Life & Health teach-in45b06144-0b24-4abb... · Life & Health teach-in | 09 December 2010 Measurement of certain balance sheet values a US GAAP EVM 15 Balance sheet assets and liabilities

a

Life & Health teach-inConference call

Zurich, 09 December 2010

Life & Health teach-in | 09 December 2010

a

Introduction Susan Holliday, Head IR

L&H overview and underwriting George Quinn, CFO

Reporting and Robyn Wyatt, CFO L&H performance measurement

Questions & answers

Today’s agenda

2


a

IntroductionSusan Holliday, Head IR

3


a

Life & Health overview and underwritingGeorge Quinn, CFO

4


aKey messages

Our L&H business is a profitable franchise on an economic and US GAAP basis

Business is priced and steered using a market consistent, economic framework (EVM)

Profit emergence under US GAAP is relatively stable over annual periods but is very small at contract inception. Profit recognition depends on product features

US GAAP framework tends to understate value of L&H business

5


a

Global

Swiss Re is a leader in L&H reinsurance

1 2009 net premiums earned including Admin Re® type business, large financing transactions, health and annuity business.Source: companies financial statements, Swiss Re Economic Research and Consulting

Swiss Re19%

Munich ReRGA

Hannover Re

others

Est. 2009 L&H reinsurance net premium distribution1

Key trends primary market Annuity markets are recovering based on economic

and financial market performance Positive long-term outlook for sales of pension and

annuity products remains due to an ageing population and reduced government support

Traditional life insurance premiums will grow at a moderate pace, close to GDP growth

Key trends reinsurance market Continued decline in cession rates in the US Lower sales of mortgage-related protection

products in the UK Solvency II in Europe Service offerings are key in the developing Asian

markets In Latin America, quickly growing penetration in

credit life and bancassurance products

L&H outlook

3.7%

Cession rates down from

13.2% to 10.6%

Market growth(10 year average annual)

6


aL&H insurance products we (re)insureProducts by line of business at Swiss Re

L&H reinsurance market is predominantly proportional, therefore primary market drivers are also reinsurance drivers

1 Also called income protection in some markets

refer to approximate weightings for Swiss Re

Product Life Health Admin Re®

Term assurance

Critical illness and disability income1

Universal life

Annuity / longevity

Unit-linked savings

7


aThe L&H performance cycleUS GAAP vs EVM view

EVM

Underwriting

8

Reporting

Performanceanalysis

US GAAP

period 1 period 2 etc

…..

US GAAP for L&H can be hard to compare to other frameworks, due in part to mix of historic cost (locked-in) and best estimate concepts

EVM framework enables effective comparison and deployment of capital between business segments to maximise economic returns


a

9

Underwriting / Pricing process

Quote Opportunity

Costing tools

Approval process

Quote conveyance

Experience monitoring

Client details product specifications underwriting process experience etc.

Input examples mortality lapse distribution incidence/coverage expense capital factors risk free rate

Risk management approvals transparency review

includes treaty preparation

studies analysis

L&H

U/W


aL&H pricing Standardised decision metrics on a deal-by-deal basis under EVM …

Economic profitInternal expenses

Cost of capital

Commission allowances

Expected claims

Consistent decision metrics for all units and lines of business Clear transparency on profitability at the point of sale Cost of capital allocation assuming risk-free investment strategy

10

U/W

Client sample:

Discounted price components for Swiss Re shareUSD millions Premium Claims and

commissionsInternal costs Cost of capital Economic

profit post-taxCoinsurance level premium term 33.657 28.562 2.176 0.646 1.895 Coinsurance increasing premium term 45.014 38.036 2.252 1.592 1.524 YRT of universal life 1.224 0.884 0.041 0.047 0.143 YRT of universal life 2.445 2.207 0.098 0.038 0.057 YRT of variable universal life 1.281 1.149 0.051 0.030 0.027 Total 83.621 70.838 4.618 2.353 3.646

EVM Capital for Swiss Re Share Inforce volume (USDbn)

EVM Capital (USDm)

Economic return on

capital

Profit Margin

Coinsurance level premium term 2.050 16.199 15.7% 11.7%Coinsurance increasing premium term 5.975 39.890 7.8% 3.8%YRT of universal life 0.102 1.166 16.3% 12.3%YRT of universal life 0.022 0.943 10.1% 6.0%YRT of variable universal life 0.021 0.754 7.6% 3.6%Total 8.170 58.952 10.2% 6.2%

YRT = Yearly Renewable Term


a

Reporting and performance measurementRobyn Wyatt, CFO L&H

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a

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2004 2004

2005 2005

2006 2006

2007 2007

2008 2008

2009 2009

2010 2010

2011 2011

2012 2012

2013 2013

2014 2014

New Business: Net Income New Business: Projected cashflows

Previous Years Business: Net Income Previous Years Business:

Previous Years Business: Change in future cashflow assumptions

Change in current year actual experience vs. expected

Polic

y Is

sue

Year

Financial Year

Polic

y Is

sue

Year

Financial Year

Calendar Year view RoE

New Business EVM Profit Margin

Discounted

Previous Business EVM Profit Margin

EVMUS GAAP

Comparison of profit recognitionDifferent under US GAAP and EVM

Profits of new business recognised at inception Shows economic value of L&H business

Profits recognised over life of policy as the company is released from risk

12

L&HReporting


aPrinciples of profit emergence

Measurement depends on product features Measurement of all future cash-flows, discounted at current risk-free rates

All profit recognised at contract inception

Prior year business is remeasured every period using best-estimate assumptions. The resulting change is disaggregated into experience variances and assumption changes. Assumption changes reflect alteration in best estimate view

Profit includes tax costs and capital charges

Cost of capital charged at inception emerges over the lifetime of the book

US GAAP EVM

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Profit represents the change in economic net worth each year, driven by underwriting activity

Measures performance after capital costs Full recognition of projection changes when they

emerge

Profit represents yearly cashflows, plus changes in the historic measurement of net GAAP liabilities

Little profit emergence at contract inception Current year profit heavily influenced by prior year

book

Traditional L&H

Admin Re®

FAS601 FAS971 Unit-linked

Profit is recognised over the life of the policy

• Expected profit emerges as a constant proportion of premium

• Experience variances are reflected each year

• Assumptions incl. PADs 2 locked-in (except claims in payment)

• Profit emerges as the margin of fees and investment returns in excess of costs for claims and expenses

• DAC/PVFP assumptions unlock

• Profit emerges as fees charged

• Fees earned vary with market value of the underlying funds

• Assumptions unlock

1 Now FASB Accounting Standards Codification Topic 944 – Insurance2 Provision for Adverse Deviation


aFeatures of profit emergence

Measurement depends on product features Premiums, claims, expenses, taxes and capital costs projected over all future periods and discounted at a risk free rate of return

No accounting deferrals, no explicit margins on best-estimate assumptions

US GAAP EVM

14

FAS 60 reports, on an earned basis, all revenues and expenses in the income statement

FAS 97 uses deposit accounting Unit-linked reports all activity, although much of

income statement is not attributed to Swiss Re


Revenues Premiums earned

Fee income Fee income

Claims Benefit paid Amount in excess of account balance

n/a

Change in benefitreserve

Change in absolutebalance sheet value. May not offset the benefit paid

n/a(unless premium deficiency)

n/a

Return credited to policy-holders

n/a Based on accountbalance. Rate can be varied (not below contract minimum)

As earned, based on contract performance

Acquisition costs

Deferral at inception and amortisation over life

Swiss Re discloses EVM profit generated by new business separate from prior year development


aMeasurement of certain balance sheet values

US GAAP EVM

15

Balance sheet assets and liabilities are generally measured at historic cost (except unit-linked liabilities)


Reserves Discounted net claims (net of premiums)

Account balance

Market value of account

Reserve assumptions

Locked in at inception (mortality,morbidity,yield, etc); with PADs

n/a n/a

DAC/PFVP Amortisesconsistently based on premium

Amortisesvariably based on EGPs*

Amortisesvariably based on EGPs*

CHF billion 31 Dec 2009

L&H assets Deferred acquisition costs (DAC) 3.1Present value of future profits (PVFP) 6.3

L&H liabilities Liabilities for L&H policy benefits 41.3

Policyholder account balances 37.9

Unpaid claims 11.8

EVM

Values assets and liabilities on a market consistent basis

Inforce liabilities represent all future benefit cash outflows while inforce assets represent all future premium cash inflows

Reflects best estimate assumptions for all inputs without PADs (margins)

CHF billion 31 Dec 2009

L&H assets

In-force business assets 170.1

L&H liabilities

In-force business liabilities 243.3

Balance sheet assets and liabilities are measured on a market consistent basis

* Expected Gross Profits


aUS GAAP accountingTraditional L&H reinsurance contract

Discount rate: based on interest rates assumed at pricing; locked-in

GAAP margin: expected income as proportion of premium

Policy liabilities533

DAC919

16

net cash outlay 312

Profit 74

New business value recognised in Year 1

0%

4%

8%

12%

16%

20%

0%

20%

40%

60%

80%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Benefit ratio (%) GAAP margin (%)

in USD thousand

Claims

Expenses

Net reserve change*

Premiums

Year 1 Year 20

Year 2 Year 9

Year 10

Year 11

Example of level term coinsurance

Inv income

* Net change in benefit reserves and DAC/PVFP


aEVM accountingTraditional L&H reinsurance contract

Discount

Future expectednet cash flows

Claims

Expenses

Taxes

Capital costs

Premiums

-40

Year 0 Year 20

5

Year 1

1

Year 9

0

Year 10

0

Year 11

Example of level term coinsurance

Discount rate: Transfer price of funds (TPF) = risk free rates at inception. Any additional investment return (loss) above (below) risk free that may be realised over time will be included in the Asset Management segment

New business value creation at day 1

Production cost 8 155

PV expectedpremiums 8 748

EVM profit593

17

Year 2in USD thousand

4


aComparison of income statement Example - year 1 of coinsurance contract

US GAAP EVM

18

All acquisition costs deferred at inception Small amount of profit recognised

PV of premiums expected at USD 8.75m EVM profit value recognised over lifetime

of treaty under US GAAP

USD thousand

RevenuesPremiums earned 1,150 Net investment income/loss (10)Total revenues 1,140

ExpensesClaims and claim adjustment expenses and L&H benefits 778

Acquisition costs 231Other expenses 57Total expenses 1,066Operating income before tax 74

Benefit Ratio 68%

USD thousand

ProfitNew business profit/loss 593

Previous years’ business profit/loss -

Total profit/loss after capital costs 593Release of capital costs -

Income before capital costs 593

Assumption: 20 year level term contract with incepting inforce of USD1bn and first year commission allowance at 100%


aComparison of income statement Example – year 5; assumption change: improved mortality

US GAAP EVM

19

Income reflects current year favourablemortality experience (also in Benefit ratio)

EVM reflects all future expected mortality profits

Good mortality experience over first 5 years has indicated overall change to mortality assumption is appropriate

USD thousand

RevenuesPremiums earned 721Net investment income/loss 57Total revenues 778

ExpensesClaims and claim adjustment expenses and L&H benefits 537

Acquisition costs 143Other expenses 36Total expenses 716Operating income before tax 62

Benefit ratio (expected 76%) 75%

USD thousand

ProfitNew business profit/loss -

Previous years’ business profit/loss 100

Total profit/loss after capital costs 100Release of capital costs 60

Income before capital costs 160


aUS GAAP: FAS 97Universal life

20

FAS 97Capitalised acquisition costs are expensed in proportion to estimated gross profits (EGPs, derived using best estimate assumptions). Changes in EGPs can be caused by:

- Realised gains/losses

- Changes in portfolio yields and reinvestment assumptions

- Change in experience (eg mortality)

Activity that accelerates (or reduces) EGPs will result in higher period amortisation

Conversely activity that decelerates (or increases) EGPs will result in lower period amortisation

"unlocking" of DAC/PFVP

Decline in EGP

Base assumption: EGPs of USD 1,000 earned over 10 years including USD 500 of DAC. In year 5, generate a realised gain of USD 10

Result: additional USD 5 of amortisation in year of gain; lower EGPs per year over remaining life

Increase in EGP

Base assumption: as above. In year 5, improve EGPs of USD 5 per year due to mortality expectations

Result: lower amortisation USD 5 in year of assumption change as inception-to-date amortisationis adjusted

Decline in EGP Increase in EGP

Illustration of "unlocking"


aUS GAAP – premium deficiency evaluation

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Loss recognition event

PAD risk margin (GAAP)

Best estimate reserves

Notional reserves based on updated assumptions

FAS 60 and FAS 97 reserves must be assessed for adequacy by comparing recorded net GAAP liabilities to a notional reserve calculated using best estimate assumptions (without PADs)

– any deficiency must be recorded by first writing down DAC/PVFP and, if required, increasing reserves

Tested periodically based on segments reported

How Swiss Re evaluates / monitors

Recorded reserves (locked-in): xxless DAC/PVFP (yy)Net GAAP reserves aa

Reserves using best estimate assumptions (no PADs) bb

Premium deficiency if:bb > aa

2009 Reserve margins of CHF 12.2bn– thereof, approx. 2/3 related to traditional life– remainder split between traditional health

and Admin Re®


aL&H has additional value in EVM

US GAAP shareholders' equity

EVM ENW

Reserve margins +12.2Add. discounting + 1.4 Friction. cap. costs - 3.7Net other -1.6

Comparison of 2009 US GAAP shareholders’ equity to ENW by segment

CHF bn

26.228.5

8.3 -6.0

L&H

Net P&C/Other

Significant L&H economic profit from business already written is not recognised in the US GAAP balance sheet

These profits will emerge in US GAAP results over time

22


aWhat drives L&H performance?Comparative weighting of factors on period results

refer to approximate weightings for Swiss Re1 Coverage (CI); Incidence (new claims) vs Termination2 Performance of equity markets and interest rates

Mortality Morbidity 1 Lapse LongevityMarket

Performance2

Term assurance

Critical illness and disability income

Universal life

Annuity / longevity

Unit-linked

23

US GAAP view

EVM view

L&HPerformance

Term assurance

Critical illness and disability income

Universal life

Annuity / longevity

Unit-linked


a

2424

Example of MonitoringMortality and lapse risk analysis

Based on available data, treaty experience can be monitored compared to pricing by duration. i.e., based on policy issue year development of experience (A/E ratios)

Monitoring by amount and count

Own information can be combined with industry information to form basis of assumptions in pricing tools

Receiving policy level data from cedents is key

Portfolio review where treaty level data unavailable

Actual claim (USD) vs expected

Actual compared to pricing expected Example of experience monitoring

Ongoing experience monitoring supports appropriate treaty re-pricing actions if necessary

50%

60%

70%

80%

90%

1 2 3 4 5 6

Cohort 1 Cohort 2

40%

50%

60%

70%

80%

1 2 3 4 5 6

Cohort 1 Cohort 2

Year

Year

….. etc.

….. etc.

Actual lapse (%) vs expected


aUS GAAP investment income allocationMethodology

Allocation of a benchmark return to L&H/P&C segments based on an average risk-free rate applied to net reinsurance GAAP reserves

Risk free rate applied based on duration of economic cash flows for the respective block of reserves, by currency

Higher yields from investing in spread assets reflected in AM only, not L&H or P&C

– Liabilities that are interest sensitive such as universal life contracts may have specified crediting rates and the allocation may result in nil spread reported by the L&H segment

– Liabilities with locked in higher interest rate assumptions will be allocated lower returns than assumed in reserving

Based on ALM policies, actual returns on assets supporting long term liabilities would not decline as rapidly as risk free rates

No return on capital is allocated to the L&H or P&C segments

Actual realised gains /losses included in AM can result in a change in PVFP amortisation. PVFP is recorded directly in the L&H segment

Methodology Implications

Direct investment income earned by each segment (e.g. policy loan interest, interest on funds withheld,unit-linked returns, ILS, variable annuities)

Actual asset returns, including realised gains/losses, which are reflected within the AM segment results

Asset Liability Management (ALM) policies and principles

Pricing

…does not impact…

25


aUS GAAP investment income allocationIllustration of methodology and impact using risk free rates

Base assumption: a sample 20 year term product issued in 2002, with 4.93% expected return on assets

Benchmark declines from 4.93% in 2002 to a rolling rate of 4.41% by 2010, assuming a duration of 20 years

Result: 2010 allocation to L&H segment is 89% of expectation at pricing

Actual assets are ALM matched and returns reported in AM segment

26

Benchmark compared to pricing1

Base assumption: same example as above

FAS 602 accounting assumes income will emerge as a constant proportion of premium (GAAP margin)

Result: using a risk-free benchmark results in a GAAP margin of less than 5% reported by the L&H segment, compared to a pricing expectation of 6.65%; the difference is reported in AM segment

Income as proportion of premium

1 Hypothetical example ignores initial net cash outflows2 Now FASB Accounting Standards Codification Topic 944 - Insurance

USD thousand

0%

1%

2%

3%

4%

5%

6%

-

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008 2009 2010

Inv. income (pricing assumption) Inv. income (rolling risk-free return)Assumed pricing yield Rolling average risk-free yield

0%

1%

2%

3%

4%

5%

6%

7%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Margin (pricing assumption) Margin (rolling risk-free return)


aUS GAAP investment income allocationIllustration of methodology and impact using corporate bond rates

Base assumption: a sample 20 year term product issued in 2002, with 5.50% expected return on assets (i.e a return higher than risk free). This implies an IRR of 12% and a GAAP margin of 8.0%

Result: 2010 allocation to L&H segment using benchmark risk free would be 80% of expectation at notional pricing

27

Using corporate bond rates in pricing1

higher implied GAAP margins

higher implied IRR

higher likelihood of GAAP shortfall in earnings if investment results do not match pricing assumptions

no difference in economic performance

…results in…

1 Hypothetical example ignores initial net cash outflows2 Now FASB Accounting Standards Codification Topic 944 - Insurance

0%

1%

2%

3%

4%

5%

6%

-

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008 2009 2010

Inv. income (pricing assumption) Inv. income (rolling risk-free return)Assumed pricing yield Rolling average risk-free yield

USD thousand

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Margin (pricing assumption) Margin (rolling risk-free return)


aKey messages

Our L&H business is a profitable franchise on an economic and US GAAP basis

Business is priced and steered using a market consistent, economic framework (EVM)

Profit emergence under US GAAP is relatively stable over annual periods but is very small at contract inception. Profit recognition depends on product features

US GAAP framework tends to understate value of L&H business

28


a

Questions & answers

29


a

Appendix

30


a

USD 10.7bn

Americas5.0

UK-Ireland-Africa

1.8

Cont. Europe

1.4

Asia0.9

Admin Re®US/UK

1.6

2009 L&H US GAAP earned premiums and fees Global diversified portfolio

By region in USD bn

31


a2009 L&H US GAAP reserves

32

USD 88.0bn

By currency including unit-linked, participating business

USD 88.0bn

Non-linked72%

Unit-linked28%

By type and line of business

USD 63.1bn

USD51%

GBP26%

EUR13%

CAD5%

Other5%

By currency excluding unit-linked, participating business

On an original currency basis, L&H reserves have been relatively stable over the past 5 years although increasing with Admin Re® acquisitions

Closing rates USD/CHF EUR/CHF GBP/CHF CAD/CHFFY 2007 1.13 1.66 2.25 1.15FY 2008 1.06 1.48 1.53 0.86FY 2009 1.03 1.48 1.67 0.99Change FY 2007 / FY 2008 -6.2% -10.8% -32.0% -25.2%Change FY 2008 / FY 2009 -2.8% 0.0% 9.2% 15.1%

USD37%

GBP47%

EUR9%

CAD4%

Other3%

Trad Life31%

Trad Health

3%

Admin Re

66%


a

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10

Life quarterlyLife yearly

Slide 33

Benefit ratioGlobal L&H

Volatility drivers

Reserve changes due to information updates from clients IBNR model changes Underlying mortality (periodicity, seasonality) Random fluctuations in any given period (Swiss Re’s book has a limited number of high sum assured

policies) Reporting delays at primary companies and changes in client reporting frequency

Benefit ratio is stable on an annual basis

Benefit ratio is calculated as claims divided by premiums, excluding unit-linked and with-profit business. Benefit ratio also excludes the impact of VA and pre-2000 GMDB from all periods presented

33


a

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Life quarterlyLife yearly

Slide 34

Benefit ratioTraditional life

Volatility drivers

Reserve changes due to information updates from clients IBNR model changes Underlying mortality (periodicity, seasonality) Random fluctuations in any given period (Swiss Re’s book has a limited number of high sum assured

policies) Reporting delays at primary companies and changes in client reporting frequency


Benefit ratio is calculated as claims divided by premiums, excluding unit-linked and with-profit business. Benefit ratio also excludes the impact of VA and pre-2000 GMDB from all periods presented

34


aBenefit ratioTraditional health

Volatility drivers

Changes in assumptions for past business (claims reserve releases/strengthening, IBNR model changes)

Change in portfolio mix (e.g. IS integration) Underlying morbidity Random fluctuations Reporting delays at primary companies and changes in client reporting frequency


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Health quarterly

Health yearly (incl. arbitration award)

Health yearly (excl. arbitration award)

Benefit ratio is calculated as claims divided by premiums, excluding unit-linked and with-profit business

35


aLife & Health Operating income break-down

USD m Q1

2009Q2

2009Q3

2009Q4

2009Q1

2010Q2

2010Q3

2010

Operating income of which approximately: 244 -8 363 88 245 142 119

VA, pre-2000 GMDB,impact from B36

81 -536 -33 -38 55 53 10

Recapture, commutation & rescission -2 269 132 31 6 -6 -2

Mortality and morbidity compared to expectations 36 60 109 33 85 36 46

Changes in models and assumptions 9 50 -63 13 -57 23 -99

Change in allocated investment income1 15 -24 5 -9 -35 -22 -8

PVFP amortisation/reserves compared to expected2 -26 -16 23 -16 -26 -88 -17

Benefit ratio3 87.8% 80.6% 81.1% 85.7% 89.1% 88.3% 93.3%

1 Change in allocated investment income compared to immediately preceding quarter2 Based on changing yields, equity markets and realised gains/losses3 Benefit ratio now excludes the impact of VA & pre-2000 GMDB from all periods presented

Based on Swiss Re estimates, aggregation by categories may be refined in the future

36


aLife & Health Variable Annuities

Capital market related risks are hedged, including underlying policyholder fund positions, volatility (vega), interest rates (rho), foreign exchange and changes in market performance (gamma)

Insurance risks such as policyholder behaviour and mortality risk are generally not hedged, but underlying performance of all cash flows and positions are monitored and hedges are repositioned based on the frequency of the reporting received from cedents

The death benefit/income benefit/accumulation benefit products have finite terms. Swiss Re hedges expected policyholder selection at contract termination and thus the resulting interest rate risk

VA and pre-2000 GMDB results in 2010 generally have been driven primarily by changes in Swiss Re's own credit spreads. Swiss Re hedges expected economic cash flows

Derivative (mark-to-market) accounting is followed for the majority of VA and all pre-2000 GMDB contracts

Account valueUSD bn End Q3 2010

VA only 16.8

equities 9.5

fixed income 7.3

Pre-2000 GMDB 4.9

equities 3.1

fixed income 1.8

Breakdown of VA ridersQ3 2010

Death benefit with income benefit or accumulation benefit 53%

Withdrawal benefit 44%

Income benefit / accumulation benefit 3%

Total 100%

37


aMeasuring Variable Annuities (VA)

38

GAAP and EVM essentially the same

USGAAP EVM

Mark-to-market of hedging instruments ✔ ✔

Mark-to-market of liability cash flows ✔ ✔

Risk margins / cost of capital ✔ ✔

Taxes x ✔

Swiss Re's credit spread ✔ x

Net hedge effectiveness measured frequently and hedging program adjusted accordingly

Example Treaty

Example Treaty (daily volume)


aCommon reinsurance treaty types

39

Reinsurer participates, on a pro-rata basis, in all premiums and benefits from the underlying policy according to the set1

(treaty) percentage

Expense reimbursement by reinsurer subject to negotiation

Reinsurer maintains assets supporting its share of the business and bears investment risk on such assets

Coinsurance / Original Term

Reinsurer covers the portion of the claim incurred in the period

Pricing of the reinsurance premium is set separately from the premium charged by cedent to policyholder

Reinsurance premium covers the annual mortality/morbidity costs; and thus can increase each year as mortality risk increases

Yearly Renewable Term (YRT) / Risk Premium

Swiss Re generally writes proportional treaties in a coinsurance or YRT form. Coinsurance can be written on a funds withheld or modified coinsurance basis

1 Applies to first dollar quota share treaty. Coinsurance agreements can also be excess of retention where participation is not at a set percentage


aSignificant product pricing factors

Life product Mortality: Higher incidence or severity than expected; or more people die than expected; and/or the people that die have larger than average size policiesLapse: number of people ceasing policy coverage may be different to expectedExpense: policy loadings in aggregate are insufficient to cover costs Distribution: mix and volume of business not in line with expectedInvestment: returns are not in line with expectations

Health product Definition of conditions covered: medical advances can lead to changes in incidence or severity of a conditionIncidence trends: more people are diagnosed with one of the conditions covered than expectedLapse, expense, distribution and investment risk remain, as with term assurance

Savings product Spread between interest earned on funds invested and the rate credited is less than expectedExpenses charged to the policy are less than the cost of running the businessMortality, lapse and distribution risk remains, as with term assurance

Unit-linked product Lapse: more people stop regular premiums to their policy or more people transfer the policy to another insurer than expectedExpenses: policy loadings in aggregate are insufficient to cover costs of the business Investment: returns are lower than expected, so reducing the value of future charges on the fund (based on % of fund value)

40


aUS GAAP accounting for L&H Long duration – traditional L&H type contracts Loss recognition

event

PAD risk margin (GAAP)

Best estimate reserves

Notional reserves based on updated assumptions

US GAAP profits emerge over the duration of the policy with little emergence at policy inception

Each assumption in the reserve calculation, i.e. mortality, morbidity, investment yield, terminations and expenses are set prudently by including a provision for the risk of adverse deviation (PAD=provision for adverse deviation)

– Except as noted below, initial assumptions are “locked-in” through the life of the contract. They are only revised if there is a material change in circumstances (a “premium deficiency” or loss recognition event)

– Disability claim reserves (claims in payment) are derived using current best estimates assumptions (i.e. assumptions not locked-in)

Premiums are recognised when due from policyholders. Claims, expenses, and investment income are reported as incurred

Capitalised acquisition costs expensed in proportion to premium recognised

Policy benefit reserves are established as the difference between the present values of future policy benefits to be paid and future net valuation premiums required to cover claims and expenses

41


a

Policy benefit reserves (policyholder account balance), is established generally representing the amount that a policyholder would receive on surrender of the policy (excluding consideration of any surrender charges)

– No provisions for adverse deviation

– Includes premium deficiency evaluation

– Interest accrues on the policyholder account balance (reported directly in the income statement)

Capitalised acquisition costs expensed in proportion to estimated gross profits (EGP derived using current best estimate assumptions)

Premiums collected are not reported as revenue and payments to policyholders that represent a return of policyholder account balances are not reported as claims

– Fees are reported for services provided by the company (reported in fee income from policyholders)

– Claims are recognised only for amounts in excess of policyholder account balance

US GAAP accounting for L&H Long duration – universal life type contracts

US GAAP profits emerge over the duration of the policy with little emergence at policy inception

42


a

Investment contracts are contracts which have no significant insurance risk

Payments from policyholders are not considered as premiums or revenues but are rather reported as deposit liabilities (“provisions for linked liabilities”) consistent with accounting for interest bearing or other financial instruments

The deposits are invested in financial assets and are reported as part of the general investments accounts

The investment income and the investment gains or losses on these linked-assets are passed through to the policyholders and do not impact the bottom line

US GAAP accounting for L&H Long duration – investment contracts (incl. most unit-linked)

The US GAAP profit emerges from fee income which is assessed against the policyholder’s account balance

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aUS GAAP accountingTraditional L&H reinsurance contract

Discount rate: based on interest rates assumed at pricing; locked-in

GAAP margin: expected income as proportion of premium

Policy liabilities0.8

DAC3.3

44

net cash outlay 2.3

Profit 0.2

New business value recognised in Year 1

in USD m

Claims

Expenses

Net reserve change*

Premiums

Year 1 Year 20

Year 2 Year 10

Example of a YRT contract

Inv income

Year 30

* Net change in benefit reserves and DAC/PVFP

Year 40

0%

4%

8%

12%

16%

20%

0%

20%

40%

60%

80%

100%

Year 5 10 15 20 25 30 35

Benefit ratio (%) GAAP margin (%)


a

45

US GAAP: FAS 97 Universal life account balanceExample of impact on US GAAP result

USDBalance

sheetIncome

statement

Opening account balance liability (1,000) ✔

Premiums paid by policyholder (50) ✔

Interest credited (40) ✔ ✔

Cost of insurance, management and expense charges 70 ✔ ✔

Benefits paid 5,000 ✔

Net benefit cost to insurer (3,980) ✔ ✔

Closing account balance liability 0 ✔

Assumes policyholder dies on last day of reporting period and is paid USD 5,000 in death benefits

Ignores investment income earned on underlying assets

FAS 97 predominantly in Admin Re®


aUS GAAP: FAS 97 Unit-linked

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PVFP is expensed in proportion to the present value of estimated gross profits (EGPs, derived using best estimate assumptions)

Policyholder funds for unit-linked policies are typically invested in a mixture of equity shares, bonds and real estate, with the equity shares component normally predominant

Fee assessments based on the market values of unit-linked assets usually contribute a significant proportion of total EGPs. The amounts of EGPs are therefore sensitive to investment returns

"unlocking" of PFVPIncrease in EGPs:

Base assumption: EGPs totaling USD1,000 over 10 years with USD 500 PVFP at inception. In Year 5, 20% boost in investment returns

Result:

– Total EGPs over life of the business increased from USD 1,000 to USD 1,089

– Lower amortisation of USD 21 in year of assumption change as inception-to-date amortisation is adjusted. Higher expected amortisation in future years reflects EGPs

Illustration of "unlocking"

Activity that accelerates (or reduces) EGPs will result in higher period amortisation

Conversely activity that decelerates (or increases) EGPs will result in lower period amortisation


a Illustration for riders only, living benefits (e.g. Guaranteed Minimum Withdrawal Benefit)

– Guarantee is accounted for as derivative, carried at fair value

– Derivative hedges with third parties

– Changes in fair value of both components are accounted for as derivative income through realisedinvestment gains

Depending on the benefit (living benefit vs. death benefit) as well as the structure of the contract (riders only vs. base contract with riders), GAAP accounting classification can be different

US GAAP accountingHow Swiss Re accounts for a VA reinsurance contract

RiderLiving benefits

Various hedges with third parties

Pre-tax GAAP income

At the end of year 1

Realisedinvestment gains

47


aTerm assurance with level annual premiumsTypical cashflows of a cohort of policies

Total premiums for the cohort reduces over time as some policyholders die. Claims increase over time due to higher mortality rates at older ages

Net cash flow is positive in the early years and negative in the later years. Positive cash flows are invested to generate investment income. The release of reserves and investment income pay for the excess of claims over premiums in later years

Lapses reduce both premiums and claims

In the published US GAAP accounts, profits emerge in line with the run-off of the business

Am

ount

Duration

Premium Claims Expenses Investment Income

48


aDisability incomeTypical cashflows of a cohort of policies

Am

ount

Duration

Premium Claims Expenses Investment Income

Overall profile is similar to term assurance with US GAAP profits emerging over the duration of the contracts

Assume level annual premiums. Total premiums for the cohort reduce over time as some policyholders die or become claimants

Claims increase over time as the number of claimants increases. Claim rates are also higher at older ages

Net cash flow is positive in the early years and negative in the later years. Positive cash flows are invested to generate investment income. The reserves and investment income pay for the excess of claims over premiums in later years

49


aUniversal lifeTypical cashflows of a cohort of policies

Profit generated from margins on business

Purchase price would be paid on acquisition of business (not shown)

Significant investment cashflows from inception due to acquisition of existing block of business

Am

ount

Duration

Net Mortality Profits Net Expense Profits Net Investment Profits Net Surrender Profits

Shows projected run off of an acquired block of Universal life business

50


a

Am

ount

Duration

Premium Charges Fixed Charges Fund charges

Administration Expenses Investment Expenses Commission Expenses

Unit-linked savings productTypical cashflows of a cohort of policies

Shows projected run off of a recently acquired block of unitised business

Present value for each of the major cash flows shows business is profitable

Income is dominated mainly by a charge on investment funds

Purchase price would be paid on acquisition of business (not shown)

Accumulated funds (savings) initially increase which results in increasing fund charges. In later years funds decrease as a result of maturities and surrenders as the business runs off

51


a

Corporate calendar

17 February 2011 Annual Results 2010 Zurich15 April 2011 147th Annual General Meeting Zurich 05 May 2011 First Quarter 2011 results Conference call07 July 2011 Investors' Day Zurich04 August 2011 Second Quarter 2011 results Conference call

Investor Relations contacts

Hotline E-mail+41 43 285 4444 [email protected]

Susan Holliday Ross Walker Chris Menth+44 20 7933 3890 +41 43 285 2243 +41 43 285 3878

Simone Lieberherr Simone Fessler+41 43 285 4190 +41 43 285 7299

Corporate calendar & contacts

52


aCautionary note on forward-looking statements

Certain statements and illustrations contained herein are forward-looking. These statements and illustrations provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to a historical fact or current fact. 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 carryforwardsand 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;

These factors are not exhaustive. Swiss Re operates in a continually changing environment and new risks emerge continually. Readers are cautioned not to place undue reliance on forward-looking statements. Swiss Re undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.

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.

53

Documents

Life & Health teach-in45b06144-0b24-4abb... · Life & Health teach-in | 09 December 2010 Measurement of certain balance sheet values a US GAAP EVM 15 Balance sheet assets and liabilities