New business profit margin (as % of APE) 14.5% 11.4% 3.1 pts
in USD millions, for the years ended December 31 2005 2004
Balance as of December 31, 2005 186 – 10,315 1 Implementation of new and revised accounting standards as discussed in note 3. 2 As approved by the Annual General Meeting on April 19, 2005, the share capital was reduced by a nominal value reduction of CHF 4.00 from CHF 6.50 to CHF 2.50 in respect of each registered share. The payment to shareholders was made on July 4, 2005.
Classification Insurance contracts are those contracts that transfer significant insurance risk. These contracts may also contain financial risk. Significant insurance risk is defined as the possibility of paying significantly more in a scenario where the insured event occurs than in a scenario where the insured event does not occur. Scenarios considered include those which are deemed to be possible.
The Group charges its customers for asset management and other related services using the following different approaches: • Front-end fees are charged to the client at inception. This approach is used particularly for single premium contracts. The consideration received is deferred as a liability and recognized over the life of the contract on a straight-line basis.
Loans originated by the Group, such as mortgage loans, policyholders’ collateral and other loans, include loans where money is provided directly to the borrower, other than those that are originated with the intent to be sold in the short term, which are recorded in the trading category.
Impairments Financial assets are assessed for impairment on a regular basis. A financial asset is impaired if its carrying value exceeds the estimated recoverable amount and there is objective evidence of impairment to the financial asset.
f) Derivative financial instruments Derivative financial instruments are carried at fair value on the balance sheet as assets or liabilities. Fair values are obtained from quoted market prices, dealer price quotations, discounted cash flow models and option pricing models, which incorporate current market and contractual prices for the underlying instrument, time to expiry, yield curves and volatility of the underlying instrument. Inputs used in pricing models are generally market observable or can be derived from market observable data. Derivative financial instruments with positive fair values are recorded as derivative trading assets and those with negative fair values are recorded as derivative trading liabilities. Apart from derivative financial instruments designated as qualifying cash flow hedging instruments (see below), changes in fair value are recognized in current period income.
IAS 27 “Consolidated and Separate Financial Statements” was revised in March 2004. The adoption of the revised guidance with respect to the consolidation requirements of venture capital organizations, mutual funds and similar entities resulted in an equivalent gross up of the Group’s assets and liabilities to reflect the liabilities to third parties and minority interests. Also, IAS 27 revised requires the disclosure of minority interests within equity separately from shareholders’ equity.
Investments held on account and at risk of life insurance policyholders 24,189 (24,189) – –
Total liabilities and equity 346,083 (1,626) 6,430 350,887 1 As published in the Annual Report 2004.
General insurance risk General insurance risk includes the reasonable possibility of significant loss due to uncertainty of the frequency of insured events occurring and the uncertainty of the amount of the resulting claims.
Life insurance risk Life insurance risk includes the reasonable possibility of significant loss due to uncertainty of rates of deaths among policyholders, rates of disability among policyholders, investment returns, and surrenders or lapses.
Direct written ended December 31, 2005 premiums by line of business and by region
Investments held by 1 Impairments on total investments amounted to USD 64 million and USD 175 million for the years ended December 31, 2005 and 2004, respectively. 2 Including net capital gains/(losses) on derivative financial instruments of USD 85 million and USD nil million for the years ended December 31, 2005 and 2004, respectively.
Less amount of net unrealized (gains)/losses on investments attributable to: Life policyholder dividends and other policyholder liabilities (2,131) (2,261)
Equity securities (including trading equity portfolios in capital markets and banking activities) 90,314 86,088 90,314 86,088
Insurance benefits, in USD millions, for the years ended December 31 losses and expenses
Deferred charges relating to retrospective reinsurance assumed totaled USD 129 million and USD 182 million as of December 31, 2005 and 2004, respectively, have been deducted from reserves for losses and loss adjustment expenses.
Gross reserves for losses and loss adjustment expenses 37,695 45,306 51,068 57,765 60,425
Unit-linked investment contracts issued by the Group are recorded at a value reflecting the returns of investment funds which include selected equities, debt securities and derivatives. Policyholders bear the full risk of the returns on these investments.
FGI is contractually permitted to receive a management fee of up to 20% (25% in the case of the Fire Insurance Exchange) of the gross premiums earned by the Farmers Exchanges, which the Group manages but does not own. In order to enable the Farmers Exchanges to maintain appropriate capital and surplus while offering competitive insurance rates, FGI has historically charged a lower management fee than the maximum allowed. The range of fees has varied by line of business over time and from year to year. During the past five years, aggregate management fees have averaged between 12% and 13% of gross premiums earned by the Farmers Exchanges. The gross earned premiums of the Farmers Exchanges were USD 14,380 million and USD 14,020 million for the years ended December 31, 2005 and 2004, respectively.
Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to its business and geographical segment. The table below shows goodwill and other intangible assets by business segment.
Present value of profits of acquired insurance Other intangible Attorney-in-fact contracts 1 assets 2 relationships Total
Capital market instruments and option rights to shareholders The share capital of Zurich Financial Services may be increased by an amount not exceeding CHF 13,704,570 by the issuance of up to 5,481,828 fully paid registered shares with a nominal value of CHF 2.50 each (1) through the exercise of conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services or one of its Group companies in national or international capital markets; and/or (2) by the exercise of option rights which are granted to the shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
d) Preferred securities In February 2001, the Group placed six series of Trust Capital Securities (Zurich RegCaPS) for the total amount of USD 1,125 million (USD 1,096 million net of issuance costs) with a limited number of qualified institutional and corporate US investors. The securities, which were issued under Rule 144A in the United States, are perpetual, non-cumulative and have a par value of USD 1,000 each. They have no voting rights, except for certain specified circumstances and are linked to Farmers Group, Inc. Class C shares. The Group has the option to call the securities after five, seven or ten years, depending on the series. Two series have a fixed rate coupon (6.01% and 6.58%) and four have a floating rate coupon (between Libor +46 bps and +71 bps). These coupon rates step up after the first call dates.
Earnings per share Net income attributable to common shareholders (in USD Number of Per share Per share millions) shares (USD) (CHF)1
Other defined post-employment benefits Certain of the Group’s operating companies provide a post-employment benefit program for medical care and life insurance. Eligibility in the various plans is generally based on completion of a specified period of eligible service and reaching a specified age. The programs pay a stated percentage of medical expenses reduced by deductibles and other coverage. The cost of post-employment benefits is accrued during the employees’ service period. The method of accounting and the frequency of valuations are similar to those for defined benefit pension plans.
Components of in USD millions, for the years ended December 31 net pension expenses
Outstanding loans and guarantees granted to members of the Group Executive Committee amounted to USD 4 and USD 3 million for the years ended December 31, 2005 and 2004, respectively. No outstanding loans or guarantees were granted to directors of Zurich Financial Services and Zurich Insurance Company for either of the years ended December 31, 2005 or 2004. The term ‘‘directors’’ and ‘‘members of the Group Executive Committee’’ in this context includes the individual as well as members of their respective households.
Zurich, Companhia de Seguros, S.A. Lisbon General Insurance 100.00 100.00 EUR 10.0
Zurich Holdings (UK) Limited Fareham, England Corporate Functions 100.00 100.00 GBP 87.1
Closing embedded value after currency translation effects, of which: 2,020 2,402
4. Taxes The tax expense consists mainly of income and capital taxes.
Manfred Gentz 1 These figures are based on the current issued and outstanding share capital. They may change due to a resolution of the Board of Directors dated February 15, 2006 according to which, out of contingent share capital, up to 1,000,000 shares are allocated for issuance to share based incentive plans.