Zurich Financial Services Group Annual Report 2008Financial Report 20082 Financial highlights 6834_p002-003.indd 26834_p002-003.indd 2 25/2/09 14:28:3025/2/09 14:28:30
That infrastructure was stress-tested by historically adverse conditions in 2008 – and we delivered. Europe General Insurance, Farmers, International Businesses and Global Life were all especially effective in drawing on the Group’s core strengths to deliver on each of the themes of profi table growth at Zurich: product excellence, customer excellence and distribution excellence.
Since The Zurich Way initiatives began, we have been building an infrastructure for profi table growth that today extends from Group level down to the smallest offi ce. Our people are motivated to supply the market with useful insurance solutions, and to share innovations as broadly as possible to reach the customers who need them.
Today we have global standards in claims, underwriting and other fundamental processes driving us forward. The Zurich Way has grown to deliver more than USD 800 million in benefi ts in 2008, with a further USD 2.7 billion in benefi ts targeted from 2009 through 2011. The Zurich Way initiatives are now integrated to ensure that all our businesses – from longstanding operations to recent acquisitions, global operations to local niche players – are engaged in a common process of delivering valuable solutions to our customers in one recognizably Zurich way.
The Group’s secondary format for segment information continued to be geographic in 2008 and was as follows: North America, Europe, International Businesses and Central Region.
Some interests in shares are held by investors in the form of CREST Depository Interests (CDIs)1 or American Depositary Receipts (ADRs)2. As of December 31, 2008, investors held 260,436 CDIs (representing 260,436 Zurich Financial Services shares) and 23,480,380 ADRs (representing 2,348,038 Zurich Financial Services shares).
There are special provisions relating to the registration of, and exercise of rights attaching to, shares by CREST International Nominees Ltd. on behalf of CDI holders and by the Bank of New York Mellon in connection with the Zurich Financial Services’ ADR program.
Convertible bonds and options Zurich Financial Services had no public convertibles or options outstanding as of December 31, 2008. For information on employee share option plans, please refer to the consolidated fi nancial statements, note 24 on pages 216 to 219.
With the exception of Ms. Bies and Mr. Chu, who have been elected to the Board of Directors on April 3, 2008, all of the current Directors have served on the Board throughout the entire year 2008. Mr. Schulmeyer retired from the Board of Directors with effect from the Annual General Meeting held on April 3, 2008.
Biographies Manfred Gentz studied law at the universities of Berlin and Lausanne and graduated with a doctorate in law from the Berlin Free University. In 1970 he joined Daimler-Benz AG where he held various positions. In 1983, he was appointed member of the board of management of Daimler-Benz AG, responsible at fi rst for human resources. From 1990 to 1995 he was chief executive offi cer of Daimler-Benz Interservices (debis) in Berlin and subsequently became chief fi nancial offi cer of Daimler-Benz AG in 1995. In December 1998, Mr. Gentz was appointed to the board of management of DaimlerChrysler AG, where he was in charge of Finance and Controlling until December 2004. From 1987 to 1995 he served on the board of supervisors of Agrippina Versicherung AG and from 1996 to 2005 he was a member of the board of supervisors of Zürich Beteiligungs-Aktiengesellschaft (Deutschland). From 1985 to 2005 Mr. Gentz was on the board of supervisors of Hannoversche Lebensversicherung AG (from 1990 as its vice chairman). From May 2005 until March 2006, he was chairman of the supervisory board of Eurohypo AG. In addition he is chairman of ICC (International Chamber of Commerce), Germany and serves on the boards of supervisors of adidas AG, DWS Investment GmbH and the German Stock Exchange (Deutsche Börse AG), of which he was elected chairman in December 2008. Because of his new function as chairman of the supervisory board of Deutsche Börse AG, Mr. Gentz will resign from his mandates with adidas AG and DWS Investment GmbH in the course of 2009. He is active in a number of scientifi c and cultural institutions, among others, he chairs the curatorship of the Technische Universität Berlin.
Don Nicolaisen graduated from the University of Wisconsin-Whitewater with a BBA degree and joined Price Waterhouse (which subsequently became PricewaterhouseCoopers), where he was admitted to partnership in 1978. He served in various capacities, including as auditor and as chairman of PricewaterhouseCoopers’ fi nancial services practice. He led that company’s national offi ce for accounting and Securities and Exchange Commission services from 1988 to 1994 and served on both the U.S.and global boards from 1994 to 2001. From September 2003 to November 2005, he was chief accountant of the U.S. Securities and Exchange Commission and was principal adviser to the Commission on accounting and auditing matters. He is a member of the board of directors of Verizon Communications Inc., Morgan Stanley and MGIC Investment Corporation. In addition, he is on the board of advisors for the University of Southern California Leventhal School of Accounting.
At the Annual General Meeting to be held on April 2, 2009, the terms of offi ce of Messrs Escher, Nicolaisen, Pidoux and Sankey will expire. All four members have been proposed for re-election by the Board. Mr. Pidoux has been nominated for a term of one year and Messrs Escher, Nicolaisen and Sankey for a term of three years each.
The Board is required to meet at least six times each year; during 2008 it held ten meetings (of which three were partly attended by phone and one was held over two days). On the occasion of one of the ten meetings the Board conducted a separate visit to businesses in the U.S. and one meeting was fully dedicated to the discussion of strategic topics. Five meetings lasted between fi ve and eight hours per day, and the remaining fi ve meetings took about two hours. In addition, the Board unanimously approved one circular resolution and held eight ad hoc meetings by telephone conference, dealing with certain acquisition projects, each telephone conference lasting approximately one hour.
To facilitate an on-going 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.
Group Audit The internal audit function of the Group (“Group Audit”) is tasked with providing independent and objective assurance to the Board, Audit Committee, the CEO and management. It does this by developing an annual audit plan, using a risk-based methodology, which is updated quarterly to refl ect changes in risk and priority. The plan is based on the full spectrum of business risks. Group Audit executes the plan by bringing a systematic and disciplined approach to evaluate, comment upon and improve risk management, control and governance processes. It assesses the suitability, reliability and functioning of the business organization with regard to technical and personnel matters and reviews the effi ciency and effectiveness of the Group’s control systems. In addition, the internal audit function reviews the fi nancial reporting processes and regulations and reviews compliance with the Group’s business and statutory requirements and regulations. Key issues raised by Group Audit are communicated to the responsible management function, the CEO and the Audit Committee using a suite of reporting tools.
The current annual basic fee for the Vice Chairman is USD 330,000, of which an amount of USD 68,500 is allocated to sales-restricted Zurich Financial Services shares. The annual basic fee for the Chairman of the Board of Zurich Financial Services and Zurich Insurance Company during 2008 was USD 700,000 and one-third of the total amount, i.e. USD 233,500 is allocated to sales-restricted Zurich Financial Services shares. Neither the Chairman nor the Vice Chairman receive any additional fees for their Committee work.
Compensation for former Directors No benefi ts (or waiver of claims) have been provided to former members of the Boards during the year 2008, nor were any provided during the year 2007.
The number of share option awards that vested to members of the Group Executive Committee in 2008 from the share option grants made in 2005, 2006 and 2007 was 269,762. This represented a basic vesting level of 175 percent of target given the actual ROE and TSR performance achievements.
Termination arrangements for members of the Group Executive Committee who gave up their functions during the year One of the Group Executive Committee members retired at the end of 2008. No termination payments were made.
J.J. Schiro, Chief Executive Offi cer 3 85,726 230,415 64,790 173,516 J. Amore, Chief Executive Offi cer General Insurance 19,606 76,096 17,220 73,880 A. Court, Chief Executive Offi cer Europe General Insurance 4 3,062 5,696 – – M. Foley, Chief Executive Offi cer North America Commercial 5 4,107 3,857 n.a. n.a. M. Greco, Chief Executive Offi cer Global Life 6 492 – – – P. Hopkins, Chief Executive Offi cer Farmers Group, Inc 6,678 21,184 4,765 26,290 A. Lehmann, Chief Risk Offi cer 13,066 49,871 10,813 39,421 P. O’Sullivan, Vice Chairman and Chief Growth Offi cer 15,848 54,315 19,739 49,031 G. Riddell, Chief Executive Offi cer Global Corporate 12,410 44,846 8,752 28,446 M. Senn, Chief Investment Offi cer 6,780 16,019 2,553 3,719 P. van de Geijn, Chief Executive Offi cer Global Life 10,952 44,034 6,993 24,889 D. Wemmer, Chief Financial Offi cer 9,267 36,630 5,565 19,549 1 None of the GEC members together with parties related to them held more than 0.5 percent of the voting rights as at December 31, 2008 or 2007, either directly or through share options.
Towards the end of 2008, Global Life saw an increased demand for protection products and changes in our customers saving patterns and we expect this trend to continue in 2009. We are well placed to respond with our ability to be fl exible, reacting to our customer needs and the market, along with our execution skills and focus on costs to drive our business forward.
Net investment income 8,725 8,591 2% Net capital (losses)/gains on investments and impairments (2,893) 1,503 (292%)
Net unrealized losses included in total equity have increased by USD 3.9 billion since December 31, 2007, due to an increase of USD 1.4 billion in net unrealized losses on debt securities as interest rates changed and credit spreads widened, as well as a reduction of USD 2.4 billion in net unrealized gains on equity securities as a result of the decline in major global equity markets.
Net investment income 3,185 3,000 6% Net capital (losses)/gains on investments and impairments (24,916) 4,142 (702%) Net investment result, net of investment expenses 1 (21,731) 7,142 (404%)
Total reserves and liabilities for insurance and investment contracts, net of reinsurance, decreased by 19 percent, and by 7 percent after excluding the impact of currency translation, compared with December 31, 2007. The decrease was primarily driven by adverse market movements reported in the change in interest and bonuses credited to policyholders for unit-linked insurance and investment contracts, an excess of policyholder benefi ts paid over premiums, partially offset by the inclusion of reserves for the acquisitions in Spain and Italy. The foreign currency impact in the unit-linked and investment contracts was primarily driven by the strengthening of the U.S. dollar against the British pound.
in USD millionsGlobal Life – Reserves and liabilities, net of reinsurance, by region in USD millionsGlobal Life – Reserves and liabilities, net of reinsurance, by region 6839_p064-089.indd 846839_p064-089.indd 84 25/2/09 14:20:5325/2/09 14:20:53
Net income after taxes 3,039 77 3,116 Net other recognized income and expenses (6,897) (71) (6,968)
Net cash provided by operating activities 7,050 (1,580) Net cash used in investing activities (1,442) (617) Net cash used in fi nancing activities (2,551) (2,686) Foreign currency translation effects on cash and cash equivalents (1,896) 640
We are constantly assessing and improving our risk management to refl ect internal and external factors. During 2008 we further strengthened our approach. These enhancements relate to both the organization and to processes, reporting and policies.
Ex ec u ti ve le ve l Bo ar d of
Group Risk Management organization The Group Chief Risk Offi cer leads the Group Risk Management function, which develops methods and processes for identifying, measuring, managing, reporting and monitoring risks throughout the Group. Group Risk Management proposes changes to the risk management framework and the Group’s risk policies; it makes recommendations on the Group’s risk tolerance and assesses the risk profi le. The Group Chief Risk Offi cer is responsible for the oversight of risks across the Group; he regularly reports risk matters to the Chief Executive Offi cer, senior management committees and the Risk Committee of the Board.
The sensitivities are reasonably possible as of the balance sheet date, but do not indicate a probability of such events occurring in the future and do not necessarily represent our view of expected future market changes, nor are they stress scenarios as additionally used by management.
1% increase in the interest rate yield curves Group Investments (805) (726) Net income before tax (329) (296) Net assets (652) (547)
Analysis of fi nancial assets 6840_p090-125.indd 1096840_p090-125.indd 109 25/2/09 14:18:0225/2/09 14:18:02
Table 17.b in USD millions, for the year ended December 31, 2007
We review and aggregate workers’ injury and property exposures to identify areas of signifi cant concentration. We also assess other lines of business, such as liability and auto, although the potential exposure is not as signifi cant. The resulting data allows our underwriters to evaluate how insuring a particular customer’s risk might affect Zurich’s overall exposure. In North America, we use a vendor-provided catastrophe model to evaluate our potential exposures in every major U.S. city. We undertake more detailed and frequent analytics for cities in which we have greater exposure. In 2008, we used a multi-disciplinary team to examine every aspect of the vendor tool and make adjustments based on our own experience, expertise and view of the potential risks.
We continue to strengthen the consistency, documentation and assessment of our internal controls for signifi cant entities, processes and locations. Although primarily focused on important controls for fi nancial reporting, this effort also includes related operational and compliance controls. For more details, please refer to the Internal control statement in the Corporate governance report.
Regulatory capital adequacy The Group endeavors to manage its capital such that all of its regulated entities meet local regulatory capital requirements at all times.
Deferred policy acquisition costs general insurance (3,571) (3,394) Dividends, share buy-back and nominal value reduction 2 (1,411) (3,867) Total eligible equity 18,516 23,117 Total required solvency capital 12,142 12,383 Excess margin 6,375 10,734 1 Under guidelines issued by FOPI during 2007, dated subordinated debt issuances are admissable up to 25 percent of the capital requirement, undated issuances up to 50 percent of the capital requirement.
Table 18 in USD millions, as of December 31The Group’s solvency as of December 31 6840_p090-125.indd 1236840_p090-125.indd 123 25/2/09 14:18:1225/2/09 14:18:12
II 1. Basis of presentation 138 2. Implementation of new accounting standards and amendments to published accounting standards 143 3. Summary of signifi cant accounting policies 144 4. Critical accounting judgements and estimates 161 5. Acquisitions and divestments 166 7. Derivative fi nancial instruments and hedge accounting 180 8. Reserves for insurance contracts and reinsurers‘ share of reserves for insurance cotracts 184 9. Liabilities for investment contracts with and without discretionary participation features (DPF) 190 10. Equity component relating to contracts with DPF 190 11. Gross and ceded insurance revenues and expenses 191 12. Deferred policy aquisition costs and deferred origination costs 192 13. Administrative and other operating expenses 192 14. Farmers management fees and other related revenues 193 16. Mortgage loans given as collateral and collateralized loans 194 17. Property and equipment 195 18. Goodwill and other intangible assets 196 19. Other liabilities 198 20. Income taxes 199 22. Shareholders‘ equity 208 23. Employee benefi ts 211 24. Share-based compensation and cash incentive plans 216 25. Contigent liabilities, contractual commitments and fi nancial guarantees 219 26. Fair value of fi nancial assets and fi nancial liabilities 223 27. Related party transactions 224 28. Farmers Exchanges 225 29. Segment information 228
Deferred tax liabilities 20 3,485 4,057 Debt related to capital markets and banking activities 21 2,527 1,663 Senior and subordinated debt 21 8,455 8,300 Total liabilities 304,163 360,023
Equity Share capital 22 10 10 Additional paid-in capital 10,131 10,289 Net unrealized gains/(losses) on available-for-sale investments (2,957) 202 Cash fl ow hedges (16) (103) Cumulative translation adjustment (1,341) 1,385 Revaluation reserve 99 83 Retained earnings 15,616 16,406 Common shareholders’ equity 21,542 28,273
Shareholders’ equity 22,103 28,945 Non-controlling interests 1,678 374 Total equity 23,781 29,318 Total liabilities and equity 327,944 389,342 1 In 2007, reserves for insurance contracts included USD 7.1 billion related to the reinsurance of a UK annuity portfolio. Subsequent to the approval from the UK High Court, effective on June 30, 2008, the underlying contracts were transferred to the reinsurer, resulting in a reduction of reserves for insurance contracts.
in USD millions, for the years ended December 31 in USD millions, for the years ended December 31 6841_p126-169.indd 1346841_p126-169.indd 134 25/2/09 14:15:2825/2/09 14:15:28
Reserves for insurance contracts 252,886 (146) 252,740 Reinsurers’ share of reserves for insurance contracts 26,977 (7) 26,970 Deferred tax assets 1,678 4 1,682 Deferred tax liabilities 4,055 2 4,057 for the year ended December 31, 2007
In March 2007, the IASB issued amendments to IAS 23 “Borrowing Costs”. The amendments are mandatory for reporting periods beginning on or after January 1, 2009. The amendments eliminate the option to recognize all borrowing costs immediately as an expense.
Financial information initially recognized at cost and adjusted thereafter for the post-acquisition change in the Group’s share of net assets of the investment.
Measurement of investment contracts Valuation techniques are used to establish the fair value of investment contracts at inception and at each subsequent reporting date.
Interest income on fi nancial assets that are not classifi ed as held for trading or designated at fair value through profi t or loss is recognized using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash fl ows discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income.
Investments backing certain life insurance policies with participation features are held as at fair value through profi t or loss in order to reduce measurement inconsistencies. Movements in the carrying value of these assets recognized in investment income are offset by equivalent movements attributable to policyholders.
The recoverable amount of a cash generating unit is the higher of its fair value less costs to sell and its value in use. Fair value less costs to sell is based on the best information available to refl ect the amount that the Group could obtain, as of the balance sheet date, from the disposal of the cash generating unit on an arm’s length basis between knowledgeable, willing parties, after deducting the costs of disposal.
p) Employee benefits Retirement benefi ts The operating companies in the Group provide employee retirement benefi ts through both defi ned benefi t plans providing specifi ed benefi ts and defi ned contribution plans. The assets of these plans are generally held separately from the Group’s general assets in trustee-administered funds. Defi ned benefi t plan obligations and contributions are determined annually by qualifi ed actuaries using the projected unit credit method. The Group’s expense related to these plans is accrued over the employees’ service periods based upon the actuarially determined cost for the period.
Refer to note 24 for further information on share-based compensation and cash incentives plans.
“Caixa Sabadell” sets out the acquisition of 50 percent of both the life and general insurance companies CaixaSabadell Vida, S.A. de Seguros y Reaseguros (CSV) and CaixaSabadell Companyia d’Assegurances Generals, S.A. (CSG), both of them based in Spain, from Caixa d’Estalvis de Sabadell (Caixa Sabadell), which the Group completed on August 14, 2008. Total acquisition costs for CSV amounted to USD 300 million and, based on the initial purchase price allocation, include net tangible assets acquired of USD 128 million and identifi able intangible assets, net of deferred tax, of USD 472 million (USD 674 million before tax, mainly relating to the life insurance distribution agreement with Caixa Sabadell of USD 552 million and to the present value of profi ts of acquired insurance contracts of USD 122 million). Total acquisition costs for CSG amounted to USD 45 million and, based on the initial purchase price allocation, include net tangible assets acquired of USD 13 million and identifi able intangible assets, net of deferred tax, of USD 77 million (USD 109 million before tax, relating to the general insurance distribution agreement with Caixa Sabadell). 50 percent of net tangible assets acquired and of identifi able intangible assets, net of deferred tax, refl ect non-controlling interests in CSV and CSG, amounting to USD 344 million. The Group has management control of the jointly owned companies and fully consolidates them.
Table 5.1 in USD millionsBusiness combinations1 6841_p126-169.indd 1666841_p126-169.indd 166 27/2/09 18:38:2927/2/09 18:38:29
Investment expenses for unit-linked contracts (581) (528) – – (581) (528) Investment result, net unit-linked contracts 3,185 3,000 (24,916) 4,142 (21,731) 7,142 1 Including net capital losses on derivative fi nancial instruments of USD 111 million and USD 114 million for the years ended December 31 2008 and 2007, respectively.
German asset-backed securities 64.6% 4.3% 31.1% – – 517 Swiss asset-backed securities 100.0% – – – – 635
Net carrying value as of December 31, 2008 359 851 86 219 374 1,889
The fi re insurance value of the Group’s own-use property and equipment totalled USD 3,676 million and USD 3,973 million as of December 31, 2008 and 2007, respectively.
USD 339 million additions to goodwill, USD 640 million additions to present value of profi ts of acquired insurance contracts, and USD 3,069 million additions to other intangible assets resulted from the acquisitions in 2008 as disclosed in note 5. Thereof, USD 285 million additions to present value of profi ts of acquired insurance contracts and USD 1,462 million additions to other intangible assets relate to non-controlling interests.
Actual income tax expense attributable to shareholders 19.0% 732 24.4% 1,874 Plus: income tax expense/(benefi t) attributable to policyholders (1,184) (83) Actual income tax expense (17.0%) (452) 23.6% 1,791
Deferred acquisition and origination costs 65 (584) 134 (605) Depreciable and amortizable assets 22 (43) 32 (8) Life policyholders’ benefi ts and deposits 1 20 – 11 – Unrealized (gains)/losses on available-for-sale investments and cash fl ow hedges 965 (332) 284 (288) Accruals & deferred income 239 – 109 – Reserves for losses and loss adjustment expenses 569 (46) 585 – Reserves for unearned premiums 744 (253) 700 (296) Pensions and other employee benefi ts 384 – 228 –
Table 20.9 in USD millions, as of December 31Tax losses carryforwards and tax credits 6842_p170-207.indd 2026842_p170-207.indd 202 25/2/09 14:13:0725/2/09 14:13:07
ZFS Finance (USA) Trust IV Series IV 5.875% USD 500 Trust Preferred Securities, due May 2062 498 497
CHF 300 million of senior bonds matured on July 22, 2008. On September 23, 2008 CHF 300 million of senior bonds were issued by Zurich Finance (USA), Inc. with a fi xed coupon of 3.5 percent and a maturity of November 2011. On September 23, 2008 CHF 500 million of senior bonds were issued by Zurich Insurance Company with a fi xed coupon of 3.75 percent and a maturity of September 2013. Both issues were made under the existing EMTN Programme.
Series II 6.45% Fixed / Adjustable Rate USD 700 ECAPS, due December 2065 6.45% payable semi-annually until June 15, 2016 and then reset quarterly to the adjustable rate
Debt maturities shown in table 21.3 refl ect original contractual dates without taking early redemption options into account. For call/redemption dates, refer to table 21.2. The total notional amount of debt due in each period is not materially different from the total carrying amount disclosed in table 21.3. Undiscounted cash fl ows include interest and principal cash fl ows on debt outstanding as at December 31, 2008 and December 31, 2007. All debt is assumed to mature within 20 years of the balance sheet date without refi nancing and where the Group has the option to repay the debt, the option is assumed to expire. Floating rates of interest are assumed to be constant as at December 31, 2008 (December 31, 2007 respectively) going forward. The aggregated cash fl ows are converted into USD at the balance sheet date.
Dunbar Bank and Zurich Bank have access to various committed credit facilities totaling GBP 405 million and GBP 230 million, respectively. As of December 31, 2008, GBP 50 million had been drawn under these credit facilities.
In February 2001, the Group placed six series of Trust Capital Securities (Zurich RegCaPS) for a total amount of USD 1,125 million (USD 1,096 million net of issuance costs) with a limited number of qualifi ed institutional and corporate U.S. investors. The securities, which were issued under Rule 144A in the U.S., are perpetual, non-cumulative and have a par value of USD 1,000 each. They have no voting rights, except in certain specifi ed circumstances and are
linked to Farmers Group, Inc. Class C shares. On March 30, 2006, April 11, 2006 and April 18, 2008, the Group redeemed the Series I, III and IV of the Zurich RegCaPS, respectively. The liquidation amounts totaled USD 550 million in aggregate. Of the remaining series totaling USD 575 million, one has a fi xed rate coupon of 6.58 percent and two have fl oating rate coupons at LIBOR +71 basis points. These coupon rates step up after the fi rst call dates. The Group has the option to call all outstanding securities in 2011.
Effect of potentially dilutive shares related to share-based compensation plans 1,572,388 (0.43) (0.52) Diluted earnings per share 5,668 144,257,656 39.29 47.11 1 The translation from USD to CHF is shown for information purposes only and has been calculated at the Group´s average exchange rates for the years ended December 31, 2008 and 2007, respectively.
Table 23.2 in USD millions, as of December 31Status of unfunded defi ned benefi t plans 6843_p208-233.indd 2126843_p208-233.indd 212 25/2/09 14:09:3325/2/09 14:09:33
Expected return on plan assets 727 704 – – Past service cost (14) (8) – – Gains on curtailment or settlement 2 – – –
Table 23.5 in USD millionsMovement in funded and unfunded defi ned benefi t pension plan obligation
Current average life expectancy for a 65 year old male 22.5 25.0 19.3 18.0 22.5 22.0 19.7 18.0
Senior Executive long-term incentive plans Each year, Senior Executives are granted performance shares and performance options, which vest on an annual basis over the subsequent three year period. The actual level of vesting, which can be between 0 percent and 175 percent, with an additional discretion to increase vesting to a maximum of 200 percent, of the original number of shares and/or options granted, depends on the performance of the Group during the previous calendar year. For 2007 and future grants we are looking back to a three year performance period. The current performance metrics are the Group’s return on equity (ROE) and the position of its total annual relative shareholder return measured against an international peer group of insurance companies. One half of the shares that actually vest are sales-restricted for a further period of three years. The options have a seven year term from the date of grant. Grants under the plan are made annually each April. The actual number of performance shares and performance options granted is determined such that the economic value is a defi ned percentage of annual salary in the year of allocation. There were a total of 170 and 159 participants in this plan as of December 31, 2008 and 2007, respectively.
In 2003, the Group completed the divestment of various asset management operations. As part of these agreements, the Group has guaranteed certain minimum levels of “assets under management” to the acquirers. The guarantees provide that if the “assets under management” fall below those defi ned levels under certain conditions, the Group may be required to compensate for these shortfalls.
Total securities at FV through profi t or loss 81,408 125,741 81,408 125,741
Farmers Group, Inc. Reno, NV Farmers Management Services 98.28 100 USD 0.001
Shareholders’ net assets are based on local statutory accounting. The EV is adjusted to refl ect the shareholders’ interest in the market value of net assets after the exclusion of goodwill. Net assets decreased due to the economic downturn in 2008 by USD 1.5 billion.
Value of business in-force is the present value of future projected profi ts from companies and business in Global Life, and is defi ned as the certainty equivalent value of business in-force less frictional costs, the time value of fi nancial options and guarantees, and the cost of non market risk. Further details of the methodology used in the calculation of these items are given in Section 3. The largest part of the decrease in value of business in-force by USD 1.6 billion comes from the increase in both intrinsic value and time value of the costs for fi nancial options and guarantees and other non-market risks.
Minimum regulatory required capital 3,566 3,748 Addditional required capital 852 1,056
Table 1.2 in USD millions, for the years ended December 31Shareholders’ net assets
Table 1.2 in USD millions, for the years ended December 31Shareholders’ net assets 6846_p240-271.indd 2416846_p240-271.indd 241 25/2/09 14:01:1025/2/09 14:01:10
Economic sensitivities A 100 basis points increase and decrease (subject to a minimum of zero percent) was applied to the risk free yield curve across all durations.
Shareholders’ net assets 1.2 1.4 Value of business in-force (1.1) 0.3
New business margin, after tax as % APE as % PVNBP
Table 2.6 in USD millions, for the year ended December 31, 2008
g) Asset and liability data For 2008, the Group has adopted a combination of approaches for obtaining the asset and liability data and for performing the EV calculations.
q) Change in legislation or solvency regime The impacts of changes in legislation or solvency regimes are included in economic variance for the analysis of movement.
None of the life companies included in the EV is considered to be in a “start-up” situation and so no allowance has been made for future development expenses.
New business margin (as % of APE) 90.4% 90.8% 10.2% 13.1% New business margin (as % of PVNBP) 9.6% 10.2% 1.2% 1.5%
Zurich Financial Services is the holding company of the Group with a listing on the SIX Swiss Exchange. Zurich Financial Services was incorporated on April 26, 2000, with a share capital of CHF 100,000. As of December 31, 2008, the shareholders’ equity totaled CHF 16,783,191,240 and as of December 31, 2007 CHF 17,352,291,968.
On February 13, 2008 the Board of Zurich Financial Services authorized a share buy-back program for the repurchase of up to CHF 2.2 billion worth of shares over the course of 2008. As of December 31, 2008 3,750,500 fully paid shares, with a nominal value of CHF 0.10 were bought back at an average price of CHF 293 per share, at a total cost of CHF 1.1 billion.
Notes to the fi nancial statements 1. Basis of Presentation Zurich Financial Services presents its fi nancial statements in accordance with Swiss law.
17 In addition to the remuneration set out in the table, the company paid contributions for Ms. Gilmore into a group health insurance plan in the UK until her retirement in April 2007 at a cost of USD 631 (CHF 765).
in CHF million1, 2All GEC members (incl. the highest paid) as of December 31 in CHF million1, 2All GEC members (incl. the highest paid) as of December 31 6847_p272-289.indd 2816847_p272-289.indd 281 27/2/09 22:41:1427/2/09 22:41:14
Base compensation 1.6 1.8 Cash incentive awards earned for the year 2.4 3.4 Service Costs for pension benefi ts 3 0.9 1.1 Value of other remuneration 4 0.5 0.4 Value of target performance share and restricted share grants 5 2.3 2.7 Value of target performance option grants 5 2.3 2.7 Total in CHF 10.0 12.1 Total in USD as shown in the Remuneration report 9.55 10.30 1 The fi gures have been translated from US dollars into Swiss francs using the relevant exchange rates throughout the year. 2 The remuneration shown in the table does not include any business related expenses incurred in the performance of the CEO’s services. 3 The amounts refl ect the total value of pension benefi ts, calculated on the basis of the Service Costs for the company as assessed under IAS 19 accounting principles. Service
All interests are benefi cial, include sales-restricted shares allocated to the members as part of their fees and shares held by related parties of the Directors.
J.J. Schiro, Chief Executive Offi cer 3 85,726 230,415 64,790 173,516 J. Amore, Chief Executive Offi cer General Insurance 19,606 76,096 17,220 73,880 A. Court, Chief Executive Offi cer Europe General Insurance 4 3,062 5,696 – – M. Foley, Chief Executive Offi cer North America Commercial 5 4,107 3,857 n.a. n.a. M. Greco, Chief Executive Offi cer Global Life 6 492 – – – P. Hopkins, Chief Executive Offi cer Farmers Group, Inc 6,678 21,184 4,765 26,290 A. Lehmann, Chief Risk Offi cer 13,066 49,871 10,813 39,421 P. O’Sullivan, Vice Chairman and Chief Growth Offi cer 15,848 54,315 19,739 49,031 G. Riddell, Chief Executive Offi cer Global Corporate 12,410 44,846 8,752 28,446 M. Senn, Chief Investment Offi cer 6,780 16,019 2,553 3,719 P. van de Geijn, Chief Executive Offi cer Global Life 10,952 44,034 6,993 24,889 D. Wemmer, Chief Financial Offi cer 9,267 36,630 5,565 19,549 1 None of the GEC members together with parties related to them held more than 0.5% of the voting rights as at December 31, 2008 or 2007, either directly or through share options.
As of December 31, 2008 Zurich Financial Services is not aware of any person, other than Credit Suisse Group, who, directly or indirectly, had an interest as benefi cial owner in shares, option rights and/or conversion rights relating to shares of Zurich Financial Services representing 3% or more of its issued shares. Credit Suisse Group, Paradeplatz 8, P.O. Box, 8070 Zurich, along with its subsidiaries, reported as per June 11, 2008, a purchase position of 3.32% and a sales position of 2.66% of registered Zurich Financial Services shares.