Managing global value creation

1
Managing global value creation Swiss Re Group
at the turn of the millennium

• Walter B. Kielholz
• Chief Executive Officer
• Glen Cove, 27 September 1999

2
Managing global value creation

• Looking back The last 12 months
• The world around us Through the rapids
• SR Group The new basic line-up or The
  offensive team

3
Managing global value creation

• Looking back The last 12 months
• The world around us Through the rapids
• SR Group The new basic line-up or The
  offensive team

4
Looking back the last 12 months

• Asia Crisis impact on Swiss Re

5
Asia Crisis dramatic impact on exchange rates
USD/Local currency
Index June 1997 100
Source Datastream
6
Non-life reinsurance premiums in Asia and the
Pacific region1
1 excl. Aus/NZ and Japan
Index 1990 100
Local currencies index based on weighted average
of real growth rate in local currencies. USD
index derived from nominal USD figures, but
adjusted for US inflation.
Source Swiss Re Economic Research Consulting
7
Asia Crisis what it means for Swiss Re

• A throw-back of five years for the region and for
  Asia Division
• Crisis caused serious cost pressure Zurich cost
  block not hedged
• No change of strategy for the region
• Tactical
• Better cost management
• Further decentralisation

8
Looking back the last 12 months

• Asia Crisis
• October 98 Financial Crisis the near miss

9
October 98 Financial Crisis - the near miss
Index 4.9.98 100
Source Bloomberg
10
Interest rates plummeted the example of US Govt
bond rates

Source Bloomberg
11
Interest rates - the spread widens

Source Bloomberg
12
October 98 Financial Crisis - lessons learned and
steps taken

• Superior risk management in investments and
  credit risk is vital
• The right steps taken by SR Investors
• Market disruption of this kind offers excellent
  opportunities for strong players (AAA) this is
  also true for insurance events
• Liquid, high quality credit risk portfolios
  demonstrate distinct advantages over other
  portfolio compositions

13
Looking back the last 12 months

• Asia Crisis
• October 98 financial crisis
• Life Re acquisition effects on the Group

14
Life Re acquisition - effects on the Group

• Significant task
• Integration of Life Re
• Exit US Health business
• Reduce headcount to recognise new set-up
• push pipeline
• Most targets achieved
• Increased Life contribution to Group results were
  overdue to confirm SRs strategy
• Self confidence of division has increased over
  the past 12 months

15
Looking back the last 12 months

• Asia Crisis
• October 98 Financial Crisis
• Life Re acquisition
• Fox-Pitt, Kelton a first step toward a new
  business model

16
Looking back the last 12 months

• Asia Crisis
• October 98 Financial Crisis
• Life Re acquisition
• Fox-Pitt, Kelton
• Closing 98 to Triple 20 background, timing and
  update of achievements

17
Profit composition unbalanced development
Before tax
CHF m
incl. Allocated Investment Return
18
Headcount development - acquisition synergies
realised?
No. of employees
Source Group HR Controlling
19
Divisional headcount - SR LH ahead in tackling
the issue
No. of employees1
1 Year end figures excluding IRMG, NCM IRMG
(July 99 412), NCM (July 99 1231)
Source Group HR Controlling
20
Premiums per employee - Non-life divisions need
to improve
CHF
Adjusted for two large transactions
21
Triple 20 Programme

• How to create awareness quickly despite record
  result
• Address various issues at the same time
  underwriting, capacity, costs
• Timing Too early or just in time?
• Reaction in the market and the Group better than
  expected

22
Triple 20 Programme where do we stand?

• Cost Management Divisional targets agreed,
  follow-up and controlling organised
• The underwriting part now enters the critical
  phase (renewals)
• Need to enter the next round of productivity
  gains soon

23
The evolution of Cost Management
Cost Management 2001
Cost Management 1998
To reach our ambitious CMI targets by 2001, all
of us ought to accept, contribute and help
establish a new way of thinking
24
Looking back the last 12 months

• Asia Crisis
• October 98 Financial Crisis
• Life Re acquisition
• Fox-Pitt, Kelton
• Closing 98 to Triple 20
• Y2K the sword of Damocles

25
Y2K - towards the finishing/crossing line
Swiss Re cannot rule out regional time limited
disruptions. Our aim is to maintain operational
stability even under adverse/unexpected
circumstances.

• Business Continuity Management (BCM)
• Strategy formulated, distributed and in
  implementation
• Y2K Command Center Group (Y2K-CC) established and
  trained
• Y2K-CC coordinates, steers and controls the
  rollover between Logistics, IT, Business Units
  and Corporate Communications
• Y2K specific exercises to be conducted for major
  locations to optimize cooperation / coordination
  within Group

26
Y2K - towards the finishing/crossing line

• Swiss Re IT readiness for Y2K
• Mission Critical Systems (MCS) work fully
  completed (100)
• Business Relevant Systems (BRS) work
  sufficiently completed (97)
• IT Contingency Planning (IT CP) work advanced
  substantially (49)
• Millennium weekend roll-over plans approved and
  impact understood
• No problems reported as a result of critical
  09.09.99 date change
• Very low internal IT system risks expected at
  1.1.00 date change

27
Y2K underwriting aspects

• Global campaign to raise Y2K-awareness of clients
• Underwriting measures established to guide Market
  Divisions
• Assessment of Y2K-exposures per LoB and
  implementations of underwriting measures by
  Market Divisions
• Best estimate of claims incurred for SR Group and
  top-down verification
• Current status
• All underwriting measures taken
• Y2K related claims should not surpass magnitude
  of expected claims from other claims scenarios
• Group wide coordination of claims handling
  procedures ready

28
Looking back the last 12 months

• Asia Crisis
• October 98 Financial Crisis
• Life Re acquisition
• Fox-Pitt, Kelton
• Closing 98 to Triple 20
• Y2K
• Stock markets opinion has Swiss Re fallen out
  of grace?

29
Stock markets opinion has Swiss Re fallen out
of grace?
Index 6.1.95 100
Source Bloomberg
30
Swiss Re vs. peers not a preferred stock right
now
Index 25.09.98 100
Source Bloomberg
31
Looking back the last 12 months

• Asia Crisis
• October 98 Financial Crisis
• Life Re acquisition
• Fox-Pitt, Kelton
• Closing 98 to Triple 20
• Y2K
• Stock markets opinion
• Interim 99 light at the end of the tunnel?

32
Interim 99 Light at the end of the tunnel?

• Excellent overall result
• Strong Life development
• Improved, but still unacceptable Non-life results
• Investment results clearly exceed expectations
• Development overall within Swiss Res long term
  target
• Unrelenting efforts on Triple 20

33
Interim Report 99 Financial key figures
34
Non-life reinsurance premium growth
in CHF m
691
35
Life reinsurance premium growth
in CHF m
525
Source Finance Division
36
The growing importance of Life business by
technical result
Technical result in CHF m
Source Finance Division
37
Swiss Res financial goal - sustainable return on
equity
1260 bps
1040 bps
970 bps
1060 bps
800 bps
38
Components of investment result(before
management charges)
CHF m
7 249
6 259
49
4 770
51
3 419
5
68
12
6
72
25
3
46
15
18
14
14
Source Swiss Re Investors
39
Bond portfolio actively managed Duration shifts
of bond portfolio
years
31.12.97
31.12.98
30.06.99
40
Managing global value creation

• Looking back The last 12 months
• The world around us Through the rapids
• SR Group The new basic line-up or The
  offensive team

41
The financial services industry five main areas
Wholesale customers
Retail customers
Banking related
Insurance related
Source McKinsey Co
42
Financial services industry the options
Wholesale banking
Wholesale insurance
Wholesale customers
Asset management
Retail customers
Retail and commercial insurance
Retail and commercial banking
Banking related
Insurance related
Source McKinsey Co
43
Financial services industry the deals
Wholesale banking
Wholesale insurance
Merill Lynch Mercury AM
General Re New England AM
Wholesale customers
Asset management
Deutsche Bank Bankers Trust
Munich Re DKV
Nat West Gartmore
AIG Sun America
Retail customers
Credit Suisse Winterthur Ins.
Retail and commercial insurance
Retail and commercial banking
Banking related
Insurance related
Source McKinsey Co
44
World direct and ceded premiums Non-life 1993
2002
Index1 1993 100
Estimates
Source Swiss Re Economic Research Consulting
1 Note Index constructed with real annual
growth rates
45
Real growth of Life and Disability markets 1993
2002
Index 1993 100
Estimates
Source Swiss Re Economic Research Consulting
46
Long term growth curve
Index 1965 100

Estimates
Source Swiss Re Economic Research Consulting
47
The Non-life cycle a negative overlay
World wide reinsurance combined ratio
Source Swiss Re Economic Research Consulting
48
E-Business

• Internet a catalyst for accelerated momentum of
  change
• Established business processes and business
  models under attack
• Two sides of the coin
• The cost game disintermediation,
  commoditisation, transparency
• Business innovation - new value propositions and
  business models
• SR Group is much affected more positive aspects
  than negative ones
• SR willing to drive technology enabled business
  innovation
• SR less affected by business legacy systems than
  primary companies

49
E-Business

• Urgent need for a clear and comprehensive
  E-Business strategy - presentation to the BoD in
  December

50
The world around us Through the rapids

• Summary
• Consolidation and changes to traditional
  financial sector structure will continue
• What is large?
• Basic growth drivers in the core business are
  positive
• The cycle Yes, the down-cycle will end, but
  soon?
• Competition SR among the winners of this phase
• E-Business the wild radical

51
Managing global value creation

• Looking back The last 12 months
• The world around us Through the rapids
• SR Group The new basic line-up or The
  offensive team

52
Swiss Re Group 1999
Board of Directors
Corporate Centre
Executive Board Chief Executive Officer
Reinsurance Risk
Finance
Communications Human Resources
Information Technology
Swiss Re
Swiss Re
Swiss Re
North
Swiss Re
Europe
Capital
New Markets
LH
America
Investors
Partners
Latin
Asia
America
Bavarian
Asset Management Financial Services
Specialities
Re
Non-life
ART
Life
53
Specific roles Reinsurance divisions

• Meet or exceed profit and growth targets set by
  the BoD
• Shift resource allocation to true value creating
  activities within certain business, geographical
  and risk limits defined by Group strategy and
  risk and capital allocation
• Plan and manage business portfolio to exploit
  opportunities Integrate trends and developments

54
Specific roles Asset Management and Financial
Services divisions

• Maintain most efficient investment portfolio
  within given SAA
• Meet or exceed ROI and Third Party Assets under
  Management growth targets
• Plan and execute TAA and securities selection
• Provide ALM and financial advisory services to
  financial services sector based on leading edge
  research and service quality
• Build and maintain Private Equity capabilities
  world wide and leverage these skills in managing
  SRs participation portfolio

55
The role of the Corporate Centre

• Corporate centres have the potential to add or
  destroy significant value - consequently one of
  the key questions is just how to go about
  designing and creating a centre that has the
  ability to fully exploit opportunities without
  the damaging overhangs.

Source PriceWaterhouseCoopers
56
The role of the Corporate Centre

• . and by the way, this also applies to the
  Divisional Centres!

Source PriceWaterhouseCoopers
57
The activities of the Corporate/Divisional Centre

• Analysing Corporate Centre activities we can
  differentiate between
• Core tasks Necessary to fulfil the organisations
  obligations to authorities and stakeholders. They
  embrace issues of legal compliance and regulatory
  reporting, as well as those which support
  stakeholder requirements
• Added Value tasks Activities that enable the
  enterprise to take full advantage of the
  opportunities for the centre to significantly
  contribute to organisational well-being and
  development
• Shared Services tasks Non-core activities that
  have been chosen to be conducted centrally
  because of economies of both scope and scale

Source PriceWaterhouseCoopers
58
Value creation The real work of the
Corporate/Divisional Centre

• Build Emerging businesses, consolidation, mergers
  acquisitions, decentralisation
• Stretch Help/force businesses to perform to the
  full potential
• Link Know-how activity sharing, pooling of
  negotiation power, strategic coordination,
  vertical integration
• Leverage Brand, relationship with other
  companies, project portfolio
• Portfolio development Business start-ups, RD

Source PriceWaterhouseCoopers
59
Specific roles Finance Division

• Capital management for the Group and efficient
  management of capitalisation process with the
  Group
• Tax optimisation on world wise basis
• Investors and Rating Agencies relations
  balancing shareholders and rating agencies
  demands
• Group accounting for external reporting
• Group controlling for internal performance
  measurement and risk capital allocation
• Law and compliance managing Group legal,
  regulatory and reputational risks

60
Specific roles Reinsurance Risk Division

• Risk management CIRM, including Cat perils and
  Retro to keep risk of the firm within agreed
  limits
• Reinsurance support Product management Property,
  Casualty, Marine, Aviation and Engineering,
  including interline issues to maintain
  consistent underwriting policy
• Knowledge management to maintain best practice
  in risk underwriting
• Claims contracts services to manage
  contractual and claims reserve risk
• Economic research consulting to support
  strategic planning and brand reputation

61
Specific roles Information Technology Division

• Define and implement Group IT strategy to support
  and integrate with business strategy
• Establish overview over Group IT project
  portfolio, ensure best practice and coordinate
  resource allocation in line with Group priorities
• Group Data Information management to enable
  optimal use of available data within our Group
• Technology Office establish and implement Group
  wide standards and provide technical consulting
  to local IT staff
• Business development in respect of E-Business

62
Specific roles Communications Human Resources
Division

• Enhance further value of Brand and position it
  based on our Corporate Philosophy
• Maintain communication with all stakeholders and
  in particular support Investor Relations
• Set framework for divisional marketing
  communication and lead process of issue
  management
• Help to win battle for talent in hiring,
  developing and retaining the best
• Support top mgt to make appropriate management
  appointments

63
Corporate/Divisional Centre the reason for being

• Corporate centres are middlemen sitting between
  investors and value creating business units as
  such, they can only justify their existence if
  they can add further value to shareholders.

Source PriceWaterhouseCoopers
64
The management process at Group level

• Corporate Philosophy
• Group Strategic Plan and Financial Ambition
• Group Balanced Scorecard
• MbOs and performance assessment of Group Key
  Position Holders
• Group Compensation Philosophy