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Nov 2007 Talking points and Q&A reference guide for Client Markets staff regarding Swiss Re's CHF 1.2 billion mark-to-market loss from its credit underwriting activities
Please note that this document may only be used for verbal briefing of clients and other stakeholders (except those listed in the e-mail of Andreas Beerli of 21 November). It must not be sent outside of Swiss Re in writing
General statement
Following completion of its October performance reporting, Swiss Re announced November 18 a CHF 1.2 billion mark-to-market loss, or CHF 981 million after tax. The loss arises from Swiss Re's exposure to two credit-related default swaps written by its Credit Solutions unit (Financial Services) that provide protection to a client for certain securities against the non-payment of principal and interest.
The unprecedented and severe market developments in October – which can be legitimately compared to a Katrina-like event – and the lack of any truly liquid market for these securities has resulted in a significant and material reduction in the value of the underlying assets.
Based on Swiss Re's solid performance so far this year and combined with the financial strength of the firm and its ongoing strategy, Swiss Re is well prepared to absorb this loss incurred by extraordinary developments in the financial markets. The company has announced it will take immediate action to make the necessary changes to further improve and reinforce its financial risk-taking process.
Swiss Re remains committed to its share buy-back programme and has reiterated its over the cycle targets of Earnings-per-Share (EPS) of 10% and Return-on-Equity (ROE) of 13%.
Q&A reference guide
Q: What kinds of transactions have caused this mark-to-market loss and when did you enter into these deals?
A: They came from two structured credit transactions within the Credit Solutions Division of Financial Services. These transactions were conducted in the second half of 2006 and first half of 2007, respectively.
Q: Which type of transactions are these?
A: The portfolios protected by these credit default swaps consist largely of mortgage-backed securities (MBS) in various forms including residential and commercial mortgage-backed securities. While the majority of the exposure is to prime and mid-prime securities, there is exposure to sub-prime and, more significantly, to asset-backed securities (ABS) in the form of collateralised debt obligations or CDOs.
Swiss Re has marked down these ABS CDOs to zero. The sub-prime securities have been written down to 62% of their original value. Other smaller adjustments have been made to the remainder of the portfolio. The market value of the portfolio is now CHF 3.6 billion but no payments have yet been made under the two credit default swaps.
Q: Who is the counter party?
A: We cannot disclose this information.
Q: Who approved these transactions and what kind of measures are you putting in place to prevent similar situations in the future?
A: The transactions were approved by the relevant internal risk committees with the
Talking points and Q&A reference guide
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appropriate levels of delegated authority.
We have already taken steps to ensure a more pro-active risk management of this type of financial market transaction. The speed of the financial market deterioration and the size of the loss underline the need for such an approach in the future.
Q: Why didn't Swiss Re report these losses during its Third Quarter results on 6 November?
A: These losses are related to market movements in October. This impact became apparent only after completing an independent price verification of the October data which was completed on 18 November.
Q: What's the lifetime of these transactions?
A: These transactions were modelled using an expected life of approximately 5 years.
Q: Will you continue writing these types of transactions in the future?
A: No. These are the only transactions of this type and we will not write new ones in the future.
Q: Will these losses impact Swiss Re's ratings?
A: Swiss Re has informed the rating agencies already and we are working with them so they understand that this event affects fourth quarter earnings. This is an earnings-related rather than a capital-related event, heavily influence by market turbulences. The affirmation of our rating (AA-/Stable/A-1+) by Standard & Poor's, Moody's (Aa2) and Fitch (AA-) following our announcement underlines the financial strengths of Swiss Re and the credibility in the firm.
The magnitude of this event – which has even taken the rating agencies by surprise –can legitimately be compared to a Katrina-like event.
Q: Will this impact the share buy-back program and the dividends? A: No. Swiss Re remains committed to its share buy-back programme and has reiterated its over the cycle targets of EPS of 10% and ROE of 13%.
We cannot comment on the dividends at this time as it is still too early.
Q: Will this have an impact on insurance-linked securities (ILS)?
A: No. Our strategy with regard to financing the increasing level of risk continues to include the use of insurance-linked securities as a way to enhance capital availability and diversification.
Q: Will this incident reflect poorly on Swiss Re's strong risk management reputation?
A: In fact, every experience both on the positive and negative side helps further build our knowledge of risk and extend our understanding of how to manage complex risks in a changing environment.
In this particular case, these investment grade credit default swaps were structured to provide protection against a remote risk of loss. The extraordinary financial market developments registered in October coupled with the lack of any truly liquid market for these securities have resulted in a significant and material reduction of the value of the underlying assets and produced the reported mark-to-market loss.
Q: Does it mean that Swiss Re has to change its strategy? Will Swiss Re get out of this business? A: No. Swiss Re's strategy to be the Port of Call for all insurable risks remains unchanged. We remain committed to continue combining our 144-year experience in the traditional reinsurance business with broad experience in the financial market to the
benefit of our clients.
The Credit Solutions team who structured the ABS CDOs belongs to Swiss Re's traditional business. Swiss Re intends to be active in the credit business in future.
Enhancing and integrating our client offering (EICO) - Talking points and Q&A reference guide
For internal use only
Last update: 5 September 2008
Talking points
EICO is an internal organisational change aimed at providing a superior, dedicated level of service to our clients while establishing a clear distinction between sales and operational activities
The new organisational set up will allow Client Markets to fully leverage its client-facing resources by freeing Client Executives, Market Executives and Client Managers from work that detracts from client business and ensuring they continue to receive specific training, performance monitoring and appropriate rewards
Client Executives and Market Executives will now have the opportunity to fully concentrate on their assigned clients or markets
While the Business Development teams will provide client analysis and transactional development support designed to generate new business, the Business Services units will deliver first-class support by assuming operational and administrative functions
The Financial Markets Origination (FMO) team will be integrated into Client Markets and Financial Markets
The task of implementing the realigned organisation now shifts to the Client Markets divisions, Client Executives Head and the Business Development and Business Services teams. Division Heads and their respective post-EICO teams will provide more details on the new organisation and the transitional phase in the coming weeks
Q&A
Roles and responsibilities
Q: Are Client Executives and Market Executives equal roles, ie are they treated equally regarding seniority etc.? A: Yes, both functions are on the same Band level, namely Managing Director.
Q: What's the difference between Market Executives and Client Executives? What is the scope of each? A: Both functions will be on the same hierarchical level and both will be leading client teams covering all insurance and corporate clients. In addition, both Executives will
provide clients with the full spectrum of Swiss Re’s products, both traditional and in financial markets.
The difference lies with the geographical scope and the number of clients. Whereas the Client Executive will be responsible for a small number of globally oriented clients, the Market Executive will be responsible for all clients in specific markets.
Q: What's the difference between the "new" Client Executive function and the current one? A: The goal of the Client Executive remains the same: selling the entire value proposition to the client on a world-wide basis, adapting a holistic client view and establishing strategic relationships and dialogues at the top client's level. The new function frees client-facing people from operational and administrative tasks and provides them with training and performance monitoring.
Q: What's the timing for implementation of the new set up across the four Client Markets divisions?
A: All Executive positions nominations are effective immediately. Although the organisational set up in the divisions will be completed by the end of September, the transitional phase will be determined by the divisional heads.
Q: Was this new set-up the ultimate intention when we created the Client Executives (CE) positions a year ago? Or did the success of this initiative trigger this change?
A: The experience gained from the Client Executive concept, feedback from clients and the urgent call from sales people to relieve them of operational tasks were the main drivers of this decision. Additionally, in order to deliver on the promise defined within our new Swiss Re Vision, we need to have a more dedicated sales force, with a distinct career path, training and performance monitoring who will ultimately have enough time to dedicate to serve the needs of our clients.
Q: If none of the front office staff (including Business Development) is charged with system entry – who is? Does this mean Client Markets will get headcount for admin/support roles?
A: The Business Services teams will assist the client-facing functions by taking over these operational and administrative tasks. The new concept does not foresee any additional resources as the staff members carrying out these tasks already exist in most locations. Going forward, there will be a clear distinction between the sales and operational activities. In order to optimise efficiency and quality, the Business Services teams will share best practices across divisions. However, the Business Services role will not be part of the Client Management career path.
Q: Will there be opportunities for staff in locations other than the eight defined locations to participate in the Business Development area? A: At the moment, only eight Business Development teams are envisioned for the four divisions. However, depending on market evolution, assignments in other locations might be possible.
Q: Is this a cost or purely client-driven decision? A: We want to be the partner of choice for our clients, searching for solutions to all insurable risks. This promise means we have to boost our client focus. Having a dedicated, world-class sales leadership is the most important step in becoming a truly client-centric organisation.
Q: What about Industrial Risk Insurer (IRI)?
A: For the top clients within the IRI client segment, this enhanced sales structure is perfectly applicable. It also needs to be noted that, unlike the reinsurance business, IRI underwriters are part of the Client Markets organisation and form a separate category
(Corporate Underwriters) next to the Client Managers.
Q: How does Products (Underwriting) interact with the new Client Markets functions? A: The current collaboration between Client Markets and Products Business Functions generally remains the same. However, as a result of EICO some calibration may be needed at the divisional level.
Q: How does FMO align/integrate with the EICO framework?
A: The Financial Markets Origination (FMO) team that Alan Badanes has lead for the past 12 months will be integrated into Client Markets and Financial Markets. The Public Sector Business Development team, led by Reto Schnarwiler, will now report directly to Agostino Galvagni's Insurance & Specialty Division. Alan Badanes has been appointed Global Head Business Development.
Q: Where does the broker market fit within the EICO concept? Will there be a CE position for the broker market?
A: No "Broker Executive" position will be introduced. Brokers will be covered by Market Executives.
Q: Will the facultative underwriters be impacted by this new concept?
A: Yes, facultative underwriters will be affected in exactly the same way as the other client-facing professionals. For example, they too will be freed from administrative tasks in order to devote more time to their clients' needs.
Q: What's the role of the local (Hub) Business Development Head?
A: Local Business Development Heads are senior, seasoned member of Client Markets whose objectives include recruiting, coaching, and mentoring top calibre graduates, providing ME, CE and CM with high quality, client-specific analytics and marketing materials, as well as facilitating execution of client action plans.
Q: Who has planning responsibility under the new structure?
A: Planning is a key process which will be aligned and harmonised on a Group level. Both Market Executives and Client Executives will work closely together in the planning of core and transactional business, as well as in the alignment of the plan from the client and market perspectives.
Q: Clearly these changes are expected to deliver "more." How will we measure this to determine (real) success? A: Within EICO, the performance measurement and monitoring for the new roles are reviewed and modified to reflect these changes. The new Key Performance Indicators will be defined by early October 2008.
Q: Where does the Globals unit fit now and what is Thierry Léger's role?
A: The role of the Globals unit will be assumed largely by the Client Executives. It will no longer be part of the Insurance & Specialty Division (formerly known as Globals & Large Risks). All Client Executives will be united under the leadership of a newly established Head Client Executives. Thierry Léger will assume this role, reporting directly to Michel Liès.
Q: Now that Globals is not part of the G&LR Division, how will that division be called?
A: Effective 5 September, the division will be renamed "Insurance & Specialty" (I&S).
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Human Resources
Q: Will there be any job losses due to this organisational alignment? A: As certain current functions will be reviewed and mapped, there remains the possibility that some functions may be streamlined. Our intention is to absorb such potential reductions through natural attrition.
Q: Is there a training/development track for Client Managers to develop into Client/Market Executives? A: The redefinition of the criteria for the different client-facing functions allows for a clear career path, incl. succession planning. In general the career path leads from Business Development to Client Manager and then ultimately either to Client Executive or Market Executive. The clear definitions of the functions on a world-wide basis allow for specific training at the different stages and/or for the different functions.
Q: How does this affect my goal performance for 2008?
A: The current 2008 goal performance is not affected as the impact on the performance measurement and rewarding will only take place with the renewals of 2008/2009.
Q: What are the next steps in the Human Resources process? When will I know if and what kind of a new job I have and who will be my (new) boss? A: The current functions are now aligned with the new structure. However, the fine-tuning and staffing of the new structure at a divisional level will be completed by the end of September 2008.
Q: What was the criteria used to select the Executives and the targets to which they will be held?
The focus was clearly on sales capabilities and sales leadership. Additional attributes included:
Able to lead the way and know where the most profitable business is
Must have a short- and long-term view at the same time
Able to motivate and energise sales teams
Able to attract, inspire and coach sales talents
Q: How will you deal with Client Managers whose functions have been downgraded due to this new set-up? What’s the incentive for them to stay?
A: With the separation of the sales tasks from the operational and administrative tasks, we aim to create a clearer and more attractive job profile going forward. We believe our current Client Managers will derive more satisfaction from their job through being able to finally devote most of their time to their clients.
Q: What are the benefits for a Client Manager of this new set-up?
A: This new concept provides new clarity on the roles and responsibilities for sales and other operational functions. It frees client-facing resources from operational and administrative tasks. The aim is to have origination executives fully dedicated to selling the whole value proposition of Swiss Re without being distracted by non-sales activities.
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Client aspects
Q: How do you plan on communicating this to clients? How will you deal with possible negative reactions from clients with established relationships?
A: No official communication is planned. The answer will strongly depend on the individual case and we recommend to discuss this within your team. However, we have to
bear in mind that our clients are primarily interested in getting high quality solutions and products from Swiss Re, rather than to learn how we optimise our organisation.
Q: What are the benefits for the clients of this new set-up?
A: The aim is to have Origination Executives dedicated to selling the whole Value Proposition of Swiss Re without being distracted by non-sales activities. Therefore the clients should benefit from enhanced client-focus and improved service tailored to their increasing complex needs. Additionally, the Business Development teams will support the Executives and client teams with high-quality analysis designed to generate more new business.
Q: What is specifically the role of the ME?
A: Market Executives (ME) have been defined across all Client Markets divisions. In their assigned markets, ME have origination and P&L responsibility for Property & Specialty, Casualty, Life & Health and FM Products for all clients with the goal of maximising economic profit and establishing Swiss Re as the Port of Call for insurable risks.
Q: What is specifically the role of the CE?
A: The Client Executives (CE) – a concept introduced in 2006 – will be enhanced and re-focused. Having worldwide P&L responsibility across all Lines of Business for their assigned clients, CE will be a role model for bringing the full Swiss Re value proposition to our clients as well as building strategic long-term and profitable partnerships with them.
Q: What is specifically the role of the CM?
A: The Client Managers (CM), which include Market Managers, Corporate Underwriters, Facultative Underwriters and Market Actuaries are responsible for prospecting opportunities and strengthening existing relationships with defined clients. CM lead the client team of Swiss Re professionals, managing all aspects of the client relationship, including technical and financial results. Depending on their assigned clients or geographic location, CM may report to either a Market Executive or a Client Executive
Q: What is specifically the role of the Business Development (BD) teams?
A: Eight Business Development teams will be established across the four divisions and will be primarily responsible for supporting ME, CE and CM with client analysis and transaction development support, including preparation of client pitches with a strong focus on new business generation.
Q: What is specifically the role of the Business Services units?
A: The Business Services units play an important role in our new organisation. They provide dedicated support to CE, ME and CM to relieve them from non-sales related tasks. Additionally, they ensure smooth coordination with other key supporting functions such as IT, Finance or Human Resources.
Q: Will there be training for the supporting functions?
A: Training needs for supporting functions should be covered by the existing offering
Each employee should take the initiative if he/she needs training in a specific area.
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Vision
How does this concept fit in with the Vision? Origination leadership helps drive the Port of Call concept, one of the pillars of Swiss Re’s Vision. Indeed, for Port of Call to flourish, sales professionals need more time to address client’s increasing sophisticated needs, including the provision of solutions that go beyond traditional reinsurance products. The clear distinction between sales and
operational functions – central to origination leadership – will help generate this valuable time. This, in turn, should enable us to position ourselves as a leading force in the risk transfer industry, combining professional resources and skills with customer focus to deliver economic profit growth.
Talking points and Q&A reference guide for client-facing staff regarding the Swiss Re Vision and Value proposition
Please note that this document may only be used for verbal briefing of clients and other stakeholders. It must not be sent outside of Swiss Re in writing
General statement
In addition to announcing annual results on 29 February, Swiss Re will unveil its Vision to external audiences, including clients and investors. As the natural evolution of our Strategic Direction, the Vision positions Swiss Re as a leading force in the risk transfer industry, combining professional resources and skills with customer focus to deliver economic profit growth.
The Swiss Re Vision meets the growing and evolving needs of clients at a time when hypercompetition, constant pressure from their stakeholders and an ever changing risk landscape poses new challenges for the industry. It is an opportunity to leverage our risk management expertise to deliver innovative products and solutions to our clients.
This document provides answers to potential questions from clients. For further client-specific requests, please contact Client Markets – Market Strategy Head Keith Saylor (Tel.: +41 43 285 5652).
Key messages to clients
Swiss Re's Vision
The Swiss Re Vision is the natural evolution of our Strategic Direction, which leads to best-in-class customer services and higher sustainable shareholder returns
The Vision allows us to better understand the needs of our clients and bring innovative, tailored-made solutions to them beyond traditional reinsurance products
Through the Vision, Swiss Re seeks to be the Port of call for all insurable risks, acting as a trusted expert and offering integrated solutions
The Vision allows Swiss Re to apply its expertise in risk management solutions to enable risk origination and transformation across the entire risk landscape
Through the Vision, Swiss Re creates a competitive advantage for its clients, providing them with effective asset protection during difficult and turbulent periods as well as helping them achieve sustainable risk adjusted returns despite constraints posed by various capital adequacy requirements
Swiss Re's Value proposition
Strong capital position and financial flexibility to benefit clients and all stakeholders
Integrated approach and points of contact to serve the needs and benefit individuals markets and clients
World-class knowledge and technical expertise in risk management
Financial strength and industry credibility to operate through all channels
Long-term personal relationships with clients based on expertise, integrity and commitment
Trusted, reliable counterpart and advisor for the clients' whole spectrum of risk management functions/interests throughout the cycle
Solid worldwide reputation of excellence
Committed to continuous, open knowledge sharing with clients and industry stakeholders
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Q&A reference guide
What is the Swiss Re Vision?
Is the natural evolution of our Strategic Direction. It allows us to position ourselves as a leading force in the risk transfer industry, combining professional resources and skills with customer focus to deliver economic profit growth.
Is this a new strategy?
No. Our Strategic Direction remains unchanged. The Vision enables Swiss Re to successfully face market drivers and industry challenges. It allows us to more effectively address the needs of our clients beyond traditional reinsurance products.
What's the value of the Vision for clients?
The Vision significantly expands our product offering by opening up a broad spectrum of channels, increasing our Value proposition and enhancing our credibility as a long-term, reliable risk partner. Through a combination of reinsurance expertise and capital markets capabilities, Swiss Re can deliver to clients enhanced balance sheet protection.
What does Port of call mean? Port of call refers to Swiss Re desire to be top of mind for clients looking for solutions of risk management, transfer and transformation for all insurable risks, irrespective of the origination channel. This entails traditional reinsurance lines (P&C, L&H), emerging financial services products, hybrid solutions or other insurable risks that have yet to emerge. Identifying new types of insurable risk will open up new opportunities for growth.
How can clients benefit for Swiss Re's insurance risk transformation expertise?
Swiss Re's established leadership in risk syndication, transformation and trading provides clients with a competitive advantage. Swiss Re is no longer simply a risk taker but a firm that can also repackage and sell or trade insurable risks by offering reinsurance expertise, financial market know-how of an investment bank and a customer-solution approach of a trusted consultant. For example, It means offering more comprehensive solutions to reinsurance clients by targeting more actively large run-off portfolios or being prepared to take larger shares on traditional business.
Is Swiss Re becoming an investment bank?
No. Swiss Re aspires to be the leading force in the risk transfer industry, focusing on taking, transferring and transforming insurable risks. While Swiss Re will continue to capitalise on traditional (re)insurance opportunities, the firm remains committed to identifying and developing business in response to the growing convergence between (re)insurance and capital markets, according to the needs of its clients.
Is the Vision just another way of saying that Swiss Re is entering the primary insurance business?
No. Swiss Re seeks to be the Port of call for managing all insurable risks, irrespective of origination channel. The company's desire for primary risk is grounded in the belief that it can structure, trade and distribute certain risks to generate above-average margins or to hedge risks currently on our clients' balance sheets.
How do we position this with clients who may be in direct competition with us in some markets?
Swiss Re does not seek to compete directly with clients. Instead, by looking at risks from a broader angle, the firm aims at developing solutions that benefit both its existing and future customer base – as well as the entire industry – when it comes to risk origination and transformation. The company's expertise and know-how in reinsurance and financial services provides a unique combination to help meet the growing and evolving needs of our clients.
Why now? Is this in response to the credit loss?
The Vision is the natural evolution of our Strategic Direction over several years. It is not a reaction to any specific development. It's a long-term endeavour that addresses our clients’ evolving needs and the realities of the markets we serve.
Will the vision affect the way we work with brokers?
The broker channel is extremely important to Swiss Re. Brokers are our allies. Swiss Re focuses on the risks irrespective of the origination channel.
Talking points and Q&A reference guide for first quarter (Q1) 2008 results and additional mark-to-market loss
Please note that this document may only be used for verbal briefing of clients and other stakeholders. It must not be sent outside of Swiss Re in writing
General statement
On 6 May, Swiss Re reported a net income of CHF 624 million in the first quarter of 2008, a reduction of 53% over the prior year's first quarter. The reduction was attributable to the continuing turmoil in the financial markets – particularly from foreign exchange fluctuations – and the resulting additional mark-to-market loss of CHF 819 million on the structured credit default swaps in run-off since November 2007.
Despite this development, Swiss Re's overall performance per business segment remains strong. Additionally, the company confirmed its targets of earnings per share growth of 10% and return on equity of 14% over the cycle.
This document provides answers to potential questions from clients regarding Swiss Re's 2008 first quarter results and the additional mark-to-market loss. For further client-specific requests, please contact Innovation & Growth Head Keith Saylor (Tel.: +41 43 285 5652).
Key messages to clients
Swiss Re reported net income of CHF 624 million for the first quarter of 2008. Earnings per share fell 52% to CHF 1.84 over the same period of last year. Return on equity was equivalent to an annualised rate of 8.5% compared to 17.1% in the first quarter 2007. Shareholders' equity decreased 13% to CHF 27.8 billion compared to 31 December 2007 due to the depreciation of the US dollar against the Swiss franc, mark-to-market effects on the investment portfolio and the continued buy-back of shares
The structured credit default swaps (collateralised debt obligations or CDOs) in run-off generated an additional mark-to-market loss of CHF 819 million in the first quarter. While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities and estimates a further loss of CHF 200 million for the month of April
Despite this loss, Swiss Re registered satisfactory performance across all its businesses segments. The P&C business registered solid operating income
despite softening market conditions. L&H benefiting from Admin Re®, variable annuity and longevity business. Financial Markets registered a strong annualised return on investments of 5.8%
Both S&P and Moody's have confirmed their ratings outlook for Swiss Re. The firm's capital position remains solid
Swiss Re's strategic Vision, with a sharp focus on underwriting quality, careful risk selection and economic profit growth, remains unchanged
Q&A
Q: What are the factors that negatively impacted Swiss Re's results in Q1 2008?
A: Swiss Re's results were impacted by the continuing turmoil in the financial markets – in particular the depreciation of the US dollar against the Swiss franc – mark-to-market effects on the investment portfolio and the continued buy-back of shares.
Q: Why didn't Swiss Re disclose the additional mark-to market loss earlier?
A: Since 19 November 2007, when the mark-to-market loss on the CDS was announced, Swiss Re informed that the transactions would continue to be exposed to market value changes. Market values change on a daily basis, and no purpose is served with constant updates.
Q: What is Swiss Re doing to mitigate future adverse development due to the mark-to-market losses and continued volatility in the foreign exchange (FX) markets? A: Swiss Re continues to actively manage its assets and hedge its risk exposures. The firm's strong capital strength positions it well to seize business opportunities. Both S&P and Moody's have confirmed their ratings outlook for the firm. Swiss Re maintains its targets of earnings per share growth of 10% and return on equity of 14% over the cycle.
Q: How does Swiss Re manage its FX exposure? A: Swiss Re currently manages its exposure to minimise the foreign exchange impact on shortfall capital adequacy. As a company operating globally, Swiss Re has fundamental FX exposures to the base currencies of leading insurance markets. Swiss Re targets its risk based capital (RBC) to a currency basket which best represents the weighting of its underlying business opportunities.
Q: How did the P&C business perform in the Q1 2008?
A: The Property & Casualty business continued its solid performance in Q1. Operating income was CHF 1.3 billion, a decrease of 6% compared to the first quarter of 2007, reflecting strict underwriting across all lines of business. The combined ratio was up 3.1 percentage points to 96.9% compared to the first quarter of 2007, mainly due to property business which was impacted by higher man-made losses and lower premium volumes.
Q: What trends do you see in the April 2008 renewals?
A: Swiss Re sees the same trend as for the January renewals, with price softening in most sectors. However, due to selective underwriting margins, Swiss Re's bound book deteriorated less than prices in general and is still at satisfactory levels.
Q: What about the performance of the L&H business?
A: The Life & Health business generated an operating income of CHF 449 million, representing a decrease of 45% compared to a very strong first quarter in 2007. While the result benefited from Admin Re® as well as variable annuity and longevity business acquired in 2007, it was impacted by lower proprietary net realised investment gains.
Where will future growth come from for Swiss Re?
A: Swiss Re started its strategic effort to strengthen its foundation for the future as early as summer 2007. The resulting business model advances Swiss Re’s two fundamental objectives: providing ample risk-taking capacity to clients and delivering enhanced returns
to shareholders.
&A reference guide for White Labelling: focus on traditional product development and fronting office and putting the Greenfield Operation for personal lines on hold
Please note that this document may only be used for verbal briefing of clients and other stakeholders. It must not be sent outside of Swiss Re in writing
Q: What is the rationale for this decision?
A: After evaluation of the current four White Labelling models, we have come to the conclusion to prioritise our resources and to focus on more immediate opportunities. By operationalising model 1 (traditional product development) and 2 (Fronting office) within Client Markets, we get the opportunity to pursue current or evolving product developments in daily business. Furthermore, in model 3 (Primary with partnership) and 4 (Primary) we would have needed to significantly invest in building up the primary expertise and skill-base in-house. Ultimately, creating a competitive advantage in the personal lines business, particularly in large and more mature markets, is very challenging.
Q: When will the changes be implemented?
A: They will be implemented with immediate effect.
Q: What happens with the work conducted by the White Labelling project team? A: A project closing report will be written including the lessons learned allowing that the work can be revisited in the future. The deals under discussion will be integrated into the daily operations of the Client Markets’ divisions.
Q: How does this decision fit with our Vision?
A: We are continuing to establish ideal conditions for the implementation of Swiss Re's Vision to become the Port of Call for all insurable risks. To this end the full integration of the White Labelling work into the businesses will enable us to identify and respond to new market opportunities more quickly.
Q: Is this purely a cost-driven decision?
A: Today we are faced with the situation that we have limited resources and very restricted personal lines capabilities in-house, particularly in Property and Casualty. Therefore, we need to prioritise our tasks and focus on the more immediate opportunities.
Q: How does this decision affect the initiatives/deals in L&H?
A: For Life & Health the situation is somewhat different, as we are currently licensed to write primary insurance in some European markets and in Australia/New Zealand. We believe that we have less skills challenges and that we can build reasonable economies of scale.
Q: What impact does this have on current deals in the pipeline of model 3?
A: The deal teams have reached out to the counterparties and explained Swiss Re's decision to focus on model 1 and 2 and discussed with them the option to use a fronting company.
Q: How do you plan on communicating this to clients? How will you deal with possible negative reactions from established clients?
A: As we have not concluded any deal under model 3 there is no need to communicate other than what is mentioned above.
Q&A reference guide
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White Labelling models
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FOR USE IN RESPONSE TO QUESTIONS FROM CLIENTS. IF YOU NEED ADDITIONAL
ASSISTANCE PLEASE CONTACT MEDIA OR INVESTOR RELATIONS.
What are Fannie Mae, Freddie Mac, etc?
The US government agencies or Government sponsored entities (agencies or ‘GSEs’) date back to the 1930s and received charters from Congress in the 1960s and 70s. Ginnie Mae is government owned, Fannie Mae and Freddie Mac are shareholder owned companies, whose mission is to support the housing industry by acting as a conduit between prime mortgage lenders and investors. To do so the agencies issue debt and common shares to fund their operations and they also securitise mortgages through the issuance of mortgage backed securities. The agencies are a little unusual in that they benefit from an implicit US government guarantee and the securities trade accordingly. Further information can be found on their websites: www.fanniemae.com www.freddiemac.com www.ginniemae.gov
What investments does Swiss Re have in these institutions?
There are three types of possible investments related to these institutions: Asset Backed Securities packaged by these agencies, Debt issued by these agencies and direct Equity investments in these agencies: Regarding asset backed securities (ABS) packaged by these agencies: At 31 March 2008, we held CHF 12.2bn of Residential Mortgage Backed Securities (RMBS) and CHF 435m of Other Structured Products from these agencies. The RMBS portfolio as at 31 March 2008 was split approximately 47% Freddie Mac, 44% Fannie Mae and 9% Ginnie Mae and the Other Structured was 100% Ginnie Mae. These investments are held in our “Mortgage backed and asset backed securities” portfolio.
Further, Swiss Re also invests in debt instruments from these companies. As at beginning of July 2008 our investment in US government sponsored agency debt was (in USD
bn): a Type
Freddie Mac
(FHLMC)
Fannie Mae
(FNMA)
Ginnie Mae
(GNMA)
Asset
category
Senior bonds 1.8 2.0 - Debt securities issued by governments and government agencies US Treasury and other US government corporations and agencies
Senior discount notes 3.4 2.4 - Short-term investments/cash
Subordinated debt 0.0 0.2 - Debt securities issued by governments and government agencies US Treasury and other US government corporations and agencies
Total 5.2 4.4 -
080805
Today, we announced our quarterly results. In summary, our operational performance in Property
& Casualty and Life & Health has been excellent, despite the impact on overall earnings from the
turbulence in the financial markets and the transactions involving Structured Credit Default
Swaps.
Before I go into more detail, let me stress the following points: Swiss Re is well on track to deliver on its
mid term goals even though it has been faced with a significantly more challenging asset management
environment. Adjusting for SCDS losses, the firm’s net earnings were about equal to those achieved in the
first half of 2006 which, if you recall, was a record year.
Our second quarter earnings were CHF 0.6 billion, a decline over last year of 53%. However, it is
important that we get these results in perspective:
Property & Casualty performance was quite simply outstanding. There is no other way to describe it. Property & Casualty is producing very strong results with a remarkable combined ratio of 92.3% (or 90.3% without the unwind of discount arising from the acquisition of GEIS). This performance reflects the continuous attention paid to quality underwriting and the underlying strength of our reserves.
Life & Health business also showed its strength with mortality and morbidity results that are significantly better than the same period last year. The operating result before capital gains and foreign exchange effect was up 67% compared to the same period a year ago. We benefited not only from the Admin Re and longevity transactions last year, but also from the time and effort that our teams have invested in carefully selecting the right risks, and working hard to get the right economics.
The Asset Management teams delivered good results despite very difficult financial markets (see appendix 1 for illustration). Here we are continuing to benefit from a fundamental financial ability other financial institutions such as banks do not have – our ability to hold assets in a matched portfolio to maturity. The financial market has unfortunately lost sight of this.
Return on investment for the first six months was lower than last year at 4.4%.The overall portfolio
continues to provide a stable and solid running yield (5.2%) which will continue to benefit our earnings for
some time to come. Impairments were only CHF 175 million. Given the nature of our business, we do
suffer from certain accounting complexities that affect the recognition of changes in market value – but
ultimately this is of no economic consequence.
The most notable impact of the turbulence in the financial markets is a further unrealised mark-to-market loss on the two transactions involving Structured Credit Default Swaps. In consequence, return on equity is a disappointing 8.5% for the quarter.
Shareholders’ equity declined in the quarter in the wake of the dividend payout and the fact that our fixed income portfolio was impacted by increases in interest rates. This was partly offset by earnings and modestly favourable foreign exchange effects in the quarter. Book value per share fell 7% to CHF 77.65, as we continued our share buy-back programme.
These achievements, I believe, suggest we are well positioned to weather this turbulence.They are
important because they reflect the efforts of everyone in the firm and you can all be proud of what
you have accomplished and, I am sure, will continue to do so.
Indeed, these hard facts are the result of your work and dedication. But we all know painfully well
that the stock market and parts of the media have a largely different perception. We cannot deny the
mediocre quarterly net income, basically related to the highly unfortunate transactions involving Structured
Cedit Default Swaps. But we need to focus on our key strengths:
Capital strength: in turbulent times, the long term winners are companies with a strong capital base. It is this strength that gives us the ability to take advantage of the opportunities that these conditions create – today’s deal with Barclays is an excellent example. With this transaction, Swiss Re has agreed to acquire Barclays Life Assurance Company Ltd. The cash purchase price is GBP 753 million, which represents a significant discount to embedded value. The transaction will provide further scale and infrastructure for Swiss Re’s Admin Re® business in the United Kingdom and underlines Swiss Re’s role as a leading player in the origination, transfer and trading of insurable risks.
Sustained asset quality in our balance sheet: we cannot control the short-term market valuation issues, but we continue to focus on investment selection in a very strict and disciplined manner as we successfully do in insurance underwriting
Client focus and solution-oriented dialogue: our clients are facing the same challenges as we are, the same unfriendly and unforgiving markets, the same decline in market value. They need our support, our innovative solutions. And Swiss Re can deliver.
Let me pick up on another issue: There has been some confusion and misunderstanding with regards to
our asset risk. We are comfortable with the quality of the assets we hold and we continue to report the
details of our investment portfolio as transparently as we can; we are also working hard to reach out to
those who want to understand more. So if you would like more detailed background information, I would
urge you to click on the appendix at the foot of this letter.
As you are aware, we adjusted management responsibilities in early July. I am very grateful to Stefan
Lippe accepting a major new commitment to make Swiss Re an even better company as newly appointed
Deputy CEO and Chief Operating Officer. I would also like to credit Stefan for creating a great team who
was able to help his successor as Chief Underwriting Officer settle in as quickly and smoothly as possible.
Please join me in welcoming Brian Gray to the Executive Committee as Chief Underwriting Officer. A
successful internal transition such as this is testimony to the firm’s sharp focus on nurturing and
developing its own deep talent pool.
Stefan will succeed Andreas Beerli, who has successfully contributed to the development of Swiss Re as
a leading and highly diversified global reinsurance firm. Andreas will remain a Member of the Executive
Committee until he retires on 30 June 2009. Andreas has served Swiss Re for over twenty years. In his
current role as Chief Operating Officer, he played a pivotal role in the successful integration of Swiss Re’s
largest ever acquisition – GE Insurance Solutions. His drive, energy and dedication have been an
example to us all.
I am confident we will weather the current market turbulence. We have shown with our accomplishments
that we can rise to the challenge. Let’s continue in the same way, as a team of which I am proud to be a
part.
Wishing you all a good second half.
Best regards
Jacques
080805
Talking points and Q&A reference guide for second quarter (Q2) 2008 results
Please note that this document may only be used for verbal briefing of clients and other stakeholders. It must not be sent outside of Swiss Re in writing
General statement
Swiss Re reported net income of CHF 0.6 billion for the second quarter of 2008 despite a challenging (re)-insurance and financial market environment. The Property & Casualty and Life & Health businesses delivered a strong performance.
The continued good performance of Property & Casualty and Life & Health demonstrates our ability to generate healthy operating earnings, even in challenging market conditions. The financial market turbulence continues, but, despite this, we are strongly capitalised and our investment portfolio remains sound.
Swiss Re is very strongly capitalised with a significant excess over the capital required for an AA rating.
The difficult market environment also creates new opportunities. Underpinned by its strict underwriting discipline, expansion in emerging markets and new product offerings, Swiss Re has the execution capability and capital strength to seize these opportunities, as just demonstrated by the acquisition of Barclays Life Assurance Company at a cash purchase price of GBP 753 million.
We continue to offer innovative solutions to our clients. For example, our latest securitisation, the USD 150 million of multi-peril natural catastrophe protection through the Vega capital programme, affirms Swiss Re’s leading role in Insurance-Linked Securities (ILS) product innovation.
Below there is a summary of key messages and answers to some questions that clients may ask regarding Swiss Re’s 2008 second quarter results. For further client-specific requests, please contact Innovation & Growth Head, Keith Saylor (Tel: +41 43 285 5652).
Key Messages
Swiss Re is very strongly capitalised with a significant excess over the capital required for an AA rating.
Swiss Re reported net income of CHF 0.6 billion or CHF 1.70 per share for the second quarter of 2008. Return on equity was equivalent to an annualised rate of 8.5% for the quarter and 8.4% for the half year.
Our businesses continued to generate strong results. Property & Casualty once again delivered a great performance with an excellent combined ratio of 92.3%, demonstrating Swiss Re’s effective cycle management.
Against a background of a softening pricing cycle, our focus on underwriting quality and careful risk selection enabled Property & Casualty to deliver operating income of CHF 0.8 billion.
Life & Health operating income was CHF 0.6 billion, benefiting from significantly improved mortality and morbidity experience, while relative to the first quarter of 2008 the Admin Re® business was impacted by lower investment gains.
The unrealised mark-to-market loss on the structured credit default swaps in run-off was CHF 362 million for the quarter. While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities and estimates mark-to-market losses on the structured credit default swaps in run-off of CHF 163 million for July 2008.
Shareholders’ equity decreased 8% in the second quarter to CHF 25.6 billion due to the valuation effects on the investment portfolio of CHF 1.7 billion, resulting from interest rate moves and dividends paid of CHF 1.3 billion.
At the end of July 2008, the Group had completed 49% of its CHF 7.75 billion share buy-back programme target, ahead of schedule and reflecting Swiss Re’s solid capital base. Book value per share was CHF 77.65 at the end of June, compared to CHF 83.26 at the end of March 2008.
Swiss Re maintains its targets of earnings per share growth of 10% and return on equity of 14% over the cycle.
Top of page
Q&A
Q: Generally, non-life insurance rates are dropping. Can Swiss Re escape this soft cycle?
A: Property & Casualty once again delivered a strong performance with an excellent combined ratio of 92.3%, demonstrating Swiss Re’s effective cycle management. Against a background of a softening pricing cycle, the Group’s focus on underwriting quality and careful risk selection enabled Property & Casualty to deliver operating income of CHF 0.8 billion, despite sharply lower investment return allocation in the quarter.
Q: What are the trends in the July renewals - the best and worst classes of business prices, terms and conditions?
A: The trend is the same as for the January and April renewals; price softening in most segments was experienced. Despite the challenging market environment, margins on our book deteriorated less than prices in general and are still at attractive levels.
Our July renewal activities demonstrate our strict approach to cycle management. We have only renewed business that we expect to meet our targets and we have redeployed capacity to those areas where we expect higher returns. For example, we reduced our US Casualty book (mainly Liability – worst segment with significant volume) to protect our margins. Non-proportional US Property business is still at very attractive levels (best segment with significant volume at July renewals). Our Property volume increased slightly at July renewal. We have also secured a number of large deals with select clients.
Overall, our price-adequacy expectations for the July 2008 book is similar to the portfolio that was due for renewal.
Q: How are the recent financial market developments expected to impact upon Swiss Re’s strategy and how can we best position ourselves to take advantage of the current environment?
A:The difficult market environment also creates new opportunities. Underpinned by its strict underwriting discipline, expansion in emerging markets and new product offerings, Swiss Re has the execution capability and capital strength to seize these opportunities.
For example, on 5 August 2008, Swiss Re agreed to acquire Barclays Life Assurance Company Ltd for a cash purchase price of GBP 753 million, which represents a significant discount to embedded value. Swiss Re will acquire approximately 760 000 life insurance and pension policies and annuity contracts, representing approximately GBP 6.8 billion in invested assets. The transaction is accretive to economic and US GAAP earnings and is expected to achieve an ROE in excess of Swiss Re’s over-the-cycle target of 14%. This transaction has no effect on Swiss Re’s previously announced share buy-back programme – the buy-back of CHF 7.75 billion of shares is expected to be completed as scheduled by April 2010.
Swiss Re anticipates additional demand for life and non-life run-off solutions, which will allow the Group to further grow its Admin Re® business in the United Kingdom and North America and to venture into new markets as opportunities arise. Swiss Re’s latest securitisation, the USD 150 million of multi-peril natural catastrophe protection through the Vega capital programme, affirms Swiss
Re’s leading role in ILS product innovation.
Q: What is the up to date position regarding our exposure to Fannie Mae and Freddie Mac?
A: Swiss Re holds CHF 11.4 billion of asset backed securities and CHF 10.362 billion of debt instruments in these institutions. This represents 12% of our total assets under management. The debt of these institutions is being supported by an emergency financing guarantee of the US Government and the quality of the GSE’s sponsored ABS in our portfolio is very high.
Q: Why has Swiss Re named Stefan Lippe as Deputy CEO – and does that mean that he will be Jacques Aigrain’s successor?
A: As you are aware, we adjusted management responsibilities in early July. Stefan Lippe has accepted a major new commitment to make Swiss Re an even better company as newly appointed Deputy CEO and Chief Operating Officer. Stefan created a great team and was able to help his successor as Chief Underwriting Officer, Brian Gray settle in as quickly and smoothly as possible. A successful internal transition such as this is testimony to the firm’s sharp focus on nurturing and developing its own deep talent pool.
Q: Where will future growth come from?
A: In the first quarter results for 2008 we articulated Swiss Re’s two fundamental objectives for advancement of the business: providing ample risk-taking capacity to clients and delivering enhanced returns to shareholders. These two objectives remain. We are committed to providing economic profit growth for our shareholders while maintaining our resolve to avoid under priced business. We see opportunities in the following areas:
P&C in emerging markets (longer-term growth potential).
Admin RE.
Longevity, variable annuities and health (the latter through joint ventures in India/China).
Pension business.
ILS business that potentially offers new trading capabilities to disconnect from the cycle. Solutions such as cat bonds or securitisations of various types of life risk and more broadly will be continuously expanded.
New, innovative solutions such as weather derivatives.
Embracing new client segments such as the public sector e g disaster risk finance based on PPP.
Further strengthening of distribution through brokers.
Q: Will Swiss Re’s strong AA rating remain despite a challenging market environment?
A: Swiss Re is very strongly capitalised with a significant excess over the capital required for an AA rating.
Q: You mentioned the focus on strict underwriting – are you exiting certain business lines and if so which ones? A: We have no reason to deviate from our strategy to have a sharp focus on underwriting quality, careful risk selection and economic profit growth.
Q: Will the loss on the two sCDS and possible further losses on the investment side have impact on the premium we (the clients) pay?
A: The unrealised mark-to-market loss on the structured credit default swaps in run-off was CHF 362 million for the quarter. While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities. We do not expect that this will have any effect on the competitiveness of the premiums our clients pay.
Optimising the organisational setup for our Vision 080813
The realignment within Financial Markets and senior executive level changes
In our efforts to strive for excellence in all we do, we also must continually reassess and, where needed, further
align our organisation; this is not only to give our people opportunities to grow but also to accelerate our
aspiration of becoming a true risk entrepreneur.
The recent announcement of the realignment within Financial Markets represents major progress towards our
Vision and its evolving business model. To that effect, Financial Markets continues to focus on two strategic
mandates that are core to Swiss Re and clearly reflected in the new organisational set-up:
Firstly, our investment capabilities are dedicated to generating superior risk-adjusted returns investing
the assets Swiss Re sources through its re/insurance activities,
Secondly, the Financial Markets Products Division is focused on fostering innovation and profitable
growth in hybrid products at the intersection of capital markets and re/insurance
The Chief Investment Officer and the four risk stripes (Rates, Credit & Securitized Products, Equity & Liquid
Alternative Investment, Illiquid Alternative Investment & Corporate Development) will use the best resources
from both the former Proprietary Asset Management (PAM) and former Financial Products area to deliver
the best possible risk adjusted return on the assets generated by the re/insurance activities. The Financial
Markets Products Division will work on structuring and distributing client oriented solutions. The various
units of Insurance Risk as well as Credit Solutions Products and Relative Value/Markets Strategy will
become part of Financial Markets Products.
Origination and overall Client Relationship Management will be fully in the hands of the Client Markets
organisation and execution will, where adequate, make use of the risk stripes' investment management desks.
Building on that, and in line with the Financial Markets realignment, there are additional personnel changes
happening.
Two senior changes have already been covered by our CEO's message; Benji Meuli, our Chief Investment
Officer, will retire from the firm. David Godfrey, currently Head of Financial Services Markets, will take on
responsibility for a new unit called Legacy Portfolio. In his new function, David will report to George Quinn,
Chief Financial Officer, with a dotted line to David Blumer, Head Financial Markets.
Additionally, Chris McKechnie, Head of Strategy Development, will take over business responsibility and
become head of a newly formed Illiquid Alternative Investment & Corporate Development team, a part of
Financial Markets and reporting to David Blumer. A number of his current team colleagues will also join
this new unit. The head of the newly formed Strategy Office will be announced shortly.
Furthermore, the EC decided on changes within Regulatory Affairs and Group Compliance:
Regulatory Affairs The various teams of regulatory officers currently in Finance, Group Legal and Risk Management
have been brought together under one roof of Risk Management to create a single global unit
already in July. Ongoing financial reporting requirements, such as legal entity or Group reporting,
remain with Finance. This change is a natural development of the strong network Swiss Re's
regulatory officers have successfully established under Giovanni Gentile's lead. Going forward,
Giovanni will remain in the Treasury Department and Philippe Brahin will take over Regulatory
Affairs with immediate effect.
Group Compliance
Swiss Re will create within the current Group Legal framework a new Group compliance unit which
will be led by Tom Scherer, currently Chief Operating Officer of Financial Markets. Tom will build
on the existing Group compliance framework in order to cultivate a stronger, proactive advisory role
for the firm.
As Jacques Aigrain pointed out in his employee letter, these developments within our organisation are
further evidence of our commitment to nurture and retain existing talent across the Group.
110917
Details of our overall net exposure to Lehman Brothers and AIG
In light of the recent unprecedented events in the global financial markets please find attached a document containing the most pressing questions and respective answers. Please note that this Q&A is for internal use only in helping answer market questions. Under no circumstances should you circulate it in any written form outside of Swiss Re.
Swiss Re's exposure to Lehman Brothers and AIG – Q&A for client managers Final version 17.09.2008 Q: What is Swiss Re's exposure to Lehman Brothers and AIG? A: Please see today’s press release. Q: How does this affect Swiss Re's financial stability/capital strength/credit rating? A: By all measures (rating agencies, statutory and economic views), Swiss Re continues to possess significant excess capital. This capital strength allows us to continue our share buy-back programme (over 50% completed to date) and to seize business opportunities as they present themselves. The recent transaction with Barclays is a good example. Q: Is this impacting Swiss Re's underwriting capacity? A: No, this will have no impact on our underwriting capacity. Swiss Re will continue to write business with the aim to achieve our targets for economic profitability. That said, the current hurricanes and winter storms may have an impact on our capacity. We do have sufficient nat. cat. capacity to meet demand, although capacity supply is clearly a function of price and the quality of underlying portfolios. Q: Will this affect our upcoming renewal 2008/2009? A: No, for the upcoming renewal 2008/2009 Swiss Re remains focused on underwriting discipline and maximising our economic profit. Q: What is Swiss Re doing to stabilise/improve its share value? A: Like all financial institutions we have no control over market trends. So we focus on
what we can control. We focus on the underlying quality of our insurance business and ensuring the resilience of our investable assets. We are committed to selective underwriting. Nothing demonstrates this better than our superior combined ratio in P&C and our benefit ratio in L&H. We pursue high quality assets while concentrating on continuous risk protection. Q: How does the financial market crisis challenge Swiss Re's overall market strategy? A: Swiss Re is built for times like these. When there is instability in the market place the companies who prosper are those who have a solid capital base and can seize opportunities as they arise. Our focus on the asset side is very simple – under David Blumer’s leadership we are focused on an asset/liability matched portfolio and the development of products that meet the needs of our clients in areas such as variable annuity. Q: Does Swiss Re see any business opportunities arising from the situation? A: A turbulent market place creates opportunities for advantageous deals for those companies who have the size, financial strength and skills to seize the opportunities. Swiss Re is constantly monitoring the landscape for business opportunities. Acquisitions are fundamental to our strategy because they can generate significant profit and additional growth. Q. AIG's reported cash-flow problems may be related to the credit default swaps it wrote. Swiss Re has also written these types of contracts. Does Swiss Re have any further exposure on this issue? Q&A client managers 20080917 final Page 2 of 2
A: We have been consistent on this issue. Swiss Re has conducted a thorough review of its portfolio and is carefully monitoring its exposure. Whilst we no longer write these types of instruments, we do have some exposure to market value fluctuations on the underlying securities, and to the extent there are forced sales of assets into the market further writedowns may be necessary. Our core property & casualty and life & health portfolios continue to deliver good results despite a challenging market. Q. The rating agencies have come under fire for failing to recognise challenges to companies like AIG. As a result, they may become even more conservative when viewing this industry. Have there been any inquiries from rating agencies concerning Swiss Re's rating? A: We do not speculate on what the rating agencies may or may not do. Swiss Re is financially strong, and recently our ratings have been affirmed by the rating agencies. Our operating performance and financial strength remain solid.
110925
Talking Points and Q&A reference guide for Investors' Day and Standard & Poor’s AA- rating on Swiss Re
Please note that this document is intended for verbal briefing of clients and stakeholders. It must not be sent out to external parties.
General statement
On September 25 we gave an overview of our Life & Health business and an update on our investments and financial market exposures in the light of the unprecedented developments in the global financial markets. Please see Investor Relations webpage for more details.
Standard & Poor’s Ratings Services affirmed its AA- insurer financial strength and long-term counterparty rating on Swiss
Reinsurance Company and it’s core subsidiaries. Read the full report.
Below there is a summary of key messages and answers to some questions that clients may ask regarding the Investors' Day and the confirmation of our AA- rating. For further client-specific requests, please contact Innovation & Growth Head, Keith Saylor (Tel: +41 43 285 5652).
Key Messages
Standard & Poor’s Ratings Services affirmed its AA – insurer financial strength and long-term counterparty rating on Swiss Reinsurance Co and its core subsidiaries.
Our business generates liquidity
We have a solid liquidity risk management framework, including weekly monitoring of the Group’s liquidity position
We have sufficient liquidity, even in extreme market conditions where there is no external funding available for the foreseeable future
Financial Markets
FM is focused on managing the Group's assets according to our ALM framework
We have a well diversified, highly rated portfolio of investments
We have reduced our exposure to corporate credit significantly
Current markets are volatile and we remain exposed to that volatility
Our capital and liquidity positions are very strong
The current environment is likely to generate opportunities for our reinsurance business
Life & Health
We are a global leader in L&H and have a strong record of profitable growth
We are responding to market movements by management of our existing business and are developing new solutions which will contribute to EPS growth and ROE
Ability to price and manage Admin Re and uniquely placed to seize opportunities arising from the current market situation
Q&A
Q: What did the Standard & Poor’s report say about our AA- rating?
A: It is a very positive report. Standard & Poor’s expects both our liquidity and capital position to remain very strong. We have a robust liquidity management process in place. The spot liquidity (liquidity sources, excluding committed external funding , readily available to the group Treasury function within seven days) currently available to us – exceeds $20 billion. They also expect that our very strong capital position will remain resilient in the face of continued market turbulence, and they expect us to hold a substantial surplus to Standard & Poor’s AA- level capital target for financial year ended 31 December 2008.
Q: What do you think the impact of the events surrounding AIG is for us? Are we interested in buying any AIG companies?
A: AIG is a respected client of ours and we are always interested in offering solutions to clients that meet our profitability
requirements. See last weeks’ press release and Q&A for more details.
Q: Has the ongoing financial markets turmoil created liquidity issues for us?
A: No, we benefit from strong cash flows from operating activities. This was demonstrated by the recent purchase of Barclays Life using a mix of internally generated cash and funding that was already in place. Our business model differs from other financial institutions in that there can be no ‘run’ on a reinsurance company. We are therefore less likely to be in the position of forced sellers of investments. Please see slides 20-23 in the Investor Relations FM presentation for more details.
Q: Has the recent market turmoil brought an end to the soft market? A: While there is little movement at the moment we believe that the combination of this year’s natural catastrophe activity, along with investment market performance is likely to accelerate the ending of the soft market.
Q: Is there a unique opportunity for more Admin Re deals?
A: Admin Re presents opportunities for growth and expansion. We continue to see opportunities in the US and UK and we believe there will be excellent opportunities to expand the Admin Re model to other markets.
Q: Where do you see the growth areas in Life & Health?
A: Within the traditional risk protection reinsurance lines we are seeing growth from:
1. Emerging markets, particular Asia. Key areas are alternative distribution channels and medical insurance business
2. Continued growth due to greater product innovation in continental Europe e g introduction of enhanced risk segmentation
3. An increasing trend for health benefits particularly those associated with older ages e g Long-term care (LTC)
Within the more developed markets we see significant growth from the ageing population and demand for retirement saving contracts. We are uniquely placed to offer solutions and benefit from the growth in variable annuities, longevity risk protection, retirement planning products and provision of risk management solutions to pension funds. Admin Re is a continuing strength for us. We expect this business to continue its growth. Please see slide 31 of Investor Relations L&H presentation for more details.
Q: How do you see the outlook for traditional life reinsurance?
A: Traditional life reinsurance is a vital part of our business, and integral to the risk and capital planning activities of our clients. In more mature markets, we have seen cession rates for mortality reinsurance plateau or decline as primary companies elect to retain more risk. The introduction of Solvency II in Europe and Principles Based Reserving in the US are driving enhanced focus on capital efficiency and risk protection which will continue to support our reinsurance proposition. Outside mortality, we see growing demand for reinsurance of health and medical risks particularly in developing countries in Asia.
081008
Talking Points: Fitch rating withdrawal
Please note that this document is intended for verbal briefings of clients and stakeholders only. It must not be sent out to external parties.
Fitch Ratings agency has announced the withdrawal of its ratings on Swiss Re and its subsidiaries. The company's statement said: "The ratings have been withdrawn as the public information and disclosure available to the agency is considered insufficient to maintain the ratings."
Fitch Ratings press release
Talking points
Q: Why has Fitch withdrawn its rating on Swiss Re?
A: Fitch does not have an interactive relationship with Swiss Re and its rating is based on public information only. Fitch requested confidential non-public information, consistent with the type of information that we can only provide to rating agencies with which we have interactive relationships. Swiss Re has the highest respect for Fitch but believes that our clients, investors and other stakeholders are well served by the existing interactive ratings. Q: What ratings does Swiss Re have? A: Swiss Re has three interactive financial strength ratings: 1. S&P AA- (Very Strong), stable outlook
2. Moody's Aa2 (Excellent), stable outlook
3. A.M. Best A+ (Superior), stable outlook
Details of our financial strength and debt ratings can be found on our website.
081010
Talking Points and Q&A guide – We remain a strong partner during the market turmoil
Please note that this document is intended for verbal briefing of clients and stakeholders. It must not be sent out to external parties.
BACKGROUND
Global capital markets are currently extremely volatile. As you have seen we are not immune to the turmoil and our share performance has suffered along with the market in general. We are well-positioned to weather the current market turbulence and serve our clients as they experience the same financial pressures.
Our claims paying ability remains strongly backed by our excess capitalisation, strong liquidity and access to the capital market. This is confirmed by Standard & Poor’s affirming its AA- insurer financial strength and long-term counterparty rating on Swiss Reinsurance Co and its core subsidiaries on 25 September.
The Group maintains its targets of earnings per share growth of 10% and return on equity of 14% over the cycle.
Below, there is a summary of key messages and answers to some questions that clients may ask regarding our ability to withstand the market turmoil.
KEY MESSAGES
Underwriting - We remain focused on maintaining underwriting quality.
Customer-focused organisation - Everything we do should bring us closer to understanding our clients' needs and delivering with accuracy and efficiency on the solutions we offer.
Prudent asset management - We maintain a well diversified, highly rated portfolio of investments. More than 50% of our total assets are invested in cash and government bonds or government backed securities. Equity exposure is minimal at this time, shielding us from current stock market turbulence. Due to increased hedging, our corporate bond exposure was reduced from CHF 16.9 billion to CHF 1.4 billion between 31 August 2008 and 19 September 2008.
Solid capital and liquidity base
Capitalisation
We are strongly capitalised with a current year projected CHF 6-7 billion capital surplus excess above S&P’s “AA” required level.
We continue to demonstrate strong operating performance, as identified by S&P in a news release on 5 September 2008.
This robust capital adequacy places us as very strong counterparty to our clients’ security interests.
There has been no significant change in our capital adequacy since second quarter results 2008.
Liquidity
Our liquidity position is strong- spot liquidity available to us exceeds USD20bn. This is due to conservative and pre-emptive management despite recent unprecedented market conditions.
Our business generates liquidity.
We have a solid liquidity risk management framework, including weekly monitoring of the Group’s liquidity position to the CEO, CRO, CFO, CIO.
We have sufficient liquidity even in extreme market conditions, or typical reinsurance triggering events, should there be no external funding available for the foreseeable future.
Access to capital markets
We are not dependent upon borrowings from banks or the markets in the foreseeable future to run our overall business
Our traditional wholesale insurance businesses generate liquidity and require no external funding, while our Financial Markets activities have required some secured and unsecured funding. This has been achieved with a conservative approach ensuring that we are only exposed to funding stress where it is well covered by immediately available liquid assets.
We have maintained our access to bank financing in 2008 at attractive terms despite the unprecedented market conditions, for example, the financing of the recent Barclays Life acquisition. We will use this financing capacity only for very attractive profitable opportunities.
On 25 September Standard & Poor’s Ratings Services affirmed its AA- insurer financial strength and long-term counterparty rating on Swiss Reinsurance Co and its core subsidiaries. What Standard & Poor’s said about us in their report on 25 September
1. S&P expects both Swiss Re’s Liquidity and capital positions to remain very strong. 2. Swiss Re has a robust liquidity management process in place. 3. S&P expects Swiss Re’s liquidity position to prove resilient to further distress in the financial markets, even
if that were to be coupled with a very substantial insured loss event. 4. S&P also expects Swiss Re’s very strong capital position to remain resilient in the face of continued market
turbulence.
Q&A
Q: Are there any positive aspects arising from the current market turmoil? A: Financial market turmoil creates opportunities for us as we are a strongly capitalised company. For, example the level of natural catastrophes and the volatility in capital markets is likely to accelerate the ending of the P&C soft market. We also continue to see opportunities to deploy capital at attractive returns in Life and Health, particularly using Admin Re®.
Q: Are we likely to have a problem meeting our claims payment obligations?
A: No, our business continues to generate liquidity, our capital adequacy has remained steady since the Q2 results and we continue to have access to capital markets. This was reinforced on 25 September when Standard & Poor’s Ratings Services affirmed its AA- insurer financial strength and long-term counterparty rating on Swiss Reinsurance Co and its core subsidiaries.
Q: What is the effect of the turmoil on our credit related asset portfolio?
A: Like most in our industry, the recent extreme market turbulence has had an affect on our credit related asset portfolio. Our assets are conservative in terms of rating, but subject to “mark to market” accounting movements impacting either our P&L or our net worth depending upon the applicable accounting convention.
Q: Do we envisage that the continuing market turmoil will cause liquidity issues for us?
A: We benefit from strong cash flows from operating activities. This enabled us to make the acquisition of Barclays Life using a mix of internally generated cash and funding that was already in place. The insurance business model differs from banks in that there can be no ‘run’ on a insurance or reinsurance companies.
Q: Has the recent market turmoil brought an end to the soft market? A: While there is little movement at the moment we believe that the combination of this year’s natural catastrophe activity, along with investment market performance is likely to accelerate the ending of the soft market.
Q: What ratings do we have? A: We have three interactive financial strength ratings:
1. S&P AA- (Very Strong), stable outlook
2. Moody's Aa2 (Excellent), stable outlook
3. A.M. Best A+ (Superior), stable outlook
Only one other global reinsurer currently exceeds our rating.
081009
Message from the Executive Committee on the current market situation
English and German language versions of the all employee email sent by Jacques Aigrain and the Executive Committee on Thursday October 9.
Deutsche Version
Dear Colleagues
The financial market turbulence remains extreme and the interest rate cuts by the US Federal Reserve and other central banks along with the announcement by the UK and German Governments on a package of measures aimed at rescuing the banking system, underscore the magnitude of the problem.
This environment has an impact on our share performance as it does on the market in general. Therefore, I would like to inform you personally why Swiss Re is very well positioned to weather this storm due to your efforts and hard work now and over the last many years. Clients are looking for further assistance and reinsurance support as they are subject to financial pressures. They are turning to us, and we are responding and will harvest the opportunities that arise in this stressed economic environment. We have four key strengths that will allow us to continue delivering sustainable profit and shareholder return. These are our strict underwriting, our people focused on customer delivery, our solid capital base and our prudent asset management.
Strict underwriting We will remain focused on underwriting quality versus quantity to ensure that shareholder value in a hardening market is maximised. Please keep up the good work and focus on underwriting profitability.
Customer-focused organisation We recently further consolidated and organised ourselves to better serve our clients. We are building an organisation that leverages our company-wide know-how and capitalises on our strengths in all aspects of insurance risk transfer. Everything we do should bring us closer to understanding our clients' needs and delivering with accuracy and efficiency on the solutions we offer.
Solid capital and liquidity base Swiss Re is strongly capitalised and our operating performance in the past has allowed us to build up a significant capital surplus, well above S&P's 'AA' required level. Our robust capital adequacy and liquidity position has been recognised by S&P through their recent re-affirmation of our 'AA-' rating on 25 September.
Prudent asset management We maintain a well diversified, highly rated portfolio of investments. More than 50% of Swiss Re's total assets are invested
in cash and government bonds or government backed securities. Equity exposure is minimal at this time, shielding us from current stock market turbulence. Due to increased hedging, our corporate bond exposure was reduced from CHF 16.9 billion to CHF 1.4 billion between 31 August 2008 and 19 September 2008.
I encourage you to have a look at the presentation I gave yesterday at the Merrill Lynch Banking & Insurance CEO Conference and at the S&P update (both to be found on the Investor Relations website). It contains more detail on why we are in a strong position to benefit from current market conditions.
We understand that it is difficult not to be distracted by the constant turmoil in the markets but we encourage you all to continue doing exactly what you all have been doing so successfully so far - stay focused on our clients and our operational performance.
Kind regards
Jacques Aigrain and the Executive Committee
081103
Talking points & Q&A reference guide for 3rd quarter (Q3) 2008 results
Please note that this document may only be used for verbal briefing of clients and other stakeholders. It must not be send outside of Swiss Re in writing.
General statement
While Swiss Re reported a net loss of CHF 304 million for the third quarter of 2008 on 4 November, net operating income for the first nine months of 2008 was CHF 884 million.
The continued turmoil in the global financial markets, lower than expected investment results and a higher level of natural catastrophe claims impacted the company's results.
As a result of our prudent investment approach, shareholders’ equity decreased only 6% in the third quarter to CHF 24.1 billion compared to the second quarter of 2008. Book value per share decreased modestly to CHF 74.16 at the end of September 2008, compared to CHF 77.65 at the end of June 2008
This document provides answers to potential questions from clients regarding Swiss Re's 3rd quarter results. For further client-specific requests, please contact the Marketing Communications team: Phil Race (+41 43 285 6712) or Felipe Stevenson (+41 43 285 3256).
Key messages to clients
Swiss Re's balance sheet is strong and the company's capital adequacy remains at very high levels. Book value per share decreased modestly to CHF 74.16 from CHF 77.65 at the end of June 2008.
The P&C business achieved a combined ratio of 99.8% for the quarter (97.6% excluding the unwind of discount) and 96.4% for the first nine months of 2008 (94.4% excluding the unwind of discount) despite a higher natural catastrophe burden, including hurricanes Gustav and Ike.
Swiss Re expects its aggregated net claims for hurricanes Gustav and Ike to be approximately USD 365 million. Swiss Re's effective protection successfully mitigated the impact of increased natural catastrophe claims.
Swiss Re remains focused on underwriting quality to ensure shareholder value is maximised. Should the early indicators of market hardening be confirmed, Swiss Re will redirect capital to Property & Casualty.
In Life & Health, operating income decreased to CHF -614 million in the third quarter of 2008. The main drivers were net realised investment losses of CHF 572 million due to financial market turmoil and higher mortality in North America. Overall, mortality developments in the first nine months of 2008 were in line with expectations.
As a consequence of the high volatility in the financial markets and a significant increase in client demand for reinsurance, Swiss Re has suspended its share buy-back programme.
The unrealised mark-to-market loss on the structured credit default swaps in run-off was CHF 289 million for the 3rd quarter.
Swiss Re is committed to its over the cycle targets of 14% ROE and 10% compound EPS growth.
Q&A
Q: Based on these somewhat negative results and the continued challenging overall market situation, can Swiss Re meet its obligations (including claims) and ensure its financial strength?
A: We benefit from strong cash flows from operating activities. This enabled us to acquire Barclays Life in August using a mix of internally generated cash and funding that was already in place. Swiss Re is currently well capitalised and has a comfortable liquidity position. This was reinforced on 25 September when Standard & Poor's Ratings Services affirmed its AA- insurer financial strength and long-term counterparty rating on Swiss Reinsurance Co and its core subsidiaries. We maintain significant financial flexibility and are able to meet all expected funding commitments, as well as funding contingencies, without accessing capital markets.
Q: What is Swiss Re doing to reduce its exposure to the unprecedented market volatility?
A: Swiss Re’s investment portfolio is of high quality and well diversified with over 50% in cash, short-term deposits, treasury bills or government-backed instruments. During the third quarter of 2008, the Group significantly reduced its exposure to corporate credit through hedging. Similarly, the traded equity portfolio was reduced through disposals and hedges.
As a result of our prudent investment approach, shareholders’ equity decreased only 6% in the third quarter to CHF 24.1 billion compared to the second quarter of 2008. Book value per share decreased modestly to CHF 74.16 at the end of September 2008, compared to CHF 77.65 at the end of June 2008.
Q: How are your results impacted by the quota-share agreement with Berkshire Hathaway?
A: Our quota share arrangement with Berkshire Hathaway increases the company's operational leverage by ceding a 20% share in new and renewed P&C business – including premiums, claims and liabilities – to Berkshire Hathaway. In the third quarter of 2008, the quota share arrangement successfully mitigated the losses of a higher level of natural catastrophe claims in the 3rd quarter. The agreement provides for a ceding commission that covers ongoing acquisition costs and a further fixed 14%. Swiss Re will remain focused on underwriting quality.
Q: Will the loss on the two Credit Default Swaps (CDS) have an impact on the premium our clients pay or the ability of Swiss Re to pay claims?
A: The additional unrealised mark-to-market loss on the structured credit default swaps in run-off was CHF 289 million for the 3rd quarter. While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities. We do not expect that this will have any effect on the premiums our clients pay nor, due to our strong capital position, on our ability to meet our claims payment obligations.
Q: Why are Swiss Re’s CDS spreads so high compared to other insurers?
A: Historically, Swiss Re's CDS spread has been wider than Munich Re's, while the differential has widened recently. A technical difference is that Swiss Re has more business with bank counterparties, which may be one of the drivers. CDS spreads are like the share price, and can also be driven by supply/demand factors. Currently there are more potential buyers of CDS protection than writers.
Q: What is Swiss Re doing to stabilise/improve its share value?
A: Like all financial institutions we have little influence on market trends. So we focus on what we can control: underlying quality of our insurance business and ensuring the resilience of our investable assets.
Q: Are there any positive aspects arising from the current market turmoil for Swiss Re? A: The current financial market turmoil creates opportunities to further help our clients. For example, the level of natural catastrophes, volatility in capital markets and scarcity of capital are creating demand for reinsurance solutions.
Q: Why is Swiss Re suspending its share buy-back programme now? A: Given the market turmoil, we have suspended our share buy-back programme. The combination of high volatility in the capital markets and a significant increase in demand for reinsurance by our clients means that this prudent step is appropriate. At the end of October 2008, the Group had completed 51.2% of its CHF 7.75 billion share buy-back programme. We can still meet our completion target of April 2010, but this will depend on some stability returning to the capital markets and the business opportunities arising for our Property & Casualty and Life & Health businesses.
Q: Is Swiss Re currently seeking emergency government funding?
A: No, Swiss Re has not engaged in discussion with the Swiss National Bank or government about any form of emergency funding. Our 3rd quarter results demonstrate that we have maintained a strong capital and liquidity position.
Q: What is the estimated exposure of Swiss Re to Lehman Brothers and American International Group (AIG)?
A: We estimate our overall net exposure to Lehman Brothers at approximately CHF 50 million and to AIG at approximately CHF 200 million.
Q: What are Swiss Re's expected losses from Hurricanes Ike and Gustav, respectively?
A: On 23 September 2008, Swiss Re communicated a preliminary claims estimate for hurricane Ike of USD 250 million. Swiss Re now estimates these net claims to be USD 315 million due to indications of higher insured claims in the US Midwest, and off-shore energy. Estimates for hurricane Gustav remain unchanged. Swiss Re expects its aggregated net claims for hurricanes Gustav and Ike to be approximately USD 365 million.
Q: How will Swiss Re's exposure to these events impact our underwriting capacity?
A: These events will have no impact on our underwriting capacity. Swiss Re will continue
to write business with the aim to achieve our targets for economic profitability. Swiss Re remains focused on underwriting quality to ensure shareholder value is maximised in a hardening market.
081105
Talking points and Q&A reference guide on Rating agency updates
Please note that this document may only be used for verbal briefing of clients and other stakeholders. It must not be sent outside Swiss Re.
General statement
Standard & Poor’s (S&Ps) and Moody's announced updates to our ratings this week. S&Ps confirmed, on November 4, that our AA- (very strong) rating and stable outlook was unaffected. Moody’s affirmed our Aa2 (excellent) rating and revised the outlook to negative on November 5.
This document provides answers to potential questions from clients regarding our ratings. For further client-specific requests, please contact the Marketing Communications team: Phil Race (+41 43 285 6712) or Felipe Stevenson (+41 43 285 3256).
Client Markets factsheet
Download
S&P's Bulletin
Download
Key messages to clients
S&Ps confirmed on 4 November that our AA- insurance financial strength rating with a stable outlook was unaffected following our Q3 results. The rating assigned by A.M. Best remains A+ with a stable outlook.
Rating agency Moody's affirmed our Aa2 financial strength rating and has announced a revision to the outlook to negative from stable.
Moody’s said that in addition to a very strong business and geographic diversification, our capitalisation remains excellent.
Moody’s also noted that they believe that we have ample liquidity both under expected conditions and under extreme stress scenarios.
S&Ps believe we are well-placed to benefit from the more favourable underwriting environment expected to emerge in 2009.
Our Aa2 rating remains among the highest in the reinsurance industry. According to Moody’s rating definitions, insurance companies rated Aa offer excellent financial security.
We remain a well-capitalised company with a strong liquidity position. We continue to have significant excess capital over what is required for an AA rating by S&Ps (estimated at CHF 5.0bn to 5.5bn as of 30 September 2008).
Q&A
Q: What are Swiss Re's current ratings?
A: Swiss Re’s insurance financial strength is rated AA- with stable outlook by Standard & Poor’s, A+ with stable outlook by A.M. Best, and Aa2 with negative outlook by Moody’s. The table below shows our financial strength ratings in comparison to competitors and peers.
Q: What does this outlook change mean? A: Moody’s provides auxiliary signals about credit risk through the use of rating outlooks and watchlist designations. A rating outlook is an opinion regarding the likely direction of an issuer’s rating over the medium term. Where assigned, rating outlooks fall into the following four categories: positive, negative, stable, and developing (contingent upon an event). A ‘rating under review’ designation indicates that the issuer has one or more ratings under review for possible change, and thus overrides the outlook designation.
Q: What do you expect to happen based on Moody’s outlook change?
A: We expect Moody’s rating action to have no adverse effect on the fundamentals of our business. The rating of Aa implies that we continue to offer excellent financial security to our clients and further counterparties. Neither will this action have any impact on our ability to access funding, nor does it trigger any additional funding needs. It does highlight one of the main challenges for us all, which will be to stay even more strongly focused on delivering solutions to our clients’ needs. Maintaining this discipline will enable us to benefit from the significant increase in demand for (re)-insurance solutions triggered by the current financial situation.
Q: What action is Swiss Re taking to respond to this outlook change from Moody's?
A: Swiss Re continues to engage in an active dialogue and provide information as requested by the three agencies with whom we have interactive ratings.
Q: What did S&P's say when it confirmed our rating was unaffected on November 4?
A: S&P's continues to expect Swiss Re to hold a substantial surplus to our 'AA-' level capital target for the financial year ended December 31, 2008. This is taking into account further write-downs during the 4th quarter. According to S&P's, Swiss Re will be well-placed to benefit from the more favourable underwriting environment expected to emerge in 2009.
Q: Does this rating action mean that Swiss Re has problems to meets its obligations (including claims)?
A: No, far from it. A rating of Aa implies that Swiss Re’s financial strength is very strong.
Q: Do you think this will have an impact on the January renewals?
A: We expect that this will not be an issue for our clients as a Moody’s rating of Aa2 is among the highest in the industry and implies that Swiss Re offers excellent financial security.
Q: Do you have downgrade clauses in your reinsurance treaties? Will these be triggered by this rating action?
A: Swiss Re has a strict underwriting policy which requires that any downgrading clauses in reinsurance treaties require approval at the highest level. As a result of this policy, Swiss Re has limited exposure to downgrading clauses in reinsurance treaties. There are no downgrading clauses in reinsurance treaties that are triggered by the current rating action.
081119
Talking Points and Q&A reference guide on financial market turmoil - We have capacity, at the right price
Please note that this document may only be used for verbal briefing of clients and other stakeholders. It must not be sent outside Swiss Re.
General Statement
The opportunity
The current financial turmoil has resulted in significant demand for reinsurance from our clients. Forms of financial support normally accessible are currently unavailable. This has resulted in a return to reinsurance solutions for many existing and potential Swiss Re clients. It could be a good opportunity for them to switch to a stronger company as their counterpart - Swiss Re.
‘We also see the company as much better placed to benefit from the improving market environment than perceived, particularly given the benefit of the reinsurance treaty in place with Berkshire Hathaway.’ Source: Citibank Analysts Report 12.11.08
This document provides talking points regarding the current financial situation and how we compare to our competitors. For further client-specific queries, please contact the Marketing Communications team: Phil Race (+41 43 285 6712) or Felipe Stevenson (+41 43 285 3256). For Investor Relations queries please contact: Susan Holliday (+44 207 933 3890).
Key Messages to clients
This is a time for:
quality underwriting - Swiss Re has the best-in-class combined ratio.
a cautious approach to financial market risk - Swiss Re moved out of the equity market at the end of the 2nd quarter and protected against the downside throughout 2008.
bold servicing of our clients with large underwriting capacity, at the right price - Swiss Re’s clients have been impacted by financial stress and need our risk solutions.
For example:
Companies with large exposures to banks that are experiencing difficulties.
Companies with significant equity market exposure.
Asian companies that tried achieving high equity investment returns to compensate for poor underwriting performance.
Companies that have made or want to make acquisitions, that now have limited resources.
And remember. The hedge funds have all but disappeared from the reinsurance market. There is increasing evidence that this may put some large reinsurers' capacity in danger for 2009.
The Facts
Ratings
We have the second highest rating of any company in the reinsurance industry
Munich Re and Hannover Re are below Swiss Re with Moody’s and equal with Standard & Poor’s (S&P) and AM Best.
Capital & Liquidity
Our shareholders’ equity stands at CHF 24.1 billion, the third highest in the entire reinsurance industry.
We remain a well-capitalised company with a strong liquidity position.
We continue to have significant excess capital over what is required for an AA level rating by S&P (estimated at CHF 5.0bn to 5.5bn as at 30 September 2008).
This is a position of strength and the capital can be directed to our clients needs, subject to the insurance risk being well-priced.
3rd Quarter Profits We are profitable - CHF 884mn net after tax, year-to-date, despite the financial market turbulence and our SCDS unrealised losses.
Munich Re claims to have a strong YTD reinsurance operating income but this has been boosted by an internal dividend payment of EUR 937 mn , i.e. 40% of the business total YTD results. Source: Munich Re 3rd quarter figures
Combined Ratio
Swiss Re leads the market on price adequacy and selective underwriting. Others have spoken - we have acted.
Our P&C combined ratio is better than General Re, Everest Re and Transatlantic Re.
It is 4% better than Munich Re and 7% better than Hannover Re. Source: Munich Re 3rd quarter figures 2008, Hannover Re 3rd
quarter figures 2008.
Investment Portfolio
Our selective underwriting allows us to continue writing good business without being dependent upon high risk financial investments.
Our new money and all our maturing investments are invested in cash, short-term deposits, treasury bills or government-backed instruments.
This equates to more than 50% of our investment portfolio.
Transparency
Swiss Re is the most transparent in terms of asset data and mark-to-market accounting among the European reinsurers. source: Herbert Fromme, FT Deutschland 5/11/08 commenting on George Quinn’s presentation to analysts.
We have suffered from unrealised losses but we have full transparency over market values and do not use the "held to maturity" asset classification. Compare with:
1. Munich Re with in excess of EUR 4 bn write offs year to date. Source: Munich Re 3rd quarter results
2. MetLife with USD7 bn unrealised losses year to date. Source: Met Life 3rd quarter results
Swiss Re can help, we have capacity, at the right price.
Top of page
Q&A
This question bank is continually updated to reflect queries that are received from Client Markets. If you have an Investor Relations query that is not covered here please contact: Susan Holliday (+442079333890).
Q: What is Swiss Re doing to reduce its exposure to the unprecedented market volatility?
A: Swiss Re’s investment portfolio is of high quality and well diversified with over 50% in cash, short-term deposits, treasury bills or government-backed instruments. During the third quarter of 2008, the Group significantly reduced its exposure to corporate credit through hedging. Similarly, the traded equity portfolio was reduced through disposals and hedges.
As a result of our prudent investment approach, shareholders’ equity decreased only 6% in the third quarter to CHF 24.1 billion compared to the second quarter of 2008. Book value per share decreased modestly to CHF 74.16 at the end of September 2008, compared to CHF 77.65 at the end of June 2008.
Q: How have we been impacted by the quota-share agreement with Berkshire Hathaway?
A: Our quota share arrangement with Berkshire Hathaway means that we cede a 20% share in new and renewed P&C business – including premiums and claims – to Berkshire Hathaway. In the third quarter of 2008, the quota share arrangement successfully mitigated the losses of a higher level of natural catastrophe claims in the 3rd quarter. The agreement provides for a ceding commission that covers ongoing acquisition costs and a further fixed 14%. Swiss Re will remain focused on underwriting quality.
Q: Will the structured Credit Default Swaps (CDS) losses have an impact on the premium our clients pay or the ability of Swiss Re to pay claims?
A: The additional unrealised mark-to-market loss on the structured credit default swaps in run-off was CHF 289 million for the 3rd quarter. While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities. We do not expect that this will have any effect on the premiums our clients pay nor, due to our strong capital position, on our ability to meet our claims payment obligations.
Q: Why are Swiss Re’s CDS spreads so high compared to other insurers?
A: Historically, Swiss Re's CDS spread has been wider than Munich Re's, and the differential has widened recently. A technical difference is that Swiss Re has more business with bank counterparties, which may be one of the drivers. CDS spreads are like the share price, and can also be driven by supply/demand factors. Currently there are more potential buyers of CDS protection than writers.
Q: What is Swiss Re doing to stabilise/improve its share value?
A: Like all financial institutions we have little influence on market trends. So we focus on what we can control: underlying quality of our insurance business and ensuring the resilience of our investable assets.
Q: Why is Swiss Re suspending its share buy-back programme now? A: Given the market turmoil, we have suspended our share buy-back programme. The combination of high volatility in the capital markets and a significant increase in demand for reinsurance by our clients means that this prudent step is appropriate. At the end of October 2008, the Group had completed 51.2% of its CHF 7.75 billion share buy-back programme. We can still meet our completion target of April 2010, but this will depend on some stability returning to the capital markets and the business opportunities arising for our Property & Casualty and Life & Health businesses.
Q: Is Swiss Re currently seeking emergency government funding?
A: No, Swiss Re has not engaged in discussion with the Swiss National Bank or government about any form of emergency funding. Our 3rd quarter results demonstrate that we have maintained a strong capital and liquidity position.
Q: What is the estimated exposure of Swiss Re to Lehman Brothers and American International Group (AIG)?
A: We estimate our overall net exposure to Lehman Brothers at approximately CHF 50 million and to AIG at approximately CHF 200 million.
Q: What are Swiss Re's expected losses from Hurricanes Ike and Gustav, respectively?
A: On 23 September 2008, Swiss Re communicated a preliminary claims estimate for hurricane Ike of USD 250 million. Swiss Re now estimates these net claims to be USD 315 million due to indications of higher insured claims in the US Midwest, and off-shore energy. Estimates for hurricane Gustav remain unchanged. Swiss Re expects its aggregated net claims for hurricanes Gustav and Ike to be approximately USD 365 million.
Q: How will Swiss Re's exposure to these events impact our underwriting capacity?
A: These events will have no impact on our underwriting capacity. Swiss Re will continue to write business with the aim to achieve our targets for economic profitability. Swiss Re remains focused on underwriting quality to ensure shareholder value is maximised in a hardening market.
Q: What does the outlook change (from Moody’s) mean? A: Moody’s provides auxiliary signals about credit risk through the use of rating outlooks and watchlist designations. A rating outlook is an opinion regarding the likely direction of an issuer’s rating over the medium term. Where assigned, rating outlooks fall into the following four categories: positive, negative, stable, and developing (contingent upon an event). A ‘rating under review’ designation indicates that the issuer has one or more ratings under review for possible change, and thus overrides the outlook designation.
Q: What do you expect to happen based on Moody’s outlook change?
A: We expect Moody’s rating action to have no adverse effect on the fundamentals of our business. The rating of Aa implies that we continue to offer excellent financial security to our clients and further counterparties. Neither will this action have any impact on our ability to access funding, nor does it trigger any additional funding needs. It does highlight one of the main challenges for us all, which will be to stay even more strongly focused on delivering solutions to our clients’ needs. Maintaining this discipline will enable us to benefit from the significant increase in demand for (re)-insurance solutions triggered by the current financial situation.
Q: What action is Swiss Re taking to respond to this outlook change from Moody's?
A: Swiss Re continues to engage in an active dialogue and provide information as requested by the three agencies with whom we have interactive ratings.
Q: What did S&P's say when it confirmed our rating was unaffected on November 4?
A: S&P's continues to expect Swiss Re to hold a substantial surplus to our 'AA-' level capital target for the financial year ended December 31, 2008. This is taking into account further write-downs during the 4th quarter. According to S&P's, Swiss Re will be well-placed to benefit from the more favourable underwriting environment expected to emerge in 2009.
Q: Does this rating action mean that Swiss Re has problems to meets its obligations (including claims)?
A: No, far from it. A rating of Aa implies that Swiss Re’s financial strength is very strong.
Q: Do you think this will have an impact on the January renewals?
A: We expect that this will not be an issue for our clients as a Moody’s rating of Aa2 is among the highest in the industry and implies that Swiss Re offers excellent financial security.
081201
Talking Points on WSJ article corrections
Response to Wall Street Journal article
On 01 December 2008, the Wall Street Journal published an article about Swiss Re. The author has drawn on published information, third party views and a short interview with George Quinn. Unfortunately the article (attached below) contains several factual errors which we are addressing with the journalist.
In case of queries from clients here are the errors with the correct statements:
WSJ statement: "Swiss Re's exposure to credit derivatives, for example, came to light only when the company had to recognize the losses." Correct: Swiss Re's exposure to credit derivatives did not only come to light when the loss was announced. See our disclosures (i.e. Notes 3 on Derivative financial instruments in the Financial Statement).
WSJ statement: "Still, Swiss Re has warned that further write-downs could force it to sell new shares to boost its capital -- a move that would dilute the holdings of existing shareholders." Correct: Swiss Re has not given such a warning. At the Q3 results we stated that we cannot rule out capital raising going forward.
WSJ statement: "That year, the company's return on capital more than doubled, to 8.7%, according to data provider Capital IQ." Correct: The 2006 return on capital number is wrong. Instead the RoE should be used. For 2006 the RoE was 16.3%
WSJ statement: For accounting purposes, the company has said it plans to hold a large portion of the securities to maturity. As a result, it doesn't have to recognize some losses until the companies and consumers behind the bonds actually renege on their debts. Correct: The held to maturity point is wrong we do not classify any securities as held to maturity. As a result all of our investments are marked to market. We are able to hold them to maturity but this is different from the accounting classification.
081201
Talking points and Q&A reference guide on Credit Default Swaps
Please note that this document may only be used for verbal briefing of clients and other stakeholders. It must not be sent outside Swiss Re.
General statement
The current market environment has lead to volatile Credit Default Swaps. Compared to some peers our Credit Default Swap spreads are trading at relatively high levels. This has resulted in enquiries from clients, investors and other stakeholders. These talking points are intended to help you explain some of the factors affecting the current CDS levels.
General drivers of CDS
Volume: CDS trading volumes are relatively small and therefore CDS can exhibit large volatility.
Transparency: CDS are traded over-the-counter, which leads to a low level of transparency.
Credit ratings and CDS market: While credit ratings are re-evaluated periodically based on in-depth analyses, CDS market participants possess only publicly available information about the issuer of debt.
CDS in the current market environment
Supply/Demand imbalance: Capital markets continue to have a major imbalance between participants looking to buy credit protection and those looking to sell protection.
‘Flight from risk’: Credit markets continue to be skewed towards de-risking and therefore limited liquidity.
Closed cash bond markets: Just as cash bond markets effectively closed, there is also an extreme scarcity of CDS protection sellers which is essentially the equivalent of purchasing a bond.
Swiss Re specific comments
Market impact vs. company impact: Swiss Re’s CDS is not an exception, also Swiss Re’s competitors have risen sharply over the past two months.
Banking relationship: Banks having greater credit exposure to Swiss Re, due to the L&H business. This may lead to higher demand from banks to buy protection.
Technical factors: Swiss Re suffers from technical factors, eg:
Complete short selling ban on stock on the Swiss Exchange leading to the use of CDS as a proxy for shorting in the equity markets.
Hedge funds hybrid capital investments may end up at banks (as a result of de-leveraging), and the banks are then required to hedge exposure.
Swiss Re has relatively liquid CDS which is used by some investors as a proxy to hedge credit exposures to other (re)insurers for which there is no CDS trading.
Perception: This period of extreme market conservatism and risk aversion can result in exaggerated reactions by investors, whether related to true hedging or speculation.
This document provides answers to potential questions from clients regarding CDS. For further client-specific requests, please contact the Marketing Communications team: Phil Race (+41 43 285 6712) or Felipe Stevenson (+41 43 285 3256).
Top of page
Key messages to clients
Swiss Re's balance sheet is strong and the company's capital adequacy remains at very high levels. Book value per share decreased modestly to CHF 74.16 from CHF 77.65 at the end of June 2008.
Our Aa2 rating remains among the highest in the reinsurance industry. According to Moody’s rating definitions, insurance companies rated Aa offer excellent financial security.
We remain a well-capitalised company with a strong liquidity position. We continue to have significant excess capital over what is required for an AA rating by S&Ps (estimated at CHF 5.0bn to 5.5bn as of 30 September 2008).
CDS spread only gives one view of the current market sentiment which in times of extreme risk aversion and illiquidity can give misleading signals about a company’s true credit quality.
Against the background of these facts it is clear that there is a fundamental disconnect between the 5-year senior CDS risk premium and the underlying economics of our business.
Top of page
Q&A
This question bank is continually updated to reflect queries that are received from Client Markets. If you have an Investor Relations query that is not covered here please contact: Susan Holliday (+442079333890).
Q: What is Swiss Re doing to reduce its exposure to the unprecedented market volatility?
A: Swiss Re’s investment portfolio is of high quality and well diversified with over 50% in cash, short-term deposits, treasury bills or government-backed instruments. During the third quarter of 2008, the Group significantly reduced its exposure to corporate credit through hedging. Similarly, the traded equity portfolio was reduced through disposals and hedges.
As a result of our prudent investment approach, shareholders’ equity decreased only 6% in the third quarter to CHF 24.1 billion compared to the second quarter of 2008. Book value per share decreased modestly to CHF 74.16 at the end of September 2008, compared to CHF 77.65 at the end of June 2008.
Q: How have we been impacted by the quota-share agreement with Berkshire Hathaway?
A: Our quota share arrangement with Berkshire Hathaway means that we cede a 20% share in new and renewed P&C business – including premiums and claims – to Berkshire Hathaway. In the third quarter of 2008, the quota share arrangement successfully mitigated the losses of a higher level of natural catastrophe claims in the 3rd quarter. The agreement provides for a ceding commission that covers ongoing acquisition costs and a further fixed 14%. Swiss Re will remain focused on underwriting quality.
Q: Have we off-loaded toxic assets from our balance sheet?
A: We fully apply US GAAP accounting rules - and these have strict rules regarding what is on and off balance sheet. Swiss Re provides full transparency on its on and off balance sheet holdings through the financial information produced every quarter and which are also available on our public web site. Specifically, our off balance sheet exposures are detailed in footnote 12 of the Q3 report (page 46). Off balance sheet exposure is also included in our slides on structured products.
Q: What is the present position on our structured CDS exposure (SCDS)?
A: Our SCDS exposure arose from the insurance side of our business and is not related to our investment portfolio. Movements are recorded in our quarterly earnings reports. Please refer to slide 39 from the Q3 presentation.
Q: Will the structured Credit Default Swaps (CDS) losses have an impact on the premium our clients pay or the ability of Swiss Re to pay claims?
A: The additional unrealised mark-to-market loss on the structured credit default swaps in run-off was CHF 289 million for the 3rd quarter. While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities. We do not expect that this will have any effect on the premiums our clients pay nor, due to our strong capital position, on our ability to meet our claims payment obligations.
Q: Why are Swiss Re’s CDS spreads so high compared to other insurers?
A: Historically, Swiss Re's CDS spread has been wider than Munich Re's, and the differential has widened recently. A technical difference is that Swiss Re has more business with bank counterparties, which may be one of the drivers. CDS spreads are like the share price, and can also be driven by supply/demand factors. Currently there are more potential buyers of CDS protection than writers.
Q: What is Swiss Re doing to stabilise/improve its share value?
A: Like all financial institutions we have little influence on market trends. So we focus on what we can control: underlying quality of our insurance business and ensuring the resilience of our investable assets.
Q: Why is Swiss Re suspending its share buy-back programme now? A: Given the market turmoil, we have suspended our share buy-back programme. The combination of high volatility in the capital markets and a significant increase in demand for reinsurance by our clients means that this prudent step is appropriate. At the end of October 2008, the Group had completed 51.2% of its CHF 7.75 billion share buy-back programme. We can still meet our completion target of April 2010, but this will depend on some stability returning to the capital markets and the business opportunities arising for our Property & Casualty and Life & Health businesses.
Q: Is Swiss Re currently seeking emergency government funding?
A: No, Swiss Re has not engaged in discussion with the Swiss National Bank or government about any form of emergency funding. Our 3rd quarter results demonstrate that we have maintained a strong capital and liquidity position.
Q: What is the estimated exposure of Swiss Re to Lehman Brothers and American International Group (AIG)?
A: We estimate our overall net exposure to Lehman Brothers at approximately CHF 50 million and to AIG at approximately CHF 200 million.
Q: What are Swiss Re's expected losses from Hurricanes Ike and Gustav, respectively?
A: On 23 September 2008, Swiss Re communicated a preliminary claims estimate for hurricane Ike of USD 250 million. Swiss Re now estimates these net claims to be USD 315 million due to indications of higher insured claims in the US Midwest, and off-shore energy. Estimates for hurricane Gustav remain unchanged. Swiss Re expects its aggregated net claims for hurricanes Gustav and Ike to be approximately USD 365 million.
Q: How will Swiss Re's exposure to these events impact our underwriting capacity?
A: These events will have no impact on our underwriting capacity. Swiss Re will continue to write business with the aim to achieve our targets for economic profitability. Swiss Re remains focused on underwriting quality to ensure shareholder value is maximised in a hardening market.
Q: What does the outlook change (from Moody’s) mean? A: Moody’s provides auxiliary signals about credit risk through the use of rating outlooks and watchlist designations. A rating outlook is an opinion regarding the likely direction of an issuer’s rating over the medium term. Where assigned, rating outlooks fall into the following four categories: positive, negative, stable, and developing (contingent upon an event). A ‘rating under review’ designation indicates that the issuer has one or more ratings under review for possible change, and thus overrides the outlook designation.
Q: What do you expect to happen based on Moody’s outlook change?
A: We expect Moody’s rating action to have no adverse effect on the fundamentals of our business. The rating of Aa implies that we continue to offer excellent financial security to our clients and further counterparties. Neither will this action have any impact on our ability to access funding, nor does it trigger any additional funding needs. It does highlight one of the main challenges for us all, which will be to stay even more strongly focused on delivering solutions to our clients’ needs. Maintaining this discipline will enable us to benefit from the significant increase in demand for (re)-insurance solutions triggered by the current financial situation.
Q: What action is Swiss Re taking to respond to this outlook change from Moody's?
A: Swiss Re continues to engage in an active dialogue and provide information as requested by the three agencies with whom we have interactive ratings.
Q: What did S&P's say when it confirmed our rating was unaffected on November 4?
A: S&P's continues to expect Swiss Re to hold a substantial surplus to our 'AA-' level capital target for the financial year ended December 31, 2008. This is taking into account further write-downs during the 4th quarter. According to S&P's, Swiss Re will be well-placed to benefit from the more favourable underwriting environment expected to emerge in 2009.
Q: Does this rating action mean that Swiss Re has problems to meets its obligations (including claims)?
A: No, far from it. A rating of Aa implies that Swiss Re’s financial strength is very strong.
Q: Do you think this will have an impact on the January renewals?
A: We expect that this will not be an issue for our clients as a Moody’s rating of Aa2 is among the highest in the industry and implies that Swiss Re offers excellent financial security.
081210
Talking Points and Q&A reference guide – Financial crisis
Please note that this document is intended for verbal briefing of clients and stakeholders. It must not be sent out to external parties.
General statement
The financial crisis continues to affect Swiss Re, its peers and clients. One outcome of the crisis is that we are seeing a significant increase in demand for reinsurance from our clients. We must maintain our quality underwriting, a cautious approach to financial market risk and bold servicing of our clients with
large underwriting capacity. And if the price meets our expectations, we are prepared to deploy substantial capital to serve clients’ needs.
We continue to believe that the current share price for Swiss Re is discounting a significant amount of bad news, while giving the company no credit for an improving underwriting environment in non-life source: Credit Suisse analyst report 28 November 2008
We do not comment on our 4th quarter results but have produced an updated Q&A to help cover existing and potential questions from clients regarding Swiss Re. Please also use the information on our website (Interview with Michel Liès and Report on Economic Forum) to help with client queries. For further client-specific requests, please contact Marketing Communications: Phil Race (+41 43 285 6712).
Key messages to clients
Swiss Re's balance sheet is strong and the company's capital adequacy remains at very high levels. Book value per share decreased modestly to CHF 74.16 from CHF 77.65 at the end of June 2008.
Our Aa2 rating remains among the highest in the reinsurance industry. According to Moody’s rating definitions, insurance companies rated Aa offer excellent financial security.
We remain a well-capitalised company with a strong liquidity position. We continue to have significant excess capital over what is required for an AA rating by S&Ps (estimated at CHF 5.0bn to 5.5bn as of 30 September 2008).
We are profitable. CHF 884mn net after tax, year-to-date, despite the financial market turbulence and our SCDS unrealised losses.
The difficult market environment also creates new opportunities. Underpinned by the expansion in emerging markets and new product offerings, Swiss Re has the execution capability and capital strength to seize upon these opportunities, if they are at the right price.
Q&A
This question bank is continually updated to reflect queries that are received from Client Markets. If you have an Investor Relations query that is not covered here please contact: Susan Holliday (+442079333890).
Q: Why is our holding of complex securities like mortgage backed-securities as a % of our market capitalisation so high?
A: Market capitalisation already includes a discount for the difficult investment environment, in particular for the asset classes exposed to credit risk. Additionally, valuations are very low for the whole industry due to the crisis. So it would be more accurate to calculate the exposure in terms of shareholders equity or total invested assets, which for Swiss Re were CHF 178bn at end September 2008. Overall our portfolio remains of high quality coupled with a dynamic hedging programme for our structured products.
Q:Why have banks been more affected by the financial crisis than insurers? A:Financial market conditions like these are unprecedented and insurers’ assets are of course affected. However, we have to remember that this crisis was started by the collapse of credit markets and the freezing of liquidity that followed. This is a big issue for banks, of course, but for insurers, who are largely funded by their policyholders, this is less of an issue. There is a big difference between insurers and banks, our business models are fundamentally different. An insurer’s principal aim when it invests is to ensure that commitments to customers are covered. Insurance is not subject to the kind of liquidity risk that affects banks because pay-outs are typically triggered by loss events, and not according to the wishes of a policyholder.
Q: How has the financial crisis affected reinsurance demand?
A: The current financial crisis has resulted in significant demand for reinsurance from our clients. Forms of financial support normally accessible are currently unavailable. Some clients need to fund their own growth, while others need to restore their capital strength, or find capital to acquire businesses. This has resulted in a return to reinsurance solutions for many existing and potential clients. So the opportunities are there and we have the scale and broad range of capabilities to make this happen. If the price meets our expectations, we are prepared to deploy substantial capital to serve clients’ needs.
Q: What is Swiss Re doing to reduce its exposure to the unprecedented market volatility?
A: Swiss Re’s investment portfolio is of high quality and well diversified with over 50% in cash, short-term deposits, treasury bills or government-backed instruments. During the third quarter of 2008, the Group significantly reduced its exposure to corporate credit through hedging. Similarly, the traded equity portfolio was reduced through disposals and hedges.
As a result of our prudent investment approach, shareholders’ equity decreased only 6% in the third quarter to CHF 24.1 billion compared to the second quarter of 2008. Book value per share decreased modestly to CHF 74.16 at the end of September 2008, compared to CHF 77.65 at the end of June 2008.
Q: How have we been impacted by the quota-share agreement with Berkshire Hathaway?
A: Our quota share arrangement with Berkshire Hathaway means that we cede a 20% share in new and renewed P&C business – including premiums and claims – to Berkshire Hathaway. In the third quarter of 2008, the quota share arrangement successfully mitigated the losses of a higher level of natural catastrophe claims in the 3rd quarter. The agreement provides for a ceding commission that covers ongoing acquisition costs and a further fixed 14%. Swiss Re will remain focused on underwriting quality.
Q: Have we off-loaded toxic assets from our balance sheet?
A: We fully apply US GAAP accounting rules - and these have strict rules regarding what is on and off balance sheet. Swiss Re provides full transparency on its on and off balance sheet holdings through the financial information produced every quarter and which are also available on our public web site. Specifically, our off balance sheet exposures are detailed in footnote 12 of the Q3 report (page 46). Off balance sheet exposure is also included in our slides on structured products.
Q: What is the present position on our structured CDS exposure (SCDS)?
A: Our SCDS exposure arose from the insurance side of our business and is not related to our investment portfolio. Movements are recorded in our quarterly earnings reports. Please refer to slide 39 from the Q3 presentation.
Q: Will the structured Credit Default Swaps (CDS) losses have an impact on the premium our clients pay or the ability of Swiss Re to pay claims?
A: The additional unrealised mark-to-market loss on the structured credit default swaps in run-off was CHF 289 million for the 3rd quarter. While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities. We do not expect that this will have any effect on the premiums our clients pay nor, due to our strong capital position, on our ability to meet our claims payment obligations.
Q: Why are Swiss Re’s CDS spreads so high compared to other insurers?
A: Historically, Swiss Re's CDS spread has been wider than Munich Re's, and the differential has widened recently. A technical difference is that Swiss Re has more business with bank counterparties, which may be one of the drivers. CDS spreads are like the share price, and can also be driven by supply/demand factors. Currently there are more potential buyers of CDS protection than writers.
Q: What is Swiss Re doing to stabilise/improve its share value?
A: Like all financial institutions we have little influence on market trends. So we focus on what we can control: underlying quality of our insurance business and ensuring the resilience of our investable assets.
Q: Why is Swiss Re suspending its share buy-back programme now? A: Given the market turmoil, we have suspended our share buy-back programme. The combination of high volatility in the capital markets and a significant increase in demand for reinsurance by our clients means that this prudent step is appropriate. At the end of October 2008, the Group had completed 51.2% of its CHF 7.75 billion share buy-back programme. We can still meet our completion target of April 2010, but this will depend on some stability returning to the capital markets and the business opportunities arising for our Property & Casualty and Life & Health businesses.
Q: Is Swiss Re currently seeking emergency government funding?
A: No, Swiss Re has not engaged in discussion with the Swiss National Bank or government about any form of emergency funding. Our 3rd quarter results demonstrate that we have maintained a strong capital and liquidity position.
Q: What is the estimated exposure of Swiss Re to Lehman Brothers and American International Group (AIG)?
A: We estimate our overall net exposure to Lehman Brothers at approximately CHF 50 million and to AIG at approximately CHF 200 million.
Q: What are Swiss Re's expected losses from Hurricanes Ike and Gustav, respectively?
A: On 23 September 2008, Swiss Re communicated a preliminary claims estimate for hurricane Ike of USD 250 million. Swiss Re now estimates these net claims to be USD 315 million due to indications of higher insured claims in the US Midwest, and off-shore energy. Estimates for hurricane Gustav remain unchanged. Swiss Re expects its aggregated net claims for hurricanes Gustav and Ike to be approximately USD 365 million.
Q: How will Swiss Re's exposure to these events impact our underwriting capacity?
A: These events will have no impact on our underwriting capacity. Swiss Re will continue to write business with the aim to achieve our targets for economic profitability. Swiss Re remains focused on underwriting quality to ensure shareholder value is maximised in a hardening market.
Q: What does the outlook change (from Moody’s) mean? A: Moody’s provides auxiliary signals about credit risk through the use of rating outlooks and watchlist designations. A rating outlook is an opinion regarding the likely direction of an issuer’s rating over the medium term. Where assigned, rating outlooks fall into the following four categories: positive, negative, stable, and developing (contingent upon an event). A ‘rating under review’ designation indicates that the issuer has one or more ratings under review for possible change, and thus overrides the outlook designation.
Q: What do you expect to happen based on Moody’s outlook change?
A: We expect Moody’s rating action to have no adverse effect on the fundamentals of our business. The rating of Aa implies that we continue to offer excellent financial security to our clients and further counterparties. Neither will this action have any impact on our ability to access funding, nor does it trigger any additional funding needs. It does highlight one of the main challenges for us all, which will be to stay even more strongly focused on delivering solutions to our clients’ needs. Maintaining this discipline will enable us to benefit from the significant increase in demand for (re)-insurance solutions triggered by the current financial situation.
Q: What action is Swiss Re taking to respond to this outlook change from Moody's?
A: Swiss Re continues to engage in an active dialogue and provide information as requested by the three agencies with whom we have interactive ratings.
Q: What did S&P's say when it confirmed our rating was unaffected on November 4?
A: S&P's continues to expect Swiss Re to hold a substantial surplus to our 'AA-' level capital target for the financial year ended December 31, 2008. This is taking into account further write-downs during the 4th quarter. According to S&P's, Swiss Re will be well-placed to benefit from the more favourable underwriting environment expected to emerge in 2009.
Q: Does this rating action mean that Swiss Re has problems to meets its obligations (including claims)?
A: No, far from it. A rating of Aa implies that Swiss Re’s financial strength is very strong.
Q: Do you think this will have an impact on the January renewals?
A: We expect that this will not be an issue for our clients as a Moody’s rating of Aa2 is among the highest in the industry and implies that Swiss Re offers excellent financial security.
081212
Talking Points and Q&A reference guide – Changes in Financial Markets Function
Please note that this document is intended for verbal briefing of clients and stakeholders. It must not be sent out to external parties.
General statement
In response to current market conditions, Asset Management (formerly Financial Markets) will focus on its two strategic mandates. Firstly, managing the assets generated through our re/insurance activities and secondly, working closely with Underwriting and Client Markets to provide solutions to our clients.
Further details on the organisational set-up and focus of Asset Management can be found under the following link.
An updated Q&A is available to help cover existing and potential questions from clients regarding the changes. For further client-specific requests, please contact Marketing Communications: Phil Race (+41 43 285 6712).
Key messages to clients
Most client offerings remain unchanged
For the capital market insurance solutions provided to clients, these changes mean Swiss Re will now focus its activities around three areas:
Retirement related businesses, comprising Swiss Re’s Variable Annuities and Pensions activities
Nat Cat and Environment related businesses with our core Nat Cat ILS structuring and distribution, complemented with ECM activities (structured weather, ELPRO and Emissions)
Credit Solutions Products
Q&A
This question bank is continually updated to reflect queries that are received from Client Markets. If you have an Investor Relations query that is not covered here please contact: Susan Holliday (+442079333890).
What do the Asset Management changes mean for our clients?
Most client offerings remain unchanged. Where this is the case it is business as usual, we continue to support our clients with our product offerings. A small number of activities are discontinued. For more details and contact points for queries please refer to the message of 11 December.
What will happen to Life ILS?
We are very supportive of the Life ILS market and will also continue to be an active issuer of Life ILS when the pricing is attractive to us. We have built up strong skills and talent in the Life ILS team which we will redeploy to support the transfer of Swiss Re's own Life risks to the financial markets. But we have stopped issuing life ILS for third parties in their current form. Prime contact for queries: Fred Kleiterp / Dan Ozizmir
Are we continuing to pursue Life Assets opportunities?
No, Life Assets (premium finance or life settlement products) are not being provided by Swiss Re at the current time.
Financial Market changes
Dear Colleagues
On Thursday, David Blumer informed his team on further steps in realigning Financial Markets. In continuation of the strategy communicated earlier this year, and in response to current market conditions, we are sharpening the function’s focus on its two strategic mandates: managing the assets generated through our re/insurance activities and working closely with Underwriting and Client Markets to provide solutions to our clients.
Firstly, we will centre our asset management activities around Rates and Credit & Securitised Products, which continue to be core in matching our assets against our re/insurance liabilities. In contrast, Investment management in Equities and Alternative Investments will be further outsourced. Dedicated Departments are managing these external mandates, ensuring first-rate selection, transparency and risk control. To reflect its primary mandate the Function has been renamed to Asset Management, which in hindsight we should have done before.
Secondly, our client-oriented activities will be consolidated around retirement related business, Nat Cat & Environment related business and on Credit Solutions Products. A dedicated Pricing Desk will support the Retirement and Non-Life & Environmental activities, ensuring a strong common source of pricing and risk taking. After careful consideration, we have also decided to make a few changes to the scope of our activities. Further details on the organisational set-up and focus of Asset Management can be found under the following link.
As a consequence, we unfortunately had to say farewell to some colleagues and I wish them all the best for the future.
The Executive Committee fully supports the efforts of building a strong and focused asset management function for the
benefit of the whole firm. We sincerely appreciate the hard work and commitment from all the teams to help manage Swiss Re through these challenging times.
Best regards
Jacques and the Executive Committee
081208 Talking Points and Q&A reference guide – Goldman Sachs report and Madoff Exposure
Please note that this document is intended for verbal briefing of clients and stakeholders. It must not be sent out to external parties.
General statement
Goldman Sachs has issued a report on Swiss Re dated 10 December 2008. An extract from the report is attached which focuses on our CDS spreads. The whole report is also attached for your information.
Goldman Sachs on Swiss Re - 10 Dec 2008
Europe Insurance Reinsurance: Goldman Sachs - 10 Dec 2008
Please use with clients where appropriate. The CDS spread is rising but we are not overly concerned
source:Goldman Sachs report 10 December 2008
There has been a lot of speculation surrounding our potential exposure to Madoff related funds. We can confirm that Swiss Re has no direct exposure to Madoff related funds and has an immaterial indirect exposure through its hedge fund investments estimated at less than USD 3m.
An updated Q&A is available to help cover existing and potential questions from clients regarding Swiss Re. For further client-specific requests, please contact Marketing Communications: Phil Race (+41 43 285 6712).
Q&A
This question bank is continually updated to reflect queries that are received from Client Markets. If you have an Investor Relations query that is not covered here please contact: Susan Holliday (+442079333890).
Has Swiss Re any exposure to Madoff?
Swiss Re has no direct exposure to Madoff related funds and has an immaterial indirect exposure through its hedge fund investments estimated at less than USD 3m.
What are we doing to maintain the dialogue with regulators?
We are maintaining a constant and open dialogue with regulators around the world to make sure they are adequately informed to properly assess Swiss Re's financial strength.
Talking Points and Q&A reference guide – A.M. Best’s Ratings
Please note that this document is intended for verbal briefing of clients and stakeholders. It must not be sent out to external parties.
General statement
A.M. Best announced updates to our ratings today. Our financial strength rating (FSR) of A+ (Superior) assigned by this rating agency has been affirmed. The issuer credit rating (ICR) rating has been reduced. The outlook for the ICR is negative and the outlook for the FSR has been revised to negative from stable.
AM Best affirms FSR Negative Outlook
AM Best Rating supplement
Client Market Factsheet
An updated Q&A is available to help cover existing and potential questions from clients regarding the ratings changes. For further client-specific requests, please contact Marketing Communications: Phil Race (+41 43 285 6712).
Key messages to clients
Rating agency A.M. Best affirmed our A+ financial strength rating and has announced a revision to the outlook to negative from stable. A.M. Best has revised our ICR rating to aa- from aa and left the outlook at negative.
We regret the A.M. Best rating decision and will continue to work together with them to address their concerns.
Our rating with all three rating agencies remains among the highest in the reinsurance industry. A.M Best rates us ‘superior’ on the FSR and ‘superior’ on the ICR.
A.M. Best believes that Swiss Re is well-positioned to benefit from opportunities if the non-life reinsurance cycle turns in 2009.
We place client safety first and foremost, we are continuing to ensure that our firm is a reliable partner deserving the long-term trust of our clients.
We are taking numerous steps to be a highly reliable counterpart as demonstrated by our Q3 results: hedging of credit risk, very low equity exposure, general derisking except on our core reinsurance liability underwriting, strong capital adequacy as underlined by Standard & Poor’s.
Q&A
This question bank is continually updated to reflect queries that are received from Client Markets. If you have an Investor Relations query that is not covered here please contact: Susan Holliday (+442079333890).
Q: What are Swiss Re's current ratings?
A: Swiss Re has three interactive financial strength ratings: • S&P AA- (Very Strong), stable outlook; • Moody's Aa2 (Excellent), negative outlook; • A.M. Best A+ (Superior), negative outlook. Details of our financial strength and debt ratings can be found on our website.
Q: Why did A.M. Best take this rating action now ?
A: The rating agencies reserve the right at any time to suspend, modify, lower, raise or withdraw a rating, or place a rating under review.
Q: What does the negative outlook on the FSR rating mean?
A: Rating outlooks are assigned to an interactive FSR to indicate its potential direction over the intermediate term, generally defined as 12 to 36 months. Swiss Re’s “A+” FSR is assigned to insurers that, in A.M. Best’s opinion, have a superior ability to meet their ongoing insurance obligations.
Rating outlooks are to be distinguished from rating modifiers such as ‘under review’. The latter is typically event-driven (with positive, negative or developing implications), and indicates that the rating may change in the near term, typically within six months.
Q: What does exactly the new Issuer Credit Rating (ICR) rating of aa- mean?
A: A.M. Best’s ICR is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and financial profile. The ICR is an independent opinion of an issuer’s ability to meet its ongoing senior financial obligations. ICRs may be enhanced with a “+” (plus) or a “-“ (minus) to indicate whether the credit quality is near the top or the bottom of the rating category. Swiss Re’s new “aa-“ ICR still belongs to the “aa” ICR category assigned to issuers that, in A.M. Best’s opinion, have a superior ability to meet their ongoing senior financial obligations.
Q: Why did A.M. Best take this rating action?
A: A.M. Best has explained the key elements underlying the rating action in the press release of 19 December 2008.
Q: How are Swiss Re's A.M. Best ratings compared with peers on the FSR and ICR?
* As of 19. December 2008
Q: How do Swiss Re’s ratings compare with other reinsurance companies?
Q: What action is Swiss Re taking to respond to the A.M. Best rating action?
A: We regret A.M. Best’s decision and are continuing to engage in an active dialogue and provide information as requested to address A.M. Best’s concerns. We continue to take steps to be a highly reliable counterpart as demonstrated by our quarter 3 results, hedging of credit risk, very low equity exposure, general derisking except on our core reinsurance liability underwriting, strong capital adequacy.
Q: What impact do you expect the FSR rating action to have on our business (premiums, pricing, etc.)?
A: We do not expect any impact. Swiss Re will continue to focus on meeting our clients’ needs and writing business which meets our hurdle rates.
Q: Does this rating action mean that SR has problems to meet its obligations (including claims)?
A: No. Swiss Re’s “A+” FSR is assigned to insurers that, in A.M. Best’s opinion, have a superior ability to meet their ongoing insurance obligations.
Q: Do you think this will have an impact in the January renewals?
A: We expect that this will not be an issue for our clients as an A.M. Best’s rating of A+ is one of the highest in the industry,
and is assigned to insurers that, in A.M. Best’s opinion, have a superior ability to meet their ongoing insurance obligations.
Q: Do we have downgrade clauses in your reinsurance treaties? Will these be triggered by this rating action?
A: Swiss Re has a strict underwriting policy which requires that any downgrading clauses in reinsurance treaties require approval at the highest level. As a result of this policy, Swiss Re has limited exposure to downgrading clauses in reinsurance treaties. There are no downgrading clauses in reinsurance treaties that are triggered by the current rating action.
What do the Asset Management changes mean for our clients?
Most client offerings remain unchanged. Where this is the case it is business as usual, we continue to support our clients with our product offerings. A small number of activities are discontinued. For more details and contact points for queries please refer to the message of 11 December.
What will happen to Life ILS?
We are very supportive of the Life ILS market and will also continue to be an active issuer of Life ILS when the pricing is attractive to us. We have built up strong skills and talent in the Life ILS team which we will redeploy to support the transfer of Swiss Re's own Life risks to the financial markets. But we have stopped issuing life ILS for third parties in their current form. Prime contact for queries: Fred Kleiterp / Dan Ozizmir
Are we continuing to pursue Life Assets opportunities?
No, Life Assets (premium finance or life settlement products) are not being provided by Swiss Re at the current time.
Q: Why is our holding of complex securities like mortgage backed-securities as a % of our market capitalisation so high?
A: Market capitalisation already includes a discount for the difficult investment environment, in particular for the asset classes exposed to credit risk. Additionally, valuations are very low for the whole industry due to the crisis. So it would be more accurate to calculate the exposure in terms of shareholders equity or total invested assets, which for Swiss Re were CHF 178bn at end September 2008. Overall our portfolio remains of high quality coupled with a dynamic hedging programme for our structured products.
Q:Why have banks been more affected by the financial crisis than insurers? A:Financial market conditions like these are unprecedented and insurers’ assets are of course affected. However, we have to remember that this crisis was started by the collapse of credit markets and the freezing of liquidity that followed. This is a big issue for banks, of course, but for insurers, who are largely funded by their policyholders, this is less of an issue. There is a big difference between insurers and banks, our business models are fundamentally different. An insurer’s principal aim when it invests is to ensure that commitments to customers are covered. Insurance is not subject to the kind of liquidity risk that affects banks because pay-outs are typically triggered by loss events, and not according to the wishes of a policyholder.
Q: How has the financial crisis affected reinsurance demand?
A: The current financial crisis has resulted in significant demand for reinsurance from our clients. Forms of financial support normally accessible are currently unavailable. Some clients need to fund their own growth, while others need to restore their capital strength, or find capital to acquire businesses. This has resulted in a return to reinsurance solutions for many existing and potential clients. So the opportunities are there and we have the scale and broad range of capabilities to make this happen. If the price meets our expectations, we are prepared to deploy substantial capital to serve clients’ needs.
Q: What is Swiss Re doing to reduce its exposure to the unprecedented market volatility?
A: Swiss Re’s investment portfolio is of high quality and well diversified with over 50% in cash, short-term deposits, treasury bills or government-backed instruments. During the third quarter of 2008, the Group significantly reduced its exposure to corporate credit through hedging. Similarly, the traded equity portfolio was reduced through disposals and hedges.
As a result of our prudent investment approach, shareholders’ equity decreased only 6% in the third quarter to CHF 24.1 billion compared to the second quarter of 2008. Book value per share decreased modestly to CHF 74.16 at the end of September 2008, compared to CHF 77.65 at the end of June 2008.
Q: How have we been impacted by the quota-share agreement with Berkshire Hathaway?
A: Our quota share arrangement with Berkshire Hathaway means that we cede a 20% share in new and renewed P&C
business – including premiums and claims – to Berkshire Hathaway. In the third quarter of 2008, the quota share arrangement successfully mitigated the losses of a higher level of natural catastrophe claims in the 3rd quarter. The agreement provides for a ceding commission that covers ongoing acquisition costs and a further fixed 14%. Swiss Re will remain focused on underwriting quality.
Q: Have we off-loaded toxic assets from our balance sheet?
A: We fully apply US GAAP accounting rules - and these have strict rules regarding what is on and off balance sheet. Swiss Re provides full transparency on its on and off balance sheet holdings through the financial information produced every quarter and which are also available on our public web site. Specifically, our off balance sheet exposures are detailed in footnote 12 of the Q3 report (page 46). Off balance sheet exposure is also included in our slides on structured products.
Q: What is the present position on our structured CDS exposure (SCDS)?
A: Our SCDS exposure arose from the insurance side of our business and is not related to our investment portfolio. Movements are recorded in our quarterly earnings reports. Please refer to slide 39 from the Q3 presentation.
Q: Will the structured Credit Default Swaps (CDS) losses have an impact on the premium our clients pay or the ability of Swiss Re to pay claims?
A: The additional unrealised mark-to-market loss on the structured credit default swaps in run-off was CHF 289 million for the 3rd quarter. While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities. We do not expect that this will have any effect on the premiums our clients pay nor, due to our strong capital position, on our ability to meet our claims payment obligations.
Q: Why are Swiss Re’s CDS spreads so high compared to other insurers?
A: Historically, Swiss Re's CDS spread has been wider than Munich Re's, and the differential has widened recently. A technical difference is that Swiss Re has more business with bank counterparties, which may be one of the drivers. CDS spreads are like the share price, and can also be driven by supply/demand factors. Currently there are more potential buyers of CDS protection than writers.
Q: What is Swiss Re doing to stabilise/improve its share value?
A: Like all financial institutions we have little influence on market trends. So we focus on what we can control: underlying quality of our insurance business and ensuring the resilience of our investable assets.
Q: Why is Swiss Re suspending its share buy-back programme now? A: Given the market turmoil, we have suspended our share buy-back programme. The combination of high volatility in the capital markets and a significant increase in demand for reinsurance by our clients means that this prudent step is appropriate. At the end of October 2008, the Group had completed 51.2% of its CHF 7.75 billion share buy-back programme. We can still meet our completion target of April 2010, but this will depend on some stability returning to the capital markets and the business opportunities arising for our Property & Casualty and Life & Health businesses.
Q: Is Swiss Re currently seeking emergency government funding?
A: No, Swiss Re has not engaged in discussion with the Swiss National Bank or government about any form of emergency funding. Our 3rd quarter results demonstrate that we have maintained a strong capital and liquidity position.
Q: What is the estimated exposure of Swiss Re to Lehman Brothers and American International Group (AIG)?
A: We estimate our overall net exposure to Lehman Brothers at approximately CHF 50 million and to AIG at approximately CHF 200 million.
Q: What are Swiss Re's expected losses from Hurricanes Ike and Gustav, respectively?
A: On 23 September 2008, Swiss Re communicated a preliminary claims estimate for hurricane Ike of USD 250 million. Swiss Re now estimates these net claims to be USD 315 million due to indications of higher insured claims in the US Midwest, and off-shore energy. Estimates for hurricane Gustav remain unchanged. Swiss Re expects its aggregated net claims for hurricanes Gustav and Ike to be approximately USD 365 million.
Q: How will Swiss Re's exposure to these events impact our underwriting capacity?
A: These events will have no impact on our underwriting capacity. Swiss Re will continue to write business with the aim to achieve our targets for economic profitability. Swiss Re remains focused on underwriting quality to ensure shareholder value is maximised in a hardening market.
Q: What does the outlook change (from Moody’s) mean? A: Moody’s provides auxiliary signals about credit risk through the use of rating outlooks and watchlist designations. A rating outlook is an opinion regarding the likely direction of an issuer’s rating over the medium term. Where assigned, rating outlooks fall into the following four categories: positive, negative, stable, and developing (contingent upon an event). A ‘rating under review’ designation indicates that the issuer has one or more ratings under review for possible change, and thus overrides the outlook designation.
Q: What do you expect to happen based on Moody’s outlook change?
A: We expect Moody’s rating action to have no adverse effect on the fundamentals of our business. The rating of Aa implies that we continue to offer excellent financial security to our clients and further counterparties. Neither will this action have any impact on our ability to access funding, nor does it trigger any additional funding needs. It does highlight one of the main challenges for us all, which will be to stay even more strongly focused on delivering solutions to our clients’ needs. Maintaining this discipline will enable us to benefit from the significant increase in demand for (re)-insurance solutions triggered by the current financial situation.
Q: What action is Swiss Re taking to respond to this outlook change from Moody's?
A: Swiss Re continues to engage in an active dialogue and provide information as requested by the three agencies with whom we have interactive ratings.
Q: What did S&P's say when it confirmed our rating was unaffected on November 4?
A: S&P's continues to expect Swiss Re to hold a substantial surplus to our 'AA-' level capital target for the financial year ended December 31, 2008. This is taking into account further write-downs during the 4th quarter. According to S&P's, Swiss Re will be well-placed to benefit from the more favourable underwriting environment expected to emerge in 2009.
Q: Does this rating action mean that Swiss Re has problems to meets its obligations (including claims)?
A: No, far from it. A rating of Aa implies that Swiss Re’s financial strength is very strong.
Q: Do you think this will have an impact on the January renewals?
A: We expect that this will not be an issue for our clients as a Moody’s rating of Aa2 is among the highest in the industry and implies that Swiss Re offers excellent financial security
Talking Points and Q&A reference guide – Long-term Letter of Credit facility with J.P. Morgan
Please note that this document is intended for verbal briefing of clients and stakeholders. It must not be sent out to external parties.
General statement
22 December it was announced that we have entered into a USD 1.5 billion long-term Letter of Credit (LoC) facility with JP Morgan. Maturing in 2028, the LoC facility has a life of 20 years, with a pricing reset after the first 10 years. This facility replaces and expands the existing arrangements we currently have in place in order to meet US regulatory requirements for our life business. An updated Q&A is available to help cover existing and potential questions from clients regarding the announcement. For further client-specific requests, please contact Marketing Communications: Phil Race (+41 43 285 6712).
Key messages to clients
Swiss Re has entered into a USD 1.5 billion long term Letter of Credit (LoC) facility with JP Morgan.
As a result of the unprecedented turmoil in the capital markets, significant opportunities are emerging for well-capitalised insurance and reinsurance companies.
We are in a strong position to respond to increasing demands from our clients for reinsurance solutions, both in Property and Casualty, and Life and Health.
Through the long term letter of credit facility with JP Morgan, Swiss Re demonstrates its access to long term financing at competitive rates.
This deal will further enhance our position to be able to benefit from opportunities that arise from the current market
environment.
Q&A
This question bank is continually updated to reflect queries that are received from Client Markets. If you have an Investor Relations query that is not covered here please contact: Susan Holliday (+442079333890).
Q: What business does the LoC support?
A:The long-term letter of credit facility covers part of our US life business, which is subject to the NAIC Valuation of Life Insurance Model Regulation or New York Regulation 147.
Q: Why does Swiss Re have to provide collateral for the US business?
A: To manage the Swiss Re group capital base efficiently Swiss Re Life and Health America (SRLHA) retrocedes this business offshore to other Swiss Re group companies and under US statutory regulations those non-US affiliates are required to post appropriate collateral in order for the ceding company to receive credit for reinsurance
What has happened to the cost of LoCs and can we pass these on to our clients?
The cost of LoCs have been increasing, and the availability has been reducing as a result of the turmoil in the financial markets. Funding costs are included in the pricing of our products to clients.
How will the LoC be different from what we were doing before? Is it cheaper / more expensive?
Previously the collateral was provided by placing assets in a trust for the benefit of SRLHA. This long term letter of credit facility is attractive both from a size as well as terms perspective and is a good complement to our existing collateral solutions. The cost of the LoC is significantly lower than Swiss Re’s current CDS spreads.
Do we have other LoCs expiring in the near future?
We have a portfolio of facilities which expire at different times. With this long term LoC facility we are well positioned in the event that markets remain closed.
Does this mean we will write more US life business?
Not necessarily. Swiss Re will continue to allocate capital and funding capacity to those lines of business where it sees an attractive return, focusing on its core strengths of underwriting discipline and risk management.
What will happen to the assets that were being used for collateral before?
The assets will be available to support other Swiss Re business.
Why are we entering into a 20 year agreement?
The life business is a long term business and therefore a long term solution is appropriate. There is a price reset feature after 10 years and Swiss Re has the option to terminate the facility at this time.
Q: What are Swiss Re's current ratings?
A: Swiss Re has three interactive financial strength ratings:
S&P AA- (Very Strong), stable outlook;
Moody's Aa2 (Excellent), negative outlook;
A.M. Best A+ (Superior), negative outlook.
Details of our financial strength and debt ratings can be found on our website.
Q: Why did A.M. Best take this rating action now ?
A: The rating agencies reserve the right at any time to suspend, modify, lower, raise or withdraw a rating, or place a rating under review.
Q: What does the negative outlook on the FSR rating mean?
A: Rating outlooks are assigned to an interactive FSR to indicate its potential direction over the intermediate term, generally defined as 12 to 36 months. Swiss Re’s “A+” FSR is assigned to insurers that, in A.M. Best’s opinion, have a superior ability
to meet their ongoing insurance obligations. Rating outlooks are to be distinguished from rating modifiers such as ‘under review’. The latter is typically event-driven (with positive, negative or developing implications), and indicates that the rating may change in the near term, typically within six months.
Q: What does exactly the new Issuer Credit Rating (ICR) rating of aa- mean?
A: A.M. Best’s ICR is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and financial profile. The ICR is an independent opinion of an issuer’s ability to meet its ongoing senior financial obligations. ICRs may be enhanced with a “+” (plus) or a “-“ (minus) to indicate whether the credit quality is near the top or the bottom of the rating category. Swiss Re’s new “aa-“ ICR still belongs to the “aa” ICR category assigned to issuers that, in A.M. Best’s opinion, have a superior ability to meet their ongoing senior financial obligations.
Q: Why did A.M. Best take this rating action?
A: A.M. Best has explained the key elements underlying the rating action in the press release of 19 December 2008.
Q: How are Swiss Re's A.M. Best ratings compared with peers on the FSR and ICR?
* As of 19. December 2008
Q: How do Swiss Re’s ratings compare with other reinsurance companies?
Q: What action is Swiss Re taking to respond to the A.M. Best rating action?
A: We regret A.M. Best’s decision and are continuing to engage in an active dialogue and provide information as requested to address A.M. Best’s concerns. We continue to take steps to be a highly reliable counterpart as demonstrated by our quarter 3 results, hedging of credit risk, very low equity exposure, general derisking except on our core reinsurance liability underwriting, strong capital adequacy
Q: What impact do you expect the FSR rating action to have on our business (premiums, pricing, etc.)?
A: We do not expect any impact. Swiss Re will continue to focus on meeting our clients’ needs and writing business which meets our hurdle rates.
Q: Does this rating action mean that SR has problems to meet its obligations (including claims)?
A: No. Swiss Re’s “A+” FSR is assigned to insurers that, in A.M. Best’s opinion, have a superior ability to meet their ongoing insurance obligations.
Q: Do you think this will have an impact in the January renewals?
A: We expect that this will not be an issue for our clients as an A.M. Best’s rating of A+ is one of the highest in the industry, and is assigned to insurers that, in A.M. Best’s opinion, have a superior ability to meet their ongoing insurance obligations.
Q: Do we have downgrade clauses in your reinsurance treaties? Will these be triggered by this rating action?
A: Swiss Re has a strict underwriting policy which requires that any downgrading clauses in reinsurance treaties require approval at the highest level. As a result of this policy, Swiss Re has limited exposure to downgrading clauses in reinsurance treaties. There are no downgrading clauses in reinsurance treaties that are triggered by the current rating action.
How are we articulating our financial strength to the regulators?
We are maintaining a constant and open dialogue with regulators around the world to make sure they are adequately informed to properly assess Swiss Re's financial strength.
Has Swiss Re any exposure to Madoff?
Swiss Re has no direct exposure to Madoff related funds and has as an immaterial indirect exposure through its hedge fund investments estimated at less than USD 3m.
What do the Asset Management changes mean for our clients?
Most client offerings remain unchanged. Where this is the case it is business as usual, we continue to support our clients with our product offerings. A small number of activities are discontinued. For more details and contact points for queries please refer to the message of 11 December.
What will happen to Life ILS?
We are very supportive of the Life ILS market and will also continue to be an active issuer of Life ILS when the pricing is attractive to us. We have built up strong skills and talent in the Life ILS team which we will redeploy to support the transfer of Swiss Re's own Life risks to the financial markets. But we have stopped issuing life ILS for third parties in their current form. Prime contact for queries: Fred Kleiterp / Dan Ozizmir
Are we continuing to pursue Life Assets opportunities?
No, Life Assets (premium finance or life settlement products) are not being provided by Swiss Re at the current time.
Q: Why is our holding of complex securities like mortgage backed-securities as a % of our market capitalisation so high?
A: Market capitalisation already includes a discount for the difficult investment environment, in particular for the asset classes exposed to credit risk. Additionally, valuations are very low for the whole industry due to the crisis. So it would be more accurate to calculate the exposure in terms of shareholders equity or total invested assets, which for Swiss Re were CHF 178bn at end September 2008. Overall our portfolio remains of high quality coupled with a dynamic hedging programme for our structured products.
Q:Why have banks been more affected by the financial crisis than insurers? A:Financial market conditions like these are unprecedented and insurers’ assets are of course affected. However, we have to remember that this crisis was started by the collapse of credit markets and the freezing of liquidity that followed. This is a big issue for banks, of course, but for insurers, who are largely funded by their policyholders, this is less of an issue. There is a big difference between insurers and banks, our business models are fundamentally different. An insurer’s principal aim when it invests is to ensure that commitments to customers are covered. Insurance is not subject to the kind of liquidity risk that affects banks because pay-outs are typically triggered by loss events, and not according to the wishes of a policyholder.
Q: How has the financial crisis effected reinsurance demand?
A: The current financial crisis has resulted in significant demand for reinsurance from our clients. Forms of financial support normally accessible are currently unavailable. Some clients need to fund their own growth, while others need to restore their capital strength, or find capital to acquire businesses. This has resulted in a return to reinsurance solutions for many existing and potential clients.
So the opportunities are there and we have the scale and broad range of capabilities to make this happen. if the price meets our expectations, we are prepared to deploy substantial capital to serve clients’ needs.
Q: What is Swiss Re doing to reduce its exposure to the unprecedented market volatility?
A: Swiss Re’s investment portfolio is of high quality and well diversified with over 50% in cash, short-term deposits, treasury bills or government-backed instruments. During the third quarter of 2008, the Group significantly reduced its exposure to corporate credit through hedging. Similarly, the traded equity portfolio was reduced through disposals and hedges.
As a result of our prudent investment approach, shareholders’ equity decreased only 6% in the third quarter to CHF 24.1 billion compared to the second quarter of 2008. Book value per share decreased modestly to CHF 74.16 at the end of September 2008, compared to CHF 77.65 at the end of June 2008.
Q: How have we been impacted by the quota-share agreement with Berkshire Hathaway?
A: Our quota share arrangement with Berkshire Hathaway means that we cede a 20% share in new and renewed P&C business – including premiums and claims – to Berkshire Hathaway. In the third quarter of 2008, the quota share arrangement successfully mitigated the losses of a higher level of natural catastrophe claims in the 3rd quarter. The agreement provides for a ceding commission that covers ongoing acquisition costs and a further fixed 14%. Swiss Re will remain focused on underwriting quality.
Q: Have we off-loaded toxic assets from our balance sheet?
A: We fully apply US GAAP accounting rules - and these have strict rules regarding what is on and off balance sheet. Swiss Re provides full transparency on its on and off balance sheet holdings through the financial information produced every quarter and which are also available on our public web site. Specifically, our off balance sheet exposures are detailed in footnote 12 of the Q3 report (page 46). Off balance sheet exposure is also included in our slides on structured products.
Q: What is the present position on our structured CDS exposure (SCDS)?
A: Our SCDS exposure arose from the insurance side of our business and is not related to our investment portfolio. Movements are recorded in our quarterly earnings reports. Please refer to slide 39 from the Q3 presentation.
Q: Will the structured Credit Default Swaps (CDS) losses have an impact on the premium our clients pay or the ability of Swiss Re to pay claims?
A: The additional unrealised mark-to-market loss on the structured credit default swaps in run-off was CHF 289 million for the 3rd quarter. While this business is in run-off, Swiss Re continues to be exposed to market value fluctuations on the underlying securities. We do not expect that this will have any effect on the premiums our clients pay nor, due to our strong capital position, on our ability to meet our claims payment obligations.
Q: Why are Swiss Re’s CDS spreads so high compared to other insurers?
A: Historically, Swiss Re's CDS spread has been wider than Munich Re's, and the differential has widened recently. A technical difference is that Swiss Re has more business with bank counterparties, which may be one of the drivers. CDS spreads are like the share price, and can also be driven by supply/demand factors. Currently there are more potential buyers of CDS protection than writers.
Q: What is Swiss Re doing to stabilise/improve its share value?
A: Like all financial institutions we have little influence on market trends. So we focus on what we can control: underlying quality of our insurance business and ensuring the resilience of our investable assets.
Q: Why is Swiss Re suspending its share buy-back programme now? A: Given the market turmoil, we have suspended our share buy-back programme. The combination of high volatility in the capital markets and a significant increase in demand for reinsurance by our clients means that this prudent step is appropriate. At the end of October 2008, the Group had completed 51.2% of its CHF 7.75 billion share buy-back programme. We can still meet our completion target of April 2010, but this will depend on some stability returning to the capital markets and the business opportunities arising for our Property & Casualty and Life & Health businesses.
Q: Is Swiss Re currently seeking emergency government funding?
A: No, Swiss Re has not engaged in discussion with the Swiss National Bank or government about any form of emergency funding. Our 3rd quarter results demonstrate that we have maintained a strong capital and liquidity position.
Q: What is the estimated exposure of Swiss Re to Lehman Brothers and American International Group (AIG)?
A: We estimate our overall net exposure to Lehman Brothers at approximately CHF 50 million and to AIG at approximately CHF 200 million.
Q: What are Swiss Re's expected losses from Hurricanes Ike and Gustav, respectively?
A: On 23 September 2008, Swiss Re communicated a preliminary claims estimate for hurricane Ike of USD 250 million. Swiss Re now estimates these net claims to be USD 315 million due to indications of higher insured claims in the US Midwest, and off-shore energy. Estimates for hurricane Gustav remain unchanged. Swiss Re expects its aggregated net claims for hurricanes Gustav and Ike to be approximately USD 365 million.
Q: How will Swiss Re's exposure to these events impact our underwriting capacity?
A: These events will have no impact on our underwriting capacity. Swiss Re will continue to write business with the aim to achieve our targets for economic profitability. Swiss Re remains focused on underwriting quality to ensure shareholder value is maximised in a hardening market.
Q: What did S&P's say when it confirmed our rating was unaffected on November 4?
A: S&P's continues to expect Swiss Re to hold a substantial surplus to our 'AA-' level capital target for the financial year ended December 31, 2008. This is taking into account further write-downs during the 4th quarter. According to S&P's, Swiss Re will be well-placed to benefit from the more favourable underwriting environment expected to emerge in 2009.
