Risk and capital management
Page contents
The management of risk and capital is a core competency for Swiss Re. Risk management evaluates the amount of risk adjusted capital needed to support the classes of business written. Capital management assesses total risk bearing capital and is responsible for timely capital supply. Swiss Re’s dynamic risk and capital management functions ensure that the company is adequately capitalised at all times and that it has sufficient financial flexibility to profit from new business opportunities as they arise.
Swiss Re uses its own Risk Adjusted Capital (RAC) model to calculate the amount of capital the company requires, while also taking account of the views of external parties such as regulators and rating agencies.
Swiss Re has interactive relationships with Standard & Poor’s, Moody’s and A.M. Best. The company’s commitment to prudent risk and capital management is reflected in its financial strength ratings, which remain among the highest in the industry.
Risk management
Swiss Re is exposed to multiple risks; it must therefore assess the entirety and correlation of the risks in its portfolio to determine which of them may accumulate and which contribute to diversification. This assessment is carried out on the basis of proprietary integrated risk models, developed over the course of more than a decade.
Actuarial models, guidelines and underwriting discipline allow Swiss Re to balance underwriting risks and react with appropriate measures to changes in its markets. Swiss Re gauges financial market risk using standard risk measurement methods and adjusts its asset allocation strategy accordingly. The company has developed powerful tools to manage its credit risks and addresses operational risks through clearly defined business and control processes and by promoting an appropriate risk culture.
Swiss Re’s risk management organisation and processes are designed to ensure a disciplined approach to risk selection, prompt implementation of strategy, monitoring of the current risk profile and clearly defined responses to changing situations. Good corporate governance dictates the need for a clear separation of responsibilities between risk taking and risk and performance measurement. This principle is evidenced by the fact that Swiss Re’s Chief Risk Officer, a member of the Executive Board Committee, does not accept risk on behalf of the company.
Focus in 2003
In 2003 Swiss Re continued to shift the composition of its portfolio towards underwriting risk and away from credit and financial market risk. A hard market environment contributed to strong growth in property and casualty. At the same time, Swiss Re further reduced its financial market risk exposure by divesting equity holdings for the fourth consecutive year.
Growth opportunities in property and casualty and life and health prompted Swiss Re to seek new ways of managing its business and reducing its net exposure through risk securitisation and risk swaps. The company will continue to pursue these risk transfer opportunities and seek to further develop these instruments.
In 2003 Swiss Re concluded a USD 100 million risk swap with Mitsui Sumitomo, and increased its natural catastrophe Securitisation volume by several hundred million US dollars. Swiss Re’s range of securitised risks was extended in December 2003 by the first life cat bond, Vita Capital, which provides USD 400 million of protection against a sudden severe increase in mortality claims.
Capital management
Swiss Re’s capital management activities strive to strike the balance between reasonable funding costs and an appropriate balance sheet structure. The company’s superior financial strength ratings attract investors to Swiss Re and encourage them to invest in its fixed income securities, thereby generating funding at attractive levels. The current low interest rate environment offers attractive debt financing opportunities. However, such opportunities need to be weighed against Swiss Re’s overall principles of prudent capital management. Standards for Letters of Credit (LoC), or alternative acceptable collateral required to support certain businesses, have become considerably stricter in recent years; providers such as banks have reassessed their portfolios and reduced their exposure to the insurance industry. This trend benefits highly rated companies such as Swiss Re, as there is a tendency for remaining LoC capacity to be shifted towards stronger market participants.
Focus in 2003
In late summer 2003, Swiss Re renewed its maturing USD 2.5 billion Syndicated Credit Line and USD 3.5 billion Syndicated Letter of Credit Line with a combined line. Initially, Swiss Re launched the line at USD 5.5 billion, but after an oversubscription of more than 50%, it decided to increase the total amount to USD 6 billion.
Swiss Re also redeemed a NLG 925 million Exchangeable Bond issued in 1998, and repaid a maturing CHF 100 million Private Placement issued in 2001. With the maturing of these two transactions, Swiss Re considerably reduced its outstanding financial debt, an achievement made possible by strong positive cash flow from operating activities.
Swiss Re’s European Medium Term Note (EMTN) programme has become an actively used funding instrument. In June 2003 the company successfully updated the programme, increasing its capacity to USD 5 billion. At the end of December 2003 Swiss Re’s outstanding debt under the EMTN programme had an aggregate book value of USD 1.95 billion.
Outlook
Swiss Re will continue to build on its strong risk and capital management skills. An integrated approach and a proactive attitude towards risk and capital management will remain key features of the company’s philosophy. Swiss Re strives to ensure a high level of security for its clients while delivering value for its shareholders, thereby maintaining the company’s strong franchise and status as an attractive investment choice.
Funded business
Swiss Re offers external funding solutions which help diversify business, generate new revenue and add value for clients. Funded business is disclosed in separate line items on the balance sheet: “Financial services assets” and “Financial services liabilities”. These transactions are structured with the intention of creating assets and liabilities that generate offsetting foreign exchange and interest rate risks, thereby not significantly affecting Swiss Re’s overall financial market risk profile. Group Capital Management coordinates funded business activities throughout Swiss Re. Currently, the main source of funded business is the Capital Management and Advisory business sector of the Financial Services Business Group.
Long-term debt used strictly for funded business is classified as operational debt. In 2003 Swiss Re took advantage of favourable conditions to issue medium and long-term operational debt. The aggregate value of European Medium Term Notes issued in 2003, maturing after the fiscal year 2004, was the equivalent of USD 540 million, with a weighted average maturity of 1.7 years. Operational long-term debt raised under Payment Undertaking Agreements in 2003 totalled USD 165 million, with a weighted average maturity exceeding 12 years. All interest rate and currency risk arising from operational debt is hedged.
Back to Top
Next section
Back to main page
