Swiss Re’s strategy helped navigate a turbulent 2017

Dear shareholders,

2017 was a turbulent year. It will go down in history as a year in which insurers – especially reinsurers – faced many claims from major natural catastrophes. Insurers saw their accounts hit by no fewer than three hurricanes in the North Atlantic, two earthquakes in Mexico, two large forest fires in California and storms in Australia. But after all, this is our business and the reason why we’re here. That’s why we provide a detailed overview of the 2017 natural catastrophes and their impact in our Annual Report. Incidentally, history shows that loss concentrations of this kind occur at a practically biblical rhythm of every five to seven years.

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

“I personally remain optimistic and confident that Swiss Re will continue its success story – thanks to our resources, financial latitude, global network and our employees’ wealth of knowledge and expertise.“

Walter B. Kielholz

Chairman of the Board of Directors

The high storm activity clearly illustrated the potential consequences of climate change. While the frequency of storms in 2017 was not actually extraordinary when viewed in a multi-year comparison, it did show us what could happen if major storms were really to occur more frequently on a lasting basis, year after year. No one can predict how the insurance industry would actually deal with such a trend. In any case, Swiss Re will help contribute to managing the implications of climate change – both through our insurance solutions and our investment strategy. Mind you, this is also something that major institutional investors increasingly and vigorously call for.

It will be interesting to see how the insurance markets will respond to a year like 2017. Prices for insurance cover normally begin to drop after a series of “good” years, or in other words, years without large claims. This has been the case for quite some time now. But prices are set to rise again in the wake of a year such as 2017 – and this has been the case since the start of 2018, although the increases in the overall market are somewhat more muted than we would have expected. I am intrigued to see how the market dynamics will continue to develop. What we already know is that 2017 didn’t particularly weaken insurance market capitalisation, which may indicate a more moderate correction in prices. This remains to be seen.

Geopolitical risks

A year ago, I commented on geopolitical risks, at that time in the wake of Brexit and the US elections. Do I feel reassured, one year later? No, I do not. However, the reasons for my concern about the geopolitical situation have shifted somewhat. I now take a slightly more optimistic view of the situation in Europe, with respect to both the political and economic conditions. While the situation in the UK remains very uncertain and the potential consequences of Brexit are still somewhat unclear, I am encouraged by developments in other European countries.

Proposed regular dividend per share for 2017



(CHF 4.85 for 2016)

While the US is demonstrating economic strength that we haven’t seen for years, the country is still bitterly divided on key issues – which will presumably worsen. I believe that the US is in the midst of a more substantial transformation than is suggested by the media’s focus on President Trump and his Twitter activity. At the same time, the Middle East continues to be the scene of great political upheaval, and unfortunately, no rays of hope are discernible on the horizon at present.

Please be assured that the management and the Board of Directors of Swiss Re take these geopolitical developments very seriously and continue to monitor them closely – we remain vigilant.

Growth, inflation and interest rates

We are obviously pleased that the global economy has entered a growth phase, even more so as our business can only grow when other industries outside of the financial sector are growing too. The inflation so long-awaited by many could, however, be a headache for us if it gets out of control. Let’s remember that we are vulnerable to inflation, especially in the liability business. In the past, it was very difficult to adjust for strong and sudden inflation hikes. Of course, we haven’t reached that point yet. But the phase of highly expansionary monetary policy – whether traditional or non-traditional – is over, and there is little doubt that yield curves will change again – move upwards and get steeper.

In fact, we are happy to experience an almost normal economic situation of this kind; but the road leading there will be painful for the insurance industry, because it implies a long and sustained bond bear market. This is a nightmare for a re/insurance company like Swiss Re that holds nearly 77% of its financial assets in bonds – and the reason why we are striving all the more to keep a check on the negative medium-term effects. Ultimately, I am convinced that the near future will see the establishment of a new reality in the financial markets, in which we will also be able to operate very successfully again.

Knowledge and experience sets us apart


Digitalisation, big data, robotics, artificial intelligence

Forward-looking concepts in the fields of digitalisation and artificial intelligence are currently at the top of the agenda – and everyone is talking about these topics. People are either euphoric or concerned about them, depending on their standpoints and interests: some discussions suggest that business models run the risk of becoming obsolete sooner or later. Meanwhile, individuals are worried about their jobs and the world with which they are familiar. They wonder if their knowledge and skills, which they have worked hard to nurture, might cease to be needed from one day to the next.

I am convinced that today’s concept of eco-system insurance will undergo drastic changes. A year ago, I already commented that I consider the distribution and production (intermediation) costs associated with insurance to be far too high given the modern technologies available. This also applies to other financial services, where the current situation has similarly attracted an almost frantic focus. We know, of course, that these far-reaching changes will probably take more time – but we also know that their effects will be felt all the more profoundly and rapidly when they do take hold. I believe that modern technologies will completely disrupt the insurance industry’s value chains and pose great challenges to the entire industry’s structure.

We have to be strategically prepared for this. We believe that digital disruption will have a less immediate impact on reinsurance and major risk business than on direct insurance business. And we believe that having an agile personnel and organisational infrastructure will be advantageous for purposes of flexibly adapting traditional business models. Nevertheless, we are not naïve: we certainly cannot allow ourselves to become complacent in such a radical phase of change – on the contrary, we want to play an active role in shaping it. Waiting anxiously and doing nothing is never a useful strategy. Swiss Re is therefore examining various strategic options that will enable us to respond rapidly to the digital transformation and fully capitalise on its future potential.

Meanwhile, this all comes down to the main aspect of our strategy: the allocation of capital and resources to emerging business models as well as the leveraging of newly established intermediaries to gain access to risk pools and end customers to which our traditional primary insurance partners have little access. Of course, we also aim to find new ways of assessing and evaluating risks – thanks to new analytical methodologies in a highly interconnected world of infinite data volumes.

Who knows where this journey will lead… but we are definitely living in exciting times. I personally remain optimistic and confident that Swiss Re will continue its success story – thanks to our resources, financial latitude, global network and our employees’ wealth of knowledge and expertise.

Industry trends

An overview of some of the observed trends that are likely to have an impact on the re/insurance industry.

Stock exchange (photo)

Geopolitical risk

In line with recent geopolitical trends, international commitment to cooperation in terms of trade, security and free movement of people is deteriorating. After a prolonged period of cooperation following the financial crisis, regulators today also seem to have less of an appetite for globally-aligned policy reforms. The chances of global re/insurance regulatory standards being agreed and implemented have diminished and a more territorial approach to supervision seems to be on the rise. The resulting fragmentation limits diversification possibilities and regulatory predictability, and it increases operational costs by requiring more local regulatory considerations. Additionally, more fragmented regulatory approaches will be less effective in promoting financial stability. Such developments may eventually lead to trade barriers and market access issues around the globe. They could also undermine re/insurers’ ability to support economic activity and close the protection gap.

Monetary policy shift

The US Federal Reserve (Fed) is expected to raise interest rates further. The central bank will need to walk a thin line between monetary policy normalisation and avoiding an unwarranted tightening in financial conditions. Inflation is the key risk that could force the Fed to hike rates more aggressively and trigger adverse financial market reactions. Re/insurance growth is often linked to GDP growth and strong global economic growth helps re/insurance make progress in bridging the protection gap.

Transformation of business models

We are experiencing the emergence of new business models that create customer centric digital journeys extending beyond what end users could previously obtain. These developments trigger new re/insurance demand, or change customer expectations for example with regards to digital interaction. Newly transformed customer centric business models will trigger further demand for novel insurance products and distribution channels, while at the same time increasing requirements for innovative solutions and data privacy. However, existing regulatory frameworks that are not appropriately geared to technology-driven innovation could limit the ability of insurers to deploy technology-based solutions, at least in the long-term.

Climate change

Physical risks posed by climate change could potentially affect three areas of the re/insurance business: reduction/disruption of insurers’ operations, modelling and pricing weather-related natural perils, and impact on the economic viability of re/insurance for risks exposed to extreme weather events. In the face of these risks, it becomes increasingly imperative that insurers are able to diversify risks globally. It is therefore important that governments work to remove remaining re/insurance market access barriers.

In conclusion, let me draw your attention to a few important personnel changes:

In light of the ongoing renewal of the Board of Directors – a process that we launched some years ago – I am very pleased that we have attracted three outstanding individuals to stand for election to the Board. At the next Annual General Meeting on 20 April 2018, we will propose Karen Gavan, Eileen Rominger and Larry Zimpleman as new, non-executive and independent members.

Karen Gavan has over 35 years’ experience in various senior-level finance and management positions in insurance companies, both in life insurance and property and casualty business. Eileen Rominger is a recognised investment professional with extensive investment management experience. Larry Zimpleman boasts a successful 44-year career with the Principal Financial Group, an investment management firm that provides insurance solutions and asset management and pension products to private individuals and institutional clients. In the course of their diverse careers, all three have accumulated extensive international experience and sound insurance expertise, as well as wide-ranging skills in the field of new digital insurance solutions and offerings.

After 17 years as a member of the Board of Directors, Rajna Gibson Brandon has decided to step down. Mary Francis and C. Robert Henrikson, current members of the Board of Directors, also plan to retire at the next Annual General Meeting. I would like to thank Rajna Gibson Brandon, Mary Francis and C. Robert Henrikson for their great dedication and valuable contribution – not to mention the strategic advice and knowledge they have placed at our disposal over the years.

As already communicated, there is also a change to our Group Executive Committee: John R. Dacey will become the new Group Chief Financial Officer, succeeding David Cole, with effect from 1 April 2018. John R. Dacey joined Swiss Re’s Group Executive Committee as Group Chief Strategy Officer more than five years ago, and has successfully led several strategic initiatives. His career in the re/insurance industry spans over 20 years, during which time he has held a range of management positions. After more than seven years at Swiss Re, David will step down as Group CFO on 31 March 2018 to pursue a non-executive career. He will, however, remain a member of the board of directors of several Swiss Re subsidiaries. We would like to thank David Cole for his management expertise and outstanding contribution to Swiss Re.

In addition, I would like to thank our approximately 14 500 employees around the world – also on behalf of the Board of Directors and the Group Executive Committee – for their impressive commitment in 2017. It was largely thanks to their efforts that we were able to successfully navigate a very demanding year. And, finally, I would also like to thank you, our shareholders, for your trust and ongoing support and I wish you a successful 2018.

Zurich, 23 February 2018

Walter B. Kielholz (signature)

Walter B. Kielholz
Chairman of the Board of Directors