Strategic capital allocation is at the heart of what we do at Swiss Re

Dear shareholders,

We are living in uncertain times and events on the world stage are increasingly providing cause for concern – at many levels.

From an economic perspective, conditions may change to the extent that we could be confronted with an end to the remarkably long cycle of global growth we are currently experiencing. Moreover, we are likely nearing a time when the phase of extremely cheap money cannot continue without the risk of unintended consequences and politically unacceptable redistributive effects.

On a geopolitical level, we have seen an increase in the intensity of conflict. Many observers are predicting the end of the post-war order and a fundamental shift in global power structures.

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

“The imminent changes on the world stage will require close analysis and rapid adaptation. I believe we are very well prepared for these changes and we are, therefore, looking to the future with confidence.”

Walter B. Kielholz

Chairman of the Board of Directors

We are facing the question of whether Europe’s geopolitical position of power, which it has held for centuries, is now reaching an end, with the possibility of liberal globalisation – which has benefited us greatly – increasingly giving way to trade and regulatory protectionism.

This dubious political development is playing out against a backdrop of remarkable technological and scientific progress, which is occurring at an unprecedented pace. Such progress undoubtedly simplifies a wide range of tasks, particularly in business, but it also polarises society and is clearly a source of “angst” for many people. The way in which people communicate is becoming more aggressive, as is the tone of political discourse.

You may well ask what this assessment of the current global situation – brief but rather more pessimistic than my usual offerings – has to do with the business developments at Swiss Re in 2018. Firstly, I wanted to illustrate the environment in which we are currently operating, and secondly, these points are relevant to my further remarks below. Let me briefly describe our role as a reinsurer and explain the major moves of Swiss Re in recent years, with a focus on how we allocated shareholders’ capital, as well as what we intend to implement in the near future.

A business model focused on capital allocation

We employ capital. This is at the heart of what we do at Swiss Re. We employ the capital made available to us by allocating it across a broad range of different risk pools. These pools are primarily insurance risks such as hurricanes in the North Atlantic, car insurance in Europe and mortality risks in the United States, and many more. In total, we manage around 50 of these risk pools, which we can consciously grow – either organically or through acquisitions – or, relatively quickly, reduce in size. We are able to reallocate capital extremely quickly as – unlike primary insurers – we do not have to maintain large sales organisations in individual markets.

Our insurance activities generate high volumes of cash flow, which we invest in financial assets. This results in substantial investment risk on our balance sheet, to which we must also allocate capital.

Depending on the assessment of overall risk, we hold a higher or lower level of overall capital, we use more or less debt to finance our activities, and the share of highly liquid – and therefore low-yield – financial assets in our balance sheet is greater or smaller. We base our decisions on the Swiss Solvency Test (SST) solvency capital requirements stipulated by the regulator; we also adhere to rating requirements issued by the rating agencies.

If we cannot find good investment opportunities that meet our criteria and there is no urgent need to further strengthen our balance sheet, we give the capital back to our shareholders.

Informed assessments, consistent decisions

We assess the performance of various risk portfolios using our proprietary Economic Value Management (EVM) method, which allows us to identify the risk portfolios in which we have historically earned our cost of capital on the allocated risk capital – and those in which we have not. EVM also enables us to compare very different risk classes with each other.

Our in-depth research carried out centrally at the Swiss Re Institute helps us assess the future profit potential of individual risk portfolios. Our executive managers and the Board of Directors also benefit from the professional advice of recognised senior advisers at the Institute, who come from a wide range of scientific and political fields. In this way, we make every possible effort to ensure that the decisions we take regarding capital allocation are the very best they can be.

We have also established a business model for the management of our financial assets, which is not only of great help in risk assessment but also yields interesting insights. As we have largely outsourced portfolio management of individual risk investments to around 20 of the best asset managers in the world, we also have a first-class information network that provides the perfect complement to our core competence in the field of strategic asset allocation.

A look back at capital allocation

Proposed regular dividend
per share for 2018



(CHF 5.00 for 2017)

It may sometimes appear that capital allocation at leading reinsurers is very stable and that large-scale changes occur once in a blue moon. Many investors regard insurers as “boring” investments. In the case of reinsurers at least, nothing could be further from the truth. Let’s take a look back at developments over the last ten years at Swiss Re:

In the aftermath of the global financial crisis, which – as you may know –impacted Swiss Re as it did so many other companies, our initial focus was on restoring a “cast-iron” balance sheet. In other words, on bringing our equity back up to a conservative level. Our clients expect nothing less. We also massively reduced the use of financial and operational debt on and off balance sheet and – in the context of an economy still experiencing the fallout of the crisis – built up an extremely high level of liquidity.

We achieved all this quicker than many expected. We then started to implement our plan for paying back capital – surplus to our conservative criteria – to our shareholders. The first step here was to pay back the convertible bond that was issued during the crisis, which, back then, was expensive and potentially diluted our common shareholders at conversion; we then continually increased the dividend, implemented the tax-free (in Switzerland) repayment of capital and established several share buyback programmes.

Moreover, in light of the cyclical risk assessment, we invested heavily in the organic growth of our Property & Casualty (P&C) businesses. In 2012, we cancelled a quota share reinsurance agreement worth 20% of our P&C business. We also pushed ahead with the organic growth of Corporate Solutions, invested in the infrastructure of this division and expanded our presence in this sector through a number of small-scale acquisitions. From 2016, which represented a turning point for the market as the achievable premiums became qualitatively weaker, we gradually reduced the amount of capital invested in P&C again, a decision that resulted in some of our competitors recording a higher rate of growth than we did.

The life insurance sector became extremely unpopular among investors after the financial crisis, and we faced increasingly loud calls to divest this segment as quickly as possible and release the capital allocated to it. Although we have had to overcome various problems in our in-force book, our confidence in the potential of this segment has never wavered. Swiss Re disregarded the market sentiment by investing heavily in organic growth. This allocation of capital has truly paid off and the Life & Health Reinsurance business at Swiss Re is once again a strong, stable revenue pillar portfolio.

We have long held the belief that the emerging markets – headed by China, South-East Asia, parts of Latin America and Africa – will account for more than 50% of growth in insurance markets in the long term, primarily due to demographic and economic criteria. Historically, we have had only limited access to this growth through our reinsurance business as the majority of new business – being large bulk retail insurance – is only reinsured minimally. Therefore, we invested a significant amount of capital in primary insurance investments in China, South-East Asia, Africa and Brazil. These are very long-term investments but I am optimistic that they will deliver results.

In another development, we have allocated new capital to Life Capital. We have partly withdrawn from the US closed book business but at the same time have invested in several large-scale transactions in the United Kingdom. We have also expanded our group life insurance and individual life business through new sales channels.

In comparison with the above-mentioned developments, our asset management activities were less prominent. Although we increased the share of alternative assets as well as that of corporate bonds in lieu of government bonds and cash, in view of our market assessments we considered it unwise to allocate significantly more capital to investment risk. We will see what 2019 has in store. We follow trends with active interest and are in a position to react swiftly.

Focusing on governance trends in Switzerland, the United States and the European Union, Swiss Re’s Board of Directors continues to demonstrate strong leadership in matters related to Corporate Governance and to steer the Group’s governance standards towards increased transparency, accountability and a long-term sustainability strategy.

Governed by a robust set of principles and procedures, the company’s governance framework secures an effective, dynamic and open dialogue between the Board of Directors and the Group Executive Committee, the top corporate bodies responsible for the strategic oversight and the management of operations, respectively.

Leadership focus on governance (photo)

An outlook

Capital returned to shareholders
in USD billions


in the form of dividends and
2017–2018 share buybacks

Let’s now turn our attention to the current situation: As mentioned, we have implemented significant changes to Swiss Re’s risk portfolio over recent years and have continually adapted the portfolio in line with current market developments based on our continuous and consistent monitoring of capital allocation.

So what is the next step? The renewal of our reinsurance business in P&C Re on 1 January 2019 has strengthened our conviction that things are starting to pick up again in the P&C business – not quite as strongly and decisively as we would like, but picking up all the same. Of course, it remains to be seen whether the market will attract an influx of new capital. We have, in any case, invested in organic growth again. It also remains to be seen whether certain market players will surrender and the sector will once again find itself in a consolidation phase. Should we identify attractive opportunities in this context, any decisions we make will be based on strategic considerations and ease to realise cost and, above all, capital synergies. However, huge acquisition premiums are definitely off the table.

As already announced, we are planning to withdraw at least partially from the closed book business in the United Kingdom and are preparing for a potential IPO for ReAssure, our UK subsidiary active in this business. The first steps in the latter process have already been taken. This is a capital allocation decision and has less to do with insurance risk than with investment risk, which is dominated by UK credit in this portfolio. If the closed-book business continues to grow – which we assume will happen – we would be pushing the boundaries of our risk appetite for UK credit. A partial withdrawal therefore represents the sensible option.

Where we will stand our ground

Returning to my rather pessimistic introductory words, it becomes clear that we currently see little leeway in terms of the ‘cast-iron’ balance sheet I referred to earlier. The question of the right equity base and how much is too much comes up again and again. Reducing our equity ratio by a significant amount, in accordance with the SST, is not something that we are currently planning. This is an area in which we will stand our ground. However, any further expansion would take us from “a lot” to “too much”.

In other areas, we are adopting a markedly more flexible approach. The imminent changes on the world stage will require close analysis and rapid adaptation. I believe we are very well prepared for these changes and we are therefore looking to the future with confidence.

Changes in the Group Executive Committee

As I draw to a close, I would like to inform you of a couple of important changes in our Group Executive Committee.

In September 2018, Russell Higginbotham took over as the new CEO of Reinsurance for the EMEA region and at the same time became a member of the Group Executive Committee. Russell Higginbotham succeeded Jean-Jacques Henchoz, who decided to leave Swiss Re last year.

Russell Higginbotham has been at Swiss Re for 24 years, in roles across multiple business areas and geographies. Most recently, he led Swiss Re’s Global Life & Health (L&H) Products Division, where he played a pivotal role in strengthening the company’s L&H solutions offering, boosting product innovation and maintaining the growth of large L&H reinsurance transactions. Previously, he served as CEO of Swiss Re UK & Ireland, as CEO of Swiss Re Australia and New Zealand and led the company’s L&H businesses in Japan and Korea.

The second change in the Group Executive Committee concerns our Corporate Solutions Business Unit. As announced in September 2018, Andreas Berger will be taking over the role of CEO of Corporate Solutions from 1 March 2019, at the same time becoming a member of the Group Executive Committee. He was most recently Chief Regions & Markets Officer and a member of the Board of Management at Allianz Global Corporate & Specialty SE and will be succeeding Agostino Galvagni, who left Swiss Re at the end of 2018.

I would like to take this opportunity to thank Jean-Jacques Henchoz and Agostino Galvagni on behalf of the Board of Directors for their commitment and valuable contribution to the success of Swiss Re over several decades.

In November 2018, we announced that Thomas Wellauer will be retiring at the end of June 2019 after 9 years with our company. I would like to thank Thomas on behalf of the Swiss Re Board of Directors for his substantial contribution to Swiss Re throughout the years. Under his leadership, Group Operations developed into a highly effective and efficient backbone for the company.

Today, we are pleased to appoint Anette Bronder as his successor taking over as Group Chief Operating Officer and member of the Group Executive Committee, effective 1 July 2019. Anette Bronder has more than 20 years of experience in operations, consulting and delivery services, most recently as a Member of the Management Board at T-Systems International. Her strategic technology knowledge and strong track record in operations delivery make her the ideal candidate to not only lead our Group Operations function but to also support Swiss Re in being at the forefront of technological changes that are taking place in our industry. I am convinced Anette Bronder will help us accelerate the digitisation of our whole value chain.

I would also like to thank – and I am sure you will join me in this – all of our 14 943 employees across the globe for their tireless work over the last year. And warm thanks to you, our highly valued shareholders, for your trust, support and loyalty.

Wishing you all the very best for a happy and successful 2019.

Zurich, 21 February 2019

Walter B. Kielholz (signature)

Walter B. Kielholz
Chairman of the Board of Directors