We are pleased to present our full-year results for 2010. The Group performed well and our financial strength, underlying operating performance, and the ongoing success of our business strategy gives us the confidence to propose a dividend of CHF 17.00 per share, an increase of 6 percent. As the dividend payment will be paid from the capital contribution reserve, it will be exempt from Swiss withholding tax.
Turning to the Group’s results by segment, Global Life and Farmers contributed to the Group’s profitability through steady top-line growth coupled with strong profit margins. General Insurance’s targeted pricing strategy contributed to underlying performance and it achieved selected top-line growth in those areas where we can do so profitably.
Customer Centricity Our customers are at the heart of all we do. This means we understand our personal, commercial and corporate customers’ needs, and are entirely focused on meeting those needs.
Results that reflect our underlying ability to thrive, even in challenging market conditions.
What brings them together is that profitability ultimately relies on executing on core insurance skills. And in this, General Insurance bears the Zurich hallmark – a focus on excellence by putting insurance skills first. Our skills create a critical edge over our rivals.
Global Life Our success at Global Life has been founded on a core strategy of globalization. We have focused our efforts to better understand and respond to the needs of our customers and distributors. By setting up global hubs and shared centers of expertise, we are able to operate more effectively and efficiently, delivering better propositions to the market quicker.
Zurich Financial Services Ltd is committed to effective corporate governance for the benefit of its shareholders, customers, employees and other stakeholders based on the principles of fairness, transparency and accountability. Structures, rules and processes are designed to provide for proper organization and conduct of business within the Zurich Financial Services Group (the ‘Group’ or ‘Zurich’) and to define the powers and responsibilities of its corporate bodies and employees.
During 2009, 550,448 shares were issued to employees out of contingent share capital. As a result, on December 31, 2009, the share capital amounted to CHF 14,747,306.80 (147,473,068 shares) and both the authorized capital and the contingent share capital (as specified in Article 5bis(1) and in Article 5ter(1a) of the Articles of Incorporation, respectively) amounted to CHF 1,000,000.00 (10,000,000 shares) and the other contingent share capital (as specified in Article 5ter(2a) of the Articles of Incorporation) amounted to CHF 264,383.10 (2,643,831 shares).
Professor in Finance at the London School of Economics. In July 2008, he was appointed Honorary Professor at the Johann Wolfgang Goethe University Frankfurt. Furthermore, he is an Honorary Fellow of the London Business School and holds an Honorary Doctorate from the Democritus University of Thrace in Greece.
Thomas Konrad Escher, born 1949, graduated in electrical engineering and in business administration from the Swiss Federal Institute of Technology (ETH) and joined IBM in 1974. In subsequent years, his career led him through various managerial line functions with responsibilities for markets and client relationships overseas, in different European countries and in Switzerland. In 1996, Mr. Escher joined Swiss Bank Corporation and was – as a member of the executive board – CEO for the major market region in Switzerland and for the information technology organization. Since the merger of Swiss Bank Corporation and Union Bank of Switzerland to form UBS AG in 1998, he headed the IT business area of the wealth management and business banking division through mid-2005 as a member of the group managing board. As of July 1, 2005, Mr. Escher assumed the function of vice chairman in the Business Group Global Wealth Management & Swiss Banking of UBS AG. In addition, Mr. Escher is a member of the board of the Greater Zurich Area Foundation. This organization engages in the active marketing of the City of Zurich and its relevant environment as domicile to foreign business.
Information and control instruments vis-à-vis the Group Executive Committee and Group Management Board The Board supervises Management and monitors its performance through reporting and controlling processes. Regular reporting by the CEO and other executives to the Board comprises appropriate information and updates, including key data for the core businesses, financial information, existing and upcoming risks and updates on developments in important markets and with regard to major competitors as well as other significant events. The Chairman of the Board regularly meets with the CEO. He
In addition, to enhance its understanding and assessment of the challenges and risks Zurich may face, the Group continues to seek external expertise and perspective. As of the end of 2010, the Group had four panels of leading academics, business and industry experts to provide feedback and insight. They are not corporate bodies of the Group and have no decision-making powers. They provide expertise and advice to senior management or certain functions of the Group. In particular, the International Advisory Council is mandated to provide an external perspective and expertise to the CEO and to members of the GEC and GMB on the Group’s growth and public policy strategies. The Investment Management Advisory Council offers feedback on Zurich’s investment results and strategy and on achieving superior risk-adjusted returns relative to the liabilities for the Group’s invested assets. The Natural Catastrophe Advisory Council provides insight into the patterns of occurrence, predictability and destructiveness of catastrophes, and feedback about Zurich’s approach to such catastrophes in order to help improve the effectiveness of its underwriting and reinsurance purchasing. The Group’s Climate Change Advisory Council provides insight and advice on issues associated with climate change.
Inga Beale British 1963 Global Chief Underwriting Officer Peter Goerke Swiss 1962 Group Head of Human Resources Markus Hongler Swiss 1957 Chief Executive Officer Zurich Insurance plc. & Chief Executive Officer Western Europe Richard Kearns American 1950 Chief Administrative Officer (until August 31, 2010) Markus Nordlin Finnish / American 1963 Chief Information Technology Officer Yannick Hausmann Swiss 1967 Group General Counsel Mario Vitale American 1955 Chief Executive Officer Global Corporate Robert Woudstra American 1945 Chief Executive Officer Farmers Group, Inc.
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 2010, the investors’ days held in Zurich on June 22 and December 2, focused on a Group strategy and capital management update as well as updates from the businesses. Further investor days are planned for 2011 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 Web site, www.zurich.com ( investors/introduction.htm).
The Group’s share-based compensation programs include regulations regarding the impact of a change of control. These regulations provide that in the case of a change of control, the Plan Administrator (the Remuneration Committee or the CEO, as applicable) has the right to have the existing share obligations rolled over into new share rights or to provide consideration for such obligations that are not rolled over. Participants who lose their employment as a result of a change of control have the right to the vesting of share obligations. No other benefits are provided to the members of the Group’s senior management in case of a change of control.
• Long-term incentive grants will be made solely in the form of performance shares and there will be no further grants of performance options in 2011. This recognizes market trends and the Board of Directors is of the opinion that performance shares better align the ultimate rewards to individuals with actual performance achievements. Further, the elimination of the option grants reduces the risk and leverage in the current remuneration architecture and also reduces the number of shares required to support the program. In connection with this change, there are no amendments to the performance based option grants made in the period up to and including 2010 which will continue to earn out in accordance with the terms and conditions of those grants.
In the meetings of the Remuneration Committee and the Board of Directors where decisions are made on the remuneration of the Chairman, the Chairman is not present. In making decisions on the remuneration of the CEO, the CEO is not present. Where decisions are made on the remuneration of other members of the GEC, those members are also not present at the meetings. The Remuneration Committee does not include members with interlinked company mandates. See page 34 in the Corporate governance report for further details of its responsibilities.
Zurich’s three year relative TSR, based on 28 companies making up primarily the Dow Jones Global Insurance Sector Titan Index
As in previous years, the target grants for 2010 were made on the third working day in April, i.e. on April 5, 2010 with 50% of the overall grant value being allocated to performance shares and 50% to performance options. The target number of performance shares and performance options was calculated by dividing the monetary value of the grant by the share price and the option price on the day prior to the grant respectively. Effective in 2011, all long-term incentive grants will be made solely in the form of performance shares.
The following table specifies the total remuneration paid to the highest paid GEC member: 5 Includes employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under employment contracts including a total amount of USD 2.1 million of respective termination payments accrued during the year 2010 for the one member who gave up the function during the year. Benefits-in-kind have been valued using market rates.
Summary of total outstanding share commitments for Group Executive Committee members under the Group’s Long-Term Incentive Plans
M. Senn, Chief Executive Officer 15,806 49,220 11,662 31,729 J.J. Schiro, former Chief Executive Officer 3 n.a. n.a. 97,426 286,165
5 Ms Court left the function on June 30, 2010. 6 Mr Hogan took on the function on July 1, 2010. 7 Mr Orator took on the function on September 1, 2010. 8 Ms Reyes took on the function on April 1, 2010. 9 Mr Terryn took on the function on July 1, 2010.
Cash incentive awards earned for the year 20101 527 Value of target performance and restricted share grants2, 3 92 Value of target performance option grants3 28 Total Variable Remuneration Pool 647 1 Includes sign-on and severance payments in cash.
Global Life business operating profit 1,474 1,477 – Global Life new business annual premium equivalent (APE) 3,699 3,667 1% Global Life new business margin, after tax (as % of APE) 22.1% 21.3% 0.8 pts Global Life new business value, after tax 817 782 4%
Insured event-related losses were more frequent compared with the relatively benign experience in 2009. The total incurred losses from such events, including earthquakes, weather-related events as well as large losses from our commercial insurance business, exceeded the 2009 amount by over USD 600 million. In the non-core banking business, the Group included the banking loan loss provision increase of USD 330 million booked in the second quarter of 2010. The continuing low interest rate environment has also impacted the Group’s business performance as lower investment yields from reinvested and new funds reduced investment income for the Group’s businesses. Consequently, the Group has put even more focus on its pricing and margin strategy to compensate for these lower investment returns.
Improved equity markets and the high quality of the Group’s bond portfolio have benefited the overall result. As reported in the nine months results, the Group has also recognized a total cost, including attorneys’ fees, of USD 545 million for the settlement of a class action lawsuit in the U.S.
• Farmers Management Services management fees and other related revenue increased by USD 88 million to USD 2.8 billion, or by 3 percent, supported by an underlying increase of 2 percent in gross earned premiums by the Farmers Exchanges, which are managed but not owned by Farmers Group, Inc., a wholly owned subsidiary of the Group. 21st Century generated an increase of USD 130 million in fees and revenue in the first full year after its acquisition. The 37 percent decrease to USD 4.2 billion in gross written premiums of Farmers Re reflects the changes in the All Lines quota share reinsurance treaty and consequent portfolio transfers.
Gross written premiums and policy fees 3,011 2,695 12% Net underwriting result (102) 64 nm Business operating profit 48 169 (72%) Loss ratio 68.3% 61.5% (6.8 pts) Expense ratio 36.3% 35.3% (1.0 pts) Combined ratio 104.6% 96.9% (7.8 pts)
Gross written premiums and policy fees increased by USD 315 million to USD 3.0 billion or by 12 percent in U.S. dollar terms and 11 percent on a local currency basis. Excluding the impact of transfers to Global Life, premiums in Latin America grew by 16 percent on a local currency basis driven by growth in Brazil and Argentina. Asia-Pacific premiums increased by 11 percent on a local currency basis reflecting growth in most major lines in Australia, mainly driven by rate increases, growth in the wholesale business in Japan, and continued growth in emerging Asian markets, although from a small base. Overall, the International Markets businesses achieved average rate increases of 3 percent on business written during the year. These rate increases were achieved mainly in Australia, where the focus has been on margins, as well as in certain Latin American countries.
Insurance deposits increased by USD 1.8 billion to USD 15.4 billion or by 13 percent in U.S. dollar terms and 17 percent on a local currency basis, primarily driven by growth in the UK, Ireland and Germany.
Gross written premiums and policy fees 4,194 6,615 (37%) Net underwriting result 134 58 nm Business operating profit 321 228 41% Loss ratio 66.5% 68.2% 1.7 pts Expense ratio 31.1% 30.8% (0.3 pts) Combined ratio 97.6% 99.0% 1.4 pts
One year later 85.7% 72.0% 66.1% 64.2% 68.1% 66.2% 71.7% 74.1% 72.0% Two years later 85.8% 72.3% 65.4% 63.5% 66.6% 64.8% 70.6% 72.4% Three years later 87.4% 74.5% 65.5% 63.7% 65.0% 63.3% 69.4% Four years later 88.5% 74.7% 65.7% 62.9% 63.8% 62.6% Five years later 90.2% 73.4% 65.0% 62.2% 63.2% Six years later 90.2% 74.3% 64.6% 62.1% Seven years later 90.3% 74.1% 64.4% Eight years later 90.6% 74.1% Nine years later 90.9%
Net reserves as of January 1 180,145 154,700 17,655 18,994 197,800 173,694
Cash and cash equivalents as of January 1 2 16,882 15,186 Cash and cash equivalents as of December 31 2 15,721 16,882 1 Excluding cash received as collateral for securities lending. 2 Including cash received as collateral for securities lending.
Risk management Mission and objectives of risk management 96 Risk management framework 96 External perspectives 97 Risk governance and risk management organization 98
The Risk review is an integral part of the Consolidated financial statements (except for the ‘Economic Capital Adequacy’ section presented on pages 130-131).
• Support the Group’s decision-making processes by providing consistent, reliable and timely risk information
An important element of the Group’s risk management framework is a well-balanced and effectively managed remuneration program. This includes a Group-wide remuneration philosophy, robust short- and long-term incentive plans, strong governance and links to the business planning, performance management and risk policies of the Group. Based on the Group’s Remuneration Rules, the Board establishes the structure and design of the remuneration arrangements so that they do not encourage inappropriate risk taking. For more information on Zurich’s remuneration system, see the Remuneration Report (unaudited).
New regulatory regimes, such as the Swiss Solvency Test and Solvency II in the European Union, emphasize a riskbased and economic approach, based on comprehensive quantitative and qualitative assessments and reports.
The Group is also involved in a number of international industry organizations engaged in advancing the regulatory dialogue pertaining to insurance and financial services. In 2010, Zurich senior executives contributed to the drafting of key papers issued by the CRO Forum (an organization composed of the chief risk officers of major insurance companies and financial conglomerates that focuses on developing and promoting industry best practices in risk management). In 2010, Zurich’s Chief Risk Officer served as vice-chair of the CRO Forum, and in 2011 serves as chair. In addition, Zurich’s Chief Financial Officer continues to serve as chair of the CFO Forum (an organization composed of the chief financial officers of major European insurance companies and financial conglomerates particularly active in contributing to the development of new accounting and regulatory standards, as well as establishing the principles for Embedded Value reporting). Zurich is also a contributing partner to the annual report on global risks, a collaborative effort under the auspices of the World Economic Forum (WEF) and produced in conjunction with the WEF Global Risk Network.
• Market – risk associated with the Group’s balance sheet positions where the value or cash flow depends on financial markets
• Credit – risk associated with a loss or potential loss from counterparties failing to fulfill their financial obligations
In addition to the specific risks insured, each line of business could expose the Group to losses that could arise from natural and man-made catastrophes. The main concentrations of risks arising from such potential catastrophes are regularly reported to senior management. The most important peril regions and risks are European windstorm, California earthquake, U.S. and Caribbean windstorm and UK river flood, as well as potential terrorism exposures.
Risks from man-made catastrophes Man-made catastrophes include such risks as industrial accidents and all types of terrorism attacks. Zurich’s experience in monitoring potential exposures from natural catastrophes is also applicable to threats posed by manmade catastrophes, particularly terrorism. Due to the high degree of uncertainty about what events might actually occur, the Group’s accumulation monitoring and analyses contain a number of assumptions about the potential characteristics of such threats.
For areas other than North America, the Group’s analysis has shown that its exposures generally are significantly lower, due in large part to government-provided pools. The Group periodically monitors accumulation limits for those areas, and continues to refine its analytics.
From a risk-management perspective, unit-linked products have been designed in order to reduce much of the market and credit risk associated with traditional business for the Group. Those risks inherent in these products are largely passed on to the policyholder, although a portion of the Group’s management fees are linked to the value of funds under management and hence are at risk if the fund values decrease. Unit-linked products carry mortality risk and market risk to the extent that there are guarantees in the product design. Contracts may have minimum guaranteed death benefits where the sum at
Other life insurance liabilities include traditional life insurance products, which include protection products and life annuity products. Protection products carry mortality, longevity and morbidity risk as well as market and credit risk. The most significant factors that could increase the frequency of mortality claims are epidemics, such as strains of influenza, or lifestyle changes such as eating, drinking and exercise habits, resulting in earlier or more claims than expected. Morbidity claims experience would not only be affected by the factors mentioned above, but because disability is defined in terms of the ability to perform an occupation, it could also be affected by economic conditions. In order to reduce cross-subsidies in the pricing basis, premiums are differentiated for example by product, age, gender and smoker status. The policy terms and conditions and the disclosure requirements contained in insurance applications are designed to mitigate the risk arising from non-standard and unpredictable risks that may result in severe financial loss.
Interest rate and credit spread risk Interest rate risk is the risk of loss resulting from changes in interest rates, including changes in the shape of yield curves. The Group is exposed to interest rate risk including from debt securities, reserves for insurance contracts, liabilities for investment contracts, employee benefit plans and loans and receivables. Changes in interest rates affect the Group’s held-to-maturity floating rate debt securities and unhedged floating rate borrowings through fluctuations in interest income and interest expense. Changes in interest rates affect the Group’s held-fortrading debt securities and fair value hedged borrowings through periodic recognition of changes in their fair values through the income statement. Changes in interest rates affect the Group’s available-for-sale debt securities through periodic recognition of changes in their fair values through shareholders’ equity. The Group also manages the credit spread risk, which describes the sensitivity of the values of assets and liabilities due to changes in the level or the volatility of credit spreads over the risk-free interest rate yield curves.
• The sensitivities are reasonably possible as of the balance sheet date, but do not indicate a probability of such events occurring in the future. They do not necessarily represent the Group’s view of expected
100 basis points decrease in the interest rate yield curves Group investments 1,045 622 293 241 140 2,340
Chemicals & Pharmaceuticals Government & Supranationals & similar Financial Institutions & similar 17.5%23.0%
Credit risk related to other loans The credit risk arising from other loans is assessed and monitored together with the fixed income securities portfolio. 72.3 percent of the reported loans are to government or supranational institutions, of which 99.5 percent are to the German Central Government or the
Table 16.a in USD millionsDevelopment of allowance for impairments – current period
Obligations. The Swiss Code of Obligations provides that dividends may only be paid out of freely distributable reserves or retained earnings and that 5 percent of annual retained earnings must be allocated to a general legal reserve until such reserve in the aggregate has reached 20 percent of the paid-in share capital; therefore the earnings allocated to those reserves are restricted. As of December 31, 2010, the amount of the general legal reserve exceeded 20 percent of the paid-in share capital of the Group. Similarly, company laws in many countries in which the Group’s subsidiaries operate may restrict the amount of dividends payable by those subsidiaries to their parent companies.
At the Group level, Zurich compares RBC to the Group’s Available Financial Resources (AFR) to derive an Economic Solvency Ratio. AFR reflects financial resources available to cover policyholder liability claims in excess of their expected value. It is derived by adjusting the IFRS shareholders’ equity to reflect the full economic capital base available to absorb any unexpected volatility in the Group’s business activities.
Reinsurers’ share of reserves for insurance contracts 8 18,809 18,751 18,778 Deposits made under assumed reinsurance contracts 2,832 3,861 2,397 Deferred policy acquisition costs 12 16,326 16,181 14,323
1 Includes land and buildings formerly classified as held for own use.
Change of ownership with no loss of control – – – – – – 4 4 – 4 – 4 Total comprehensive income for the period, net of tax – – 2,081 65 (729) 28 3,261 4,705 11 4,717 (13) 4,704
1 The number of common shares issued as of December 31, 2010 was 146,586,896 (December 31, 2009: 147,473,068, December 31, 2008: 142,122,620). 2 The number of treasury shares deducted from equity as of December 31, 2010 amounted to 1,399,080 (December 31, 2009: 3,269,338, December 31, 2008: 5,219,803).
Zurich Financial Services Ltd, a Swiss corporation, is the holding company of the Group and is listed on the SIX Swiss Exchange. Zurich Financial Services Ltd was incorporated on April 26, 2000, in Zurich, Switzerland. It is recorded in the Commercial Register of the canton of Zurich under its registered address at Mythenquai 2, 8002 Zurich. Due to a change in the Swiss Code of Obligations Zurich Financial Services was renamed to Zurich Financial Services Ltd effective April 2, 2009. Throughout this document Zurich Financial Services Ltd is used consistently even if reference is made to facts that occurred prior to the renaming of the company.
Policyholders’ contract deposits represent the estimated policy benefits for investment type insurance contracts invested in non unit-linked funds. This liability comprises the accumulation of premium received less charges plus declared dividends.
The liability held for unit-linked contracts with capital units is measured at the funded value of those units. At the date of issue, the difference between the funded and unfunded value of units is treated as deferred revenue.
Other intangible assets with definite lives are carried at cost less accumulated amortization and impairments. They are amortized using the straight-line method over their useful lives and reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/associate at the acquisition date. Goodwill on the acquisition of subsidiaries is included in the balance sheet as a separate line. Goodwill on acquisition of associates is included in the value of equity method accounted investments and is tested for impairment as part of the overall measurement of the carrying amount of those investments.
p) Employee benefits Share-based compensation and cash incentive plans Under the Group’s equity-settled share-based compensation plan, the fair value of the employee services received in exchange for the grant of shares and/or options is recognized as an expense in income over the vesting period, with a corresponding amount recorded in additional paid-in capital.
• Estimates are also made as to future investment income arising from the assets backing long-term insurance contracts. These estimates are based on current market returns as well as expectations about future economic and financial developments.
For held-to-maturity investments and loans and receivables, the recoverable amount is determined by reference to the present value of the estimated future cash flows. The carrying amount of mortgage loans and receivables is reduced through an impairment allowance determined using an analytical method based on knowledge of each loan group or receivable. The method is normally based on historical statistics, adjusted for known or anticipated trends in the group of financial assets or individual accounts. As judgement is inherent in such impairment reviews, actual outcomes could vary significantly from the forecast future cash flows.
e) Fair values of assets and liabilities attributable to business combinations Acquired businesses are accounted for using the purchase method of accounting which requires that the assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. Fair values of financial assets and liabilities and insurance liabilities are determined as described in the respective sections above.
Book value of net assets prior to acquisition 147 9 156 Fair value of net tangible assets acquired 11 9 20 Identifiable intangible assets, net of deferred tax 91 19 110
Consolidated financial statements continued 8. Reserves for insurance contracts and reinsurers’ share of reserves for insurance contracts
Policyholders’ contract deposits and other funds 17,430 18,857 (2,246) (2,457) 15,184 16,400 Reserves for unit-linked contracts 61,786 58,204 – – 61,786 58,204 Total reserves for insurance contracts 1 242,646 242,094 (18,942) (18,839) 223,704 223,255 1 The total reserves for insurance contracts ceded are gross of allowance for uncollectible amounts of USD 132 million and USD 88 million as of December 31, 2010 and December 31, 2009, respectively.
Cumulative paid as of December 31: One year later (7,976) (8,923) (9,930) (9,464) (11,423) (11,237) (12,551) (13,047) (12,716) Two years later (12,855) (14,472) (15,550) (16,273) (18,044) (18,362) (19,660) (19,909) Three years later (16,698) (18,001) (20,407) (21,234) (23,077) (23,421) (24,428) Four years later (19,255) (21,390) (23,941) (24,945) (26,850) (26,839) Five years later (21,634) (23,814) (26,616) (27,798) (29,425) Six years later (23,471) (25,799) (28,668) (29,810) Seven years later (24,849) (27,442) (30,245) Eight years later (26,166) (28,672) Nine years later (27,105)
Table 8.3 in USD millions, as of December 31Development of insurance losses, net
The Group has considered asbestos, environmental and latent injury claims and claims expenses in establishing the reserves for losses and loss adjustment expenses. The Group continues to be advised of claims asserting injuries from toxic waste, hazardous materials and other environmental pollutants, alleged damages to cover the clean-up costs of hazardous waste dump sites relating to policies written in prior years and indemnity claims asserting injuries from asbestos. Coverage and claim settlement issues, such as determination that coverage exists and the definition of an occurrence, together with increased medical diagnostic capabilities and awareness have often caused actual loss development to exhibit more variation than in other lines. Such claims require specialized reserving techniques and the uncertainty of the ultimate cost of these types of claims has tended to be greater than the uncertainty relating to standard lines of business.
Foreign currency translation effects (1,922) 3,091 – – (1,922) 3,091 1 The 2010 net movement includes USD (12) million related to the transfer from other reserves categories (see note 1) and USD (160) million related to loss of control in Caixa Sabadell (see note 5).
Other Operating Businesses 5 – – – 268 – 273 Non-Core Businesses – – – – 2 – 2 Net carrying value as of December 31, 2010 2,104 906 2,281 1,025 1,623 119 8,059
Net carrying value as of December 31, 2009 2,297 1,137 3,174 1,025 1,569 139 9,342
Gross deferred tax Deferred acquisition and origination costs 26 (618) 31 (516) Depreciable and amortizable assets 33 (38) 22 (31) Life policyholders’ benefits and deposits 1 34 (13) 17 (7) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 321 (358) 316 (365) Accruals & deferred income 207 (4) 197 – Reserves for losses and loss adjustment expenses 511 (2) 489 – Reserves for unearned premiums 720 – 704 – Pensions and other employee benefits 381 – 376 –
Debt related to capital markets Debt related to capital markets increased by USD 375 million from USD 25 million as of December 31, 2009 to USD 400 illion as of December 31, 2010 due to an increase in commercial paper issuance.
Deposits previously presented under debt related to banking activities (USD 814 million as of December 31, 2009) are now presented under “other liabilities” (see note 1).
Redeemable in whole every five years at par plus any accrued interest.
5.75% EUR 500 bond, due October 2023 5.75% payable annually up to October 2, 2013 and then reset quarterly to 3-month EURIBOR plus 2.67%.
Expected long-term rate of return on assets 3.4% 6.2% 6.4% 4.5% 4.1% 6.6% 7.0% 5.1%
Consolidated financial statements options granted, depends on the performance of the Group during the previous calendar year. For 2010 and future grants the Group is 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 defined percentage of annual salary in the year of allocation. There were a total of 168 and 175 participants in this plan as of December 31, 2010 and 2009, respectively.
All Lines Quota Share reinsurance agreement Effective December 31, 2002, certain of the Farmers Exchanges began participating in a 10.0 percent All Lines Quota Share reinsurance agreement (All Lines agreement) with Farmers Re Co and ZIC which has been amended over the years. The All Lines agreement provided for a cession of a quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers Exchanges after the APD agreement has been applied.
Non-Core Businesses include insurance businesses that the Group does not consider core to its operations and that are therefore mostly managed to achieve a beneficial run-off. In addition, Non-Core Businesses also include the Group’s banking activities.
Policyholder dividends and participation in profits, net 3 15 10,302 12,018 – – – – 496 826 (1) – 10,801 12,859 Income tax expense/(benefit) attributable to policyholders – – 462 387 – – – – – – – – 462 387 Underwriting and policy acquisition costs, net 5,396 5,493 1,503 1,145 1,733 1,760 6 12 8 10 (10) (18) 8,636 8,403 Administrative and other operating expense (excl. depreciation / amortization) 3,134 3,184 1,883 1,827 1,900 1,311 980 962 188 136 (1,195) (1,215) 6,890 6,206 Interest credited to policyholders and other interest 39 32 428 444 1 – 3 1 62 90 (3) (4) 529 563 Restructuring provisions and other items not included in BOP (306) (170) (179) (119) (602) (34) 12 81 21 1,165 – – (1,055) 922 Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 28,061 29,177 24,539 26,296 6,739 6,941 1,072 1,143 1,544 2,123 (1,209) (1,237) 60,746 64,444 Business operating profit (before interest, depreciation and amortization) 3,398 3,927 1,922 1,965 1,860 1,731 322 510 (46) (160) (874) (921) 6,581 7,052 Depreciation and impairments of property and equipment 83 80 32 34 65 86 20 35 4 11 – – 205 245 Amortization and impairments of intangible assets 398 177 303 346 109 82 64 38 8 3 – – 882 647
Debt related to capital markets – – – – – – 623 553 1,624 1,769 (1,847) (2,298) 400 25
Gross written premiums and policy fees 4,194 6,615 Net earned premiums and policy fees 5,574 5,722 Insurance benefits and losses, net (3,708) (3,904) Total net technical expenses (1,733) (1,760) Net underwriting result 134 58 Net non-technical result (excl. items not relevant for BOP) 84 71 Net investment result income 104 100 Business operating profit before non-controlling interests 321 228 Business operating profit 321 228 Farmers business operating profit 1,686 1,554
On January 25, 2011 the general assemblies of Türk Ekonomi Bankası A.Ş. (TEB) and Fortis Bank A.Ş. (Fortis), two banks based in Turkey, approved the merger of Fortis into TEB by dissolution without liquidation. In addition to the Group’s existing bancassurance partnership with TEB since 2008 and in anticipation of this merger the Group entered into a distribution agreement with Fortis on December 21, 2010. The consideration for this agreement comprises an initial payment of USD 26 million plus an earn-out component.
Closing embedded value 1 ZIS is Zurich International Solutions, the international business based in the Isle of Man.
Present value of new business premiums (PVNBP) 2 6,942 7,677 6,256 10,523 31,399 5,912 6,363 6,449 10,791 29,515
For ZIS, sales were down over the year, although they improved in the final three months of the year. A focus on expense control and improved claims experience in corporate protection business has allowed the new business margin to increase throughout the period.
d) Value of business in force The value of business in force is the present value of future projected profits, distributable after tax to shareholders from the covered business. It is defined as the certainty equivalent value of business in force less frictional costs, the time value of financial options and guarantees, and the cost of residual non-hedgeable risk. These components are explained below.
Embedded value report f) Asset and liability data The majority of the Group’s embedded value, has been calculated using a “hard close” approach. This means that all asset and liability data reflect the actual position as of the valuation date.
h) Economic Scenario Generator All operations use actual yield curves observable as of December 31, 2010 for the calculation of the certainty equivalent value of business in force.
Embedded value is shown net of non-controlling interests. Where the Group has a controlling interest in a subsidiary company, the new business value and the premium information are shown gross of non-controlling interests. The noncontrolled share of new business value is eliminated through “Non-controlling interests”.
Liquidity premiums The CFO Forum engaged Barrie & Hibbert who estimated a liquidity premium proxy to be equal to 50 percent times the (Credit spread over swaps less 40 basis points) where Credit spreads over swaps is equal to Credit spread on a representative corporate bond index less the swap rate for each particular currency.
The liquidity premium is not applied to the Time Value of Options and Guarantees, this would represent an area of non-compliance with the MCEV principles. All sensitivities in the report relate to the base yield curve with no liquidity premium.
Holding company 14. Information on the risk assessment process Refer to the disclosures in the Risk review on pages 95 to 131 of this Annual Report.
Costs value the amount of the pension benefits accruing during the year and for defined contribution plans takes the amount of the company contribution paid during the year. Service Costs do not include the interest cost on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
The Board of Directors proposes to the Annual General Meeting on March 31, 2011 to transfer CHF 2,492 million from the capital contribution reserve to the free reserve to be subsequently paid out as a dividend.
• Norges Bank, Bankplassen 2, P.O. Box 1179, Sentrum, 0107 Oslo, Norway, reported as per 20 December 2010, a purchase position of 3.02% of registered Zurich Financial Services Ltd shares.
Annual Review 2010 The Annual Review contains information about Zurich’s businesses, its strategy and its performance over 2010. It is available in German, French and English.