Group overview Financial highlights 1 Zurich at a glance 2 Message from the Chairman and CEO 4 Global perspectives 8 Our strategy 12 Our strategy – measuring our performance 14 Our performance 16
• Life Insurer of the Year and Energy Insurer of the Year (Middle East and North Africa Insurance Review)
The best way we show our success is by continuing to help our customers understand and protect themselves from risk. In 2011, one of the most expensive in terms of catastrophe-related losses for the insurance industry, we dedicated ourselves to helping customers mitigate catastrophe risks and to rebuilding in their aftermath. In 2012 we proudly celebrate 100 years of providing that help in the United States. Going forward we will seek to find more ways to leverage our insurance and risk management expertise to equip people to better manage change and risk in their lives and in the world around them.
The demanding conditions of 2011 have challenged – and confirmed – the strength of our strategy.
Farmers is responding to the ways in which technology is segmenting consumers, with a growing trend toward direct purchase of personal lines insurance (i.e., via Internet or phone). By using a varied but joined-up approach that integrates agents, direct sites, social media and other means, Farmers can mitigate this channel conflict and enable cross-selling of insurance from across the Farmers organization.
Tom de Swaan Dutch 1946 Director Chairman of the Risk Committee Member of the Audit Committee
Fritz Gerber is the Honorary Chairman of Zurich Financial Services Ltd. He was chairman of Zurich Insurance Company between 1977 and 1995 and its Chief Executive Officer between 1977 and 1991. In recognition of his leadership and services to that company, he was appointed Honorary Chairman. Such designation does not confer Board membership or any Director’s duties or rights, nor does it entitle him to any Director’s fees.
The Governance and Nominations Committee is composed of four Board members. It oversees the Group’s governance and measures it against best practice with a view to ensuring that the rights of the shareholders are fully protected. It also develops and proposes to the Board corporate governance guidelines and reviews them from time to time. The Governance and Nominations Committee is further entrusted with succession planning with respect to the Board, the CEO and members of the GEC. In this regard, it proposes the principles for the nomination and ongoing qualification of members of the Board and makes proposals to the Board on the composition of the Board, as well
To facilitate an ongoing exchange of information between the Risk Committee and the Audit Committee, the Chairman of the Audit Committee is a member of the Risk Committee and the Chairman of the Risk Committee is a member of the Audit Committee. The Chairman of the Board regularly participates in both the Audit and Risk Committee meetings as a guest.
Zurich Financial Services Ltd maintains a regular dialogue with investors through its Investor Relations department and responds to questions and issues raised by institutional and private individual shareholders. In addition, Zurich Financial Services Ltd organizes investor days for institutional investors to provide comprehensive information on its businesses and strategic direction. Such presentations can be followed via webcast or conference call. In 2011, the investors’ day held in Zurich on December 1, focused on progress on the delivery of our targets and included presentations by the Chief Executive Officer, the CEOs of the business segments, the Chief Financial Officer and the Chief Investment Officer. A further investor day is planned for 2012 on topics of interest to the investment market. A wide range of information on the Group and its businesses, including the aforementioned results reporting documents and the full documentation distributed at the investor days, is also available on the Investor Relations section of Zurich’s website, www.zurich.com (
The Board Audit Committee approves the Group Audit Plan annually and at least every quarter reviews reports from the function on its activities as well as significant risk, control and governance issues. The Head of Group Audit reports functionally to the Board Audit Committee and administratively to the CEO, and regularly meets with the Chairman of the Board. Group Audit has no operational responsibilities over the areas it reviews and all staff within Group Audit globally report to the Head of Group Audit.
Through a comprehensive program, the compliance function implements, embeds and enforces internal policies and guidance. As part of it, compliance officers are active in the introduction of new employees and in the integration of newly acquired companies. To help employees understand their responsibilities under Zurich Basics and internal policies, all employees receive regular ethical and compliance training. In addition, the compliance function spearheads internal awareness campaigns on ethical and regulatory conduct. Each year Zurich managers confirm their understanding and compliance with Zurich Basics and internal policies. Zurich encourages its employees to speak up and report improper conduct. Zurich does not tolerate retaliation against any employee who reports such concerns in good faith.
Variable remuneration is structured such that on average there is a higher weighting towards the longer term sustainable performance for the most senior employees of the Group, including the individuals considered to be key risk takers. This ensures that a significant portion of the variable pay for these employees is deferred.
Employee benefits The Group provides a range of employee benefits which are designed by reference to local market practices. Employees are normally required to contribute to the cost of these benefits, and the overall benefits offering is based on the relevant market median.
3 Committee chairs receive an annual fee of CHF 30,000 (USD 20,000 in 2010) and the chair of the Audit Committee receives an additional CHF 10,000 (USD 10,000 in 2010). The Committees on which the Directors serve and the chairs are set out in the Corporate Governance Report on page 30.
Termination arrangements for members of the Board of Directors who gave up their functions No Director gave up his or her function in 2011. Mr Pidoux retired from the Board at the Annual General Meeting during 2010. No termination payments were made to him.
Personal loans for former Directors As of December 31, 2011, and 2010, respectively, no former Director had outstanding loans, advances or credits.
The number of share option awards that vested in 2011 to members of the GEC serving in 2011 from the share option grants made in 2008, 2009 and 2010 was 184,219. This represented a basic vesting level of 135 percent of target given the actual ROE and TSR performance achievements.
Cash incentive awards earned for the year1 482 527 Value of target performance and restricted share grants made in the year2, 3 136 92 Value of target performance option grants made in the year3, 4 – 28 Total Variable Remuneration Pool 618 647 1 Includes sign-on and severance payments in cash.
1 Assets under management comprise Group and unit-linked investments that are included in the Global Life balance sheet plus assets that are managed by third parties, on which the business earns fees.
Bank Distribution decreased new business value by USD 31 million to USD 201 million, or by 13 percent in U.S. dollar terms and 17 percent on a local currency basis. This was predominantly driven by reduced volumes of single premium sales in Germany and significantly reduced volumes of savings business in Spain where pricing behavior in the market was on terms considered uneconomic by the Group leading to lower participation in this business. These reductions were partly offset by an increase of USD 15 million in new business value for higher margin protection products in Spain, driving an overall improvement in new business margin of 3.8 percentage points to 28.8 percent.
Gross written premiums and policy fees 3,529 4,194 (16%) Net underwriting result (23) 134 nm Business operating profit 116 321 (64%) Loss ratio 70.5% 66.5% (4.0 pts) Expense ratio 30.2% 31.1% 0.8 pts Combined ratio 100.8% 97.6% (3.2 pts)
Common stocks, including equity unit trusts 8,355 1 10,005 1 68,308 76,187 Unit trusts (debt securities, real estate and short-term investments) 2,451 3,208 11,554 9,577 Common stock portfolios backing participating with-profit policyholder contracts 420 516 – –
Unit-linked investments decreased by USD 3.3 billion to USD 104.6 billion since December 31, 2010, or by 3 percent in U.S. dollar terms and 2 percent on a local currency basis as a result of the performance of financial markets.
Details of debt issuances are set out in note 21 of the audited Consolidated financial statements.
variance over the prior period, for the year ended December 31, 2011Selected Group income statement line items variance over December 31, 2010, as of December 31, 2011Selected Group balance sheet line items
Insurance risk sensitivity for the General Insurance business – current period
As shown in the table above, the Group had debt exposure to Eurozone nations of USD 29.5 billion and USD 26.9 billion as of December 31, 2011 and 2010, respectively. Exposure to Greece, Ireland, Italy, Portugal and Spain amounted to USD 10.9 billion and USD 11.6 billion as of December 31, 2011 and 2010, respectively. In accordance with the Group’s risk limits, exposure to peripheral sovereign debt, in particular subordinated bank debt, was actively and selectively reduced in 2011. In addition to the above debt exposure, the Group had sovereign loan exposure of USD 4.9 billion and USD 5.7 billion to Germany, and sovereign loan exposure of USD 7 million and USD 20 million to Austria as of December 31, 2011 and 2010, respectively.
Mortgage loans given as collateral relate to German mortgages that are subject to repurchase agreement, but where Zurich still retains the credit risk of the underlying mortgages. See note 15 of the Consolidated financial statements.
1 Due to the reclassification to held for sale of the Group’s operations in Bolivia (see note 5 of the Consolidated financial statements).
At the Group level, similar guidelines apply and detailed liquidity forecasts based on the local businesses’ input and the Group’s own forecasts are regularly performed. As part of its liquidity management, the Group maintains sufficient cash and cash equivalents and high quality, liquid investment portfolios to meet expected outflows including those for maturing debt obligations. In addition, the Group maintains internal liquidity sources that cover the Group’s potential liquidity needs, including those that might arise under stressed conditions. The Group takes into account the amount, permanence of availability and speed of accessibility of the sources. The Group centrally maintains committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and use of letters of credit. The Group maintains a broad range of maturities for external debt securities. A possible concentration risk could arise from a downgrade of the Group’s credit rating. This could impact the Group’s commitments and guarantees, thus potentially increasing the Group’s liquidity needs. These contingencies are also considered in the Group’s liquidity management.
Generally, all business activities contain some aspect of operational risk. Therefore, ongoing initiatives such as The Zurich Way and operational transformation help Zurich manage operational risks through standardization of processes. Projects with an expected budget over a defined threshold undergo a risk assessment.
Zurich is fully engaged in an extensive program of work in order to meet all Solvency II requirements when they enter into force. The Group intends to use its internal model, which aligns the Solvency II approach with that used for the SST for its major EU subsidiaries. The Group has started the pre-application process in order to gain regulatory approval for the internal model from EU supervisors. The Central Bank of Ireland became the Group’s EU lead regulator in 2011.
As of December 31, 2010 and 2011, the Group and its material, regulated subsidiaries complied with the applicable regulatory minimum capital requirements.
• The Group effective tax rate is assumed to be 24.1 percent in 2011. For the Non-Core Businesses with life insurance characteristics, specific tax rates have been applied.
Monetary impact on total IFRS equity 2011 totaI IFRS equity: USD 34.0bn
The chart below shows the estimated Available Financial Resources (AFR) for the SST at the beginning of the respective period to cover the risks that could materialize over a one year time horizon. As of July 1, 2011 the AFR amounted to USD 45 billion, while the SST Target Capital measured as an expected shortfall at the 99 percent confidence level, amounted to USD 20 billion. The Group has filed with FINMA an SST ratio of 225 percent, which is a slight improvement compared to January 1, 2011 when the filed ratio was 223 percent.
In addition, there have been further restatements on the balance sheet and reclassifications as previously disclosed: • Certain balances erroneously reported as cash and cash equivalents amounting to USD 376 million and USD 723 million as of December 31, 2010, and January 1, 2010, respectively, are now presented as other loans. In addition, certain balances erroneously reported as unit-linked cash and cash equivalents amounting to USD 5,619 million and USD 4,917 million as of December 31, 2010, and January 1, 2010, respectively, are now presented under unit-linked other loans. These changes, as well as a change in presentation of certain debt during 2011 result in a decrease of net cash provided by operating activities of USD 766 million, a decrease in net cash used in financing activities of USD 411 million and a decrease of cash and cash equivalents by USD 5,995 million as of December 31, 2010 as presented in the cash flow statement. These changes in presentation are reflected in the consolidated balance sheets, consolidated income statements, consolidated statements of cash flows and note 6.
Maturity tables have been provided for the following balances: reserves for insurance contracts (tables 17a and 17b in the Risk Review), liabilities for investment contracts (tables 18a and 18b in the Risk Review), debt securities (table 6.4), derivative assets and derivative liabilities (tables 7.1 and 7.2), collateralized loans (table 15), other financial liabilities (table 19.2) and outstanding debt (table 21.3).
Basic earnings per share 23.63 (0.04) 23.59 Diluted earnings per share 23.44 (0.04) 23.40 in CHF
In November 2009, the IASB issued amendments to IAS 24 “Related Party Disclosures”. The amendments are effective for reporting periods beginning on or after January 1, 2011. The amendments to IAS 24 provide a partial exemption from the disclosure requirements for government-related entities and clarifies the definition of a related party.
Reserves for life benefits Future life policyholders’ benefits represent the estimated future benefit liability for traditional life insurance policies.
DAC for investment type insurance contracts such as universal life, unit-linked and unitized with-profits contracts is amortized over the life of the contracts based on estimated gross profits expected to be realized over the life of the contract. Estimated gross profits are updated for actual and anticipated future experience using either the rate in effect at the inception of the contracts or the latest revised interest rate for the remaining benefit period, depending on whether crediting is based on the policyholder’s or on the reporting entity’s investment performance. Resultant deviations are reflected in income.
Objective evidence of impairment exists if it is probable that the Group will not be able to collect principal and/or interest due according to the contractual terms of the instrument. When impairment is determined to have occurred, the carrying amount of held-to-maturity investments, loans or receivables is reduced through the use of an allowance account, and the movement in the impairment allowance is recognized as an impairment loss in income. The impairment allowance of financial assets carried at amortized cost is measured as the difference between the amortized cost of the assets and the present value of estimated future cash flows, calculated using the original effective interest rate, for fixed rate financial assets, or current effective interest rate, for variable rate financial assets. The impairment allowance for mortgage loans and receivables is determined using an analytical method based on knowledge of each loan group or receivable. The method is usually based on historical statistics, adjusted for known or anticipated trends in the group of financial assets or individual accounts. If the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognized, the impairment loss is reversed through income. The amount of reversal is limited so that it does not result in a carrying amount exceeding the amortized cost that would have been calculated at the date of reversal had the impairment not been previously recognized.
Consolidated financial statements continued f) Derivative financial instruments and hedge accounting Derivative financial instruments held by the Group include interest rate, currency and total return swaps, futures, forwards and option contracts, all of which derive their value mainly from changes in underlying interest rates, foreign exchange rates, commodity values or equity instruments. A derivative contract may be traded on an exchange or over-the-counter (OTC). Exchange-traded derivatives are standardized and include futures and certain option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards, caps, floors and swaps. Derivative financial instruments are subject to various risks similar to those related to the underlying financial instruments, including market, credit and liquidity risk.
On September 30, 2011, the Group completed the acquisition of 100 percent of Malaysian Assurance Alliance Berhad (MAA), a composite insurer based in Malaysia, together with 100 percent of four related services companies. The acquisition of MAA is aligned with the Group’s emerging-market strategy of expanding the Group’s presence in the Asia-Pacific region. The total preliminary purchase price of USD 135 million included an initial consideration of USD 108 million and an anticipated purchase price adjustment amounting to USD 27 million. Of the initial consideration, USD 56 million was paid in cash on completion, USD 30 million was placed into escrow and USD 22 million was retained by the Group. The amount in escrow and the retention are to be held for a period of two years. The fair value of net tangible assets acquired amounted to USD 113 million and identifiable intangible assets, net of deferred tax, amounted to USD 19 million which mainly consisted of the PVFP from insurance contracts. Residual goodwill amounted to USD 3 million. In addition, the Group has injected approximately USD 135 million of capital into MAA since the completion of the acquisition to meet regulatory capital requirements.
Investment result, gross for Group investments 7,437 7,317 2,182 898 9,619 8,215 Investment expenses for Group investments (252) (225) – – (252) (225) Investment result, net for Group investments 7,185 7,092 2,182 898 9,367 7,990 1 Net capital gains/(losses) on derivatives attributable to cash flow hedge ineffectiveness amounted to USD (13) million and USD 10 million for the years ended December 31, 2011 and 2010, respectively.
Investments in associates and joint ventures 161 0.1 188 0.1 1 As of December 31, 2011 and 2010 this includes the Group’s investment of 12.5 percent and 20 percent, respectively, in New China Life Insurance Company Ltd., over which the Group has no significant influence.
Debt securities Swiss federal and cantonal governments 3,104 3,082 511 262 – (9) 3,615 3,335
Almost all positions are for hedging purposes. With respect to the short positions, call options are used in collar structures to mitigate the hedging costs and the written put positions are mostly backed by long put positions or by cash collateral.
In Global Corporate, favorable development of USD 402 million was primarily driven by Europe and North America. In Europe, general liability and property contributed the most while in North America, the change in prior year estimates came from many lines of business with the exception of workers compensation.
North America Commercial favorable development of USD 458 million arose mostly from medical malpractice, general liability, directors and officers, errors and omissions, direct markets and surety business.
Wages and salaries 3,276 3,055 Other employee benefits 565 410 Amortization and impairments of intangible assets 805 882 Depreciation and impairments of property and equipment 191 205 Rent, leasing and maintenance 453 389 Marketing costs 209 201 Life recurrent commission 386 348 Asset and other non-income taxes 58 44 IT costs 804 691 Litigation and settlement costs 77 646 Restructuring costs 222 111 Foreign currency translation (157) (159)
Net carrying value as of January 1, 2011 352 777 107 96 357 1,689
Other financial liabilities Derivative liabilities 700 1,005 Amounts due to reinsurers, agents and other insurance companies 2,076 2,041 Amounts due to investment brokers 1,399 1,059 Amounts due to life policyholders 639 668 Liabilities for cash collateral received for securities lending 159 485 Deposits from banking activities 815 1,559 Liabilities for defined benefit plans 2,905 1,779 Other liabilities for employee benefit plans 109 112 Other liabilities 6,231 6,583 Other non-financial liabilities Current tax payables 779 850 Restructuring provisions 254 155 Premium prepayments and other advances 869 957 Other liabilities 1,192 1,141 Liabilities related to Santander insurance operations in Latin America 1 13,191 – Total other liabilities 31,317 18,396 1 See note 5.
4 The holders of these notes benefit from the Replacement Capital Covenant which states that if Series IV and V Fixed / Floating Trust Preferred Securities, issued by
The actual returns on defined benefit pension plan assets for the years ended December 31, 2011 and 2010 were gains of USD 1,316 million and USD 1,110 million, respectively.
Sensitivity of fair values reported for Level 3 instruments to changes in key assumptions As of December 31, 2011 and 2010 under Level 3, the Group classified asset-backed securities (ABSs) amounting to USD 2.5 billion and USD 3.6 billion, respectively. These ABSs include non-agency backed securities for which the limited market activity observable during the year required the Group’s external pricing providers to make certain internal valuation assumptions. To determine the fair value of these investments, pricing providers use valuation models that are based on an expected present value technique.
Table 26.4b as of December 31, 2010Sensitivity analysis of Level 3 ABSs to changes in key assumptions – prior period
Malaysia 109 – Zurich International Life 5 5 Subtotal Asia-Pacific and Middle East 127 11 Other Luxembourg 4 2 Subtotal Other 4 2
ZCM Asia Holdings Pty Limited Sydney Other Operating Businesses 100 100 AUD 172.1
Taiwan Zurich Insurance (Taiwan) Ltd. Taipei General Insurance 99.73 99.73 TWD 2,000.0 Turkey Zurich Sigorta A.S. Istanbul General Insurance 100 100 TRY 133.8 United Kingdom
ZFS Finance (USA) LLC V 8 Wilmington, DE Other Operating Businesses 100 100 USD –
Richard Burger Patrick Shouvlin Audit expert Global relationship partner Auditor in charge
Global Life generated USD 1,363 million of embedded value operating earnings during 2011. This consisted of USD 980 million of new business value, and USD 383 million of other operating earnings. Changes in economic conditions reduced value by USD 1,322 million. Other non-operating variances increased embedded value by USD 160 million. The strengthening of the U.S. dollar decreased value by USD 194 million as a result of the effects of currency translation. In total the embedded value has decreased by USD 627 million, after allowing for the impact of non-controlling interests and dividends of USD 633 million.
Embedded value operating earnings were USD 383 million excluding the impact of new business. Of this, USD 740 million was the expected emergence of value from in-force business, which was offset by adverse operating variances of USD 357 million, arising from experience and other operating variances as well as assumption changes.
– Values in the above table have not been restated and have been calculated without liquidity premium in the discount rate and using a cost of capital charge of 2.5 percent applied to CRNHR.
All 2010 figures in this section have been restated to include a liquidity premium in the discount rate and a cost of capital applied to residual non-hedgeable risks of 4 percent to be consistent with the 2011 figures.
IFRS shareholders’ net assets 1 15.4 Less non-controlling interests 2 (1.0) IFRS shareholders’ equity net of joint ventures and non-controlling interests 14.4 Plus pension scheme liabilities 3 0.6 Less intangible assets 4 (6.7)
a) Covered business Covered business includes all business written by companies that are included in the Global Life segment (excluding the recently acquired businesses in Malaysia and Latin America), unless otherwise stated. In particular: • life and critical illness insurance; • savings business (with profit, non-profit and unit-linked); • pensions and annuity business; and
For most products, the average value has been calculated using Monte Carlo simulations. For a small number of products, the TVFOG has been derived using closed form solutions.
The cost of residual non-hedgeable risk (CRNHR) is an explicit deduction for non-hedgeable financial risks (non-hedgeable asset/liability management risks and reinsurance credit risk), and non-financial risks (mortality, persistency, expenses and operational risk). The certainty equivalent value allows for best estimate shareholder cashflows. The CRNHR is largely an allowance for uncertainty in shareholder cashflows, and for risks which are not already considered in the certainty equivalent value or time value of financial options and guarantees, such as operational risk. Most residual non-hedgeable risks have a symmetric impact on embedded value apart from operational risk.
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised conditions. The results include any impact of the assumption changes on the time value of financial options and guarantees.
Short-term liabilities Loans from subsidiaries 202,794 2,014,308 Other liabilities to subsidiaries – 449 Other liabilities to third parties 1,511 1,456 Other liabilities to shareholders 377 304 Accrued liabilities to subsidiaries 14,578 13,683 Accrued liabilities to third parties 49,713 26,416 Derivatives with subsidiaries 3,315 17,409 Total short-term liabilities 272,288 2,074,025 Long-term liabilities Long-term loans from subsidiaries 490,834 488,923 Provisions 75,008 – Total long-term liabilities 565,842 488,923 Total liabilities 838,130 2,562,948 Shareholders’ equity (before appropriation of available earnings) Share capital 10 14,739 14,659 Legal reserves: 13,322,807 14,341,140
6. Tax expense The tax expense consists of income, capital and other taxes.
As of January 1 14,000,000 – Transfer from general legal reserve – 10,776,161 Transfer from free reserve – 3,223,839 Appropriation of available earnings
According to the information available on December 31, 2011, Zurich Financial Services Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, Norges Bank, Oslo and Aberdeen Asset Management PLC, Aberdeen, which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Financial Services Ltd representing three percent or more of its issued shares.
Remuneration of Directors The following tables set out the total fees paid to Directors of Zurich Financial Services Ltd. All the Directors are also Directors of Zurich Insurance Company Ltd. The Directors receive a combined fee for their work in connection with Zurich Financial Services Ltd and Zurich Insurance Company Ltd. In addition, Mr de Swaan is a member of the Board of both Zurich Insurance plc and Zurich Life Assurance plc and Mrs Bies and Mr Nicolaisen are members of the Board in Zurich Holding Company of America (ZHCA). The fee structure for Directors was reviewed and updated for 2011, and details on those changes were disclosed last year and are set out in the Remuneration Report on page 60. A fixed portion of the fee continues to be allocated towards the provision of three-year sales-restricted Zurich Financial Services Ltd shares. The portion for the Chairman was set at CHF 333,500 in 2011 (USD 233,500 or CHF 248,584 respectively for 2010), and the portion for the other members of the Board of Directors at CHF 80,000 in 2011 (USD 68,500 or CHF 72,925 respectively for 2010). The overall fees are set out in the following tables: Basic Fee
It is the duty of the Board of Directors to perform the issuance of new shares in accordance with the requirements of the company’s statutes. Our responsibility is to perform audit procedures designed to test whether the issuance was performed in accordance with the law and requirements of the company’s statutes. We confirm that we meet the licensing and independence requirements as stipulated by Swiss law.
Business operating profit (after-tax) return on common shareholders’ equity indicates the level of business operating profit or loss relative to resources provided by common shareholders. It is calculated as business operating profit or loss, annualized on a linear basis and adjusted for preferred shareholder dividends and taxes, divided by the average value of common share holders’ equity on a simple basis using the value at the beginning and end of the period.