The place to succeed For our employees, we want to be the place to succeed. Our corporate culture attracts and develops top talent from around the globe. Representing more than 80 nations, our employees contribute their skills, diversity and talent to a work culture shaped by mutual respect, thriving in an environment designed to make each of them a success.
May Swiss Re reports net income of USD 158 million for the first quarter of 2010, even though the Property & Casualty result is affected by high natural catastrophe losses in the first quarter.
June Swiss Re holds its Investors’ Day, providing insights into its Asset Management and the Swiss Solvency Test framework. The Group says it expects claims from the Chile earthquake to be approx. USD 630 million.
Market environment: The UN Climate Change Conference in Cancun, Mexico, ends with the adoption of decisions that set all governments more firmly on a path towards a low-emissions future and that support enhanced action on climate change in the developing world.
What we do Catastrophes are becoming ever more costly, but reinsurance helps insurers and governments with innovative solutions to mitigate the impact. Ageing populations stretch pension funds, but reinsurance helps manage the financial consequences of longevity. Diversifying risk globally and sharing its expertise, Swiss Re supports economic progress and contributes to social stability.
Driving innovations Standing at the forefront of new research and product development, Swiss Re offers expertise and experience, as well as insurance capacity. Our innovative solutions prove we can deliver value in a competitive market. At the same time, our new dedicated client service model allows us to offer clients solutions that are tailored to their specific needs.
Making societies more resilient To help secure the prospects of developing countries, Swiss Re – together with the World Bank Group and national governments – has pioneered a number of new risk transfer solutions that make societies more resilient in the event of a disaster.
USD 4.6 billion in 2010 for Property & Casualty USD 4.5 billion in 2010 for Life & Health
Subdued growth and low investment yields in developed countries have produced a challenging environment for insurers and reinsurers – but innovative products and solutions from Swiss Re allow our clients and ourselves to grow profitably, while assuring future economic and social stability.
Global economy: moderate growth amid fiscal worries Although the world’s major economies have emerged from recession, economic growth in most developed countries has been moderate. Financial markets remain nervous about the sustainability of the economic upswing because unemployment is still high in many developed economies. In addition, fiscal deficits have surged as a consequence of the crisis and the banking sector remains vulnerable. In some euro countries, the debt crisis escalated and ‘bailouts’ became necessary to stave off contagion that would have threatened the currency union. To accommodate the still fragile upswing, central banks kept monetary policy extremely loose, leading to very low levels of government bond yields. The underlying trend has been positive, despite financial markets remaining nervous, allowing insurers and reinsurers to restore their capital positions.
Property and casualty: superior underwriting capabilities are key in the soft market environment In this post-crisis era, slow growth and low investment yields are denting profitability in the majority of markets. Instead of restoring profitability by raising rates, however, property and casualty insurers are confronted with a continuation of the soft market trend, because of plentiful capacity in all insurance segments. Consequently, an increasing part of the business is very likely under-priced today, particularly in the liability lines. A hardening of rates has only been seen in a few segments which were exposed to highly negative underwriting results or where catastrophe losses occurred; for example, the earthquakes in Chile and New Zealand, and the explosion of the Deepwater Horizon oil rig off the Gulf of Mexico.
Antoine Bommier Professor of Integrative Risk Management and Economics at the Swiss Federal Institute of Technology (ETH). This professorship is supported by Swiss Re.
10.9 billion Premiums earned in USD (USD 12.8 billion in 2009)
Key facts and figures for our Property & Casualty business in 2010 ...
Helping Swiss Re’s Brazilian life insurance clients grow through tele-underwriting: Hernan Fatone, Head of Life & Health Underwriting Continental Europe, Latin America and Middle East (in front) and Rolf Steiner, Regional Head of Life & Health, Brazil and Southern Cone Countries, at a training session with staff from Advance Medical.
Like every other global function of Swiss Re, the Asset Management team is focused on satisfying its clients’ needs. The only difference is that Asset Management has only one client: Swiss Re itself. That client needs, above all, to have its assets matched to the liabilities that the Group takes on in its re/insurance business, so that returns on investments closely match the scale and timing of expected payouts.
For full details on Asset Management performance, please see 2010 Financial Report 4.5 billion Operating income in USD (USD 3.6 billion in 2009)
Partnerships between the private and public sectors can greatly enhance insurance protection in emerging and developing countries. One of the most successful in a series of innovative solutions supported by Swiss Re provides insurance cover for natural catastrophes in the Caribbean.
Closing the insurance gap in emerging countries One important problem for emerging and developing countries is their low level of insurance protection – all the more of a problem since many of them face a range of substantial perils, from windstorms and floods to earthquakes. Inadequate insurance protection means that the damage and costs from natural disasters can set back economic and social development by years.
̤ A new introduction programme for Board members enabled new directors of the parent company and subsidiaries to take office quickly and effectively.
Introduction programme for Board members Swiss Re’s introduction programme for Board members ensures that new Board members become familiar with the firm’s business, organisation and other aspects directors need to understand to perform their duties effectively. In 2010, the introduction programme was revised and substantially enhanced. The programme includes comprehensive documentation on all business aspects for self-study as well as a number of specific training sessions managed by members of the Executive Committee. All new Board members of the parent company and several Board members of Group companies completed the programme in 2010.
Swiss Re’s Board of Directors consisted of 12 members as of 31 December 2010. In terms of Swiss Re’s independence criteria, all directors of Swiss Re qualified as independent.
Malcolm D. Knight Malcolm D. Knight joined the Board of Directors in April 2010. He is a Vice Chairman of Deutsche Bank and a Visiting Professor in Finance at the London School of Economics and Political Science. Previously, he served as the General Manager of the Bank for International Settlements, Senior Deputy Governor of the Bank of Canada and Deputy Director at the International Monetary Fund.
AA+ A1 Financial strength rating Standard & Poor’s Moody’s A.M.Best positive stable positive
04 Financial year 06﻿ ﻿Market﻿environment 11﻿ ﻿Group﻿results 14﻿ ﻿Summary﻿of﻿financial﻿statements 16﻿ ﻿Property﻿&﻿Casualty 21﻿ ﻿Life﻿&﻿Health 25﻿ ﻿Asset﻿Management 29﻿ ﻿Legacy 30﻿ ﻿Share﻿performance 48 Corporate governance 50﻿ ﻿Overview 52﻿ ﻿Group﻿structure﻿and﻿shareholders 54﻿ ﻿Capital﻿structure 57﻿ ﻿Board﻿of﻿Directors 72﻿ ﻿Executive﻿management 77﻿ ﻿Shareholders’﻿participation﻿rights 78﻿ ﻿Changes﻿of﻿control﻿
The market for pure longevity risk transfer continues to expand strongly, primarily in the UK.
Group results In 2010, we reported strong net income of USD 863 million. Even after the early repayment of the convertible perpetual capital instrument (CPCI) issued to Berkshire Hathaway, Swiss Re’s capitalisation is very strong.
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 short-term 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.
The decrease in operating income was driven by the higher loss experience in 2010, and the reduction in investment income. The investment income declined by USD 519 million year on year, reflecting the low interest rate environment and the decrease in the level of reserves.
Life & Health Market environment Sales of new life insurance policies in North America and Europe gradually recovered during 2010 from their drop in 2009 following the financial crisis. A subdued housing market, however, continued to constrain sales of mortgage-related life cover, particularly in the UK. Life insurance markets in Canada, Asia and Australia showed higher growth.
Net investment income – unit-linked 549 593 8 Net investment income – with-profit business 152 145 –5 Net investment income – non-participating 2 470 2 314 –6 Net realised investment gains/losses – unit-linked 3 332 2 034 –39 Net realised investment gains/losses – with-profit business 289 196 –32 Net realised investment gains/losses – non-participating –500 101 –
The primary drivers of Life & Health financial performance are mortality, morbidity and lapse experience and financial market performance. Financial markets can influence the results directly through changes in net investment returns, amortisation of present value of future profits (PVFP) and earned fee income, but can also impact policyholder behaviour, which may be exhibited through policy lapse and incidence rates. In addition, the timing and granularity of data received from cedents can affect reported financial results. In some regions, reporting may only be received from cedents on an annual basis, thus causing some volatility in reported results in the period of reporting.
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.
̤ Based on our improved capital position and retained earnings of USD 19.7 billion for 2010, Swiss Re proposes a dividend increase from CHF 1.00 per share for 2009 to CHF 2.75 per share for 2010.
The market value of spot liquidity within the central liquidity pool was USD 26.4 billion as of 31 December 2010, compared to USD 21.9 billion on the same date in 2009. The repayment in January 2011 of the capital instrument issued to Berkshire Hathaway reduced the amount of spot liquidity by USD 3.9 billion to USD 22.5 billion. Based on the internal liquidity stress tests described above, we estimate that Swiss Re held surplus spot liquidity on 31 December 2010.
̤ Open risk culture: Risk transparency, knowledge sharing and responsiveness to change are integral to our risk control process.
The Executive Committee (EC) is responsible for implementing the risk management framework through four further committees: ̤ The Group Risk and Capital Committee has responsibility for allocating capital and insurance risk capacity, approving investment risk limits, and determining changes to the internal risk and capital methodology.
̤ Financial market risk decreased 2% to USD 9.9 billion, mainly due to lower interest rate risk following the unwind of a short position against economic liabilities. This was partly offset by higher risk from the reduction of corporate bond hedges.
Our internal model takes account of the correlation and diversification between individual risks. The effect of diversification at the category level is demonstrated in the table below, which shows that the capital requirement for the Group’s overall portfolio is lower than the sum of the capital requirements for individual sub-portfolios. The extent of diversification depends on the level at which it is measured.
Property and casualty 6.8 6.4 –5 Life and health 5.3 5.2 –2 Financial market 10.1 9.9 –2
Large individual transactions that could materially affect the Group’s risk exposure require independent review and sign-off by Risk Management before they can be authorised. This is part of our three-signature approval process (involving Underwriting, Client Markets and Risk Management) that reinforces the accountability of each of the parties for significant transactions. We also monitor accumulated exposure to single risks or to an underlying risk factor (eg Californian earthquake) on a Group-wide basis.
̤ Swiss Re introduced a new governance framework for Group companies and branch offices.
Hans Ulrich Maerki graduated with a master’s degree in business administration from the University of Basel in 1972.
Nominations for election at the Annual General Meeting of 15 April 2011 The Board of Directors has decided to nominate the following Board members for re-election for a three-year term: ̤ Raymund Breu ̤ Mathis Cabiallavetta ̤ Raymond K. F. Ch’ien ̤ Rajna Gibson Brandon ̤ Hans Ulrich Maerki
Vice Chairman The Vice Chairman deputises for the Chairman in his absence or in the event of a conflict of interest of the Chairman. He prepares and executes Board resolutions on request of the Board and liaises between the Board and executive management in matters not reserved to the Chairman.
Chairman’s and Governance Committee The Chairman’s and Governance Committee had six regular meetings in 2010. One resolution was taken by written agreement. On average, the meetings lasted 2.5 hours. Attendance was 100%. Besides the committee members and the Company Secretary, the Chief Executive Officer was invited to attend the Chairman’s and Governance Committee meetings.
Audit Committee The Audit Committee held eight regular meetings and three extraordinary meetings in 2010. On average, the meetings lasted 2.5 hours. Average attendance was 97.7% at the meetings throughout the year. Besides the committee members and the Company Secretary, the Chief Executive Officer, the Chief Financial Officer, the Chief Accounting Officer, the Head of Group Internal Audit, the Head Legal, the Head Compliance and the two lead auditors representing the external auditor were invited to attend Audit Committee meetings in an advisory capacity. The Head Group Internal Audit and the two lead auditors of the external auditor are normally present in executive sessions of the Committee.
Raj Singh joined Swiss Re in January 2008 as Chief Risk Officer and a member of the Executive Committee.
February ̤ Compensation Report 2009; ̤ Performance targets for variable compensation for 2010; ̤ Performance targets of Long-term Incentive award for 2010; ̤ Performance outcome of deferred compensation and Long-term Incentive from earlier years, due to vest in 2010.
CHF millions Economic value at grant Accrued economic value Fair value mark-up Total expense
Total mortgages and loans to members of the Executive Committee 6 169 Highest mortgages and loans to an individual member of the Executive Committee: Raj Singh 3 596 Total mortgages and loans not at market conditions to former members of the Executive Committee 7 298
Premiums and other receivables 11 773 11 095 Reinsurance recoverable on unpaid claims and policy benefits 8 11 251 12 637 Funds held by ceding companies 9 605 9 346
Net income after non-controlling interests 699 1 980 Convertible perpetual capital instrument (net income)2 –203 –1 117 Dividends on common shares –30 –319 Cumulative effect of adoption of FSP SFAS 115-26 334 Cumulative effect of adoption of EITF 07-54 178 Cumulative effect of adoption of ASU No. 2009-175 60 Balance as of period end 19 047 19 651
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 the 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.
The cost of equity securities AFS is reduced to fair value, with a corresponding charge to realised investment losses if the decline in value, expressed in functional currency terms, is other-than-temporary. Subsequent recoveries of previously recognised impairments are not recognised.
Other assets Other assets include deferred expenses on retroactive reinsurance, separate account assets, prepaid reinsurance premiums, receivables related to investing activities, real estate for own use, property, plant and equipment, accrued income, certain intangible assets and prepaid assets.
As of 31 December 2009 and 2010, the Group’s investment in mortgages and other loans included USD 187 million and USD 270 million, respectively, of loans due from employees, and USD 400 million and USD 356 million, respectively, due from officers. These loans generally consist of mortgages offered at variable and fixed interest rates.
As of 31 December 2009 USD millions 0–5 years 5–10 years Over 10 years
Deferred tax assets Income accrued/deferred 666 606 Technical provisions 919 785 Unrealised losses on investments 475 63 Pension provisions 236 243 Benefit on loss carryforwards 3 989 4 222 Currency translation adjustments 519 483
Plan asset allocation by asset category The actual asset allocation by major asset category for defined benefit pension plans as of the respective measurement dates in 2009 and 2010, is as follows: Actual asset allocation is determined by a variety of current economic and market conditions and considers specific asset class risks.
For the years ended 31 December, the fair values of pension plan assets by level of input were as follows: 2009 USD millions
United Arab Emirates GlobeMed Gulf FZ-LLC, Dubai 3 3 41 e
Variable interest entities Swiss Re Group enters into arrangements with variable interest entities (VIEs) in the normal course of business. The involvement ranges from being a passive investor to designing, structuring, and managing the VIEs. The variable interests held by the Group arise as a result of the Group’s involvement in a modified coinsurance agreement, certain insurance-linked and credit-linked securitisations, swaps in trusts, debt financing and other entities which meet the definition of a VIE.
Net realised investment gains/losses 1 579 –467 279 895 2 793 1 679 –615 –8 677 875 2 783
Amortisation of goodwill –218 –224 –233 –222 Other operating costs and expenses –2 005 –2 074 –2 180 –2 358 –2 477 –3 679 –4 900 –4 358 –3 976 –3 620
The following commentary on the 2010 financial year of the parent company thus complements the review of the financial year of the Swiss Re Group.
A restructuring of the capital financing model of the Company’s subsidiaries resulted in an increase in investments in subsidiaries and affiliated companies by CHF 4.8 billion and in a decrease in loans to Swiss Re Group subsidiaries by CHF 11.2 billion.
Technical provisions declined 6% to CHF 43.6 billion. Property and casualty gross unpaid claims decreased 12%, mainly impacted by favourable claims experience and the development of foreign exchange rates. Gross and retro life and health unpaid claims and policy benefits increased mainly as a result of a portfolio transfer from a Swiss Re Group subsidiary, which also caused the increase of funds held under reinsurance treaties.
The increase in other liabilities is mostly due to payables of CHF 3.0 billion in respect of repurchase agreements and securities lending transactions for which the Company receives cash collateral to cover the assumed counterparty risk associated with such transactions.
Members of the Executive Committee are granted Long-term Incentive (LTI) plans. The plans can be settled in cash or shares with a requisite service period as well as the maximum contractual term for each plan of three years. Each plan includes a payout factor which is derived from Return on Equity (ROE) and Earnings per Share (EPS) targets over the vesting period. The payout ratio can vary between 0 and 2 and the final payment for each plan will depend on whether the performance targets have been achieved over the plan period. For plans granted up to and inclusive of 2009, the payout factor is driven by average ROE and EPS compound annual growth over the vesting period. For the LTI plan granted in 2010 and subsequent grants the payout factor is driven by an average ROE and average EPS over the vesting period.
Subsequent events Details on Swiss Re Group’s subsequent events are disclosed on page 191, which might have similar impacts for Swiss Reinsurance Company Ltd.
Mumbai Unit 701-702, 7th Floor Tower ‘A’ Peninsula Corporate Park Ganpatrao Kadam Marg Lower Parel
Life & Health premiums and fees decreased 10%, mainly as a result of the US individual life retrocession agreement announced in the first quarter of 2010. Excluding this impact and foreign exchange movements, Life & Health premiums increased 6%, reflecting new business growth particularly in Asia and higher fee income in Admin Re®.
Expenses Investment and operating expenses decreased to USD 77 million in 2010 from USD 78 million in 2009.
Net realised investment gains/losses (total impairments for the years ended 31 December were 3 450 in 2009 and 683 in 2010, of which 1 784 and 423, respectively, were recognised in earnings) 2, 10 875 2 783
Accumulated other comprehensive income: Net unrealised investment gains/losses, net of tax –993 1 042 Other-than-temporary impairment, net of tax –397 –169 Cumulative translation adjustments, net of tax –3 560 –3 742 Accumulated adjustment for pension and post-retirement benefits, net of tax –453 –522
In July 2010, the FASB issued “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (ASU No. 2010-20), an update to Topic 310 – Receivables. This ASU requires additional disclosures about an entity’s allowance for credit losses and the credit quality of its financing receivables. The Group adopted this update as of the fourth quarter of 2010. The new disclosure requirements are included in the current Financial Review in Notes 2 and 7.
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 25 951 263 –933 25 281 States of the United States and political subdivisions of the states 57 2 –4 55
Fixed income securities available-for-sale 79 443 3 285 –1 524 –254 80 950 Equity securities available-for-sale 1 241 258 –25 1 474
Debt securities issued by governments and government agencies: US Treasury and other US government corporations and agencies 10 383 539 10 383 539 States of the United States and political subdivisions of the states 128 7 128 7
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) As of 31 December 2009 and 2010, the reconciliation of the fair values of assets and liabilities measured on a recurring basis using significant unobservable inputs were as follows: 2009 USD millions
Total net amount of derivative financial instruments 3 286 –4 986 –1 700
Maximum potential loss In consideration of the rights of setoff and the qualifying master netting arrangements with various counterparties, the maximum potential loss as of 31 December 2009 and 2010 was approximately USD 6 466 million and USD 4 409 million, respectively. The maximum potential loss is based on the positive market replacement cost assuming non-performance of all counterparties, net of cash collateral.
As of 1 January 2010, the Group adopted ASU No.2009-17 relating to consolidation of variable interest entities. For more information on the transition impact on debt, please refer to Note 11.
Maturity Instrument Issued in Currency Nominal in millions Interest rate Book value in USD millions 2012 EMTN 2010 CHF 250 3M Libor +45bps 268 2016 Credit-linked note 2007 USD 382 1M Libor 347
64 Swiss Re 2010 Financial Review a) Business segment results For the years ended 31 December
Expenses Claims and claim adjustment expenses; life and health benefits –7 970 –8 639 –366 –16 975 Return credited to policyholders –4 597 –4 597
Net realised investment gains/losses 39 32 71 –49 22 Other revenues 34 34
Second quarter 2011 results 3 November 2011 Third quarter 2011 results