Corporate highlights Strong net income of CHF 4.2 billion with excellent underlying performance; earnings per share of CHF 11.95; book value per share of CHF 92.00 Property & Casualty reported its best performance ever with operating income of CHF 5.9 billion and a combined ratio of 90.2%, despite an increase in natural catastrophe events compared to the previous year Life & Health improved on a very strong prior year result with operating income of CHF 2.7 billion and a return on operating revenues of 14.7% Financial Markets activities delivered a solid return of investments of 4.9% Mark-to-market loss on structured credit default swaps of CHF 1.2 billion reported in fourth quarter Shareholders’ equity increased 3% to CHF 31.9 billion on strong earnings Return on equity remains above target at 13.5% Total capital returned to shareholders in 2007 through dividend and share buy-back was CHF 3.7 billion 2007 dividend increased to CHF 4.00 per share Share buy-back programme increased to CHF 7.75 billion and expected to be completed over the next 24 months
With property and casualty rates softening and client retentions increasing, the industry is entering a more challenging business environment compared to the very favourable markets of 2006 and 2007. In these conditions, Swiss Re will not pursue premium growth; instead, we will strictly apply the same approach to underwriting that has delivered the successful results we are now sharing with you. Our disciplined underwriting and careful risk selection were reflected in a 12% reduction in volume during the January 2008 renewals. Our focus continues to be on achieving attractive margins and delivering strong earnings per share for you.
We are also pleased that Raymond K.F. Ch’ien and Mathis Cabiallavetta have made themselves available to join the Board of Directors. Their election will be proposed at the Annual General Meeting on 18 April 2008. Mr Ch’ien is chairman of CDC Corporation and chairman of the board of Hang Seng Bank. Among others, he also serves on the board of directors of the Hongkong and Shanghai Banking Corporation. Mr Cabiallavetta is vice chairman of Marsh & McLennan Companies and chairman of Marsh & McLennan International. He is also a former chairman of the board of UBS AG.
19 November Credit underwriting loss CHF 1.2 billion mark-to-market loss from credit underwriting activities 31 December New business activities of GE Life UK sold New business operations of the former GE Life UK sold to Liverpool Victoria (LV=)
We have been an acknowledged pioneer in identifying and tackling the challenges of climate change for almost 20 years.
Swiss Re is committed to delivering value for clients and attractive returns for shareholders.
Swiss Re is a global company operating from 79 offices around the world. Our clients include leading insurers, Fortune Global 500 companies, governments and non-governmental organisations in over 160 countries. Understanding local market needs is key to our success as a leading global reinsurer.
Standalone covers maximise Swiss Re’s capacity, since they enable better accumulation control and transparency of coverage and premium
For Swiss Re, being a responsible company means creating sustainable value for shareholders, clients and society at large. The Group’s corporate responsibility framework is founded on the three pillars of corporate governance, corporate sustainability and corporate citizenship. In all three areas, Swiss Re pursues the highest standards.
In 2003, Swiss Re became the first large financial services provider to commit itself to becoming fully greenhouse neutral. The Group pledged to reduce per-capita CO2 emissions by 15% within ten years, with investments to offset the remainder.
Asset management Swiss Re has managed a dedicated sustainability portfolio for a number of years. It seeks out investment opportunities in alternative energy, water, resource efficiency, carbon, forestry and agriculture, drawing on know-how from an internal and external network of specialist partners. The amount of invested and committed assets continued to grow strongly in 2007, including investments in Brazil, China and Eastern Europe. The total value of the portfolio has increased more than tenfold since 2004.
In all instances, the most important growth opportunities for Swiss Re lie in anticipating longterm changes in the insurance industry.
Admin Re® is a key element of Swiss Re’s growth strategy. In 2007, we completed one of the largest-ever longevity deals, adding significant scale and embedded value to the Group.
Despite increased competition, underwriting results in the largest markets were mostly positive. The UK, however, suffered from the costliest floods in its history, and is expected to post a negative result. Without the exceptional flood losses, the 2007 combined ratio would only have risen slightly. In Germany, winter storm Kyrill generated significant claims, increasing the combined ratio by approximately 5%. Also in Germany, the most competitive segments – motor and industrial fire – are expected to post deteriorating underwriting results due to falling rates. In other major European markets, preliminary information suggests much better results with combined ratios near 95%. The US experienced a similar industry-wide combined ratio of around 94%, up only slightly from 92% in 2006.
The following discussion reflects changes in Swiss Re’s financial reporting segmentation due to the realignment of the Group’s Financial Services activities.¹
In the US, Swiss Re continued to reclaim market share while life reinsurance cession rates generally decreased. Overall pricing levels and treaty terms in this market have migrated towards a more sustainable equilibrium over the past few years and, in the current environment, Swiss Re’s financial strength, capacity and expertise are valued by clients.
In January 2007, Swiss Re transferred a further CHF 885 million of extreme mortality risk to the capital markets through its Vita Capital securitisation programme. Interest was strong in Swiss Re’s third mortality catastrophe bond, enabling peak mortality exposures to be managed in a sustainable and capital-efficient manner. Part of the issuance was used to replace cover provided by the first Vita Capital securitisation, which expired at the end of 2006.
Similarly, Swiss Re’s equity market exposure was actively reduced by means of equity derivatives. Measured in terms of the equity market stress scenario that assumes a 30% fall in equity markets with a simultaneous increase in volatility, the gross stress exposure of CHF 3.9 billion was reduced to a net stress exposure of CHF 2.7 billion by the end of 2007.
Influenza pandemic modelling Swiss Re has developed a sophisticated epidemiological model to improve the understanding of the potential range of outcomes from an influenza pandemic. In April 2007, the workings of the model were summarised, along with some key results, in a brief focus report: “Influenza pandemics: Time for a reality check?”
It is possible to estimate the effect of each potential pandemic on an insurer’s portfolio by applying weightings for exposures by age group and by country. This generates a complete distribution model of potential additional mortality as well as the probability for each level of excess mortality, enabling Swiss Re to calculate relevant risk measures, such as 99% VaR, 99% Tail VaR, and losses for various return periods.
Capital views and related targets Each of the three capital constraints is managed and monitored against Group targets set by the Board of Directors. The overall risk tolerance target is to maintain the ability to continue the risk transfer business after a year of extremely adverse loss events.
Capital Management actively works towards closing the gap between the rating, regulatory and internal views on capital requirements. In this respect, Swiss Re has provided active support for the development of Standard & Poor’s new insurance capital model, as well as for current developments in Solvency II and the Swiss Solvency Test (SST).
Swiss Re’s internal capital adequacy based on 99% Tail VaR Swiss Re determines the amount of economic capital it has available to cover adverse events based on published shareholders’ equity and a number of adjustments net of tax. Thus, no allowance is made for potential tax offsets due to future losses arising from adverse experience. The calculation of available capital is shown in table 6.
Shareholders‘ equity 30.9 31.9 Mark-to-market adjustments 1.6 1.6 Goodwill and intangibles –5.4 –5.5 P&C and L&H valuation adjustments 14.4 14.3 Tax and other –2.8 –1.9 Shareholders’ net worth 38.7 40.4 Hybrid capital 8.1 7.3 Swiss Re Group available capital 46.8 47.7
In addition, Mr Kielholz is a member of the European Financial Roundtable (EFR), a member of the board (president in 2006/2007) of the International Monetary Conference and a member of the Institute of International Finance (IIF). Mr Kielholz is also chairman of the supervisory board of Avenir Suisse and a member of the board and the committee of the Swiss Business Federation (economiesuisse). In 2005, he was elected to the Insurance Hall of Fame, which honours individuals who have exercised substantial influence on the insurance industry for the benefit of society.
Mathis Cabiallavetta, a Swiss citizen born in 1945, is vice chairman of Marsh & McLennan Companies, Inc. (MMC) and chairman of Marsh & McLennan International. He has been a member of MMC’s international advisory board since 1994 and served as a director of MMC from 2000 to 2004.
Mr Cabiallavetta is also a member of the boards of directors of Altria Group, Inc. and BlackRock, Inc. In addition, he is a member of the advisory board of General Atlantic Partners in New York.
The Board of Directors proposes to the Annual General Meeting of 18 April 2008 to reduce the term of office for members of the Board of Directors from four to three years.
Audit Committee Responsibilities of the Audit Committee The central task of the Audit Committee is to assist the Board in fulfilling its oversight responsibilities as they relate to the integrity of the Group financial statements, the Group’s compliance with legal and regulatory requirements, the external auditor’s qualifications and independence, and the performance of the Group’s internal audit function and its external auditor.
Members of the Compensation Committee Robert A. Scott, Chair Thomas W. Bechtler Raymund Breu Dennis D. Dammerman (until 20 April 2007) Hans Ulrich Maerki (as of 20 April 2007)
The Board and its committees meet at the invitation of the Chairman of the Board as often as business requires. The Board has six regular two-day meetings a year. The first day is usually reserved for the committees; on the second day, the full Board meets for as long as required, mostly the whole day.
3.5.3 Work methods of the Board of Directors and its committees 3.5.3 Work methods of the Board of Directors and its committees
In 2007, there were nine Audit Committee meetings, including one extraordinary meeting. No resolutions were taken by written agreement. On average, the meetings lasted 2.5 hours. Between one and ten agenda items were discussed per meeting, with an average of six items. Average attendance was 95.0% at the regular meetings throughout the year and 91.1% including the extraordinary meeting, which was called at short notice.
In 2007, there were four Governance Committee meetings. There were no extraordinary meetings and two resolutions by written agreement. On average, the meetings lasted one hour. Between two and seven agenda items were discussed per meeting, with an average of five items. Average attendance was 86.7% during the reporting year.
The meetings of 11 May, 22 October, 16 November, 18 November and 28 December were extraordinary meetings.
He is also a board member of IMD, a leading international business school.
Swiss Re has not entered into reportable management contracts with any third party.
As of 2008, employees will have the opportunity to take some or all of their cash API in the form of Swiss Re shares. This bonus shares programme encourages employee ownership by allowing employees to use API funds to purchase shares of the company at a discount of 10% to the open market. At the end of a one-year blocking period, the employee assumes full ownership of the purchased shares.
The Articles of Association do not provide for any statutory quorums. Any General Meeting of shareholders passes resolutions without regard to the number of shareholders present or shares represented by an absolute majority of the votes validly cast, subject to the compulsory exceptions provided by law. The Chairman of the General Meeting shall determine the voting procedure. As a rule, voting is usually carried out electronically. When this is not the case, votes shall be cast by ballot if more than 50 of the shareholders present so demand by a show of hands.
In 2007, Swiss Re published its first comprehensive Corporate Responsibility Report which has evolved from the previous Sustainability Report. While Swiss Re has a tradition of pursuing high standards in corporate governance, corporate sustainability and corporate citizenship, this report provides a complete overview of the Group’s efforts in all three areas. This voluntary publication contains detailed information on how the company strives to create long-term value and how it addresses key sustainability challenges.
At the Annual General Meeting on 20 April 2007, Swiss Re’s shareholders approved a further buy-back of shares for cancellation of up to CHF 4.2 billion over three years.
Investments 2,3 Fixed income securities: Available-for-sale, at fair value (including 18 744 in 2006 and 9 045 in 2007 subject to securities lending and repurchase agreements) (amortised cost: 2006: 92 151; 2007: 105 995)
consolidated subsidiaries and investments accounted for using the equity method are reported in shareholders’ equity.
Liabilities for life and health policy benefits from reinsurance business are generally calculated using the net level premium method, based on assumptions as to investment yields, mortality, withdrawals, lapses and policyholder dividends. Assumptions are set at the time the contract
Unpaid claims and claim adjustment expenses Unpaid claims and claim adjustment expenses
Realised gains and losses for fixed income, equity securities and other investments were as follows: CHF millions 2006 2007
Fixed income securities available-for-sale Gross realised gains 922 621 Gross realised losses –591 –670 Equity securities available-for-sale Gross realised gains 1 151 1 714 Gross realised losses –189 –159 Other-than-temporary impairments –156 –647 Net realised investment gains /losses on trading securities 439 –917 Change in net unrealised investment gains on trading securities 1 763 298 Other investments Gross realised /unrealised gains/losses 56 356 Exchange gains /losses –1 289 –1 335 Net realised investment gains /losses 2 106 –739
The Group may sell available-for-sale equity or fixed income securities at a loss in subsequent periods having previously asserted the intent and ability to hold such securities until recovery. Such sales may only take place in response to changes in market conditions or other circumstances that occur after the balance sheet date. As a result, the Group recognises the associated realised losses in the period in which the decision to sell the securities is taken.
As of 31 December 2006 and 2007, long-term debt as reported above had the following maturities: CHF millions 2006 2007
Total subordinated debt as of 31 December 2007 13 896 Total subordinated debt as of 31 December 2006 5 491
¹ This debt is resulting from a single transaction and is non-recourse.
Reserves for asbestos and environmental pollution claims in the U.S. were increased during 2007. Experience on workers’ compensation line of business continues to develop negatively, and industry statistics are showing a longer development pattern. The Group revised its reserves accordingly during the second half of 2007. The casualty line of business was negatively impacted by adverse development in product liability business and medical malpractice claims.
Change in unpaid claims and claim adjustment expenses; life and health benefits, net 1 592 –1 694 –102 1 987 –1 525 462 Claims and claim adjustment expenses; Acquisition costs Acquisition costs, gross –3 970 –2 596 –6 566 –3 901 –3 021 –6 922
Deferred tax liabilities Present value of future profits –2 469 –1 710 Income accrued/deferred –767 –500 Bond amortisation –230 –203 Deferred acquisition costs –746 –632 Technical provisions –1 577 –1 113 Unrealised gains on investments –649 –553 Foreign exchange provisions –374 –446
The Group adopted FIN 48 on 1 January 2007 and recognised a decrease of CHF 30 million in the liability for unrecognised tax benefits. The decrease was reported as an adjustment to the opening balance of retained earnings. A reconciliation of the beginning and ending amount of gross unrecognised tax benefits (excluding interest and penalties) is as follows: CHF millions 2007
Balance as of 1 January 1 667 Additions based on tax positions of the current year 233 Additions for tax positions of prior years 259 Reductions for tax positions of prior years –89 Settlements –106 Reductions due to lapse of applicable statute of limitations – Balance as of 31 December 1 964
Components of net periodic benefit cost and other amounts recognised in other comprehensive income consist of: Swiss plans pension benefits
Discount rate 3.2% 3.5% 5.2% 5.8% 3.9% 4.5% Rate of compensation increase 2.3% 2.3% 4.5% 4.7% 4.5% 4.5%
As of 31 December 2007, the total unrecognised compensation cost (net of expected forfeitures ) related to non-vested share-based compensation awards and the weighted average period over which that cost is expected to be recognised is as follows: Name of plan
¹ Retired from the Board of Directors at the Annual General Meeting of 20 April 2007. ² Elected to the Board of Directors at the Annual General Meeting of 20 April 2007.
Shares awarded to the members of the Executive Committee are subject to a one-year blocking period. The bonus plan stipulates that Executive Committee members decide on the split between cash and shares. The shares are awarded at a discount to the open market. The share price on 31 December 2007 of CHF 80.45, net of discount, has been used for calculating the number of shares awarded based upon the amount of the bonus received in shares.
Members of the Board of Directors Function Number of shares held as of 31 December 2007
Revenues Premiums earned 18 541 10 974 29 515 Fee income from policyholders 879 879 Net investment income 3 753 3 686 6 055 184 –5 687 7 991 Net realised investment gains/losses 379 1 667 765 103 –808 2 106
Net investment income – unit-linked 111 638 749 Net realised investment gains/losses – unit-linked –421 933 512 Net realised investment gains/losses – non-participating –90 14 51 –25
Certain parts of the former Capital Management and Advisory business are now included in the Property & Casualty business segment, including revenues and expenses related to Property & Casualty insurance-linked securities.
Assets not affected by the reclassifications1 173 087 0 173 087
The new disclosure requirements under Swiss Company Law in respect of management compensation to the members of the Board of Directors and of the Executive Committee of Swiss Reinsurance Company, Zurich, as well as to closely related persons, are detailed on pages 172 to 177.
The modification of estimation models and assumptions resulted in no material transition impact. No restatement of previously reported 2006 figures is made.
“Swiss Re’s transaction stood out for its A$750 million (US$659 million) size and the speed with which it was completed following roadshow …” (KangaNews, December 2007 / January 2008; February 2008)