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Annual Report 2015

Keeping the long term in view

The strategic priorities that will shape our future

Dear shareholders,

Another very successful year for your company has just ended and this report will explain it in great detail. For this success to happen we needed, of course, benign circumstances, but we also needed the full effort of dedicated employees, our loyal clients and, last but not least, the support of our shareholders. To the many that contributed throughout the year, my sincere thanks.

Proposed regular dividend per share for 2015



(CHF 4.25 for 2014)

Walter B. Kielholz – Chairman of the Board of Directors (photo)

“Three things set us apart: capital strength, client relationships and knowledge.”

The conundrum: lower prices, but ever-higher margins and less demand

In 2015 we again observed high margins, and as a consequence high returns. The most significant were in Property & Casualty Reinsurance, but also in our life and health businesses, which have recovered from difficult results the year before.

At the same time many market participants speak about a significant erosion of pricing levels across all businesses. They complain about this and about a further reduction in investment returns. The relationship between demand and available capacity seems out of balance — and while we all complain, margins have remained strong for quite a few years now.

Particularly amazing is that the high margins are achieved despite continuously decreasing investment returns which in our business have always been an important contributor to margins. Central banks’ extremely easy monetary policies in our main markets are certainly a challenge for an industry which carries large balance sheets full of financial assets.

What leaves me perplexed is, in addition, that our clients (the insurance industry and large corporate clients) are not taking advantage of this market. Quite the opposite: the lower prices get, the less reinsurance cover they buy. This is a period of high uncertainty (just to mention some: climate change, geopolitical security challenges, technology developments with huge consequences, economic growth is very unstable, and financial markets face the biggest monetary policy experiment ever). So what should a company like Swiss Re do in this situation?

Just to avoid any misunderstanding: we are clearly positive about the longer-term prospects for our business. Many trends in the world — in society, in science and in the economy — are positive for demand for our business: risk underwriting. But we have to successfully deal with important adverse forces in the short term.

Therefore we have presented an update last December on the strategic direction and priorities which should allow us both to succeed in the short term and not lose sight of long-term strategic direction.

Be quick on your feet!

In risk underwriting and in asset management, value is created by allocating capital to where pricing inefficiencies can be detected and exploited. There is nothing new in this really. The present situation, however, requires us to identify inefficient pricing in the risk markets quickly and react decisively by either investing or, more likely at present, withdrawing capital. Doing this systematically will move the needle.

Capital allocation matters, we all know that. But you have to be in a position to actually execute on your analysis. In this respect the reinsurance industry is in a better situation than primary insurers, who have to invest significantly in building the infrastructure in markets they operate in. Their flexibility is limited. Reinsurance on the other hand can react fairly quickly, not only on the asset side, but also on the underwriting side of the house. So we’ll aim to take advantage of this and be quick on our feet.

Of course we spend a lot of time researching investible ideas in all our businesses. Sometimes with more success (like the acquisition of the Guardian life portfolio last year), sometimes with less … and if we don’t find a good place to invest, then we can also distribute more money back to you. To some degree that has been the case this year, so we plan to propose a regular dividend of CHF 4.60 per share, as well as a new share buy-back programme of up to CHF 1 billion.

Secure access to business opportunities!

“I believe the outlook is very positive indeed.”

Reinsurers traditionally have access to the risks they underwrite through intermediaries: direct insurance companies, brokers and others. However, and today more than ever, some of these intermediaries run the risk of getting disintermediated sooner rather than later because they are unable to adapt their business model, disruptors are penetrating their markets or technology is changing the entire industry.

Therefore for us it is of vital importance: don’t let traditional distribution channels make efficient capital allocation impossible. Swiss Re has to have access to the risks it wants to underwrite. In this context we have built our Global Partnerships business, which is trying to develop opportunities with governments and supranational institutions. And we have just created our Life Capital Business Unit, which is underwriting individual and group life risks through and with the help of distribution partners or by acquiring closed life books.

Put your money where your mouth is!

A third pillar of our strategy is about resource allocation. Allocate resources to where you see the opportunities; reallocate radically. Again, this sounds trivial, but it is not.

Take the example of emerging markets. Our own projections show that about 50% of the top-line growth and incremental capital requirements over the next ten years will come from emerging markets. Not a big surprise if we think of topics like protection gaps, urbanisation, formation of middle classes and the build-up of sophisticated industries in these parts of the world.

At present only about 15% of our global resources are allocated to these markets, even less than that if we think of senior management, research and local footprint. Change is required.

Resources in our business are people and systems. Once you have made up your mind where you want to allocate the capital, develop them so that they can match the challenges. Maintain this even and deliberately when the margin pressure is intense. It will ultimately produce a high return for shareholders. Inadequate resource has never been a recipe for success, certainly not in our business of risk underwriting and tough investment decisions.

Be different and — of course — better than the others

We are convinced that the strength of the Swiss Re brand and reputation lies in a very clear development of three elements of differentiation: capital strength, client relationships and knowledge. These principal differentiation factors have been with our company since its foundation more than 150 years ago. Apparently it has been a great success. Let me quickly address what I sometimes call the wallet, the heart and the brain.

We are quite open about what we consider an adequate capital underpinning of our underwriting and investment activities. This gives our clients real peace of mind when they allocate large chunks of their reinsurance business with one provider: Swiss Re. Visibly and in addition we keep more free capital at the holding company level, at some short-term cost to you, our shareholders. We however are convinced that this strong capital position and the resulting financial flexibility is of great value in the longer term. It is there for the moment it can be deployed with great benefit for both the client and for you.

Clients in reinsurance are partners. Our clients regularly put us at the top of the league tables as best reinsurer, in all parts of the world and nearly all lines of business. We are enthusiastic about our clients and will continue to be so. This allows us to fix problems with our clients instead of abandoning them at a crucial moment. Our portfolio of reinsurance business is therefore superior in quality.

And last but not least: we are here to develop the body of knowledge available within the firm and share it with our clients. This allows us to develop better products with and for them and allows us to learn from each other. We spend a significant amount for research both at the product development level and at the portfolio level, supporting our capital allocation. It might lead to a higher operating cost than some of our peers have. But it should also lead to overall higher margins. No surprise. It would be strange if superior insight were not relevant to risk underwriting and investment decisions.

Christian Mumenthaler to become Group CEO on 1 July 2016, Michel M. Liès to retire

Finally, I must share some important news. Christian Mumenthaler, currently CEO of Reinsurance, will become our Group Chief Executive Officer on 1 July 2016, and Michel M. Liès will retire. On behalf of the entire Board I extend our warmest thanks to Michel for his more than 35 years of service to Swiss Re. Throughout his career, Michel has lived Swiss Re’s highest values and been key to our Group’s continued strong performance. Under his leadership net income has almost doubled, the capital base has increased significantly and we have distributed more than USD 12 billion of excess capital back to you, our shareholders. It is fitting that we make this announcement at the end of a successful 2011–2015 financial target period, and after having introduced a new strategic framework. We wish him the very best.

The good news is that we have a highly qualified successor. In Christian we have a candidate who can both transition smoothly into this new role and who brings an intimate understanding of our Group’s strategy. Christian has been with us for 17 years, and for nearly the last five, as CEO of Reinsurance, and therefore responsible for approximately 85% of our revenue. He has been the driving spirit behind P&C Re’s continued outperformance and a key figure in getting L&H Re back on track. His nomination demonstrates both the depth of Swiss Re’s talent and the importance of maintaining Swiss Re’s distinctive culture. I wish Christian every success in the new role.

Dear shareholders, I hope you share my confidence for the future. Our strategic priorities are confirmed and we welcome Christian to implement them together with his team and the 12 000 colleagues at Swiss Re. I believe the outlook is very positive indeed and I look forward to continuing our success story together.

Zurich, 23 February 2016

Walter B. Kielholz (signature)

Walter B. Kielholz
Chairman of the Board of Directors