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Operating Review - Overview
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The Group posted a USD 3.4 billion loss in 2002. This loss was primarily driven by our decision to take special provisions of USD 3.5 billion. These special provisions are comprised of a strengthening of non-life reserves, the write-off of certain assets and an operational improvement charge.

These charges are directly related to our decision to refocus our Group’s strategy towards being an insurance-based financial services provider. Our emphasis is now on providing non-life and life insurance products in the geographic markets we have identified as core: the United States, the United Kingdom and Continental Europe (particularly Germany, Switzerland, Italy, and Spain). While we have identified these markets as core, we will continue to maintain an international network.

In the non-life industry, we are taking full advantage of the best pricing conditions in fifteen years. In the United States, for example, rate increases in 2002 for workers compensation lines of business were approximately 30%, increases for liability lines were 10% to 20%, and increases for commercial automobile lines were 15% to 20%. Key indicators of growth in the United Kingdom include commercial property lines, where rates increased by more than 50%, and commercial liability lines, by over 70%. In Germany, rates for commercial property lines increased approximately 10%, illustrative of improved pricing conditions in that market.

However, we continue to face industry-wide challenges. Volatile investment markets again adversely impacted our financial performance in 2002. In our core markets, broad-based equity market indices declined significantly: the S&P 500 in the United States was down 23% for the year, the FTSE 100 in the United Kingdom declined by 24%, the Swiss Market Index (SMI) was off 28%, and the DAX in Germany shed 44% of its value. In addition, the insurance industry is confronted with numerous regulatory changes, particularly in the United Kingdom and the United States, as well as an increasingly unpredictable tort environment in the latter.

Following a difficult first half of the year that witnessed significant changes in both our businesses and management, we announced our plans for refocusing and restructuring our Group on 5 September 2002. We are now delivering on the promises made that day.


We have begun to execute our strategy of a concentration on core businesses and markets. We divested several non-core businesses during the year and exited businesses in the Eastern European and Nordic markets in 2002, generating before tax gains of USD 498 million.


We strengthened our balance sheet by increasing loss reserves by USD 2.0 billion (before tax) and writing off USD 954 million of goodwill, E-business and other assets.


We reduced our exposure to volatile equity markets by reducing the proportion of equity securities for which the Group bears investment risk to 8.3% of our investment portfolio at year end, as compared to 12.1% in the prior year.


We improved our capital position with the issuance and subsequent exchange of deferred exchangeable equity securities (MILES) in January which contributed USD 344 million to our shareholders’ equity. A successful rights offering in October contributed another USD 2.4 billion to our shareholders’ equity.


We began implementing a major global operational improvement program, which we expect to add USD 1.0 billion to net income by the end of 2003. We announced 4,500 in staff reductions by year end 2003. In connection with the execution of our program, we recorded after tax special provisions for operational improvement of USD 746 million in the second half of 2002.

In 2002, we continued to experience considerable growth in our core Non-life Insurance and Life Insurance segments, most of which came from our core markets.


Overall gross written premiums and policy fees rose 19% over the prior year to USD 41.4 billion, as a result of a 27% increase in Non-life Insurance and a 32% increase in Life Insurance, and partially offset by an 83% decline in our Reinsurance – run-off segment. Non-life growth was driven primarily by rate increases, whereas growth in the life segment was largely a result of our acquisition of the insurance operations of Deutsche Bank in Continental Europe. The decline in Reinsurance – run-off was a result of our disposal of this business, with the spin-off of Converium in December 2001.


Net earned premiums and policy fees were up 15% over 2001, to USD 31.4 billion, with Non-life and Life insurance increasing 21% and 35%, respectively. This growth is similarly attributable to that of gross written premiums and policy fees.

Key indicators for our core businesses of Non-life Insurance and Life Insurance also improved in 2002.


Our non-life combined ratio, before special provisions, continued to benefit from better expense management and higher net earned premiums, and improved by 5.6 percentage points to 103.6%.


The embedded value operating return for our life businesses was 9.0% which was higher than the prior year return of 8.7%, while our new business profit margin improved by 2.0 percentage points to 6.1%.

While we met our goal of reducing the share of equity securities in our investment portfolio, we remain vulnerable to movements in equity markets.


Net realized and unrealized capital gains and losses declined by USD 1.8 billion in 2002, as compared to the prior year. Included in this figure is a before tax impairment charge of USD 956 million. While classified as an expense under International Financial Reporting Standards (IFRS), this charge has no cash flow implications for the Group.


Lower equity markets also adversely affected the life insurance operations in our UKISA region. The decline in equity markets caused accelerated amortization of deferred acquisition costs (DAC) in 2002 as the amortization is only partially offset by a release of front-end fees and other reserve movements. Total DAC amortization for the Group was USD 2.7 billion in 2002.


Our fee revenue from the unit-linked life insurance and asset management businesses declined during the year, as the level of underlying assets is a key revenue driver.

The factors listed above impacted our 2002 financial results.


Our business operating profit improved by USD 903 million to USD 1.1 billion in 2002.


Our net income before special provisions declined from USD 319 million in 2001 to USD 28 million in 2002.


Our IFRS net loss increased by USD 3.0 billion to USD 3.4 billion in 2002.

We had a difficult second half of 2002.


Our business operating profit has increased by 38% since 30 June 2002. Growth in our business operating profit was constrained by the flood losses in our Continental Europe and Other Non-life Insurance regions, increased net realized and unrealized capital losses in our Capital Markets & Banking segment (which are not adjusted) and adverse development in our non-life insurance portfolio in our Centre segment.


Our net income before special provisions declined by 96% since 30 June 2002, primarily due to the significant increase in net realized and unrealized capital losses from USD 122 million for the first half of 2002 to USD 1.1 billion for the full year.

The topics addressed in this overview are discussed in more detail in the sections that follow.

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