Investments
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Swiss Re delivered a return on investment of 5.1%, exceeding its three year average target. This result was achieved against a background of volatile bond markets and despite continued significant impairments of equities in the first half of 2003. The investment result was supported by capital gains from both fixed income and equity securities.
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2003 was a year of contrasts for investments. In the first half, war in Iraq and mixed economic news translated into a climate of instability and pessimism, driving equity markets to record lows in the first quarter and interest rates to historic lows in the second quarter. The second half of 2003, however, offered a more upbeat perspective, as leading economic indicators turned generally positive in the US, Japan and (to a lesser extent) Continental Europe.
Other fundamental trends in 2003 were the rapid decline of the US dollar, most markedly against the yen and the euro, coupled with widening macroeconomic and trade imbalances, most notably the US current account and federal deficits – as well as the emergence of China as a prime destination for foreign investment.
At the end of 2003, Swiss Re’s investment portfolio was valued at CHF 88 billion – little changed in Swiss franc terms from the end of 2002, although the portfolio grew by 5% in local currencies. The proportion of fixed income investments increased during 2003 to 88% of the overall portfolio. Two Admin ReSM transactions in the US and one in the UK supported the expansion of the fixed income portfolio. Investments in equities represented slightly under 8% of the total, down from 14% (before hedge) at the end of 2002. Active sales of equities, including the divestment of Swiss Re’s holding in Partner Re, contributed to this trend.
The investment result of CHF 5 billion represents a return on investment of 5.1%. The result is composed of net investment income totalling CHF 4.6 billion, and net realised investment gains of CHF 376 million. This outcome compares favourably to 2002, when the investment return of 4.7% was heavily affected by impairments on equity securities.
US dollar denominated holdings, mainly fixed income securities, now account for 53% of the total investment portfolio. This is slightly down from 55% at the end of 2002. The growth in the US dollar portfolio has been more than offset by the fall in value of the US dollar against the Swiss franc.
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Fixed income
After reaching historic lows in June 2003, interest rates ended the year slightly above their levels at the end of 2002. The main central banks broadly maintained their expansive monetary policies throughout the year. A steepening yield curve became more apparent in the third and fourth quarters, responding to evidence of good economic performance and expectations that interest rates would rise further. Corporate bond spreads continued to tighten, most markedly in the lower credit quality areas, offering less incentive for investors to take additional credit risk.
Swiss Re’s fixed income investments (including short-term securities and mortgage loans) totalled CHF 78 billion at the end of 2003, compared to CHF 70 billion at the end of 2002. The portfolio’s credit exposure remained stable, due to the Group’s continued focus on high quality investment grade corporate bonds. Three Admin ReSM transactions, including the purchase of the Zurich Life business in the UK, added CHF 1.9 billion to the fixed income portfolio. The organic growth of the portfolio was more than offset on the balance sheet by the 11% decline in value of the US dollar against the Swiss franc.
In a historically low interest rate environment, the current income (coupon) earned on the portfolio remained solid. The Group realised significant capital gains of CHF 1.1 billion, mainly in the second quarter of the year, as fixed income values peaked. Net unrealised gains on the bond portfolio (which are not included in the balance sheet) decreased to CHF 1.1 billion at year end from CHF 2.2 billion at the prior year end.
Equities
The major stock markets all posted significant gains in local currencies during 2003, with the eurozone lagging behind the US and, to a lesser extent, the UK. Equity valuations remained relatively attractive compared to bonds. Given the removal of uncertainty over the war in Iraq and clear signs of reflation arising from massive US fiscal and monetary stimulus, investors were prepared to increase their risk tolerance and shift into equities.
The size of the Group’s equity portfolio was further reduced in 2003 in order to increase its allocation of capital to core reinsurance business and to take full advantage of the favourable non-life underwriting conditions. The hedging instruments used throughout the year to manage exposure to equity markets expired in the fourth quarter. They were not renewed because the Group’s gross equity exposure has now achieved targeted levels.
Equity investments, including private equites, contributed sizable net realised gains of CHF 650 million, even though the 2002 market decline necessitated additional net impairments of CHF 583 million. These were recognised in the income statement, principally in the first half of the year and mainly related to 2002 change in values. At the end of 2003, the equity portfolio had CHF 416 million of net unrealised gains, compared to net unrealised losses of CHF 821 million the year before.
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