Life & Health Business Group
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Despite a strong life result, return on operating revenues for the business group declined slightly to 8.7%, reflecting the impact of the lower health result. The Life & Health Business Group further demonstrated its leading position in life reinsurance with the expansion of its Admin ReSMoperations to the UK and the development of life insurance-linked securities.
Key business group topics
Admin ReSM
Administrative Reinsurance or Admin ReSM is a core offering of Swiss Re. It involves the acceptance of closed blocks of in-force life and health insurance business, either through acquisition or reinsurance, with Swiss Re usually assuming responsibility for administering the underlying policies. Admin ReSM can therefore include both the acquisition of individual blocks of business and the acquisition of an entire life insurance company. The administration of the business is generally managed together with a third party administrator.
Admin ReSM allows insurers to free their capital and gain access to future cash flows from non-core portfolios. It also increases operational efficiency by removing the need for life insurers to maintain legacy IT systems for non-core lines. With 35 transactions successfully completed over the past seven years, Swiss Re has superior experience in the complexities of policy conversion, regulatory approval and effective management of in-force books of business for the continuing benefit of policyholders. Swiss Re draws on its extensive experience gained through its traditional reinsurance business to bring customers an attractive solution.
Conditions in an increasing number of markets are creating opportunities for Admin ReSM. Primary life insurance markets – particularly in the UK and US – are experiencing significant consolidation and disaggregation of non-core lines of business, generating additional opportunities for Admin ReSM. In 2003, Swiss Re expanded its Admin ReSM portfolio to the UK for the first time with the acquisition of the closed book of Zurich Life. This acquisition provided the Life & Health Business Group with responsibility for administering an additional 225 000 life insurance policies in the UK and added a further CHF 1.1 billion in assets to the balance sheet. This is the first transaction outside the US, representing an important step in the expansion of Admin ReSM activities.
Swiss Re completed another two Admin ReSM transactions in the US during 2003: Guarantee Reserve and Clarica. These two transactions added an additional CHF 1 billion in assets to the Group’s balance sheet.
In February 2004, Swiss Re announced an Admin ReSM deal in the US with CNA’s individual life business. It is anticipated that when this transaction closes later in the first half of 2004, it will add an additional one million policies and CHF 3.8 billion in assets to the Group. This will bring the total number of Admin ReSM policies managed by the Group to over three and a half million.
Insurance-linked securitisation
In December 2003, Swiss Re sponsored the first ever Insurance-linked securities relating to life mortality risk, obtaining USD 400 million of coverage from institutional investors. This transaction reflects Swiss Re’s strategy of proactively protecting against remote but significant contingencies.
Through this securitisation, Swiss Re has transferred mortality risk to the capital markets as an alternative to traditional retrocession. To fund potential payments under this arrangement, variable rate notes were issued by Vita Capital, a specially created insurance-linked security intermediary. The notes mature after four years.
The structure of the risk coverage was based on a combined mortality index. The principal of the notes is at risk if, during any single calendar year in the risk coverage period, the combined mortality index exceeds 130% of its baseline 2002 level.
Following strong investor demand for this innovative transaction, the business group is exploring further arrangements for transferring life insurance risk into the capital markets. Swiss Re intends to develop its capabilities in life insurance-linked securitisation, extending the range of solutions it offers.
Mortality
Mortality risk is the core business of the Life & Health Business Group. Historically, mortality rates in insured populations have shown significant improvement as medical treatments have substantially raised life expectancy through the elimination of early deaths. Advances in medicine suggest that the extension of normal lifespan is becoming increasingly feasible. Research conducted by the business group suggests that the overall trend is one of sustained improvement, but that its extent will vary considerably according to age group and market.
Swiss Re gains from having one of the largest books of mortality risk in the world, allowing it to diversify and reduce exposure to the risks of any particular insured segments. The Life & Health Business Group also benefits from its leading role in the market, which enables it to monitor mortality results from a global client base. Swiss Re can therefore ensure that mortality risk is priced appropriately and adjust these prices over time where necessary. During the course of 2004, Swiss Re will be updating its pricing assumptions, particularly in North America, in line with revised economic and experience assumptions. Swiss Re continues to lead strategic thinking through its knowledge of mortality issues.
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Business group results
The operating result (excluding net realised investment gains/losses) declined from CHF 1.3 billion in 2002 to CHF 1.2 billion in 2003. The principal reason for this decrease was the impact of currency exchange movements, in particular the depreciation of the US dollar, where the average rate fell 14%.
Excluding currency exchange movements, the operating result decreased by CHF 63 million, reflecting a CHF 252 million increase in the life business and a CHF 315 million decrease in health business.
Life & Health Business Group results
| CHF millions |
2002
|
2003
|
Change in %
|
|
|
|||
Revenues |
|||
| Premiums earned |
11275
|
10229
|
-9
|
| Net investment income |
3476
|
3085
|
-11
|
|
|
|||
| Operating revenues |
14751
|
13314
|
-10
|
| Net realised investment gains/losses |
-28
|
55
|
|
|
|
|||
| Total revenues |
14723
|
13369
|
-9
|
Expenses |
|||
| Claims and claim adjustment expenses; life and health benefits |
-10084 |
-9085 |
-10 |
| Acquisition costs |
-2582
|
-2479
|
-4
|
| Other operating costs and expenses |
-741
|
-587
|
-21
|
|
|
|||
| Total expenses |
-13407
|
-12151
|
-9
|
|
|
|||
| Operating income |
1316
|
1218
|
-7
|
|
|
|||
| Operating result, excluding net realised investment gains/losses |
1344 |
1163 |
-13 |
|
|
|||
| Management expense ratio (in %) |
5.0
|
4.4
|
|
| Return on operating revenues (in %) |
9.1
|
8.7
|
|
The life operating result rose 30% to CHF 1.1 billion, excluding currency exchange movements. This rise was partly aided by the absence of the negative impact recorded fromGuaranteed Minimum Death Benefit (GMDB) products, which was primarily related to the poor equity market perfomance in 2002. GMDB continued in run-off through the year under review, with no significant effect on results. The life operating result was somewhat reduced because of lower investment yields; this will continue to be the case as long as interest rates remain at historically low levels.
In July 2002, Swiss Re sold the Employer Stop Loss (ESL) business that had formed part of Lincoln Re, acquired in the previous year. The 83% decrease in the health operating result for 2003 reflects both the absence of the ESL business and the absence of one-off gains on recaptures experienced in 2002. The underlying health business, much of which is in run-off, continues to provide lower returns than life business and demonstrates the volatility of its large run-off component.
Premiums earned
| CHF millions |
2002
|
2003
|
Change in %
|
At constant exchange rate in %
|
|
|
||||
| Life |
8968
|
8263
|
-8
|
3
|
| Health |
2307
|
1966
|
-15
|
-8
|
|
|
||||
| Total |
11275
|
10229
|
-9
|
1
|
|
|
||||
Operating result, excluding net realised investment gains/losses
| CHF millions |
2002
|
2003
|
Change in %
|
At constant exchange rate in %
|
|
|
||||
| Life |
934
|
1099
|
18
|
30
|
| Health |
410
|
64
|
-84
|
-83
|
|
|
||||
| Total |
1344
|
1163
|
-13
|
-5
|
|
|
||||
Currency exchange rate movements also affected premiums earned in 2003, reducing reported growth by 10%.
In 2002, the ESL business generated CHF 231 million in health premiums (at constant exchange rates). Excluding the impact of the ESL disposal and of adverse currency exchange movements, total premiums increased by 3% during 2003. This slow growth rate reflects both flat sales of protection business in the North American and UK primary markets and the first impacts of Swiss Re's repricing actions.
Swiss Re’s main life and health market continues to be North America, which contributed 67% of total premiums in 2003, compared to 70% in 2002. The UK remains the principal market in Europe, with 14% of total premiums in 2003. The “rest of the world” includes both growing markets such as Asia – which expanded by 17% in 2003 (excluding currency exchange effects) – and established businesses in South Africa and Australia.
Excluding currency exchange movements, investment income declined by 1%, due to the continuing decline in global interest rates. This was, to some extent, offset by a greater volume of funds under management, stemming in part from two new Admin ReSM transactions in the US.
The return on operating revenues for life business increased from 7.9% to 10.3%, reflecting both the absence of a charge arising from GMDB in 2003 compared to 2002 and the underlying stability of life results. The return on operating revenues for health continues to be volatile, reflecting the fact that the majority of this business is in run-off.
The management expense ratio improved significantly, from 5.0% in 2002 to 4.4% in 2003. This reflects a number of key initiatives resulting in both recurring and one-off expense savings. The expense ratio is higher for Admin ReSM business than for traditional business due to the increased maintenance costs associated with direct business and with handling individual policy records and policyholder communications. This ratio is therefore expected to rise as the volume of Admin ReSM business grows.
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Outlook
In mature markets, traditional life reinsurance is expected to grow by 6% a year in the medium term. Emerging markets, particularly China and India, could see a much higher rate of growth. The Life & Health Business Group anticipates that short-term growth in its traditional life reinsurance may be lower in the US and UK as cession rates have stabilised and growth in primary protection markets remains flat.
Swiss Re expects Admin ReSM to continue to grow strongly, compensating for lower growth in traditional business – as was shown in early 2004 by the CNA life transaction. The business group continues to focus above all on improving margins and returns.
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