Life & Health teach-in. Conference call Zurich, 09 December 2010

Transcription

1 Life & Helth tech-in Conference cll Zurich, 09 December 2010

2 Tody s gend Introduction L&H overview nd underwriting Reporting nd performnce mesurement Susn Hollidy, Hed IR George Quinn, CFO Robyn Wytt, CFO L&H Questions & nswers 2

3 Introduction Susn Hollidy, Hed IR 3

4 Life & Helth overview nd underwriting George Quinn, CFO 4 Key messges Our L&H business is profitble frnchise on n economic nd US GAAP bsis Business is priced nd steered using mrket consistent, economic frmework (EVM) Profit emergence under US GAAP is reltively stble over nnul periods but is very smll t contrct inception. Profit recognition depends on product fetures US GAAP frmework tends to understte vlue of L&H business 5

5 Swiss Re is leder in L&H reinsurnce Globl L&H outlook Mrket growth (10 yer verge nnul) 3.7% Cession rtes down from 13.2% to 10.6% Key trends primry mrket Annuity mrkets re recovering bsed on economic nd finncil mrket performnce Positive long-term outlook for sles of pension nd nnuity products remins due to n geing popultion nd reduced government support Trditionl life insurnce premiums will grow t moderte pce, close to GDP growth Est L&H reinsurnce net premium distribution 1 others Hnnover Re RGA Swiss Re 19% Munich Re Key trends reinsurnce mrket Continued decline in cession rtes in the US Lower sles of mortgge-relted protection products in the UK Solvency II in Europe Service offerings re key in the developing Asin mrkets In Ltin Americ, quickly growing penetrtion in credit life nd bncssurnce products net premiums erned including Admin Re type business, lrge finncing trnsctions, helth nd nnuity business. Source: compnies finncil sttements, Swiss Re Economic Reserch nd Consulting 6 L&H insurnce products we (re)insure Products by line of business t Swiss Re Product Life Helth Admin Re Term ssurnce Criticl illness nd disbility income 1 Universl life Annuity / longevity Unit-linked svings refer to pproximte weightings for Swiss Re L&H reinsurnce mrket is predominntly proportionl, therefore primry mrket drivers re lso reinsurnce drivers 1 Also clled income protection in some mrkets 7

6 The L&H performnce cycle US GAAP vs EVM view Underwriting US GAAP EVM Reporting Performnce nlysis.. period 1 period 2 etc US GAAP for L&H cn be hrd to compre to other frmeworks, due in prt to mix of historic cost (locked-in) nd best estimte concepts EVM frmework enbles effective comprison nd deployment of cpitl between business segments to mximise economic returns 8 Underwriting / Pricing process U/W L&H Quote Opportunity Client detils product specifictions underwriting process experience etc. studies nlysis Experience monitoring Costing tools Input exmples mortlity lpse distribution incidence/coverge expense cpitl fctors risk free rte includes trety preprtion Quote conveynce Approvl process Risk mngement pprovls trnsprency review 9

7 L&H pricing Stndrdised decision metrics on del-by-del bsis under EVM U/W Client smple: Economic profit Internl expenses Cost of cpitl Commission llownces Expected clims Discounted price components for Swiss Re shre USD millions Premium Clims nd commissions Internl costs Cost of cpitl Economic profit post-tx Coinsurnce level premium term Coinsurnce incresing premium term YRT of universl life YRT of universl life YRT of vrible universl life Totl EVM Cpitl for Swiss Re Shre Inforce volume (USDbn) EVM Cpitl (USDm) Economic return on cpitl Profit Mrgin Coinsurnce level premium term % 11.7% Coinsurnce incresing premium term % 3.8% YRT of universl life % 12.3% YRT of universl life % 6.0% YRT of vrible universl life % 3.6% Totl % 6.2% YRT = Yerly Renewble Term Consistent decision metrics for ll units nd lines of business Cler trnsprency on profitbility t the point of sle Cost of cpitl lloction ssuming risk-free investment strtegy 10

8 Reporting nd performnce mesurement Robyn Wytt, CFO L&H 11 Comprison of profit recognition Different under US GAAP nd EVM Finncil Yer Finncil Yer L&H Reporting Policy Issue Yer Clendr Yer view RoE Policy Issue Yer Discounted Previous Business EVM Profit Mrgin New Business EVM Profit Mrgin US GAAP EVM New Business: Net Income New Business: Projected cshflows Previous Yers Business: Net Income Previous Yers Business: Chnge in current yer ctul experience vs. expected Previous Yers Business: Chnge in future cshflow ssumptions Profits recognised over life of policy s the compny is relesed from risk Profits of new business recognised t inception Shows economic vlue of L&H business 12

9 Principles of profit emergence US GAAP EVM Mesurement depends on product fetures Mesurement of ll future csh-flows, discounted FAS60 t current risk-free rtes 1 FAS97 1 Unit-linked Expected profit emerges s constnt proportion of premium Experience vrinces re reflected ech yer Assumptions incl. PADs 2 locked-in (except clims in pyment) Trditionl L&H Profit is recognised over the life of the policy Profit emerges s the mrgin of fees nd investment returns in excess of costs for clims nd expenses DAC/PVFP ssumptions unlock Admin Re Profit emerges s fees chrged Fees erned vry with mrket vlue of the underlying funds Assumptions unlock All profit recognised t contrct inception Prior yer business is remesured every period using best-estimte ssumptions. The resulting chnge is disggregted into experience vrinces nd ssumption chnges. Assumption chnges reflect ltertion in best estimte view Profit includes tx costs nd cpitl chrges Cost of cpitl chrged t inception emerges over the lifetime of the book Profit represents yerly cshflows, plus chnges in the historic mesurement of net GAAP libilities Little profit emergence t contrct inception Current yer profit hevily influenced by prior yer book 1 Now FASB Accounting Stndrds Codifiction Topic 944 Insurnce 2 Provision for Adverse Devition Profit represents the chnge in economic net worth ech yer, driven by underwriting ctivity Mesures performnce fter cpitl costs Full recognition of projection chnges when they emerge 13 Fetures of profit emergence US GAAP EVM Mesurement depends on product fetures Premiums, clims, expenses, txes nd cpitl costs projected over ll future periods nd discounted t FAS60 FAS97 Unit-linked risk free rte of return Revenues Premiums erned Fee income Clims Benefit pid Amount in excess of ccount blnce Chnge in benefit reserve Return credited to policyholders Acquisition costs Chnge in bsolute blnce sheet vlue. My not offset the benefit pid n/ n/ (unless premium deficiency) Bsed on ccount blnce. Rte cn be vried (not below contrct minimum) Fee income n/ n/ Deferrl t inception nd mortistion over life As erned, bsed on contrct performnce No ccounting deferrls, no explicit mrgins on best-estimte ssumptions FAS 60 reports, on n erned bsis, ll revenues nd expenses in the income sttement FAS 97 uses deposit ccounting Unit-linked reports ll ctivity, lthough much of income sttement is not ttributed to Swiss Re Swiss Re discloses EVM profit generted by new business seprte from prior yer development 14

10 Mesurement of certin blnce sheet vlues Reserves Reserve ssumptions US GAAP CHF billion 31 Dec 2009 L&H ssets Deferred cquisition costs (DAC) 3.1 Present vlue of future profits (PVFP) 6.3 L&H libilities Libilities for L&H policy benefits 41.3 Policyholder ccount blnces 37.9 Unpid clims 11.8 FAS60 FAS97 Unit-linked Discounted net clims (net of premiums) Locked in t inception (mortlity, morbidity, yield, etc); with PADs DAC/PFVP Amortises consistently bsed on premium * Expected Gross Profits Account blnce Blnce sheet ssets nd libilities re generlly mesured t historic cost (except unit-linked libilities) n/ Amortises vribly bsed on EGPs* Mrket vlue of ccount n/ Amortises vribly bsed on EGPs* EVM EVM CHF billion 31 Dec 2009 L&H ssets In-force business ssets L&H libilities In-force business libilities Vlues ssets nd libilities on mrket consistent bsis Inforce libilities represent ll future benefit csh outflows while inforce ssets represent ll future premium csh inflows Reflects best estimte ssumptions for ll inputs without PADs (mrgins) Blnce sheet ssets nd libilities re mesured on mrket consistent bsis 15 US GAAP ccounting Trditionl L&H reinsurnce contrct Exmple of level term coinsurnce Premiums Inv income Clims Yer 1 Yer 2 Yer 9 Yer 10 Yer 11 Yer 20 New business vlue recognised in Yer 1 in USD thousnd DAC 919 Profit 74 Policy libilities 533 Expenses Net reserve chnge * 100% 80% 60% 40% 20% 20% 16% 12% 8% 4% net csh outly 312 Discount rte: bsed on interest rtes ssumed t pricing; lockedin GAAP mrgin: expected income s proportion of premium 0% Benefit rtio (%) GAAP mrgin (%) 0% * Net chnge in benefit reserves nd DAC/PVFP 16

11 EVM ccounting Trditionl L&H reinsurnce contrct Exmple of level term coinsurnce Premiums Yer 0 Yer 1 Yer 2 Yer 9 Yer 10 Yer 11 Yer 20 New business vlue cretion t dy 1 in USD thousnd EVM profit 593 Clims Expenses PV expected premiums Production cost Txes Cpitl costs Future expected net csh flows Discount rte: Trnsfer price of funds (TPF) = risk free rtes t inception. Any dditionl investment return (loss) bove (below) risk free tht my be relised over time will be included in the Asset Mngement segment Discount 17 Comprison of income sttement Exmple - yer 1 of coinsurnce contrct US GAAP EVM USD thousnd Revenues Premiums erned 1,150 Net investment income/loss (10) Totl revenues 1,140 Expenses Clims nd clim djustment expenses nd L&H benefits 778 Acquisition costs 231 Other expenses 57 Totl expenses 1,066 Operting income before tx 74 USD thousnd Profit New business profit/loss 593 Previous yers business profit/loss - Totl profit/loss fter cpitl costs 593 Relese of cpitl costs - Income before cpitl costs 593 Assumption: 20 yer level term contrct with incepting inforce of USD1bn nd first yer commission llownce t 100% Benefit Rtio 68% All cquisition costs deferred t inception Smll mount of profit recognised PV of premiums expected t USD 8.75m EVM profit vlue recognised over lifetime of trety under US GAAP 18

12 Comprison of income sttement Exmple yer 5; ssumption chnge: improved mortlity US GAAP USD thousnd Revenues Premiums erned 721 Net investment income/loss 57 Totl revenues 778 Expenses Clims nd clim djustment expenses nd L&H benefits 537 Acquisition costs 143 Other expenses 36 Totl expenses 716 Operting income before tx 62 Benefit rtio (expected 76%) 75% EVM USD thousnd Profit New business profit/loss - Previous yers business profit/loss 100 Totl profit/loss fter cpitl costs 100 Relese of cpitl costs 60 Income before cpitl costs 160 Good mortlity experience over first 5 yers hs indicted overll chnge to mortlity ssumption is pproprite Income reflects current yer fvourble mortlity experience (lso in Benefit rtio) EVM reflects ll future expected mortlity profits 19 US GAAP: FAS 97 Universl life "unlocking" of DAC/PFVP FAS 97 Cpitlised cquisition costs re expensed in proportion to estimted gross profits (EGPs, derived using best estimte ssumptions). Chnges in EGPs cn be cused by: - Relised gins/losses - Chnges in portfolio yields nd reinvestment ssumptions - Chnge in experience (eg mortlity) Decline in EGP Illustrtion of "unlocking" Bse ssumption: EGPs of USD 1,000 erned over 10 yers including USD 500 of DAC. In yer 5, generte relised gin of USD 10 Result: dditionl USD 5 of mortistion in yer of gin; lower EGPs per yer over remining life Increse in EGP Bse ssumption: s bove. In yer 5, improve EGPs of USD 5 per yer due to mortlity expecttions Result: lower mortistion USD 5 in yer of ssumption chnge s inception-to-dte mortistion is djusted Activity tht ccelertes (or reduces) EGPs will result in higher period mortistion Decline in EGP Increse in EGP Conversely ctivity tht decelertes (or increses) EGPs will result in lower period mortistion 20

13 US GAAP premium deficiency evlution How Swiss Re evlutes / monitors FAS 60 nd FAS 97 reserves must be ssessed for dequcy by compring recorded net GAAP libilities to notionl reserve clculted using best estimte ssumptions (without PADs) ny deficiency must be recorded by first writing down DAC/PVFP nd, if required, incresing reserves Tested periodiclly bsed on segments reported Loss recognition event PAD risk mrgin (GAAP) Best estimte reserves Notionl reserves bsed on updted ssumptions 2009 Reserve mrgins of CHF 12.2bn thereof, pprox. 2/3 relted to trditionl life reminder split between trditionl helth nd Admin Re Recorded reserves (locked-in): less DAC/PVFP Net GAAP reserves Reserves using best estimte ssumptions (no PADs) xx (yy) bb Premium deficiency if: bb > 21 L&H hs dditionl vlue in EVM Comprison of 2009 US GAAP shreholders equity to ENW by segment CHF bn Reserve mrgins Add. discounting Friction. cp. costs Net other L&H Net P&C/Other 28.5 US GAAP shreholders' equity EVM ENW Significnt L&H economic profit from business lredy written is not recognised in the US GAAP blnce sheet These profits will emerge in US GAAP results over time 22

14 Wht drives L&H performnce? Comprtive weighting of fctors on period results Performnce L&H Mortlity Morbidity 1 Lpse Longevity Mrket Performnce 2 Term ssurnce US GAAP view Criticl illness nd disbility income Universl life Annuity / longevity Unit-linked Term ssurnce EVM view Criticl illness nd disbility income Universl life Annuity / longevity Unit-linked refer to pproximte weightings for Swiss Re 1 Coverge (CI); Incidence (new clims) vs Termintion 2 Performnce of equity mrkets nd interest rtes 23 Exmple of Monitoring Mortlity nd lpse risk nlysis Actul compred to pricing expected Exmple of experience monitoring Actul clim (USD) vs expected Bsed on vilble dt, trety experience cn be monitored compred to pricing by durtion. i.e., bsed on policy issue yer development of experience (A/E rtios) Monitoring by mount nd count Own informtion cn be combined with industry informtion to form bsis of ssumptions in pricing tools 90% 80% 70% 60% 50% Yer Receiving policy level dt from cedents is key Cohort 1 Cohort 2.. etc. Portfolio review where trety level dt unvilble 80% Actul lpse (%) vs expected 70% 60% Ongoing experience monitoring supports pproprite trety re-pricing ctions if necessry 50% 40% Yer Cohort 1 Cohort 2.. etc. 24

15 US GAAP investment income lloction Methodology Methodology Alloction of benchmrk return to L&H/P&C segments bsed on n verge risk-free rte pplied to net reinsurnce GAAP reserves Risk free rte pplied bsed on durtion of economic csh flows for the respective block of reserves, by currency does not impct Direct investment income erned by ech segment (e.g. policy lon interest, interest on funds withheld,unit-linked returns, ILS, vrible nnuities) Actul sset returns, including relised gins/losses, which re reflected within the AM segment results Asset Libility Mngement (ALM) policies nd principles Pricing Implictions Higher yields from investing in spred ssets reflected in AM only, not L&H or P&C Libilities tht re interest sensitive such s universl life contrcts my hve specified crediting rtes nd the lloction my result in nil spred reported by the L&H segment Libilities with locked in higher interest rte ssumptions will be llocted lower returns thn ssumed in reserving Bsed on ALM policies, ctul returns on ssets supporting long term libilities would not decline s rpidly s risk free rtes No return on cpitl is llocted to the L&H or P&C segments Actul relised gins /losses included in AM cn result in chnge in PVFP mortistion. PVFP is recorded directly in the L&H segment 25 US GAAP investment income lloction Illustrtion of methodology nd impct using risk free rtes Benchmrk compred to pricing 1 Bse ssumption: smple 20 yer term product issued in 2002, with 4.93% expected return on ssets Benchmrk declines from 4.93% in 2002 to rolling rte of 4.41% by 2010, ssuming durtion of 20 yers Result: 2010 lloction to L&H segment is 89% of expecttion t pricing Actul ssets re ALM mtched nd returns reported in AM segment Income s proportion of premium Bse ssumption: sme exmple s bove FAS 60 2 ccounting ssumes income will emerge s constnt proportion of premium (GAAP mrgin) Result: using risk-free benchmrk results in GAAP mrgin of less thn 5% reported by the L&H segment, compred to pricing expecttion of 6.65%; the difference is reported in AM segment 1 Hypotheticl exmple ignores initil net csh outflows 2 Now FASB Accounting Stndrds Codifiction Topic Insurnce USD thousnd 600 6% 500 5% 400 4% 300 3% 200 2% 100 1% - 0% Inv. income (pricing ssumption) Inv. income (rolling risk-free return) Assumed pricing yield Rolling verge risk-free yield 7% 6% 5% 4% 3% 2% 1% 0% Mrgin (pricing ssumption) Mrgin (rolling risk-free return) 26

16 US GAAP investment income lloction Illustrtion of methodology nd impct using corporte bond rtes Using corporte bond rtes in pricing 1 Bse ssumption: smple 20 yer term product issued in 2002, with 5.50% expected return on ssets (i.e return higher thn risk free). This implies n IRR of 12% nd GAAP mrgin of 8.0% Result: 2010 lloction to L&H segment using benchmrk risk free would be 80% of expecttion t notionl pricing USD thousnd % 5% 4% 3% 2% 1% 0% results in higher implied GAAP mrgins higher implied IRR higher likelihood of GAAP shortfll in ernings if investment results do not mtch pricing ssumptions no difference in economic performnce 1 Hypotheticl exmple ignores initil net csh outflows 2 Now FASB Accounting Stndrds Codifiction Topic Insurnce Inv. income (pricing ssumption) Inv. income (rolling risk-free return) Assumed pricing yield Rolling verge risk-free yield 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Mrgin (pricing ssumption) Mrgin (rolling risk-free return) 27 Key messges Our L&H business is profitble frnchise on n economic nd US GAAP bsis Business is priced nd steered using mrket consistent, economic frmework (EVM) Profit emergence under US GAAP is reltively stble over nnul periods but is very smll t contrct inception. Profit recognition depends on product fetures US GAAP frmework tends to understte vlue of L&H business 28

17 Questions & nswers 29

18 Appendix L&H US GAAP erned premiums nd fees Globl diversified portfolio By region in USD bn Asi 0.9 Cont. Europe 1.4 Admin Re US/UK 1.6 UK- Irelnd- Afric 1.8 Americs 5.0 USD 10.7bn 31

19 2009 L&H US GAAP reserves By currency including unitlinked, prticipting business EUR 9% GBP 47% CAD Other 4% 3% USD 37% By type nd line of business Unitlinked 28% Admin Re 66% Nonlinked 72% Trd Life 31% Trd Helth 3% By currency excluding unitlinked, prticipting business CAD 5% EUR 13% GBP 26% Other 5% USD 51% USD 88.0bn USD 88.0bn USD 63.1bn Closing rtes USD/CHF EUR/CHF GBP/CHF CAD/CHF FY FY FY Chnge FY 2007 / FY % -10.8% -32.0% -25.2% Chnge FY 2008 / FY % 0.0% 9.2% 15.1% On n originl currency bsis, L&H reserves hve been reltively stble over the pst 5 yers lthough incresing with Admin Re cquisitions 32 Benefit rtio Globl L&H 100% 90% 80% 70% 60% 50% 40% Life qurterly Life yerly 30% 20% 10% 0% Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Benefit rtio is clculted s clims divided by premiums, excluding unitlinked nd with-profit business. Benefit rtio lso excludes the impct of VA nd pre-2000 GMDB from ll periods presented Voltility drivers Reserve chnges due to informtion updtes from clients IBNR model chnges Underlying mortlity (periodicity, sesonlity) Rndom fluctutions in ny given period (Swiss Re s book hs limited number of high sum ssured policies) Reporting delys t primry compnies nd chnges in client reporting frequency Benefit rtio is stble on n nnul bsis Slide 33 33

20 Benefit rtio Trditionl life 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Life qurterly Life yerly 0% Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Benefit rtio is clculted s clims divided by premiums, excluding unitlinked nd with-profit business. Benefit rtio lso excludes the impct of VA nd pre-2000 GMDB from ll periods presented Voltility drivers Reserve chnges due to informtion updtes from clients IBNR model chnges Underlying mortlity (periodicity, sesonlity) Rndom fluctutions in ny given period (Swiss Re s book hs limited number of high sum ssured policies) Reporting delys t primry compnies nd chnges in client reporting frequency Benefit rtio is stble on n nnul bsis Slide Benefit rtio Trditionl helth 100% 90% 80% 70% 60% 50% Helth qurterly 40% Helth yerly (incl. rbitrtion wrd) 30% Helth yerly (excl. rbitrtion wrd) 20% 10% 0% Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Benefit rtio is clculted s clims divided by premiums, excluding unitlinked nd with-profit business Voltility drivers Chnges in ssumptions for pst business (clims reserve releses/strengthening, IBNR model chnges) Chnge in portfolio mix (e.g. IS integrtion) Underlying morbidity Rndom fluctutions Reporting delys t primry compnies nd chnges in client reporting frequency Benefit rtio is stble on n nnul bsis 35

21 Life & Helth Operting income brek-down USD m Q Q Q Q Q Q Q Operting income of which pproximtely: VA, pre-2000 GMDB, impct from B Recpture, commuttion & rescission Mortlity nd morbidity compred to expecttions Chnges in models nd ssumptions Chnge in llocted investment income PVFP mortistion/reserves compred to expected Benefit rtio % 80.6% 81.1% 85.7% 89.1% 88.3% 93.3% 1 Chnge in llocted investment income compred to immeditely preceding qurter 2 Bsed on chnging yields, equity mrkets nd relised gins/losses 3 Benefit rtio now excludes the impct of VA & pre-2000 GMDB from ll periods presented Bsed on Swiss Re estimtes, ggregtion by ctegories my be refined in the future 36 Life & Helth Vrible Annuities Account vlue USD bn End Q VA only 16.8 equities 9.5 fixed income 7.3 Pre-2000 GMDB 4.9 equities 3.1 fixed income 1.8 Brekdown of VA riders Q Deth benefit with income benefit or ccumultion benefit 53% Withdrwl benefit 44% Income benefit / ccumultion benefit 3% Totl 100% Cpitl mrket relted risks re hedged, including underlying policyholder fund positions, voltility (veg), interest rtes (rho), foreign exchnge nd chnges in mrket performnce (gmm) Insurnce risks such s policyholder behviour nd mortlity risk re generlly not hedged, but underlying performnce of ll csh flows nd positions re monitored nd hedges re repositioned bsed on the frequency of the reporting received from cedents The deth benefit/income benefit/ccumultion benefit products hve finite terms. Swiss Re hedges expected policyholder selection t contrct termintion nd thus the resulting interest rte risk VA nd pre-2000 GMDB results in 2010 generlly hve been driven primrily by chnges in Swiss Re's own credit spreds. Swiss Re hedges expected economic csh flows Derivtive (mrk-to-mrket) ccounting is followed for the mjority of VA nd ll pre-2000 GMDB contrcts 37

22 Mesuring Vrible Annuities (VA) GAAP nd EVM essentilly the sme Exmple Trety US GAAP EVM Mrk-to-mrket of hedging instruments Mrk-to-mrket of libility csh flows Risk mrgins / cost of cpitl Txes x Exmple Trety (dily volume) Swiss Re's credit spred x Net hedge effectiveness mesured frequently nd hedging progrm djusted ccordingly 38 Common reinsurnce trety types Coinsurnce / Originl Term Reinsurer prticiptes, on pro-rt bsis, in ll premiums nd benefits from the underlying policy ccording to the set 1 (trety) percentge Expense reimbursement by reinsurer subject to negotition Reinsurer mintins ssets supporting its shre of the business nd bers investment risk on such ssets Yerly Renewble Term (YRT) / Risk Premium Reinsurer covers the portion of the clim incurred in the period Pricing of the reinsurnce premium is set seprtely from the premium chrged by cedent to policyholder Reinsurnce premium covers the nnul mortlity/morbidity costs; nd thus cn increse ech yer s mortlity risk increses Swiss Re generlly writes proportionl treties in coinsurnce or YRT form. Coinsurnce cn be written on funds withheld or modified coinsurnce bsis 1 Applies to first dollr quot shre trety. Coinsurnce greements cn lso be excess of retention where prticiption is not t set percentge 39

23 Significnt product pricing fctors Life product Helth product Svings product Unit-linked product Mortlity: Higher incidence or severity thn expected; or more people die thn expected; nd/or the people tht die hve lrger thn verge size policies Lpse: number of people cesing policy coverge my be different to expected Expense: policy lodings in ggregte re insufficient to cover costs Distribution: mix nd volume of business not in line with expected Investment: returns re not in line with expecttions Definition of conditions covered: medicl dvnces cn led to chnges in incidence or severity of condition Incidence trends: more people re dignosed with one of the conditions covered thn expected Lpse, expense, distribution nd investment risk remin, s with term ssurnce Spred between interest erned on funds invested nd the rte credited is less thn expected Expenses chrged to the policy re less thn the cost of running the business Mortlity, lpse nd distribution risk remins, s with term ssurnce Lpse: more people stop regulr premiums to their policy or more people trnsfer the policy to nother insurer thn expected Expenses: policy lodings in ggregte re insufficient to cover costs of the business Investment: returns re lower thn expected, so reducing the vlue of future chrges on the fund (bsed on % of fund vlue) 40 US GAAP ccounting for L&H Long durtion trditionl L&H type contrcts Premiums re recognised when due from policyholders. Clims, expenses, nd investment income re reported s incurred Cpitlised cquisition costs expensed in proportion to premium recognised Policy benefit reserves re estblished s the difference between the present vlues of future policy benefits to be pid nd future net vlution premiums required to cover clims nd expenses Loss recognition event PAD risk mrgin (GAAP) Best estimte reserves Notionl reserves bsed on updted ssumptions Ech ssumption in the reserve clcultion, i.e. mortlity, morbidity, investment yield, termintions nd expenses re set prudently by including provision for the risk of dverse devition (PAD=provision for dverse devition) Except s noted below, initil ssumptions re locked-in through the life of the contrct. They re only revised if there is mteril chnge in circumstnces ( premium deficiency or loss recognition event) Disbility clim reserves (clims in pyment) re derived using current best estimtes ssumptions (i.e. ssumptions not locked-in) US GAAP profits emerge over the durtion of the policy with little emergence t policy inception 41

24 US GAAP ccounting for L&H Long durtion universl life type contrcts Policy benefit reserves (policyholder ccount blnce), is estblished generlly representing the mount tht policyholder would receive on surrender of the policy (excluding considertion of ny surrender chrges) No provisions for dverse devition Includes premium deficiency evlution Interest ccrues on the policyholder ccount blnce (reported directly in the income sttement) Cpitlised cquisition costs expensed in proportion to estimted gross profits (EGP derived using current best estimte ssumptions) Premiums collected re not reported s revenue nd pyments to policyholders tht represent return of policyholder ccount blnces re not reported s clims Fees re reported for services provided by the compny (reported in fee income from policyholders) Clims re recognised only for mounts in excess of policyholder ccount blnce US GAAP profits emerge over the durtion of the policy with little emergence t policy inception 42 US GAAP ccounting for L&H Long durtion investment contrcts (incl. most unit-linked) Investment contrcts re contrcts which hve no significnt insurnce risk Pyments from policyholders re not considered s premiums or revenues but re rther reported s deposit libilities ( provisions for linked libilities ) consistent with ccounting for interest bering or other finncil instruments The deposits re invested in finncil ssets nd re reported s prt of the generl investments ccounts The investment income nd the investment gins or losses on these linkedssets re pssed through to the policyholders nd do not impct the bottom line The US GAAP profit emerges from fee income which is ssessed ginst the policyholder s ccount blnce 43

25 US GAAP ccounting Trditionl L&H reinsurnce contrct Exmple of YRT contrct Premiums Inv income Clims Expenses Net reserve chnge * 100% 80% 60% 40% 20% 0% Yer 1 Yer 2 Yer 10 Yer 20 Yer Benefit rtio (%) GAAP mrgin (%) Yer 30 20% 16% 12% 8% 4% 0% Yer New business vlue recognised in Yer 1 in USD m DAC 3.3 Profit 0.2 Policy libilities 0.8 net csh outly 2.3 Discount rte: bsed on interest rtes ssumed t pricing; lockedin GAAP mrgin: expected income s proportion of premium * Net chnge in benefit reserves nd DAC/PVFP US GAAP: FAS 97 Universl life ccount blnce Exmple of impct on US GAAP result Assumes policyholder dies on lst dy of reporting period nd is pid USD 5,000 in deth benefits Ignores investment income erned on underlying ssets USD Blnce sheet Opening ccount blnce libility (1,000) Premiums pid by policyholder (50) Income sttement Interest credited (40) Cost of insurnce, mngement nd expense chrges 70 Benefits pid 5,000 Net benefit cost to insurer (3,980) Closing ccount blnce libility 0 FAS 97 predominntly in Admin Re 45

26 US GAAP: FAS 97 Unit-linked "unlocking" of PFVP PVFP is expensed in proportion to the present vlue of estimted gross profits (EGPs, derived using best estimte ssumptions) Policyholder funds for unit-linked policies re typiclly invested in mixture of equity shres, bonds nd rel estte, with the equity shres component normlly predominnt Fee ssessments bsed on the mrket vlues of unit-linked ssets usully contribute significnt proportion of totl EGPs. The mounts of EGPs re therefore sensitive to investment returns Increse in EGPs: Illustrtion of "unlocking" Bse ssumption: EGPs totling USD1,000 over 10 yers with USD 500 PVFP t inception. In Yer 5, 20% boost in investment returns Result: Totl EGPs over life of the business incresed from USD 1,000 to USD 1,089 Lower mortistion of USD 21 in yer of ssumption chnge s inception-to-dte mortistion is djusted. Higher expected mortistion in future yers reflects EGPs Activity tht ccelertes (or reduces) EGPs will result in higher period mortistion Conversely ctivity tht decelertes (or increses) EGPs will result in lower period mortistion 46 US GAAP ccounting How Swiss Re ccounts for VA reinsurnce contrct Illustrtion for riders only, living benefits (e.g. Gurnteed Minimum Withdrwl Benefit) Gurntee is ccounted for s derivtive, crried t fir vlue Derivtive hedges with third prties Chnges in fir vlue of both components re ccounted for s derivtive income through relised investment gins At the end of yer 1 Rider Living benefits Relised investment gins Vrious hedges with third prties Pre-tx GAAP income Depending on the benefit (living benefit vs. deth benefit) s well s the structure of the contrct (riders only vs. bse contrct with riders), GAAP ccounting clssifiction cn be different 47

27 Term ssurnce with level nnul premiums Typicl cshflows of cohort of policies Amount Durtion Premium Clims Expenses Investment Income Totl premiums for the cohort reduces over time s some policyholders die. Clims increse over time due to higher mortlity rtes t older ges Net csh flow is positive in the erly yers nd negtive in the lter yers. Positive csh flows re invested to generte investment income. The relese of reserves nd investment income py for the excess of clims over premiums in lter yers Lpses reduce both premiums nd clims In the published US GAAP ccounts, profits emerge in line with the run-off of the business 48 Disbility income Typicl cshflows of cohort of policies Amount Durtion Premium Clims Expenses Investment Income Assume level nnul premiums. Totl premiums for the cohort reduce over time s some policyholders die or become climnts Clims increse over time s the number of climnts increses. Clim rtes re lso higher t older ges Net csh flow is positive in the erly yers nd negtive in the lter yers. Positive csh flows re invested to generte investment income. The reserves nd investment income py for the excess of clims over premiums in lter yers Overll profile is similr to term ssurnce with US GAAP profits emerging over the durtion of the contrcts 49

28 Universl life Typicl cshflows of cohort of policies Shows projected run off of n cquired block of Universl life business Amount Durtion Net Mortlity Profits Net Expense Profits Net Investment Profits Net Surrender Profits Purchse price would be pid on cquisition of business (not shown) Significnt investment cshflows from inception due to cquisition of existing block of business Profit generted from mrgins on business 50 Unit-linked svings product Typicl cshflows of cohort of policies Shows projected run off of recently cquired block of unitised business Amount Present vlue for ech of the mjor csh flows shows business is profitble Durtion Premium Chrges Fixed Chrges Fund chrges Administrtion Expenses Investment Expenses Commission Expenses Purchse price would be pid on cquisition of business (not shown) Accumulted funds (svings) initilly increse which results in incresing fund chrges. In lter yers funds decrese s result of mturities nd surrenders s the business runs off Income is dominted minly by chrge on investment funds 51

29 Corporte clendr & contcts Corporte clendr 17 Februry 2011 Annul Results 2010 Zurich 15 April th Annul Generl Meeting Zurich 05 My 2011 First Qurter 2011 results Conference cll 07 July 2011 Investors' Dy Zurich 04 August 2011 Second Qurter 2011 results Conference cll Investor Reltions contcts Hotline E-mil Susn Hollidy Ross Wlker Chris Menth Simone Lieberherr Simone Fessler Cutionry note on forwrd-looking sttements Certin sttements nd illustrtions contined herein re forwrd-looking. These sttements nd illustrtions provide current expecttions of future events bsed on certin ssumptions nd include ny sttement tht does not directly relte to historicl fct or current fct. Forwrd-looking sttements typiclly re identified by words or phrses such s nticipte, ssume, believe, continue, estimte, expect, foresee, intend, my increse nd my fluctute nd similr expressions or by future or conditionl verbs such s will, should, would nd could. These forwrd-looking sttements involve known nd unknown risks, uncertinties nd other fctors, which my cuse Swiss Re s ctul results, performnce, chievements or prospects to be mterilly different from ny future results, performnce, chievements or prospects expressed or implied by such sttements. Such fctors include, mong others: further instbility ffecting the globl finncil system nd developments relted thereto; chnges in globl economic conditions; Swiss Re s bility to mintin sufficient liquidity nd ccess to cpitl mrkets, including sufficient liquidity to cover potentil recpture of reinsurnce greements, erly clls of debt or debt-like rrngements nd collterl clls under derivtive contrcts due to ctul or perceived deteriortion of Swiss Re s finncil strength; the effect of mrket conditions, including the globl equity nd credit mrkets, nd the level nd voltility of equity prices, interest rtes, credit spreds, currency vlues nd other mrket indices, on Swiss Re s investment ssets; chnges in Swiss Re s investment result s result of chnges in its investment policy or the chnged composition of its investment ssets, nd the impct of the timing of ny such chnges reltive to chnges in mrket conditions; uncertinties in vluing credit defult swps nd other credit-relted instruments; possible inbility to relise mounts on sles of securities on Swiss Re s blnce sheet equivlent to its mrk-to-mrket vlues recorded for ccounting purposes; the outcome of tx udits, the bility to relise tx loss crryforwrds nd the bility to relise deferred tx ssets (including by reson of the mix of ernings in jurisdiction or deemed chnge of control), which could negtively impct future ernings; the possibility tht hedging rrngements my not be effective; the lowering or loss of finncil strength or other rtings of one or more of the compnies in the Group or developments dversely ffecting the bility to chieve improved rtings; the cycliclity of the reinsurnce industry; uncertinties in estimting reserves; the frequency, severity nd development of insured clim events; cts of terrorism nd cts of wr; mortlity nd morbidity experience; policy renewl nd lpse rtes; extrordinry events ffecting Swiss Re s clients nd other counterprties, such s bnkruptcies, liquidtions nd other creditrelted events; current, pending nd future legisltion nd regultion ffecting Swiss Re or its ceding compnies, nd regultory or legl ctions; chnges in ccounting stndrds; significnt investments, cquisitions or dispositions, nd ny delys, unexpected costs or other issues experienced in connection with ny such trnsctions, including, in the cse of cquisitions, issues rising in connection with integrting cquired opertions; chnging levels of competition; nd opertionl fctors, including the efficcy of risk mngement nd other internl procedures in mnging the foregoing risks. These fctors re not exhustive. Swiss Re opertes in continully chnging environment nd new risks emerge continully. Reders re cutioned not to plce undue relince on forwrd-looking sttements. Swiss Re undertkes no obligtion to publicly revise or updte ny forwrd-looking sttements, whether s result of new informtion, future events or otherwise. 53