Capital strength restored The measures we have taken to rebuild our capital base have proven to be very effective. In 2009, our capital position improved steadily quarter by quarter. At year end, estimated excess capital at AA level was more than CHF 9 billion. This means we are on schedule to meet our goal of redeeming the CHF 3 billion convertible perpetual capital instrument (CPCI) issued to Berkshire Hathaway.
Life & Health also demonstrated strong underwriting performance, reporting operating income of CHF 0.7 billion and a benefit ratio of 82.4%. Improvement in the financial markets, favourable mortality experience as well as the positive outcome of an arbitration were partially offset by unfavourable results from the discontinued variable annuity business.
Farmers face financial risks from weather, pests, diseases and commodity prices. Reinsurance gives them the back-up to cope with agriculture’s many uncertainties – and prepare for a new harvest.
We reduced our exposure to selected markets and financial instruments with a view to economic value preservation. In particular, we materially reduced our exposure to credit and securitised products, as well as to alternative investments. Accordingly, we adopted a cautious investment policy, gearing our asset allocation towards asset classes with a lower risk profile, re-investing, for the time being, primarily in government bonds.
Legacy We succeeded in significantly reducing risk in Legacy in 2009. We substantially terminated all of the exposures in the Portfolio CDS, and liquidated several positions from the former Structured CDS
Changes As of 1 May 2009, Walter B. Kielholz, former Vice Chairman, succeeded Peter Forstmoser as Chairman of the Board of Directors. Mathis Cabiallavetta was appointed Vice Chairman at Swiss Re’s 2009 Annual General Meeting.
Impact of climate change adaptation In relation to expected GDP loss by 2030
Extensive discussions with the InterAmerican Development Bank (IADB) led to the launch of an innovative facility to manage natural catastrophe risks for several countries in Central America. The design of the facility includes so-called sovereign captives and a partial transfer of risk to the capital markets. In 2009, we received a mandate from the IADB to structure and implement this innovative solution to cover earthquake and hurricane risks in two Central American pilot countries.
Risk management We integrate sustainability principles and ethical criteria in our risk management using tailor-made analytical instruments. Our Sensitive Business Risks (SBR) process, introduced in 2002, offers underwriters and client managers independent recommendations from internal experts on potentially sensitive business transactions.
Community involvement Swiss Re employees regularly volunteer their services and raise funds for good causes. In Overland Park, Kansas, a Swiss Re office in the US, we supported a range of projects with the City Union Mission – a non-profit organisation that serves the city’s most vulnerable people; the Front Porch Alliance – a community group dedicated to revitalising blighted neighbourhoods in the inner city; and the Kansas City Zoo, which relies on donated funds and labour for facility maintenance and operations.
The market for several types of nontraditional life reinsurance solutions is essentially suspended. This is particularly true for embedded value (EV) securitisations, and “XXX“ and “AXXX“ securitisations. EV life securitisations are likely to regain their attraction only when credit markets fully recover, probably in late 2010 or 2011. Block deals involving asset transfers, such as Admin Re®, annuity block transactions, and pension buyouts became less attractive during the crisis because they require financing and involve a transfer of assets to the reinsurer.
Changes in shareholders’ equity Shareholders’ equity increased 28% to CHF 26.2 billion. The increase was partially due to the CPCI issued to National Indemnity Company, a subsidiary of Berkshire Hathaway, in March 2009. Net unrealised gains increased by CHF 1.0 billion, mainly driven by mark-to-market gains in the credit portfolio attributable to credit spread tightening, as well as gains on securitised products.
Fourth-quarter 2009 results In the fourth quarter of 2009, net income was CHF 0.4 billion, compared to a loss of CHF 1.7 billion in the prior year period. Natural catastrophe experience remained benign, and Property & Casualty contributed a strong operating result to the Group performance. Life & Health was impacted by unfavourable results in the variable annuity business, mainly related to further tightening of Swiss Re’s credit spread in the fourth quarter. Fourth quarter results were partially offset by lower investment returns following the allocation to high-quality assets and short-term investments, as well as impairment losses of CHF 269 million. Earnings per share for the quarter were CHF 1.18. Annualised return on equity in the fourth quarter of 2009 was 7.0%.
 an innovative long-term agreement, combining reinsurance with the outsourcing of the medical underwriting process to Swiss Re
We recently closed a retrocession transaction with Berkshire Hathaway on a block of pre-2004 US individual life business that will allow us to free up approximately CHF 300 million in capital to invest in more attractively priced business. The transaction is effective 1 October 2009 and will be reported in 2010, as the regulatory approvals were received in January 2010.
Total operating income/loss 4 018 –120 3 898 Return on investments in %1 1.8%
Rating agency capital requirements Rating agencies assign credit ratings to the obligations of Swiss Reinsurance Company Ltd and its rated subsidiaries. The agencies evaluate Swiss Re based on a set of criteria, which include an assessment of our capital adequacy. Each rating agency uses a different methodology for this assessment; for example, Standard & Poor’s (S&P) and A. M. Best base their evaluation on their own proprietary capital models.
 56% G7 government bonds, Swiss government bonds and reverse repurchase agreements
We have further strengthened the role of risk management in business processes and decisions. Our Risk Management function is involved throughout the business cycle from strategic planning, via capital allocation and target setting, through to large transaction approval, portfolio monitoring and performance measurement.
Property and casualty 7.9 7.0 –11 Life and health 5.2 5.5 6
Property and casualty insurance risk Property and casualty insurance risk arises predominantly from coverage that Swiss Re provides for Property, Liability, Motor and Accident risks, as well as for specialty risks such as Engineering, Aviation and Marine.
Risk modelling and risk measures We use a proprietary integrated risk model to determine the capital required to support the risks on Swiss Re books, as well as to allocate risk-taking capacity to the different lines of business. This internal model is based on two important principles. First, it applies an asset-liability management (ALM) approach, which measures the net impact of risk on the economic value of both assets and liabilities. Second, it adopts an integrated perspective, recognising that a single risk factor can affect different sub-portfolios and that different risk factors can have mutual dependencies.
The quality of corporate governance is measured by the effectiveness of its implementation: good governance means good results, not just good rules.
Changes in 2007 and previous years Information about changes in capital in 2007 can be found on pages 84 and 85 of the 2007 Annual Report. Information about changes in capital for earlier years can be found in the Annual Reports of the respective year.
All shares issued by Swiss Reinsurance Company Ltd are fully paid-in registered shares. Each share carries one vote. There are no categories of shares with a higher or limited voting power, privileged dividend entitlement or any other preferential rights, nor are there any other securities representing a part of the company’s share capital. The company cannot exercise the voting rights of own shares. As of 31 December 2009, 207 537 973 shares of a total of 370 701 168 issued shares carried voting rights, and 342 707 001 shares were entitled to dividend.
First election and remaining term of each director Please refer to the table provided on page 92.
In the meeting, the agenda items are usually introduced by a presentation, followed by a discussion and, where necessary, a resolution on the item. The presentation is given by an expert from the Executive Committee, by other employees having the requisite specialist knowledge or, in certain cases, by external advisers. Specific subjects can be discussed in a closed session with a reduced number of participants. Depending on the item being discussed, these closed sessions consist solely of Board members (private session) or Board members and the Chief Executive Officer (executive session).
Chairman’s and Governance Committee The Chairman’s and Governance Committee, which was established in 2009 and held its first meeting on 17 June 2009, had four regular meetings in the reporting year. On average, the meetings lasted 1.5 hours. Attendance was 100%. Besides the committee members and the Company Secretary, the Chief Executive Officer was invited to attend Chairman’s and Governance Committee meetings.
Agostino Galvagni, an Italian citizen born in 1960, graduated in business management from the Università Commerciale Luigi Bocconi in Milan and then joined Bavarian Re (former Swiss Re subsidiary), Munich, as a trainee in 1985.
Jacques Aigrain resigned as Chief Executive Officer on 11 February 2009; the Board of Directors appointed Stefan Lippe, Chief Operating Officer and Deputy Chief Executive Officer, as his successor, effective 12 February 2009.
The acquisition by a shareholder of more than 33⅓% of the Swiss Re shares would trigger a mandatory takeover offer for the shares owned by all other shareholders. Under the Swiss Stock Exchange Act, if a shareholder acquires shares representing more than 33⅓% of the voting rights of a Swiss company listed on a Swiss exchange, the shareholder would be obligated to launch a takeover offer for the shares it does not own. The Stock Exchange Act also allows these companies to include in their articles of association an “opt up” provision (in which the threshold could be raised above 33⅓%) or an “opt out” provision (where the obligation to make a takeover offer upon reaching the 33⅓% threshold is waived), but the Swiss Re articles of association contain neither an “opt up” provision nor an “opt out” provision.
Audit-related fees comprise, among other things, additional work related to prior year statutory audits, accounting advice, information systems reviews, and reviews of internal controls.
Our external advisor, Mercer, conducts an annual review of the total compensation for the Executive Committee relative to a group of reference companies in the financial services industry to ensure that market competitiveness is maintained. This peer group consists of firms such as Ace, Aegon, Allianz, Allstate, Aviva, Axa, ING Group, Met Life, Munich Re, Partner Re, Prudential, QBE, Scor, and Zurich Financial Services.
Value Alignment Incentive The VAI award is adjusted at the end of the three-year performance period. In cases where performance of the underlying business during this period is lower than expected, a reduction in VAI will apply; conversely, where performance is higher than expected, a premium will apply. The adjustment can range between 50% and 150% of the original award. The final VAI payment may also contain an additional mark-up element to assist with retention and compensate for time value of money.
Treasury shares, net of tax Balance as of 1 January –1 540 –1 640 Cumulative effect of adoption of EITF 07-52 64 Purchase of treasury shares –2 032 –59 Cancellation of shares bought back 1 453 Sales of treasury shares 479 61 Balance as of period end –1 640 –1 574
Adjustment for pension and other post-retirement benefits, net of tax Balance as of 1 January –115 –529 Change during the period –414 60 Balance as of period end –529 –469
4 Refer to note 2 for further details on the presentation of non-credit related other-than-temporary impairment. 5 The novation of certain treaties from Swiss Re’s Bermuda branches to Swiss Re Zurich resulted in a net deferred tax liability transfer to Swiss Re Zurich. The respective increase in deferred tax liability is due to different jurisdictional tax rates. The transfer of the net deferred tax liability does not impact the Group’s net income or effective tax rate.
Cash flows from operating activities Net income/loss attributable to common shareholders –864 506 Adjustments to reconcile net income to net cash provided/used by operating activities: Depreciation, amortisation and other non-cash items 871 21 Net realised investment gains/losses 9 482 –733 Change in: Technical provisions, net –11 687 –3 727 Funds held by ceding companies and other reinsurance balances 1 941 –642 Reinsurance recoverable on unpaid claims and policy benefits 1 250 –391 Other assets and liabilities, net –3 407 –81 Income taxes payable/recoverable –1 213 –607 Income from equity-accounted investees, net of dividends received 1 031 –174 Trading positions, net 4 721 254 Securities purchased/sold under agreement to resell/repurchase, net –8 214 –2 592
The Group also designates non-derivative monetary financial instruments as a hedge of 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.
In May 2009, the FASB issued an updated accounting standard (SFAS No. 165) that establishes principles and requirements for recognition and disclosure of subsequent events. The Group adopted the new standard as of the second quarter of 2009.
Closing balance as of 31 December 2008 11 521 220 14 286 1 580 27 607
Gains and losses on assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
The fair value option under the Financial Instruments Topic permits the choice to measure specified financial assets and liabilities at fair value on an instrument-by-instrument basis.
As of 31 December 2009, the fair values and notional amounts of the derivatives outstanding were as follows: Fair values of derivative financial instruments
Short-term debt – financial and operational debt 8 862 8 378
In August 2009, the Group issued CHF 500 million senior notes under the EMTN programme, with a five-year maturity and a coupon of 3.25%.
During the year, the Group met the effectively settled definition within FIN 48 for various tax positions and audits in Switzerland, the United Kingdom and the United States.
The Group sponsors various funded defined benefit pension plans. Employer contributions to the plans are charged to income on a basis which recognises the costs of pensions over the expected service lives of employees covered by the plans. The Group’s funding policy for these plans is to contribute annually at a rate that is intended to maintain a level percentage of compensation for the employees covered. A full valuation is prepared at least every three years.
Purchases, issuances and settlements Transfers in and/or out of Level 3 21 15 36 Impact of foreign exchange movements –2 –2
As part of its normal business operations, the Group enters into a number of lease agreements. Such agreements, which are operating leases, total the following obligations for the next five years and thereafter: The following schedule shows the composition of total rental expenses for all operating leases as of 31 December (except those with terms of a month or less that were not renewed): As a participant in limited investment partnerships, the Group commits itself to making available certain amounts of investment funding, callable by the partnerships for periods of up to 10 years. The total commitments remaining uncalled as of 31 December 2009 were CHF 2 065 million.
Net realised investment gains/losses –1 225 –250 –3 547 –5 022 Other revenues
Financial statements / Notes to the Group financial statements d) Asset Management For the years ended 31 December
Financial statements / Notes to the Group financial statements e) Net premiums earned and fee income from policyholders by country
The reinsurance business result increased 40% and amounted to a gain of CHF 2.5 billion. Property and casualty business continued to perform well, benefiting from favourable claims experience and benign natural catastrophe losses incurred. Life and health business delivered a substantially improved result driven by a favourable mortality experience and the positive recapture impact of business retroceded from a Swiss Re Group subsidiary. The investment result improved slightly, mainly due to lower valuation adjustments on investments.
The decrease in technical provisions of CHF 13.8 billion primarily reflects the termination of intragroup retrocession arrangements with European subsidiaries in connection with the continuing consolidation of the Group’s European business. This results in a realignment of the intragroup retrocession programme impacting the liabilities. The increase in reinsurance recoverables on unpaid claims is mainly due to a loss reserve adverse development reinsurance cover with Berkshire Hathaway Inc. entered in 2009. The reduction of liabilities for life and health policy benefits was a result of the portfolio transaction with the Company’s life and health subsidiaries. The increase in reinsurance recoverables on life and health policy benefits was mainly due to an accounting policy change for modified coinsurance treaties.
Financial statements / Swiss Reinsurance Company Ltd 4. Liabilities from reinsurance
Individual compensation of the remaining members of the Board of Directors granted in 2009 was: Total compensation for members of the Executive Committee was: The fair values of the Value Alignment Incentive (VAI) granted in the reporting year were based on the nominal amount of the grant and a mark-up of 25% on nominal value. Subsequently, the fair values of VAIs granted were updated based on actual results for the years covered by the grants. For a description of the VAI plans see page 123, Compensation.
Compensation due to member leaving 1 378 Contractual commitments due to new members 9 124 Funding of pension benefits 1 084 2 582 1 Includes 25% mark-up on nominal value, which will be paid out at vesting after three years.
Deposit arrangements generated the following balances, which are included in: CHF millions 2008 2009
For the financial year 2009: – eligible for dividend 342 707 001 34 270 700 – not eligible for dividend 27 994 167 2 799 417
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 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.
A number of lawsuits have been filed against financial service firms raising claims tied to the unprecedented market turmoil. Swiss Re is subject to one such action, which is a putative securities class action filed in the United States District Court for the Southern District of New York in February 2008 against it and certain of its executive officers alleging false and misleading statements in connection with the mark-tomarket loss, announced on 19 November 2007. Plaintiff seeks to certify a class of all U.S. residents or citizens that purchased Swiss Re stock between March 1, 2007 and November 19, 2007. Swiss Re plans to vigorously defend the lawsuit. On September 4, 2009, Swiss Re filed a motion to dismiss and requested oral argument.