Positioning Swiss Re for continued long-term success in a challenging environment

Dear shareholders,

2019 was a year of important steps to position Swiss Re for continued long-term success in a challenging macroeconomic and re/insurance industry environment. We reached an agreement to sell ReAssure, which should maximise the value of this asset for the Group and ultimately for you, our shareholders. We initiated a far-reaching transformation of Corporate Solutions to return this business to profitability. And we made good progress on our targeted growth strategy in Reinsurance, with an emphasis on our capabilities in underwriting large transactions and providing innovative solutions. Finally, we further reinforced our commitment to sustainability by setting new ambitious goals for achieving net-zero carbon emissions in our underwriting, investing and operations.

Four big trends affecting the re/insurance industry stood out in 2019: declining interest rates; rising costs attributable to climate-related disasters, such as heatwaves and wildfires; higher insurance claims due to societal trends, such as changing perceptions by an injured party of what they are owed and their willingness to pursue claims via the legal system; and hardening rates in some lines of business.

As global economic growth weakened due to trade tensions and geopolitical polarisation, more than half the central banks around the world cut interest rates in 2019 – the biggest number to do so since the aftermath of the global financial crisis. Interest rates are forecast to stay low for longer, and this has a two-fold effect on our business. This environment has led to an influx of capital into the re/insurance market over the past years, damping prices and suppressing investment yields. These conditions also negatively affect global economic resilience. The world economy currently has less capacity to absorb a shock than it did in 2007, according to the latest research by Swiss Re Institute. And this means that re/insurance is needed more than ever to help close a record-high USD 1.2 trillion protection gap in the three main risk areas – natural catastrophes, mortality and healthcare spending.

Natural catastrophes are estimated to have caused more than USD 130 billion in economic damage in 2019. While this is lower than we have seen in some recent years, we again saw a high number of smaller and mid-sized loss-generating disaster events, most likely as a result of climate change. Together, climate-related perils such as heatwaves, droughts, wildfires and floods caused more than 50% of the global insured losses from natural catastrophes in 2019, demonstrating once again the very significant impact these events can inflict on communities and societies.

Another trend that has been gaining momentum in recent years is the phenomenon of so-called social inflation, or rising insurance claims due to increased litigation, higher jury awards and broader contract interpretations. With roots in the general anti-corporate sentiment since the global financial crisis, social inflation is particularly visible in US liability claims.

These adverse developments are somewhat balanced by hardening rates in loss-affected reinsurance lines, such as the natural catastrophe business. We also see strong pricing momentum in Corporate Solutions, which achieved a 12% price increase in its portfolio in 2019. However, to ensure a re/insurance market that is sustainable in the long-term, further rate increases are needed to reflect changing market conditions.

Our response to market developments

As stewards of this Group, we have to adapt our business constantly to stay at the forefront of the latest developments. We cannot control our environment, but we can make sure that our response is informed, timely and effective. Fast-paced change creates both challenges and opportunities for our industry, which is also facing growing and ever-more complex risks, an exponentially increasing wealth of data as well as new competitors. This is why our strategy is centred around diversifying our access to risk pools by leveraging our risk knowledge, unique client access and capital strength. Diversification creates a natural hedge within our business model as different lines of business go through diverging economic cycles. Our ability to adapt at speed is what makes our business model sustainable over the long term.

Reinsurance remains our core engine of profitability, delivering a market-leading combination of shareholder returns and capital repatriation to the Group. To address the recent trends, we employ robust portfolio steering to inform our strategy of targeted growth. Based on expected loss trends, pricing outlook and risk management, Property & Casualty Reinsurance (P&C Re) is expanding its natural catastrophe franchise in attractive segments, while managing exposure and strengthening reserves in the casualty business. Our Life & Health Reinsurance segment continues to deliver solid performance. Transactions and solutions are becoming ever more important to our offering and demonstrate significant further growth potential. Demand for transactions, which contributed approximately 23% to the economic profit of the Reinsurance Business Unit in 2019, continues to increase because they have the potential to meet a range of client needs, such as greater capital efficiency or reduced earnings volatility. Economic profit from solutions, where Swiss Re helps clients to deliver on their strategic priorities, such as improving profitability or developing new products, rose 12% in 2019 from the prior year.

In Corporate Solutions, we took decisive actions to adapt to the unfavourable claims trends and a soft market environment. These measures included cutting costs, reserve strengthening, the establishment of an Adverse Development Cover with P&C Re, as well as a reduction in risk exposures in specific lines of business. Portfolio repositioning will allow Corporate Solutions to focus on selected profitable segments where we are seeing an improving price environment. The next steps in business transformation will focus on de-commoditisation of its core portfolio, selective growth with differentiating capabilities such as innovative risk solutions, and expansion through tech-driven initiatives. Portfolio repositioning, together with efficiency gains and the accelerating momentum in insurance rates should help Corporate Solutions return to underwriting profitability with a target normalised combined ratio of 98% in 2021.

Life Capital is successfully transitioning to a dynamically growing, digital B2B2C business. Our goal has been to deconsolidate our UK closed-book subsidiary ReAssure because of the high capital requirements for this business under the Swiss solvency rules. Although our attempt to do an initial public offering of ReAssure was thwarted by unfavourable conditions in the UK primary equity market in the first half of 2019, we are very pleased to have found a strong buyer for this business in Phoenix Group Holdings plc. The rationale for this transaction is compelling, and once completed, we believe it will maximise long-term value for Swiss Re shareholders. In the meantime, our open-book businesses are continuing to attract new partners and expand. In particular, our white-label digital platform iptiQ is developing dynamically and selling more than 4 000 policies per week across both the Life & Health and Property & Casualty businesses, with significant opportunities for geographic expansion. Partnerships, such as the recent agreement with IKEA to offer transparent, affordable and easily accessible home insurance, demonstrates the great potential for this business in the future as well as the strategic role it plays when it comes to accessing attractive new risk pools for Swiss Re.

Our commitment to sustainability

Despite the low-yield environment, our asset management team again demonstrated their ability to consistently generate very strong returns, achieving a return on investments of 4.7% in 2019. They do this while taking an industry-leading approach focused on environmental, social and governance (ESG) criteria, which underscores that putting sustainability at the heart of the business makes economic sense. In 2019, Swiss Re demonstrated yet again its strong commitment to sustainable investing by being one of the founding partners of the UN-convened Net-Zero Asset Owner Alliance, pledging to transition our investment portfolios to net-zero carbon emissions by 2050. We have already reduced the carbon intensity of our listed equity and corporate bond portfolios by an average of 50% since the end of 2015.

We have also made the same strong commitment on our underwriting side by signing the “UN Business Ambition for 1.5°C” pledge. In 2018, we stopped providing re/insurance to businesses with more than 30% thermal coal exposure. In a next step, Swiss Re will gradually stop supporting the top 10% of the world’s most carbon-intensive oil and gas companies by the end of 2023. With these measures, we aim to provide incentives for carbon-intensive businesses to transition towards more sustainable business models. And it is important that we as a society focus on setting the right incentives rather than simply punishing the businesses that powered the industrial revolution and progress over the past two centuries. After all, these companies still offer jobs to millions of people worldwide. This is why actively engaging with clients on sustainability matters is very important to us at Swiss Re.

In our own operations, we have been carbon neutral since 2003. We have achieved this by continuously reducing our emissions and purchasing high-quality emission reduction credits. As a next step, we have committed to start removing our carbon emissions from the atmosphere, with the goal of reaching net-zero emissions by 2030. I am encouraged by many other companies making similar pledges to fight global warming. Swiss Re has been warning about the effects of climate change for the past 40 years, and finally the tide seems to be shifting towards concrete actions. I sincerely hope that an ever-growing number of companies will take responsibility for their actions that will affect our planet’s future. Businesses have the power of capital to take significant steps in addressing the climate crisis, and we should not wait for national governments to agree on how to tackle this global problem. Seeing the corporate actions taken  over the past 12 months makes me optimistic that we can make the shift. I envision a strong alliance of stakeholders and capital markets – bound together by mutual interest in fostering long-term business success.

Starting 2020 with an improved portfolio

We at Swiss Re will continue to do our part in fighting the climate crisis and making the world more resilient. Our very strong capital position allows us to continue to support our clients and capture growth opportunities as they arise, while maintaining attractive shareholder returns.

In January 2020, we achieved a 2% increase in premium volume of renewed reinsurance contracts and a nominal price increase of 5%, as growth in our property business, and particularly in the natural catastrophe book, was offset by our decision to reduce casualty exposure. The risk-adjusted price quality was unchanged, reflecting both the lower interest rate environment and our more conservative loss assumptions. We are therefore starting the year with an improved quality of our portfolio, and we aim to maintain this trend in the upcoming renewals later in the year. We will also focus on completing the sale of ReAssure and improving the performance of Corporate Solutions through active portfolio pruning and rate increases.

In these challenging, transformative times, we are fortunate to be able to rely on the dedication and hard work of our employees, whom I would like to thank for their engagement. I would also like to thank you, our shareholders, for your continued support.

Zurich, 19 March 2020

Christian Mumenthaler

Group Chief Executive Officer