Cayman Islands Ampersand Investments (UK) Limited, George Town 939 876 100 f Cobham Funding Limited, George Town 0 0 100 f Dunstanburgh Finance (Cayman) Limited, George Town 0 0 100 f Epping Funding Limited, George Town 0 0 100 f Kilgallon Finance Limited, George Town 0 0 100 f SR Alternative Financing I SPC, George Town 0 0 100 f SR Alternative Financing II SPC, George Town 0 0 100 f SR Cayman Holdings Ltd, George Town 0 0 100 f SR York Limited, George Town 0 0 100 f Swiss Re Strategic Investments UK Limited, George Town 0 0 100 f
Australia Swiss Re Australia Ltd, Sydney 21 19 100 f Swiss Re Life & Health Australia Limited, Sydney 159 148 100 f
South Africa Swiss Re Africa Limited, Cape Town 2 1 100 f Swiss Re Life and Health Africa Limited, Cape Town 0 0 100 f
China Beijing Prestige Health Consulting Services Company Limited, Beijing 6 5 100 e
Insurance-linked and credit-linked securitisations The insurance-linked and credit-linked securitisations transfer pre-existing insurance or credit risk to the capital markets through the issuance of insurance-linked or credit-linked securities. In insurance-linked securitisations, the securitisation vehicle assumes the insurance risk through insurance or derivative contracts. In credit-linked securitisations, the securitisation vehicle assumes the credit risk through credit default swaps. The securitisation vehicle generally retains the issuance proceeds as collateral. The collateral held predominantly consists of investment-grade securities.
Debt financing vehicles Debt financing vehicles issue preference shares or loan notes to provide the Group with funding. The Group is partially exposed to the asset risk by holding equity rights or by protecting some of the assets held by the VIEs via guarantees or derivative contracts. The assets held by the VIEs consist of investment-grade securities, structured products, hedge fund units, derivatives and others.
Other The VIEs in this category were created for various purposes. Generally, the Group is exposed to the asset risk of the VIEs by holding an equity stake in the VIE or by guaranteeing a part or the entire asset value to third-party investors. A significant portion of the Group’s exposure is either retroceded or hedged. The assets held by the VIEs consist mainly of private equity investments, residential real estate and other.
The Group did not provide financial or other support to any VIEs during 2010 that it was not previously contractually required to provide.
The assets and liabilities for the swaps in trusts category represent the positive and negative fair values of the derivatives the Group has entered into with the trusts.
Liabilities are recognised for certain debt financing VIEs when losses occur. To date the respective debt financing VIEs have not incurred any losses. Liabilities of USD 597 million recognised for the “Other” category relate mainly to collateral received.
Other invested assets 871 1 406 Premiums and other receivables 2 Reinsurance recoverables 1 631 Deferred acquisition costs 2
The Asset Management business segment increased the provision by USD 11 million during 2010, mostly for leaving benefits associated with current de-risking activities.
̤ The Group Asset-Liability Committee oversees the management of Swiss Re’s balance sheet, in particular its liquidity, capital and funding positions and related policies. ̤ The Group Products and Limits Committee determines Swiss Re’s product policy and standards, sets reinsurance and counterparty credit risk limits, and decides on large or non-standard transactions.
̤ The Group Regulatory Committee is the central information and coordination platform for regulatory matters. It ensures a consistent approach to external communication on regulatory issues.
The global Risk Management function operates through dedicated units for property and casualty risk, life and health risk, and financial market and credit risk. Each unit is entrusted with Group-wide responsibility for identifying, assessing and controlling their allocated risks and for risk governance at the risk category level. The units also work closely with each other where necessary on transaction reviews and other cross-category issues. Actuarial management is an integral part of the insurance risk units, ensuring reserving adequacy.
Liquidity risk, capital adequacy, and emerging risks are managed at Group level. Certain other risk management activities are also performed globally, across all risk categories. These include risk governance at Group level, risk modelling, risk reporting and the steering of the Group’s regulatory activities.
In addition, Swiss Re provisionally estimates its claims from the Queensland, Australia, floods that occurred in the first quarter of 2011 to be USD 225 million, net of the benefits of retrocession and before tax. Further, the Group preliminarily estimates its loss from the Australian cyclone Yasi to be USD 100 million, net of the benefits of retrocession and before tax.
Significant uncertainties are involved in estimating losses from such events and these preliminary estimates may be subject to change as new information becomes available.
Board of Directors’ Responsibility The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Earnings/losses per share in USD –0.34 –0.19 4.06 6.42 5.98 10.75 9.94 –2.00 1.46 2.52 Earnings/losses per share in CHF –0.57 –0.29 5.48 8.00 7.44 13.49 11.95 –2.61 1.49 2.64 1 Numbers are based on the Group’s previous accounting standards.
Expenses Claims and claim adjustment expenses –9 638 –9 274 –11 040 –11 109 –11 866 –9 405 –10 035 –9 222 –8 336 –7 254
Convertible perpetual capital instrument –203 –1 117 Net income/loss attributable to common shareholders –97 –55 1 262 1 985 1 852 3 637 3 460 –663 496 863
Liabilities Unpaid claims and claim adjustment expenses 41 329 45 309 51 323 54 189 54 447 77 829 78 195 70 944 68 412 64 690 Liabilities for life and health policy benefits 24 917 26 952 30 114 38 025 23 583 36 779 44 187 37 497 39 944 39 551
Financial year 2010 The after-tax profit for the 2010 financial year amounted to CHF 380 million, compared to CHF 1 070 million in the previous year.
In 2010, the Swiss franc strengthened significantly against the majority of the main currencies in which the Company operates. The currency fluctuations markedly affected the comparison of year-on-year reported income statement and balance sheet figures.
Gross premiums earned increased slightly from CHF 14.8 billion to CHF 15.5 billion for the year under report. Property and casualty gross premiums earned declined 15% to CHF 6.3 billion reflecting selective underwriting and active cycle management as well as the deterioration of most currencies against the Swiss franc. The premium volume for life and health increased by CHF 2.1 billion, mainly due to initial premiums received for the integration of the life and health portfolio of a Swiss Re Group subsidiary into a branch of the Company. Excluding this one-off transaction, life and health gross premiums earned remained stable at CHF 3.4 billion, compared to 2009, also excluding non-recurring impacts.
Despite the higher volume of natural catastrophes, property and casualty net claims and claim adjustment expenses decreased during 2010, partly in line with the lower volume of business written as well as positive claims experience.
Investment income decreased by CHF 0.3 billion to CHF 3.3 billion. This development was mostly driven by significantly lower valuation readjustments, partly compensated by higher realised gains on sale of investments. The 2009 investment income was marked by the change of the accounting policy for reinsurance derivative financial instruments, allowing for valuation readjustments of CHF 1.1 billion, which otherwise would have been deferred until contract expiration.
In 2010, investment expenses decreased by CHF 0.8 billion to CHF 2.2 billion, mainly as a result of lower realised losses on derivative financial instruments, which were partially offset by additional precautionary valuation adjustments on subsidiaries and affiliated companies.
Other receivables increased, reflecting mainly a higher balance with a Swiss Re Group subsidiary in respect of derivative financial instruments which hedge the variable annuity business. The increase in other assets related mostly to security lending collateral and reverse repurchase transactions in the total amount of CHF 5.5 billion.
Debts decreased by CHF 1.9 billion to CHF 10.3 billion as a result of redemptions of intragroup loans.
As a result of guidance issued by the Swiss Federal Tax Administration SFTA in connection with the capital contribution principle newly introduced in Swiss Tax Law, which became effective as of 1 January 2011, a reclassification of reserves of CHF 9.8 billion from other reserves to legal reserves from capital contributions is proposed to be made on the Company’s stand-alone balance sheet as of 31 December 2010. This total amount includes capital contributions from 1 January 1997 to 31 December 2010 and was confirmed by the SFTA. Legal reserves from capital contributions preserve the right to pay out dividends exempt from Swiss withholding tax.
The nominal share capital of the Company increased slightly due to newly issued shares from the conditional capital for employee participation programmes. As of 31 December 2010, the nominal share capital amounted to CHF 37 million.
Claims and claim adjustment expenses –9 412 –7 774 Life and health benefits 1 725 –1 868 Acquisition costs –1 827 –1 584 Other reinsurance result 714 412 Operating costs –905 –912 Allocated investment return 1 054 858
Current assets Premiums and other receivables from reinsurance 3 6 283 5 067 Funds held by ceding companies 3 18 362 17 655 Deferred acquisition costs 3 605 565 Cash and cash equivalents 6 069 6 247
Revenues and expenses are translated into Swiss francs at average exchange rates of the year under report.
Subsequent recoveries of previously recorded downward value adjustments may be recognised up to the lower of historical cost or market value at the balance sheet date. The valuation rules prescribed by the Swiss Financial Market Supervisory Authority FINMA are observed.
Intangible assets Intangible assets, consisting of capitalised development costs for software for internal use, are stated at cost less straight-line amortisation over the estimated useful lives.
Other assets Other assets include deferred expenses on retroactive reinsurance policies, which are amortised through earnings over the expected claims-paying period, as well as receivables in connection with securities lending collateral and reverse repurchase transactions, which are carried at nominal value.
Accounting principles for life and health business require that no contract is treated as an asset on the balance sheet, with the exception of specific contracts where an offsetting amount has been paid and is recoverable from the ceding company.
Modified coinsurance arrangements are treated on a gross basis with the separate recognition of the funds withheld, as well as the liabilities for life and health policy benefits.
Non-technical provisions The provision for taxation contains taxes on the basis of the financial year under report.
Allocated investment return The allocated investment return contains the calculated interest generated on the investments covering the technical provisions. The interest rate reflects the currency-weighted five-year average yield on five-year government bonds.
Tax expense The tax expense relates to the financial year and includes taxes on income and capital as well as indirect taxes. Value-added taxes are included in the respective expense lines in the income statement.
Claims and claim adjustment expenses –9 058 –354 –9 412 –7 411 –363 –7 774
Compensation for acting members of governing bodies Article 663bbis of the Swiss Code of Obligations requires disclosure of total compensation paid to members of the Board of Directors and the Executive Committee. Compensation to members of the Board of Directors and the highest paid members of the Executive Committee are shown by individual. For a description of the elements of this compensation, see page 93, Compensation.
In 2010 the Group changed the valuation methodology of the payout factor to a stochastic model which considers the likelihood of achieving the performance targets. Basis inputs for the model continue to be the Group’s plan targets, however, the model now considers the probability of meeting such targets. The likelihood is measured by reference to external analysts’ expectations. Group plan targets and analysts’ expectations are equally weighted in the model. This valuation approach has been applied to all unvested LTI plans as of 31 December 2010. Furthermore, the model will discount the share price at grant to reflect dividend forgone during the vesting period. For further information on LTI plans see page 95, Compensation.
The performance share plan is measured against total relative shareholder return (TSR). The 2009 and 2010 performance shares were granted at a reference price of CHF 36.00 and CHF 53.60, respectively. The final number of shares to be released after three years can vary between 0% and 150% depending on the relative total shareholder return against a peer group. For further information on this performance plan see page 105, Compensation.
The shares received by the remaining members of the Board of Directors have a four-year deferral period. The share price as of 15 May 2009 of CHF 36.00 and the share price as of 6 April 2010 of CHF 53.60 were used for calculating the number of shares awarded based on the amount of the fee received in shares for 2009 and 2010 grants respectively.
Individual compensation of the remaining members of the Board of Directors for 2009 was: Individual compensation of the remaining members of the Board of Directors granted for 2010 was: Walter B. Kielholz, Chairman CHF thousands 2009 2010
Fees and allowances in cash 1 401 1 500 2009 CHF thousands
Jakob Baer, Chairman of the Audit Committee 480 320 800 Raymund Breu, Member 365 365 Raymond K.F. Ch’ien, Member 219 146 365 John R. Coomber, Chairman of the Finance and Risk Committee 419 276 695 Rajna Gibson Brandon, Member 207 138 345 Hans Ulrich Maerki, Member 325 325 Robert A. Scott, Chairman of the Compensation Committee 291 194 485 Thomas W. Bechtler, Former member1 38 26 64 Peter Forstmoser, Former Chairman2 550 550 Bénédict G.F. Hentsch, Former member1 64 64 Kaspar Villiger, Former member3 38 26 64 1 Term of office expired as of 13 March 2009 and member did not stand for re-election. 2 Resigned from the Board of Directors as of 1 May 2009. 3 Resigned from the Board of Directors as of 13 March 2009.
Share ownership The disclosure below is in line with article 663c para. 3 of the Swiss Code of Obligations which requires disclosure of share ownership, options and related instruments individually for each member of the Board of Directors and Executive Committee, including shares, options and related instruments held by persons closely related to, and by companies controlled by members of the Board of Directors and Executive Committee.
The numbers of shares held as of 31 December were: Members of the Board of Directors 2009 2010
Mathis Cabiallavetta, Vice Chairman 1 961 1 961 Jakob Baer, Chairman of the Audit Committee 23 030 29 001
Raymond K.F. Ch’ien, Member 5 144 7 943 John R. Coomber, Chairman of the Finance and Risk Committee 124 302 129 526 Rajna Gibson Brandon, Member 16 821 19 433 Malcolm D. Knight, Member1 1 502 Hans Ulrich Maerki, Member 16 789 19 215 Carlos E. Represas, Member1 3 502 Jean-Pierre Roth, Member2 1 129 Robert A. Scott, Chairman of the Compensation Committee 16 663 20 395 1 Elected to Swiss Re’s Board of Directors at the Annual General Meeting of 7 April 2010. 2 Elected to Swiss Re’s Board of Directors at the Annual General Meeting of 7 April 2010, effective 1 July 2010.
Stefan Lippe, Chief Executive Officer 66 121 66 121 David J. Blumer, Chief Investment Officer 27 000 54 000 Agostino Galvagni, CEO Corporate Solutions1 10 735 11 747 Brian Gray, Chief Underwriting Officer 15 912 15 912 Michel M. Liès, Chief Marketing Officer 62 931 60 358 George Quinn, Chief Financial Officer 19 703 20 103 1 Appointed CEO Corporate Solutions on 1 October 2010.
Number of options Members of the Board of Directors 2009 2010
John R. Coomber, Chairman of the Finance and Risk Committee 314 000 290 000
Total mortgages and loans to members of the Executive Committee 6 699 6 169 Highest mortgages and loans to an individual member of the Executive Committee
Federal securities class action lawsuit In 2009, Plumbers’ Union Local No. 12 Pension Fund, a Swiss Re shareholder, filed a federal securities law class action against Swiss Re, Swiss Re’s former Chief Executive Officer and Swiss Re’s Chief Financial Officer arising out of Swiss Re’s announcement in November 2007 that it would report a CHF 0.9 billion mark-to-market loss on two credit default swaps. By order dated 1 October 2010, all claims against Swiss Re and the individual defendants in that action were dismissed with prejudice. Plaintiff’s deadline to file an appeal has lapsed.
Leasing contracts Total off-balance sheet commitments from operating leases for the next five years and there after are as follows: These commitments pertain to the non-cancellable contract periods and refer primarily to office and apartment space rented by the Company.
Security deposits To secure the technical provisions at the 2010 balance sheet date, securities with a value of CHF 9 858 million (2009: CHF 8 456 million) were deposited in favour of ceding companies, of which CHF 9 297 million (2009: CHF 7 617 million) refer to Group companies.
Securities lending and repurchase agreements To enhance the performance of its investment portfolio, the Company enters into securities lending and reverse repurchase transactions. In the context of such transactions securities are transferred to the counterparty.
An overview of the fair value of securities transferred under securities lending and borrowing as well as repurchase agreements is provided in the following table as of 31 December: These securities were transferred with the right to be sold or pledged by the borrowing entity.
Investment funds As of 31 December 2010, fixed income securities of CHF 5 881 million (2009: CHF 2 998 million) were held in investment funds which are owned by Swiss Re Group companies. The securities in these funds and their revenues are reported in the corresponding asset category.
Fire insurance value of tangible assets As of 31 December 2010, the insurance value of tangible assets, comprising the real estate portfolio and other tangible assets, amounted to CHF 2 563 million (2009: CHF 2 515 million).
Investments in subsidiaries Details on the Swiss Re Group’s subsidiaries are disclosed on pages 180 to 183.
Deposit account Deposit arrangements generated the following balances, which are included in: Claims on and obligations towards Group companies
Conditional capital and authorised capital The Annual General Meeting, held on 7 April 2010, approved an increase of conditional capital by CHF 1 093 085 for employee participation purposes.
The Annual General Meeting, held on 13 March 2009, approved an increase of conditional capital by CHF 16 000 000 in connection with a convertible bond or a similar financial instrument in favour of Berkshire Hathaway Inc. and the creation of authorised capital of CHF 18 000 000 with shareholders’ subscription rights.
Reinsurance result 76 80 Premiums and other receivables from reinsurance 902 469 Funds held by ceding companies 133 66 Funds held under reinsurance treaties 302 2 Reinsurance balances payable 811 617
Premiums and other receivables from reinsurance 1 455 986 Funds held by ceding companies 16 042 15 524
Funds held under reinsurance treaties 1 595 3 189 Reinsurance balances payable 1 025 962
Major shareholders As of 31 December 2010, there were six shareholders with participation exceeding the 3% threshold of Swiss Reinsurance Company Ltd’s share capital: a. Berkshire Hathaway Inc., 3355 Farnam Street, Omaha, NE 68131, USA, notified Swiss Reinsurance Company Ltd on the 9 November 2010 that it held as of 3 November 2010, following the termination of a convertible perpetual capital instrument, through a number of group companies, 11 262 000 registered Swiss Re shares and thereby had a voting right of 3.04% in Swiss Reinsurance Company Ltd.
c. Brandes Investment Partners, L.P., 11988 El Camino Real, Suite 500, San Diego, CA 92130, USA, notified Swiss Reinsurance Company Ltd on 21 June 2010 that it held as of 17 June 2010, through an acquisition, in the capacity of investment manager for clients 8 883 676 registered Swiss Re shares and 2 367 440 American Depositary Receipts (ADR), representing 3.04% of the voting rights of Swiss Reinsurance Company Ltd, which can be exercised autonomously of the beneficial owners.
d. Dodge & Cox, 555 California Street, 40th Floor, San Francisco, CA 94104, USA, notified Swiss Reinsurance Company Ltd on 31 October 2008 that it held on behalf of the Dodge & Cox International Stock Fund as of 22 October 2008, through an acquisition, 10 766 995 registered Swiss Re shares, representing 3.05% of the voting rights of Swiss Reinsurance Company Ltd, which can be exercised autonomously of the beneficial owners.
f. Swiss Reinsurance Company Ltd, Mythenquai 50/60, P.O. Box, 8022 Zurich, Switzerland, held, as of 31 December 2010, a total of 28 635 251 registered Swiss Re shares or 7.72% of its share capital.
Personnel information As of 31 December 2010, Swiss Reinsurance Company Ltd employed a worldwide staff of 3 513 (2009: 3 485). Personnel expenses for the 2010 financial year amounted to CHF 967 million (2009: CHF 909 million).
Change in reporting of derivative financial instruments on foreign exchange In the year under report, the Company has revised its reporting of derivative financial instruments on foreign exchange. Such derivatives are newly presented net by contract as either an asset or a liability, whereas for 2009, the payer and receiver leg of a contract were individually reported on a gross basis. As a consequence of this net presentation, assets and liabilities in derivative financial instruments as of 31 December 2010 were reduced by CHF 1.7 billion.
Outlook 2011 On 17 February 2011, Swiss Reinsurance Company Ltd announced that it plans to establish a new corporate structure under a newly formed holding company. Accordingly, the new company will launch an exchange offer for all shares in Swiss Reinsurance Company Ltd. The corporate governance arrangements in the new holding company are intended to mirror those currently in place in Swiss Reinsurance Company Ltd. Further information on the new holding company structure will be provided in an offer prospectus for the exchange offer, which is to be released around the end of March 2011.
Proposal for allocation of disposable profit The Annual General Meeting, to be held in Zurich on 15 April 2011, has at its disposal the following profit: The Board of Directors proposes to the Annual General Meeting to allocate the disposable profit and to pay a dividend as follows: Dividend If the Board of Directors’ proposal for allocation of disposable profit is accepted, a dividend of CHF 2.75 per share will be paid from other reserves.
Retained earnings brought forward from the previous year 42 852 555 50 211 859 Profit for the financial year 1 070 068 181 380 219 312
2 The Board of Directors’ proposal to the Annual General Meeting of 15 April 2011, subject to the actual number of shares outstanding and eligible for dividend.
Report of the statutory auditor on the Financial Statements As statutory auditor, we have audited the financial statements of Swiss Reinsurance Company Ltd, which comprise the income statement, balance sheet and notes (pages 199 to 217), for the year ended 31 December 2010.
222 Business contact details 223 Corporate calendar 224 Glossary 230 Cautionary note on forward-looking statements 231 Note on risk factors
Glossary Risk that arises when a large number of individual risks are correlated such that a single event will affect many or all of these risks.
Acceptance of a closed block of in-force life and health insurance business either through acquisition or reinsurance, typically assuming the responsibility to administer the underlying policies. Admin Re® can also extend to the acquisition of an entire life insurance company.
Insurance of accident and liability risks, as well as hull damage, connected with the operation of aircraft.
The benefit ratio is calculated as claims paid and claims adjustment expenses in relation to premiums earned, both of which exclude unit-linked and with-profit business. The Swiss Re benefit ratio was refined in 2010 to exclude the impact of guaranteed minimum death benefit (GMDB) products, as this ratio is not indicative of the operating performance of such products. The comparative for the 2009 benefit ratio has been adjusted accordingly.
Applies to derivative products. Difference in the value of two options, when the value of the one sold exceeds the value of the one bought.
Insurance which lowers the risk carried by primary insurance companies. Reinsurance includes various forms such as facultative, financial, non-proportional, proportional, quotashare, surplus and treaty reinsurance.
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 is employer stop loss (ESL) coverage, 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.
Operating income plus net unrealised gains/losses on available-for-sale securities as a percentage of average invested assets. Invested assets include investments, cash and cash equivalents, securities in transit, financial liabilities and exclude policy loans and Legacy assets.
Forward-looking statements typically are identified by words or phrases such as “anticipate“, “assume“, “believe“, “continue“, “estimate“, “expect“, “foresee“, “intend“, “may increase“ and “may fluctuate“ and similar expressions or by future or conditional verbs such as “will“, “should“, “would“ and “could“. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Swiss Re’s actual results, performance, achievements or prospects to be materially different from any future results, performance, achievements or prospects expressed or implied by such statements. Such factors include, among others: ̤ further instability affecting the global financial system and developments related thereto; ̤ changes in global economic conditions; ̤ Swiss Re’s ability to maintain sufficient liquidity and access to capital markets, including sufficient liquidity to cover potential recapture of reinsurance agreements, early calls of debt or debt-like arrangements and collateral calls under derivative contracts due to actual or perceived deterioration of Swiss Re’s financial strength; ̤ the effect of market conditions, including the global equity and credit markets, and the level and volatility of equity prices, interest rates, credit spreads, currency values and other market indices, on Swiss Re’s investment assets; ̤ changes in Swiss Re’s investment result as a result of changes in its investment policy or the changed composition of its investment assets, and the impact of the timing of any such changes relative to changes in market conditions; ̤ uncertainties in valuing credit default swaps and other credit-related instruments; ̤ possible inability to realise amounts on sales of securities on Swiss Re’s balance sheet equivalent to its mark-to-market values recorded for accounting purposes; ̤ the outcome of tax audits, the ability to realise tax loss carryforwards and the ability to realise deferred tax assets (including by reason of the mix of earnings in a jurisdiction or deemed change of control), which could negatively impact future earnings; ̤ the possibility that hedging arrangements may not be effective; ̤ the lowering or loss of financial strength or other ratings of one or more of the companies in the Group or developments adversely affecting the ability to achieve improved ratings; ̤ the cyclicality of the reinsurance industry; ̤ uncertainties in estimating reserves; ̤ the frequency, severity and development of insured claim events; ̤ acts of terrorism and acts of war; ̤ mortality and morbidity experience; ̤ policy renewal and lapse rates; ̤ extraordinary events affecting Swiss Re’s clients and other counterparties, such as bankruptcies, liquidations and other credit-related events; ̤ current, pending and future legislation and regulation affecting Swiss Re or its ceding companies, and regulatory or legal actions; ̤ changes in accounting standards; ̤ significant investments, acquisitions or dispositions, and any delays, unexpected costs or other issues experienced in connection with any such transactions, including, in the case of acquisitions, issues arising in connection with integrating acquired operations; ̤ changing levels of competition; and ̤ operational factors, including the efficacy of risk management and other internal procedures in managing the foregoing risks.
Changes may also occur in areas of broader application, such as competition policy and tax laws. Any number of these changes could apply to the Group and its operations. These changes could increase the costs of doing business, reduce access to liquidity, limit the scope of business or affect the competitive balance, or could make reinsurance less attractive to primary insurers.
General information / Note on risk factors can increase, as could other-than-temporary impairments. With respect to equity prices, the Group is exposed to changes in the level and volatility of equity prices, as they affect the value of equity securities themselves as well as the value of securities or instruments that derive their value from a particular equity security, a basket of equity securities or a stock index. The Group is also subject to equity price risk to the extent that the value of life-related benefits under certain life contracts, most notably variable annuity business, are tied to financial market values; to the extent market values fall, the financial exposure on guarantees related to these contracts would increase to the extent this exposure is not hedged. While the Group has discontinued writing new variable annuity business and has an extensive hedging programme covering its existing variable annuity business, certain risks cannot be hedged, including actuarial risks, basis risk and correlation risk. Exposure to foreign exchange risk arises from exposures to changes in spot prices, forward prices and volatile movements in exchange rates.
Liquidity risks The Group’s business requires, and its clients expect, that it has sufficient capital and sufficient liquidity to meet its reinsurance obligations, and that that would continue to be the case following the occurrence of any event or series of events, including extreme catastrophes, that would trigger insurance or reinsurance coverage obligations. The Group’s
Risks relating to credit rating downgrades Ratings are an important factor in establishing the competitive position of reinsurance companies, and market conditions could increase the risk of downgrade. Third-party rating agencies assess and rate the financial strength of reinsurers and insurers, such as Swiss Re. These ratings are intended to measure a company’s ability to repay its obligations and are based upon criteria established by the rating agencies. The Group’s ratings came under pressure due to the additional asset write-downs it recorded for the fourth quarter of 2008 and the resulting impact on the Group’s capital position. The Group’s ratings could be subject to additional pressure in the future.
The Group’s ratings reflect the current opinion of the relevant rating agencies. One or more of its ratings could be downgraded or withdrawn in the future. Rating agencies may heighten their scrutiny of rated companies, increase the frequency and scope of ratings reviews, revise their criteria or take other actions that may negatively impact the Group’s ratings, particularly in light of recently proposed or enacted provisions aimed at regulating rating agencies. In addition, changes to the process or methodology of issuing ratings, or the occurrence of events or developments affecting the Group, could make it more difficult for the Group to achieve improved ratings which it would otherwise have expected.
Use of models; accounting matters The Group is subject to risks relating to the preparation of estimates and assumptions that management uses, for example, as part of its risk models as well as those that affect the reported amounts of assets, liabilities, revenues and expenses in the Group’s financial statements, including assumed and ceded business. For example, the Group estimates premiums pending receipt of actual data from ceding companies, which actual data could deviate from the estimates. To the extent that management’s estimates or assumptions prove to be incorrect, it could have a material impact on underwriting results (in the case of risk models) or on reported financial condition or results of operations, and such impact could be material.
The Group’s results may be impacted by changes in accounting standards, or changes in the interpretation of accounting standards. The Group’s results may also be impacted if regulatory authorities take issue with any conclusions the Group may reach in respect of accounting matters. Changes in accounting standards could impact future reported results or require restatement of past reported results.
No. 01-11-212522 – www.myclimate.org © myclimate – The Climate Protection Partnership
Swiss Reinsurance Company Ltd Mythenquai 50/60 P.O. Box 8022 Zurich Switzerland
Premiums earned and fee income 10 704 9 677 –10 Benefit ratio in % 83.8 88.7
Share price in CHF 55.50 Market capitalisation in CHF millions 20 574
24 Balance sheet 26 Statement of shareholders’ equity 28 Statement of comprehensive income 29 Statement of cash flow
Notes to the condensed Group financial statements (unaudited): 30 Note 1 Organisation and summary of significant accounting policies 32 Note 2 Investments 38 Note 3 Fair value disclosures 48 Note 4 Derivative financial instruments 54 Note 5 Debt 57 Note 6 Unpaid claims and claim adjustment expenses 59 Note 7 Reinsurance information 61 Note 8 Earnings per share 62 Note 9 Contingent liabilities 63 Note 10 Information on business segments 70 Note 11 Variable interest entities 74 Note 12 Restructuring provision 75 Note 13 Subsequent events
This 2010 Financial Review contains updates on our business and results and preliminary unaudited financial information for 2010. The updates on our business and results will be included in our 2010 Annual Report, together with our audited financial statements for 2010 and other disclosures we are required to include or historically have included in an annual report. This Financial Review is not intended to be a substitute for the full 2010 Annual Report, which will be published on the Swiss Re website on 24 March 2011. This Financial Review does not constitute an offer of securities for sale, or a solicitation of an offer to acquire securities, in any jurisdiction, including the US, and refers to securities that have not been, and will not be, registered under the US Securities Act of 1933.
Strong earnings power demonstrated in 2010 Swiss Re reported net income of USD 863 million for 2010, an increase of 74%, including the impact from terminating the CPCI. This result demonstrates strong earnings power despite the continuing soft pricing cycle in the property and casualty market and the prevailing low interest rate environment during 2010. Earnings per share were USD 2.52 (CHF 2.64), compared to USD 1.46 (CHF 1.49) in 2009. Return on equity was 3.6% in 2010 and 2.3 % in 2009. Excluding the impact of the CPCI, net income in 2010 was USD 2.3 billion. The return on equity excluding the CPCI was 9.2%.
Restored capital position Shareholders’ equity in 2010 was stable at USD 25.3 billion. However, it should be noted that around USD 4.0 billion of shareholder equity was created during the year. The impact of the CPCI repayment was therefore offset by unrealised gains on investments and net earnings for the year.
Very successful January 2011 renewals Swiss Re began 2011 with very successful January renewals. While average reinsurance market prices declined by 4 –7%, Swiss Re was able to outperform the market based on our disciplined underwriting and success on non-commodity placements. Swiss Re’s risk-adjusted price adequacy fell by 2%.
The rationale for the adjusted legal structure is as follows: ̤ Client focus – Our clients will be better served by the individual Business Units, which will develop dedicated service models. The changes announced will increase the flexibility and agility of these Business Units, allowing them to develop tailored market approaches and leading to a more entrepreneurial approach to client service.
̤ Transparency – A significant benefit of the new legal set-up will be to create a simplified corporate structure that further improves transparency with respect to the performance of Swiss Re’s three main Business Units. Furthermore, it will increase clarity as to how capital and assets are allocated between them. The increase in transparency comes at a time of intensified regulatory focus on the component parts of large cross-border (re) insurance groups.
̤ Accountability – Greater transparency into the performance of the Business Units will bring more accountability in terms of the allocation of resources within those units. The management of each Business Unit will be fully accountable for the strategy as well as the entire business performance of each Unit, including financial results, capital and asset allocation, and tax issues.
̤ Flexibility – The new structure grants Swiss Re more flexibility to manage our business segments in distinct ways, including creating the option to attract new funding sources for individual business areas if business opportunities exceed our balance sheet capacity – for example in Admin Re®. As a further benefit, it will be possible for each business area to have a capital and funding structure appropriate to its needs, which Swiss Re anticipates should improve returns.
Positioned to capture future earnings growth Having fulfilled our promises and invested in the company’s future in 2010, we believe that Swiss Re is in an excellent position to capture future earnings growth. Over the next three years, the following growth drivers will provide opportunities for Swiss Re’s Business Units: ̤ Hardening in the property and casualty market in 2012/2013 will benefit Reinsurance and Corporate Solutions; ̤ Expiration of the quota share with Berkshire Hathaway at end 2012 will add 25% growth potential in P & C Reinsurance and Corporate Solutions; ̤ Higher capital demands and further industry consolidation will provide opportunities for
Admin Re® and for large deals in Reinsurance; ̤ Recovery of the global economy will benefit Reinsurance, Corporate Solutions, and Asset
Based on our capital strength, our global market position, our outstanding (re)insurance expertise and our innovation power, we are well placed to improve returns and create value, for you, our shareholders.
Property & Casualty continued to deliver a strong underwriting result. Life & Health reported a solid result in a challenging interest rate environment. Asset Management delivered a good performance with a return on investments of 3.5%.
Fee income from policyholders 847 918 8 Proprietary net investment income 5 698 4 684 –18 Net investment income from unit-linked and with-profit business 701 738 5 Proprietary net realised investment gains/losses –2 746 553 – Net realised investment gains/losses from unit-linked and with-profit business 3 621 2 230 –38 Other revenues 178 60 –66
Income attributable to non-controlling interests –154 – Net income after attribution of non-controlling interests 699 1 980 183
Convertible perpetual capital instrument 1 –203 –1 117 – Net income attributable to common shareholders 496 863 74 1 Please refer to Note 8 Earnings per share to the Condensed Group financial statements for details on the impact of the CPCI on earnings.
Return on equity increased to 3.6% from 2.3% in 2009, despite the early termination of the CPCI. Excluding all impact of the CPCI of USD 1.4 billion, return on equity would have been 9.2%.
Proprietary net investment income was USD 4.7 billion, an 18% decrease from the previous year, reflecting the repositioning of the investment portfolio through lowering the allocation to corporate bonds and securitised products. The fixed income running yield was 4.1%, reflecting lower yields on recent purchases, primarily government bonds, and the increased fair value of assets.
Return credited to policyholders reflects the investment performance on the underlying assets, mainly backing unit-linked and unitised with-profit policies, which is passed through to contract holders. In 2010, policy holders benefited from total investment returns of USD 3.4 billion, mainly driven by the further recovery of equity markets, compared to USD 4.6 billion in the prior year.
Acquisition costs decreased 18% to USD 3.7 billion. Property & Casualty and Life & Health contributed equally to the decrease. The commutation of a non-traditional Property & Casualty transaction had unfavourably impacted acquisition costs in 2009. Decreasing acquisition costs in the Life & Health traditional lines of business reflected the impact of the retrocession agreement announced in the first quarter of 2010.
Shareholders’ equity, which excludes non-controlling interests, remained stable at USD 25.3 billion in 2010. The impact of the early termination of the CPCI of USD 2.7 billion, which resulted in a reclassification of the instrument to shortterm liabilities, was more than offset by the net earnings of the period and unrealised investment gains on investments of USD 2.3 billion due to lower interest rates and tightening credit spreads.
Interest expenses were USD 1.1 billion, an increase of 8% from the prior-year period. The increase includes the impact of the early termination of the CPCI.
Changes in shareholders’ equity Total equity, including non-controlling interests, was USD 26.9 billion. Non-controlling interests reflect interests attributable to non-controlling owners of Swiss Re’s subsidiaries. They relate to a modified coinsurance treaty and the management company of certain private equity funds acquired in the first quarter of 2010, which resulted in the consolidation of all the investees’ assets and liabilities even though the Group does not own the majority of the equity. Swiss Re presents non-controlling interests as separate
Property﻿&﻿Casualty﻿ Market environment In﻿2010,﻿the﻿reinsurance﻿industry﻿continued﻿ its﻿gradual﻿recovery﻿from﻿the﻿financial﻿crisis.﻿ Insurance﻿and﻿reinsurance﻿balance﻿sheets﻿ appeared﻿strong,﻿suggesting﻿ample﻿capacity.﻿ Prices﻿and﻿volumes﻿remained﻿subdued﻿﻿ in﻿many﻿markets,﻿delaying﻿the﻿hardening﻿ of﻿reinsurance﻿rates.﻿Indeed,﻿most﻿markets﻿ saw﻿a﻿further﻿decline,﻿although﻿those﻿ markets﻿that﻿suffered﻿significant﻿losses﻿in﻿ 2010,﻿such﻿as﻿Chile﻿(earthquake)﻿and﻿ Australia﻿(hailstorms,﻿floods),﻿showed﻿higher﻿ premium﻿rates.﻿Accordingly,﻿it﻿became﻿ challenging﻿to﻿maintain﻿adequate﻿profitability﻿ levels﻿in﻿many﻿segments.﻿Industry﻿earnings﻿ on﻿current﻿business﻿were﻿often﻿ supplemented﻿with﻿reserve﻿releases﻿from﻿ prior﻿underwriting﻿years.﻿While﻿these﻿ releases﻿are﻿almost﻿certain﻿to﻿end﻿in﻿the﻿ near﻿future,﻿the﻿generally﻿positive﻿results﻿ recorded﻿by﻿insurers﻿and﻿reinsurers﻿mean﻿ that﻿they﻿are﻿not﻿yet﻿under﻿sufficient﻿ pressure﻿to﻿take﻿immediate﻿action﻿on﻿rate﻿ levels.
Revenues Premiums﻿earned 12﻿769 10﻿871 –15 Net﻿investment﻿income 2﻿257 1﻿738 –23 Net﻿realised﻿investment﻿gains/losses 22 110 400 Other﻿revenues 34 –100 Total revenues 15﻿082 12 719 –16
Claims﻿ratio﻿in﻿%,﻿including﻿unwind﻿of﻿discount 60.5 66.2 Expense﻿ratio﻿in﻿% 27.8 27.7 Combined﻿ratio﻿in﻿%,﻿including﻿unwind﻿of﻿discount 88.3 93.9 Combined﻿ratio﻿in﻿%,﻿excluding﻿unwind﻿of﻿discount 86.5 92.3
Expenses Claims﻿and﻿claim﻿adjustment﻿expenses –2﻿318 –1﻿554 –1﻿155 –378 –705 –1﻿285 –7﻿395 –575 –7﻿970 Acquisition﻿costs –741 –359 –224 –121 –311 –374 –2﻿130 –73 –2﻿203 Other﻿expenses –371 –425 –103 –94 –69 –212 –1﻿274 –122 –1﻿396 Total expenses –3﻿430 –2﻿338 –1﻿482 –593 –1﻿085 –1﻿871 –10﻿799 –770 –11﻿569
Net﻿realised﻿investment﻿gains/losses –80 92 11 23 87 110 Other﻿revenues –2 –2 2 0
Even﻿in﻿industrialised﻿countries,﻿a﻿large﻿part﻿ of﻿the﻿population﻿remains﻿underinsured﻿ against﻿life﻿and﻿health﻿risks,﻿as﻿shown﻿in﻿ research﻿undertaken﻿by﻿Swiss﻿Re﻿and﻿ published﻿in﻿our﻿European﻿Insurance﻿Report﻿ 2010.﻿The﻿report﻿concludes﻿that﻿in﻿the﻿﻿ 12﻿countries﻿it﻿studied﻿there﻿is﻿a﻿mortality﻿ protection﻿gap﻿of﻿EUR﻿10﻿trillion,﻿equivalent﻿ to﻿a﻿potential﻿annual﻿premium﻿volume﻿﻿ of﻿EUR﻿25﻿billion.﻿Swiss﻿Re﻿aims﻿to﻿help﻿﻿ its﻿clients﻿close﻿this﻿gap﻿by﻿providing﻿ accessible,﻿affordable﻿and﻿sustainable﻿life﻿ and﻿health﻿protection﻿products﻿in﻿their﻿ markets.
The﻿primary﻿drivers﻿of﻿Life﻿&﻿Health﻿financial﻿ performance﻿are﻿mortality,﻿morbidity﻿﻿ and﻿lapse﻿experience﻿and﻿financial﻿market﻿ performance.﻿Financial﻿markets﻿can﻿ influence﻿the﻿results﻿directly﻿through﻿changes﻿ in﻿net﻿investment﻿returns,﻿amortisation﻿﻿ of﻿present﻿value﻿of﻿future﻿profits﻿(PVFP)﻿and﻿ earned﻿fee﻿income,﻿but﻿can﻿also﻿impact﻿ policyholder﻿behaviour,﻿which﻿may﻿be﻿ exhibited﻿through﻿policy﻿lapse﻿and﻿incidence﻿ rates.﻿In﻿addition,﻿the﻿timing﻿and﻿granularity﻿ of﻿data﻿received﻿from﻿cedents﻿can﻿affect﻿ reported﻿financial﻿results.﻿In﻿some﻿regions,﻿ reporting﻿may﻿only﻿be﻿received﻿from﻿ cedents﻿on﻿an﻿annual﻿basis,﻿thus﻿causing﻿ some﻿volatility﻿in﻿reported﻿results﻿in﻿the﻿ period﻿of﻿reporting.
Expenses Claims﻿and﻿claim﻿adjustment﻿expenses;﻿ life﻿and﻿health﻿benefits –8﻿639 –8﻿236 –5 Return﻿credited﻿to﻿policyholders –4﻿597 –3﻿371 –27 Acquisition﻿costs –2﻿292 –1﻿826 –20 Other﻿expenses –781 –817 5 Total expenses –16﻿309 –14 250 –13
The﻿Life﻿&﻿Health﻿segment﻿continues﻿to﻿ develop﻿innovative﻿risk﻿solutions﻿for﻿our﻿ clients﻿while﻿also﻿executing﻿risk﻿protection﻿ and﻿capital﻿relief﻿structures﻿for﻿existing,﻿ assumed﻿risks.﻿During﻿2010,﻿the﻿company﻿ successfully﻿developed﻿and﻿deployed﻿ customised﻿client﻿solutions﻿for﻿extreme﻿ mortality﻿risk﻿associated﻿with﻿collateralised﻿ funding﻿solutions,﻿while﻿also﻿extending﻿﻿ its﻿own﻿extreme﻿mortality﻿protection﻿ through﻿the﻿Vita﻿programme﻿by﻿issuing﻿ USD﻿225﻿million﻿in﻿two﻿tranches,﻿and﻿ launching﻿a﻿structure﻿to﻿transfer﻿a﻿portion﻿of﻿ its﻿own﻿longevity﻿risk﻿to﻿the﻿capital﻿markets﻿ through﻿the﻿Kortis﻿Capital﻿Ltd.﻿securitisation﻿ programme.
Performance Life﻿&﻿Health﻿reported﻿operating﻿income﻿﻿ of﻿USD﻿810﻿million﻿in﻿2010,﻿compared﻿to﻿ USD﻿687﻿million﻿in﻿2009.﻿Improving﻿ financial﻿markets﻿and﻿favourable﻿mortality﻿ experience﻿were﻿partially﻿offset﻿by﻿﻿ higher﻿amortisation﻿of﻿the﻿PVFP﻿and﻿lower﻿ allocated﻿net﻿investment﻿income﻿in﻿﻿ a﻿declining﻿interest﻿rate﻿environment.﻿In﻿ addition,﻿the﻿2009﻿results﻿included﻿the﻿ effects﻿of﻿several﻿one-time﻿items﻿which﻿did﻿ not﻿recur﻿in﻿2010,﻿including﻿the﻿rescission﻿of﻿ a﻿disability﻿contract﻿and﻿the﻿commutation﻿﻿ of﻿certain﻿personal﻿accident﻿treaties,﻿offset﻿ by﻿a﻿change﻿in﻿lapse﻿assumption﻿on﻿the﻿ variable﻿annuity﻿business﻿as﻿well﻿as﻿the﻿ effect﻿of﻿Swiss﻿Re’s﻿own﻿credit﻿spreads.
Benefit and expense ratios The﻿Life﻿&﻿Health﻿benefit﻿ratio﻿increased﻿﻿ 4.9﻿percentage﻿points﻿to﻿88.7%.﻿Excluding﻿ the﻿prior﻿year﻿benefit﻿derived﻿from﻿the﻿ rescission﻿of﻿a﻿disability﻿contract﻿together﻿ with﻿the﻿impact﻿of﻿certain﻿commutations,﻿ the﻿benefit﻿ratio﻿increased﻿3.0﻿percentage﻿ points.﻿Traditional﻿mortality﻿experience﻿﻿ was﻿better﻿than﻿expected,﻿although﻿less﻿ favourable﻿than﻿the﻿results﻿recorded﻿in﻿﻿ the﻿prior﻿year.
Operating﻿revenues1 7﻿809 2﻿337 3﻿028 13﻿174 Operating﻿income/loss 36 784 –133 687 Benefit﻿ratio2﻿in﻿% 83.8
Operating﻿revenues1 6﻿565 2﻿413 3﻿013 11 991 Operating﻿income/loss 516 363 –69 810 Benefit﻿ratio2﻿in﻿% 88.7 1﻿﻿Operating﻿revenues﻿exclude﻿net﻿investment﻿income﻿and﻿net﻿realised﻿investment﻿gains/losses﻿from﻿unit-linked﻿and﻿ with-profit﻿business﻿as﻿these﻿are﻿passed﻿through﻿to﻿contract﻿holders.﻿Operating﻿revenues﻿also﻿exclude﻿net﻿realised﻿ investment﻿gains/losses﻿from﻿non-participating﻿business.
Traditional health Operating﻿income﻿from﻿the﻿traditional﻿ health﻿business﻿declined﻿USD﻿421﻿million﻿ to﻿USD﻿363﻿million.﻿Morbidity﻿experience﻿ was﻿within﻿expectations﻿in﻿2010﻿while﻿ cedent﻿reporting﻿timing﻿differences﻿were﻿ positive﻿in﻿the﻿reporting﻿year.﻿The﻿2009﻿ operating﻿income﻿included﻿the﻿one-time﻿ gain﻿from﻿an﻿arbitration﻿award﻿related﻿to﻿the﻿ rescinded﻿disability﻿income﻿reinsurance﻿ agreement﻿as﻿well﻿as﻿gains﻿from﻿the﻿ commutation﻿of﻿certain﻿personal﻿accident﻿ treaties.﻿
Admin Re® Admin﻿Re®﻿operating﻿loss﻿was﻿reduced﻿by﻿ USD﻿64﻿million﻿to﻿USD﻿69﻿million.﻿The﻿ Admin﻿Re®﻿segment﻿benefited﻿from﻿higher﻿ fee﻿income﻿related﻿to﻿the﻿improvement﻿﻿ in﻿the﻿UK﻿equity﻿markets.﻿US﻿mortality﻿was﻿ favourable﻿compared﻿to﻿expectations﻿﻿ for﻿2010.﻿This﻿was﻿partially﻿offset﻿by﻿an﻿ increase﻿in﻿reserves﻿due﻿to﻿model﻿ enhancements﻿and﻿higher﻿amortisation﻿of﻿ PVFP﻿and﻿lower﻿allocated﻿net﻿investment﻿ income﻿in﻿a﻿declining﻿interest﻿rate﻿ environment.﻿
Asset﻿Management﻿ Market environment 2010﻿marked﻿another﻿volatile﻿year﻿in﻿ financial﻿markets,﻿with﻿sovereign﻿debt﻿being﻿ the﻿main﻿focus﻿of﻿concern﻿–﻿particularly﻿﻿ the﻿heavily﻿burdened﻿government﻿balance﻿ sheets﻿of﻿peripheral﻿Europe.﻿Coordinated﻿ support﻿programmes﻿and﻿promised﻿fiscal﻿ reforms﻿helped﻿somewhat﻿to﻿reduce﻿the﻿ tensions﻿prevalent﻿in﻿the﻿first﻿half﻿of﻿the﻿ year,﻿but﻿a﻿lack﻿of﻿clarity﻿about﻿how﻿debt﻿ would﻿be﻿serviced﻿beyond﻿the﻿scope﻿of﻿﻿ EU-﻿and﻿IMF-designed﻿programmes﻿ prompted﻿renewed﻿market﻿worries﻿toward﻿ the﻿end﻿of﻿2010.
Strategy and priorities Following﻿2009,﻿a﻿year﻿of﻿significant﻿ change,﻿Asset﻿Management﻿utilised﻿2010﻿ to﻿cement﻿the﻿foundations﻿established﻿﻿ by﻿previous﻿initiatives.﻿The﻿programmes﻿﻿ to﻿reduce﻿risk﻿in﻿the﻿portfolio﻿continued.﻿﻿ De-risking﻿efforts﻿focused﻿on﻿commercial﻿ mortgage-backed﻿securities﻿and﻿ subordinated﻿bank﻿debt:﻿USD﻿5.4﻿billion﻿﻿ of﻿securitised﻿products﻿were﻿sold﻿in﻿2010﻿ (excluding﻿agency﻿securities);﻿and﻿corporate﻿ credit﻿hedges﻿were﻿lifted.
Control﻿principles﻿and﻿procedures﻿remained﻿ a﻿high﻿priority;﻿the﻿operating﻿and﻿﻿ systems﻿platform﻿saw﻿further﻿upgrades﻿and﻿ improvements.﻿Asset﻿Management﻿ achieved﻿operational﻿efficiencies﻿and﻿control﻿ improvements﻿in﻿several﻿areas.﻿Several﻿ operations﻿tasks﻿were﻿transferred﻿from﻿ high-cost﻿locations﻿to﻿Bratislava﻿in﻿Slovakia.﻿ Systems﻿technology﻿continued﻿to﻿be﻿ upgraded:﻿there﻿is﻿now﻿one﻿core﻿operating﻿ system﻿for﻿Asset﻿Management,﻿which﻿﻿ will﻿materially﻿improve﻿underlying﻿data﻿ quality﻿and﻿reporting﻿efficiency.﻿Data﻿was﻿ an﻿area﻿of﻿particular﻿focus﻿in﻿2010:﻿clear﻿ governance﻿protocols﻿were﻿established﻿and﻿ a﻿Head﻿of﻿Data﻿was﻿appointed﻿to﻿ensure﻿ adherence﻿to﻿best﻿industry﻿standards.
For﻿2010,﻿the﻿return﻿on﻿investments﻿was﻿ 3.5%,﻿compared﻿to﻿1.8%﻿for﻿the﻿prior﻿year,﻿ and﻿operating﻿income﻿increased﻿to﻿﻿ USD﻿4.5﻿billion﻿from﻿USD﻿3.6﻿billion﻿in﻿ 2009.﻿This﻿was﻿driven﻿mainly﻿by﻿realised﻿ gains,﻿lower﻿impairments﻿and﻿lower﻿ hedging﻿costs,﻿which﻿more﻿than﻿offset﻿the﻿ impact﻿of﻿lower﻿net﻿investment﻿income﻿﻿ from﻿lower﻿yields.﻿Mark-to-market﻿gains﻿ increased﻿shareholders’﻿equity﻿by﻿﻿ USD﻿3.7﻿billion,﻿primarily﻿as﻿a﻿result﻿of﻿an﻿ increase﻿in﻿mark﻿to﻿market﻿on﻿securitised﻿ products﻿and﻿the﻿impact﻿of﻿lower﻿interest﻿ rates,﻿leading﻿to﻿a﻿total﻿return﻿of﻿6.5%﻿﻿ in﻿2010.
Equities and alternative investments Equities﻿increased﻿by﻿USD﻿0.9﻿billion﻿mainly﻿ as﻿a﻿result﻿of﻿new﻿equity﻿mandates.﻿Operating﻿ income﻿for﻿equity﻿and﻿alternative﻿investments﻿ was﻿USD﻿0.4﻿billion﻿in﻿2010,﻿compared﻿to﻿ an﻿operating﻿loss﻿of﻿USD﻿0.1﻿billion﻿in﻿2009.﻿ This﻿improvement﻿was﻿mainly﻿due﻿to﻿higher﻿ valuations﻿of﻿private﻿equity﻿investments﻿and﻿ real﻿estate.﻿
Outlook The﻿global﻿recession﻿ended﻿more﻿than﻿a﻿ year﻿ago,﻿but﻿recovery﻿remains﻿sluggish,﻿ particularly﻿in﻿developed﻿economies﻿where﻿ high﻿unemployment﻿generates﻿low﻿consumer﻿ confidence.﻿We﻿expect﻿the﻿recovery﻿to﻿ continue,﻿but﻿at﻿a﻿more﻿modest﻿pace﻿–﻿as﻿ suggested﻿by﻿the﻿IMF﻿forecast﻿of﻿4.2%﻿GDP﻿ growth﻿in﻿world﻿output﻿for﻿2011,﻿after﻿4.8%﻿ in﻿2010﻿(IMF﻿World﻿Economic﻿Outlook,﻿ October﻿2010).
In﻿summary,﻿we﻿are﻿cautiously﻿optimistic﻿ about﻿financial﻿markets﻿in﻿2011﻿from﻿a﻿topdown ﻿investment﻿point﻿of﻿view.﻿We﻿believe﻿ that﻿emerging﻿economies﻿will﻿continue﻿to﻿ grow﻿more﻿strongly﻿than﻿developed﻿ economies.﻿Among﻿the﻿potential﻿risks,﻿we﻿ will﻿be﻿vigilant﻿about﻿the﻿impact﻿of﻿changes﻿ in﻿the﻿regulatory﻿environment,﻿pressures﻿ toward﻿protectionist﻿measures,﻿ developments﻿on﻿the﻿sovereign﻿risk﻿front﻿ and,﻿of﻿course,﻿shifts﻿in﻿monetary﻿policy.
Net﻿investment﻿income 4﻿209 61 4﻿270 Net﻿realised﻿investment﻿gains/losses –571 –146 –717 Fees,﻿commissions﻿and﻿other﻿revenues 69 2 71 Total revenues 3﻿707 –83 3﻿624
Legacy Business information Legacy consists of Financial Guarantee Re (FG Re) and former trading activities, including credit correlation, swaps in trust, total return swaps relating to insurancelinked securities, collateralised fund obligations, and other non-core activities. There is no remaining exposure to former Structured CDS at the end of 2010.
Performance Legacy generated a net operating loss of USD 14 million in 2010, compared to net operating income of USD 128 million in 2009. The portfolio continued to be de-risked during the year as a result of sales and maturities of USD 1.3 billion of securitised products which included the sale of all of the former Structured CDS positions. There were assignments, commutations and unwinds in several products during the year, including commutations in FG Re and unwinds in swaps in trust and collateralised fund obligations.
Expenses Claims and claim adjustment expenses 7, 10 –8 336 –7 254 Life and health benefits 7, 10 –8 639 –8 236 Return credited to policyholders 10 –4 597 –3 371
Earnings per share in CHF2 1 The Group changed its reporting currency from CHF to USD. Please refer to Note 1. 2 The translation from USD to CHF is shown for informational purposes only and has been calculated at the Group’s average exchange rates for the years ended 31 December 2009 and 2010, respectively.
Equity securities: Available-for-sale, at fair value (cost: 2009: 392; 2010: 1 241) 554 1 474
Short-term investments, at amortised cost which approximates fair value (including 673 in 2009 and 1 319 in 2010 subject to securities lending and repurchase agreements) 10 144 21 446
Equity Convertible perpetual capital instrument2 2 670 Common stock, CHF 0.10 par value
Total liabilities and equity 232 748 228 403 1 The Group changed its reporting currency from CHF to USD. Please refer to Note 1. 2 The CPCI was reclassified from equity to short-term debt upon termination in the fourth quarter of 2010. Please refer to Note 8 Earnings per share for details on the accounting for the CPCI.
Net unrealised gains/losses, net of tax Balance as of 1 January –2 262 –993 Other changes during the period 1 269 2 070 Cumulative effect of adoption of ASU No. 2009-175 –35 Balance as of period end –993 1 042
Foreign currency translation, net of tax Balance as of 1 January –4 709 –3 560 Other changes during the period 1 149 –182 Balance as of period end –3 560 –3 742
1 The Group changed its reporting currency from CHF to USD. Please refer to Note 1. 2 The CPCI was reclassified from equity to short-term debt upon termination in the fourth quarter of 2010. Please refer to Note 8 Earnings per share for details on the accounting for the CPCI.
3 The balance represents the premium from the conversion of mandatory convertible bonds that matured in June 2009. 4 The Group adopted a new accounting pronouncement, EITF 07-5, as of 1 January 2009, which resulted in a change in accounting principle for certain types of instruments and embedded features linked to Swiss Re’s own shares. The cumulative impact upon adoption resulted in a net increase in retained earnings of USD 178 million, a decrease in treasury shares of USD 60 million, an increase in other invested assets of USD 285 million and a tax income of USD 47 million.
5 The Group adopted a new accounting pronouncement, ASU No. 2009-17 (FAS167), an update to Topic 810 – Consolidation, as of 1 January 2010, which resulted in the full consolidation of certain VIEs. This resulted in a transition impact to retained earnings of USD 60 million and to net unrealised gains/losses of USD –35 million, and other balance sheet items. Please refer to Note 11 for more details.
6 Retained earnings as of 31 December 2008 were increased by USD 71 million to reflect the release of a valuation allowance against deferred tax assets associated with investment impairment losses.
7 Non-controlling interests relate to a modified coinsurance treaty and the acquisition of the management company of private equity funds, resulting in the consolidation of all the investees’ assets and liabilities even though the Group does not own the majority of the equity.
Cash flows from financing activities Issuance/repayment of long-term debt 3 134 1 052 Issuance/repayment of short-term debt –1 235 –4 165 Equity issued 1 Proceeds from the issuance of convertible perpetual capital instrument, net of issuance cost 2 661 Purchase/sale of treasury shares 3 –6 Interest on convertible perpetual capital instrument –222 –323 Dividends paid to shareholders –30 –319 Net cash provided/used by financing activities 4 312 –3 761
Valuation of financial assets The fair value of the majority of the Group’s financial instruments is based on quoted prices in active markets or observable inputs. These instruments include government and agency securities, commercial paper, most investment-grade corporate debt, most high-yield debt securities, exchange traded derivative instruments, most mortgage-backed and asset-backed securities and listed equity securities. In markets with reduced or no liquidity, spreads between bid and offer prices are normally wider compared to spreads in highly liquid markets. Such market conditions affect the valuation of certain asset classes of the Group, such as some asset-backed securities as well as certain derivative structures referencing such asset classes.
The Group considers both the credit risk of its counterparties, and own risk of non-performance in the valuation of derivative instruments and other over-the-counter financial assets. In determining the fair value of these financial instruments, the assessment of the Group’s exposure to the credit risk of its counterparties incorporates consideration of existing collateral and netting arrangements entered into with each counterparty. The measure of its counterparty credit risk is estimated with incorporation of the observable credit spreads, where available, or credit spread estimates derived based on the benchmarking techniques where market data is not available. The impact of the Group’s own risk of non-performance is analysed in the manner consistent with the aforementioned approach; with consideration of the Group’s observable credit spreads. The value representing such risk is incorporated into the fair value of the financial instruments (primarily derivatives), in a liability position as of the measurement date. The change in this adjustment from period to period is reflected in realised gains and losses in the income statement.
Recent accounting guidance In June 2009, the FASB issued “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (VIEs)” (ASU No. 2009-17), an update to Topic 810 – Consolidation. This ASU requires companies to assess VIEs under a new method for consolidation. The Group adopted this new standard as of 1 January 2010. Refer to Note 11 for further information.
Also in June 2009, the FASB issued “Accounting for Transfers of Financial Assets” (ASU No. 2009-16), an update to Topic 860 – Transfers and Servicing. This ASU requires additional disclosures about transfer of financial assets and continuing exposure to the risks related to transferred assets. It also changes the requirements for derecognising financial assets. The Group adopted this new standard as of 1 January 2010. The adoption did not have a material impact on the Group’s financial statements.
In January 2010, the FASB issued “Improving Disclosures about Fair Value Measurements” (ASU No. 2010-06), an update to Topic 820 – Fair Value Measurements and Disclosures. This new standard implements additional disclosure requirements for the three fair value levels. The requirements, which are applicable from 1 January 2010 on, are disclosed in Note 3.
In March 2010, the FASB issued “Scope Exception Related to Embedded Credit Derivatives” (ASU No. 2010-11), an update to Topic 815 – Derivatives and Hedging. This ASU clarifies how embedded credit-derivative features should be analysed to determine whether those features should be accounted for separately. The Group adopted this new standard as of 1 July 2010. The adoption did not have a material impact on the Group’s financial statements.
Equity securities 498 509 Policy loans, mortgages and other loans 413 428 Investment real estate 184 188 Short-term investments 42 88 Other current investments 93 –32 Share in earnings of equity-accounted investees 239 351 Cash and cash equivalents 77 102 Deposits with ceding companies 624 513
Fixed income securities available-for-sale: Gross realised losses –1 758 –1 149
Impairment on fixed income securities related to credit losses Other-than-temporary impairments for debt securities are bifurcated between credit and non-credit components, with the credit component recognised through earnings and the non-credit component recognised in other comprehensive income. The credit component of otherthan -temporary impairments is defined as the difference between a security’s amortised cost basis and expected cash flows. Methodologies for measuring the credit component of impairment are aligned to market observer forecasts of credit performance drivers. Management believes that these forecasts are representative of median market expectations.
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 18 868 337 –539 18 666 States of the United States and political subdivisions of the states 172 1 –7 166
As of 31 December 2009 and 2010, investments (including cash and cash equivalents) with a carrying value of approximately USD 9 015 million and USD 8 573 million, respectively, were placed on deposit or pledged to secure certain reinsurance liabilities.
Collateral accepted which the Group has the right to sell or repledge As of 31 December 2009 and 2010, the fair value of the government bond, corporate bond and equity securities received as collateral was USD 12 221 million and USD 6 539 million, respectively. Of this, the amount that was sold or repledged as of 31 December 2009 and 2010 was USD 758 million and USD nil million, respectively, which is used to settle short government bond positions. The sources of the collateral are typically highly rated banking market counterparties.
Mortgage- and asset-backed securities with no fixed maturity 20 535 18 623 15 268 15 131 Total fixed income securities available-for-sale 89 031 87 182 79 443 80 950
Unrealised losses on securities available-for-sale 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 2009 and 2010. As of 31 December 2009 and 2010, USD 15 million and USD 25 million, respectively, of the gross unrealised loss on equity securities availablefor -sale relates to declines in value for less than 12 months and USD 11 million and USD nil million, respectively, to declines in value for more than 12 months.
Fair value, as defined by the Fair Value Measurements and Disclosures Topic, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Group holds both exchange-traded and over-the-counter (OTC) interest rate, foreign exchange, credit and equity derivative contracts for hedging and trading purposes. The fair values of exchange-traded derivatives measured using observable exchange prices are classified in level 1. Long-dated contracts may require adjustments to the exchange-traded prices which would trigger reclassification to level 2 in the fair value hierarchy. OTC derivatives are generally valued by the Group based on the internal models, which are consistent with industry standards and practices, and use both observable (dealer, broker or market consensus prices, spot and forward rates, interest rate and credit curves and volatility indices) and unobservable inputs (adjustments for liquidity, inputs derived from the observable data based on the Group’s judgments and assumptions).
The Group’s OTC interest rate derivatives primarily include interest rate swaps, futures, options, caps and floors, and are valued based on the cash flow discounting models which generally utilise as inputs observable market yield curves and volatility assumptions.
The Group’s investments in equity derivatives primarily include OTC equity option contracts on single or baskets of market indices and equity options on individual or baskets of equity securities, which are valued using internally developed models (such as Black-Scholes option pricing model, various simulation models) calibrated with the inputs, which include underlying spot prices, dividend curves, volatility surfaces, yield curves, and correlations between underlying assets.
Assets and liabilities measured at fair value on a recurring basis As of 31 December 2009 and 2010, the fair values of assets and liabilities measured on a recurring basis by level of input were as follows: As of 31 December 2009 USD millions
Debt securities issued by US government and government agencies 22 930 2 482 25 412 Debt securities issued by non-US governments and government agencies 32 727 82 32 809
Equity securities backing unit-linked and with-profit life and health policies 18 495 41 18 536 Equity securities held for proprietary investment purposes 622 817 170 1 609
Transfers in and/or out of level 3 –59 –3 482 –965 –245 –13 497 81 –641 –59 –4 886 Impact of foreign exchange movements 57 –65 442 62 –282 –16 51 49 298
Purchases, issuances, and settlements 237 237 Transfers in and/or out of level 3 877 877 Impact of foreign exchange movements –1 –18 –19
Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) The gains and losses relating to the assets and liabilities measured at fair value using significant unobservable inputs (level 3) were as follows: Other assets measured at net asset value Other assets measured at net asset value as of 31 December 2009 and 2010, respectively, were as follows: The hedge fund investments employ a variety of strategies including global macro, relative value, and event driven strategies across various asset classes including long/short equity and credit investments.
The redemption frequency of hedge funds varies depending upon the manager as well as the nature of the underlying product. Additionally, certain funds may impose lock-up periods and redemption gates as defined in the terms of the individual investment agreement.
Gains/losses included in net income for the period 194 –36 Whereof change in unrealised gains/losses relating to assets and liabilities still held at the reporting date 1 676 –825
Equity securities trading The Group elected the fair value option for an investment previously classified as available-for-sale within other invested assets in the balance sheet. The Group economically hedges the investment with derivative instruments that offset this exposure. The changes in fair value of the derivatives are recorded in earnings. Electing the fair value option eliminates the mismatch previously caused by the economic hedging of the investment and reduces the volatility in the income statement.
Liabilities for life and health policy benefits The Group elected the fair value option for existing guaranteed minimum death benefit (GMDB) reserves related to certain variable annuity contracts which are classified as universal life-type contracts. The Group has applied the fair value option as the equity risk associated with those contracts is managed on a fair value basis, and it is economically hedged with derivative options in the market.
Assets and liabilities measured at fair value pursuant to election of the fair value option Pursuant to the election of the fair value option for the items described, the balances as of 31 December 2009 and 2010 were as follows: Changes in fair values for items measured at fair value pursuant to election of the fair value option Gains/losses included in earnings for items measured at fair value pursuant to election of the fair value option including foreign exchange impact were as follows: Fair value changes from fixed income securities trading and equity securities trading are reported in net realised investment gains/losses. Fair value changes from the GMDB reserves are shown in life and health benefits.
The fair values represent the gross carrying value amounts at the reporting date for each class of derivative contract held or issued by the Group. The gross fair values are not an indication of credit risk, as many over-the-counter transactions are contracted and documented under ISDA master agreements or their equivalent. Management believes that such agreements provide for legally enforceable setoff in the event of default, which substantially reduces credit exposure.
Fair value hedging relationships Interest rate contracts –605 684 183 –147 Foreign exchange contracts 93 –23 –57 116 Total gain/loss recognised in income –512 661 126 –31
As of 31 December 2009 and 2010, the fair values and maximum potential payout of the written credit derivatives outstanding were as follows: Total fair values of credit derivatives written/sold
Maturity of long-term debt As of 31 December 2009 and 2010, long-term debt as reported above had the following maturities: USD millions 2009 2010 1 Balance was reclassified to short-term debt.
Subordinated financial debt 81 1 781 Short-term debt – financial and operational debt 8 105 10 798
2 These instruments were consolidated as of 1 January 2010 under ASU No.2009-17 relating to the consolidation of variable interest entities. For more information, refer to Note 11.
In July 2010, the Group issued CHF 250 million under the EMTN programme, with a four-year maturity and a coupon of 1.75%.
Subordinated private placement (amortising, limited recourse) 2007 GBP 1 481 4.90% 2 319
Subordinated private placement (amortising, limited recourse) 2007 GBP 1 858 4.77% 2 908 Subordinated perpetual loan note 2006 EUR 1 000 5.25% 2016 1 336 Subordinated perpetual loan note 2006 USD 752 6.85% 2016 752 Subordinated perpetual loan note 2007 GBP 500 6.30% 2019 780 2 subordinated perpetual loan notes 2007 AUD 750 various 2017 766
Amortisation of deferred expense on retroactive reinsurance and impact of commutations 59 66
At the end of 2010 the Group carried net reserves for US asbestos, environmental and other long-latent health hazards equal to USD 2 226 million. During 2010, the Group incurred net losses of USD 1 million and paid net against these liabilities USD 27 million.
Interest expenses of USD 113 million related to the period between 4 November 2010 and 31 December 2010 is recognised gross of tax in the “Interest expenses” line. An additional foreign exchange loss of USD 198 million related to the same period is recognised gross of tax in “Net realised investment gains/losses”.
The effect of the potential instrument conversion up until 4 November 2010, which totalled 101 000 000 shares, was included in the diluted earnings per share calculation.
Swiss Re 2010 Financial Review 63 15 Information on business segments
The Life & Health segment continues to consist of the following sub-segments: Life traditional, Health traditional and Admin Re®. The Life & Health business segment includes variable annuity business and Life & Health insurance-linked securities.
Expenses Claims and claim adjustment expenses; life and health benefits –7 200 –8 236 –54 –15 490 Return credited to policyholders –3 371 –3 371
USD millions, for the year ended 31 December 2009 Property & Casualty Life & Health Asset Management Allocation
Expenses Claims and claim adjustment expenses –2 318 –3 087 –1 990 –7 395 –575 –7 970 Acquisition costs –741 –704 –685 –2 130 –73 –2 203 Other expenses –371 –622 –281 –1 274 –122 –1 396 2010 USD millions
66 Swiss Re 2010 Financial Review c) Life & Health business segment – by line of business For the years ended 31 December
Net investment income – unit-linked 27 522 549 Net investment income – with-profit business 152 152 Net investment income – non-participating 700 366 1 404 2 470 Net realised investment gains/losses – unit-linked 446 2 886 3 332 Net realised investment gains/losses – with-profit business 289 289 Net realised investment gains/losses – non-participating –524 192 –168 –500
2 The benefit ratio is calculated as claims divided by premiums earned, both of which exclude unit-linked and with-profit business. The benefit ratio was refined in 2010 to exclude the impact of guaranteed minimum death benefit (GMDB) products, as this ratio is not indicative of the operating performance of such products. The comparative for the 2009 benefit ratio has been adjusted accordingly.
2 The benefit ratio is calculated as claims divided by premiums earned, both of which exclude unit-linked and with-profit business. The benefit ratio also excludes the impact of guaranteed minimum death benefit (GMDB) products, as this ratio is not indicative of the operating performance of such products.
Net realised investment gains/losses –571 –146 –717 2010 USD millions Credit & Rates
As of 31 December 2010, the total assets of the insurance-linked and credit-linked securitisation vehicles in which the Group holds variable interests but is not the primary beneficiary were USD 5 320 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 1 851 million.
Swaps in trusts Through the Legacy segment, the Group provides risk management services to certain asset securitisation trusts which qualify as VIEs. As the involvement of the Group is limited to interest rate and foreign exchange derivatives, Swiss Re does not have power to direct any activities of the trusts and therefore does not qualify as primary beneficiary of any of these trusts.
As of 31 December 2010, the total assets of other VIEs in which the Group holds variable interests but is not the primary beneficiary were USD 3 476 million. The total assets of the vehicles in which the Group is the primary beneficiary were USD 709 million.
Due to the implementation of ASU No. 2009-17, certain insurance-linked securitisation vehicles were consolidated from 1 January 2010 on, as the Group was considered to be the primary beneficiary under the new guidance. The Group recognised the assets, liabilities, and non-controlling interests of the newly consolidated VIEs at the carrying amounts at which the amount would have been carried in the consolidated financial statements had ASU No. 2009-17 been effective when the Group first met the conditions to be the primary beneficiary.
Deferred and other non-current taxes 13 Short-term debt 872 Accrued expenses and other liabilities –40 Long-term debt 797 Net unrealised investment gains/losses, net of tax –35 Retained earnings 60 Total liabilities and shareholders’ equity 1 667
Unpaid claims and claim adjustment expenses (whereof limited recourse: 2010: 23) 19 23 Liabilities for life and health policy benefits (whereof limited recourse: 2010: 1 182) 1 218 1 182 Policyholder account balances (whereof limited recourse: 2010: 1 440) 1 515 1 440 Funds held under reinsurance treaties (whereof limited recourse: 2010: 133) 133 Reinsurance balances payable (whereof limited recourse: 2010: 8) 10 8 Deferred and other non-current taxes (whereof limited recourse: 2010: 76) 40 76 Short-term debt (whereof limited recourse: 2010: 1 485) 3 200 Accrued expenses and other liabilities (whereof limited recourse: 2010: 136) 486 530 Long-term debt (whereof limited recourse: 2010: 5 938) 5 377 5 938
The following table shows the total assets and liabilities in the Group’s balance sheet related to VIEs in which the Group holds a variable interest but is not the primary beneficiary as of 31 December: The following table shows the Group’s assets as of 31 December 2010, and liabilities and maximum exposure to loss as of 31 December 2009 and 2010 which are related to VIEs in which the Group holds a variable interest but is not the primary beneficiary: The liabilities of USD 1 665 million as of 31 December 2010 for insurance-linked and credit-linked securitisations represent almost entirely funds held under reinsurance treaties.
Difference between exposure and liabilities Total assets Total liabilities Maximum exposure to loss
1 The maximum exposure to loss for swaps in trusts cannot be meaningfully quantified due to their derivative character. 2 The Group revised the total liabilities and the difference between exposure and liabilities for year-end 2009. The revision has no impact on total revenues, net income or net equity.
The increase of the provision in the Property & Casualty and the Life & Health business segments of USD 55 million and USD 27 million in 2010, respectively, are related to leaving benefits, office structure simplification costs and cost for the concentration of support resources allocated to the Property & Casualty and the Life & Health business segments.
For the years ended 31 December, restructuring provision developed as follows: 12 Restructuring provision 2009 USD millions Property & Casualty Life & Health Asset Management Total
Release of provision –21 –3 –6 –30 Costs incurred –83 –40 –68 –191
Release of provision –9 –5 –2 –16 Costs incurred –73 –41 –22 –136
Swiss Re provisionally estimates its claims from the Queensland, Australia floods that occurred in the first quarter of 2011 to be USD 225 million, net of the benefits of retrocession and before tax. Further, the Group preliminarily estimates its loss from the Australian cyclone Yasi to be USD 100 million, net of the benefits of retrocession and before tax. Significant uncertainties are involved in estimating losses from such events and these preliminary estimates may be subject to change as new information becomes available.
Note on risk factors General impact of adverse market conditions Since 2007, the global financial markets have experienced extreme volatility and disruption, due in large part to turmoil affecting the liquidity of the banking system and the market reaction thereto. The impact of the turmoil in the financial markets was exacerbated by adverse macro-economic trends affecting a number of the principal economies. Volatility and disruption reached unprecedented levels in 2008 to 2009 and continued in 2010, triggered in large part by concerns over the sovereign debt of Greece, Ireland and Portugal and concerns over the pace of economic recovery. It is difficult to predict what the impact of market and economic conditions will be on the Group from a general business perspective or from a capital or liquidity perspective were conditions to again deteriorate or were austerity or stimulus measures adopted by governments in response to budget deficits and adverse economic conditions to be unsuccessful or harmful.
While many changes will impact banking institutions, some could have direct applicability to insurance or reinsurance operations and others could have a general impact on the regulatory landscape for financial institutions, which might indirectly impact capital requirements and/or required reserve levels or have other direct or indirect effects on the Group. In addition, there appears to be a trend towards a more coordinated, centralised and stricter approach to insurance regulation specifically, in both the EU and the US. For example, a pan-European regulator for insurance companies, the European Insurance and Occupational Pension Authority, gained its regulatory powers on 1 January 2011 and will be able to overrule national regulators in certain circumstances. In the US, as a possible step towards federal oversight of insurance, the US Congress created the Federal Insurance Office within the Department of Treasury.
Market risk Volatility and disruption in the global financial markets can expose the Group to significant financial and capital markets risk, including changes in interest rates, credit spreads, equity prices and foreign currency exchange rates, which may adversely impact the Group’s financial condition, results of operations, liquidity and capital position. The Group’s exposure to interest rate risk is primarily related to the market price and cash flow variability associated with changes in interest rates. Exposure to credit spreads primarily relates to market price and cash flow variability associated with changes in credit spreads. When credit spreads widen, the net unrealised loss position of the Group’s investment portfolio can increase, as
General information / Note on risk factors could other-than-temporary impairments. With respect to equity prices, the Group is exposed to changes in the level and volatility of equity prices, as they affect the value of equity securities themselves as well as the value of securities or instruments that derive their value from a particular equity security, a basket of equity securities or a stock index. The Group is also subject to equity price risk to the extent that the value of life-related benefits under certain life contracts, most notably variable annuity business, are tied to financial market values; to the extent market values fall, the financial exposure on guarantees related to these contracts would increase to the extent this exposure is not hedged. While the Group has discontinued writing new variable annuity business and has an extensive hedging programme covering its existing variable annuity business, certain risks cannot be hedged, including actuarial risks, basis risk and correlation risk. Exposure to foreign exchange risk arises from exposures to changes in spot prices, forward prices and volatile movements in exchange rates.
Credit risk Like other financial institutions, the Group was adversely impacted by the deterioration in the credit markets in 2008 – 2009. Although the Group has taken significant steps to de-risk its portfolio and reposition its assets, if the credit markets were again to deteriorate and further asset classes were to be impacted, the Group could experience further losses. Changes in the market value of the underlying securities and other factors impacting their price could give rise to market value losses. If the credit markets were to deteriorate again, the Group could face further write-downs in other areas of its portfolio, including other structured instruments, and the Group and its counterparties could once again face difficulties in valuing credit-related instruments.
Valuation processes can produce significantly different outcomes, which could create additional uncertainty and differences of opinion among counterparties to swaps and other similar instruments as to obligations in respect of collateral and other terms of such instruments. These differences in opinion, in turn, could result in legal disputes among counterparties as to their respective obligations, the outcomes of which are difficult to predict and could be material.
Liquidity risks The Group’s business requires, and its clients expect, that it has sufficient capital and sufficient liquidity to meet its reinsurance obligations, and that that would continue to be the case following the occurrence of any event or series of events, including extreme catastrophes, that would trigger insurance or reinsurance coverage obligations. The Group’s uses of funds include obligations arising in its reinsurance business (including claims and other payments
General information / Note on risk factors as well as insurance provision repayments due to portfolio transfers, securitisations and commutations), which may include large and unpredictable claims (including catastrophe claims), funding of capital requirements and operating costs, payment of principal and interest on outstanding indebtedness and funding of acquisitions. The Group also enters into contracts or trading arrangements that could give rise to significant short-term funding obligations and, in connection with the Group’s trading operations, it could be subject to unexpected calls to deliver collateral or unwind trading positions at a net cost to it. The Group also has unfunded capital commitments in its private equity and hedge fund investments, which could result in funding obligations at a time when it is subject to liquidity constraints.
General information / Note on risk factors accidents, explosions, industrial actions, fires and pandemics) may expose the Group to unexpected large losses, competitive conditions, cyclicality of the industry, risks related to emerging claims and coverage issues, risks arising from the Group’s dependence on policies, procedures and expertise of ceding companies, and risks related to the failure of operational systems and infrastructure. Even natural catastrophe events that occur in relatively sparsely populated areas, such as the volcanic eruption in Iceland in April 2010, can have severe and wide-reaching economic impact. In addition, the occurrence of future risks that the Group’s risk management procedures fail to identify or anticipate could have a material adverse effect on the Group.
The Group uses non-GAAP financial measures in its external reporting, including in this report. These measures are not prepared in accordance with US GAAP or any other comprehensive set of accounting rules or principles, and should not be viewed as a substitute for measures prepared in accordance with US GAAP. Moreover, these may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies. These measures have inherent limitations, are not required to be uniformly applied and are not audited.
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