21 (2005: CHF 81.41) and 2 181 679 treasury shares (2005: 3 674 784) were sold at an average price of CHF 94.50 (2005: CHF 83.27).
As of 31 December 2006, Swiss Reinsurance Company‘s total conditional capital outstanding amounted to CHF 4 649 560 (2005: CHF 2 659 565). CHF 4 000 000 was reserved for the exercise of conversion rights and warrants granted in connection with bonds and similar instruments, CHF 900 000 thereof was reserved for General Electric Company, and CHF 649 560 for employee participation purposes.
As of 31 December 2006, there were two shareholders with a participation exceeding the 5% threshold of Swiss Reinsurance Company’s share capital.
Swiss Reinsurance Company, Zurich, employed a worldwide staff of 3 745 on the balance sheet date (2005: 3 696). Personnel expenses for the 2006 financial year amounted to CHF 1 187 million (2005: CHF 871 million).
In 2006, management expenses of CHF 170 million (2005: CHF 194 million) were recharged to Group companies and reported net in the positions operating costs and investment expenses. In previous years, such recharges were additionally recorded on a gross basis in other income and other expenses.
Profit for the financial year 1 069 525 771 2 144 273 601
² Board of Directors’ proposal to the Annual General Meeting of 20 April 2007 subject to the actual number of shares outstanding and eligible for dividend.
After deduction of the Federal Withholding Tax of 35%, the dividend will be paid from 25 April 2007 by means of dividend order to shareholders recorded in the Share Register or to their deposit banks.
Other operating costs and expenses –2 698 –2 785 –3 074 –3 384 –3 240 –2 942 –2 940 –3 081 –4 111
Income tax expense –647 –783 –689 –61 –127 –634 –892 –255 –1 296
Net income/loss on ordinary activities 2 161 2 446 2 966 –165 –91 1 702 2 475 2304 4 560
Security backed by notes or receivables against assets such as auto loans, credit cards, royalties, student loans and insurance.
Sum of the non-life claims ratio, acquisition ratio and the expense ratio.
Risk reduction technique that limits the risk of accumulation by spreading an organisation ’s risks across different geographical locations as well as across different lines of business, in order to increase the number of mutually independent risks.
Actuarially determined estimate of the economic value of the in-force life and health insurance operations of an insurance company (excluding any value attributable to future new business). Embedded value earnings, defined as the change in embedded value over the year (after adjustment for any capital movements such as dividends and capital injections), provide a measure of the performance of the life and health operations of an insurance company.
Insurance taken out by employers covering employees against injuries arising out of their employment.
Vehicle for raising funds by borrowing from the capital markets or from private investors. The EMTN programme itself is effectively a platform, under a standard documentation framework, from which to launch such issues on an ongoing basis.
Reinsurance contract under which the ceding company pays premiums to build a fund from which to pay expected claims. The premium less the reinsurance charge is paid out to the ceding company in the future as claim payments, returned premiums, or contingent commissions.
Insurance of the liability of the manufacturer or supplier of goods for damage caused by their products.
Present value of future profits (PVFP)Present value of future profits (PVFP)
Financial Services operating result (operating revenues less the sum of acquisition costs, claims and claim adjustment expenses and operating costs) divided by operating revenues (premiums earned and net investment income plus trading revenues and fees and commissions).
Financial transaction, in which future cash flows from assets (or insurable risks) are pooled, converted into tradable securities and transferred to capital market investors. The assets are commonly sold to a special-purpose entity, which purchases them with
General information Glossary cash raised through the issuance of beneficial interests (usually debt instruments) to third- party investors.
Form of reinsurance that protects the ceding insurer against an aggregate amount of claims over a period, in excess of either a stated amount or a specified percentage of estimated benefit costs. An example of this type of cover is Employer Stop Loss (ESL) which is used by US companies to cap losses on self-funded group health benefit programmes. The stop-loss can apply to specific conditions or aggregate losses.
Maximum possible loss in market value of an asset (or risk) portfolio within a given time span and at a given confidence level.
The web version of the 2006 Annual Report is available at: www.swissre.com /annualreport
Swiss Reinsurance Company Mythenquai 50/60 P.O. Box 8022 Zurich Switzerland www.swissre.com