Our objectives include becoming one of the top five global insurers and providing a consistent mid-term ROE of 16 percent. We also aim to strengthen our market leadership positions, expand capital-light and fee income businesses, and position Zurich as the employer of choice. To achieve these objectives, we will focus on operational transformation and profitable growth, coupled with the talent management and capital discipline that have proved the cornerstones of our success in recent years.
The Risk Committee of the Board assesses whether management is addressing risk and control issues in a timely and appropriate manner. The Risk Committee of the Board receives regular reports regarding the Group’s risk profile and mitigation actions.
In the Life Insurance business, we have established formal local product development committees and a Group-level product approval committee for potential new products that could significantly increase or change our risks. Such review allows us to take planned risks as we develop our business. We regularly review the continued suitability and the potential risks of existing products.
Georisks (earthquake) Climate-induced (includes one or more of windstorm, river flood, tornado/hail)
Our multi-year initiative to strengthen the consistency, documentation and assessment of our internal controls continued for significant controls and locations. Although primarily focused on important controls for financial reporting, this initiative also applies to related operational controls. For more details, please see the Internal Control Statement in the Corporate Governance Report.
In early 2007, Zurich established a Global Microinsurance team marshalling Zurich’s insurance expertise and global reach to more rapidly develop microinsurance and microinsurance skills.
For information on changes of share capital during 2005, see the Annual Report 2006 of Zurich Financial Services, Financial Report, pages 32 to 33, and page 151.
CREST Depository Interests, or CDIs. CREST is the system for the paperless settlement of trades in securities and the holding of uncertificated securities in the United Kingdom.
Tom de Swaan Dutch 61 Member of the Risk Committee 2006 2008
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 first for human resources. From 1990 to 1995 he was chief executive officer of Daimler-Benz Interservices (debis) in Berlin and subsequently became chief financial officer 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
performance relating to the senior management’s short-term and long-term incentive plans. To assist in the review of the compensation structures and practices, the Remuneration Committee has retained its own independent advisor, Hewitt Associates. The Remuneration Committee met six times (once together with the Governance and Nominations Committee) in 2007, with an average attendance of 97%. Details of the Group’s remuneration principles are given in the Remuneration Report on pages 54 to 56.
In January 2008 a further panel of leading academics and experts has been established, the Climate Change Advisory Council, which advises management on issues associated with climate change.
Paul van de Geijn Dutch 61 Chief Executive Officer Global Life
Annette Court graduated from Oxford with an honors degree in engineering science. She joined IBM UK Ltd. in 1983, working in various positions in systems engineering and client management in the banking and insurance sectors. In 1994, she joined Direct Line Group as central planning manager, and three years later became managing director of motor insurance. She was appointed managing director of Direct Line Insurance in 2000 and chief executive officer of Direct Line Group the following year, responsible for all retail, partnerships and international businesses. In 2003, Annette Court became chief executive officer of Royal Bank of Scotland Insurance following the acquisition and successful integration of Churchill Group with Direct Line. She joined Zurich on January 15, 2007 and assumed the function of CEO of Europe General Insurance and member of the GEC as of March 1, 2007. She is a member of the board of the Association of British Insurers.
Members of the GEC are also part of the Group Management Board (GMB), which includes the heads of certain business units and Group functions. The GMB primarily focuses on communication, capability building and development of the Group, represents the businesses and functions and serves to foster horizontal collaboration throughout the Group.
With a view to ensure an orderly process, shortly before the shareholders’ meeting the Board determines the record date at which a shareholder needs to be registered in the share register in order to exercise his or her participation rights by attending the shareholders’ meeting. Such record date is published, together with the invitation to the shareholders’ meeting, in the Swiss Official Gazette of Commerce and in several newspapers.
Total fees (including expenses and value added taxes) in the year 2007 for additional services (e.g., tax services or special audits required by local law or regulatory bodies) performed by the Group auditors and parties associated with them for Zurich Financial Services or one of the Group’s companies amounted to USD 3.7 million (USD 3.5 million in 2006).
The Audit Committee regularly meets with the external auditors, at least four times a year. During 2007, the Audit Committee met with the external auditors six times. The external auditors regularly have private sessions with the Audit Committee, without Management present. Based on written reports, the Audit Committee discusses with the external auditors the quality of the Group’s financial and accounting function and any recommendations that the external auditors may have. Topics considered during such discussions include strengthening of internal financial controls, applicable accounting principles and management reporting systems. In connection with the audit, the Audit Committee obtains from the external auditors a timely report relating to the audited financial statements of Zurich Financial Services and the Group.
As of December 31, 2007, all of the Directors of Zurich Financial Services are non-executives, independent of management. The remuneration for Directors and for members of the Group Executive Committee (Executives), as well as their shareholdings, is therefore disclosed separately.
Members of the GEC received other remuneration in 2007 in relation to employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under each member’s employment contract. The total value of the other remuneration elements in 2007 was USD 3.6 million. Benefits-in-kind have been valued using market rates.
The number of share awards that vested to members of the GEC in 2007 from the performance share grants made in 2004, 2005 and 2006 was 44,774. This represented a basic vesting level of 150% of target given the actual ROE and TSR performance achievements. One-half of the shares that vest under the plan are sales-restricted for three years from the date of vesting.
APE by product in USD millions, for the years ended December 31
1 This measure is calculated as the gross operating profit of Farmers Management Services divided by the gross earned premiums of the Farmers Exchanges. For additional information on the calculation, refer to the explanatory notes in the Financial Supplement.
Common stock portfolios backing participating with-profit policyholder contracts 1,274 1,604 – –
Debt related to capital markets and banking activities 20 1,663 1,889
Change in cash and cash equivalents excluding change in cash received as collateral for securities lending 1 (4,241) 391
2 The number of common shares issued as of December 31, 2007 was 145,546,820 (December 31, 2006: 144,749,399, December 31, 2005: 144,006,955). 3 On February 14, 2007, the Board of Zurich Financial Services authorized a share buy-back of up to CHF 1.25 billion (approximately USD 1 billion) over the course of 2007. A proposal to cancel all repurchased shares will be submitted to shareholders at the Annual General Meeting on April 3, 2008. The share buy-back scheme was completed on July 3, 2007, when 3,432,500 fully paid shares, with nominal value CHF 0.10, had been bought back at an average price of CHF 364.00 per share.
Certain reclassifications have been made to prior year amounts and segment disclosures to conform to the current year presentation. These reclassifications have no effect on the previously reported net income.
• Corporate Functions includes Group holding and financing companies, Corporate Center operations and certain alternative investments.
Standards published and effective as of January 1, 2007 and relevant for the Group’s operations The following standards, amendments and interpretations to published standards are relevant to the Group’s operations: In August 2005, the IASB issued IFRS 7 “Financial Instruments: Disclosures” which became effective for annual reporting periods beginning on or after January 1, 2007, and the complementary Amendment to IAS 1 “Presentation of Financial Statements – Capital Disclosures”. In December 2005, the IASB released amendments to IFRS 4 “Insurance Contracts” to align risk disclosure requirements with IFRS 7. The impact of the adoption of IFRS 7 and the changes to IAS 1 and IFRS 4 has been to expand the disclosures provided in these financial statements regarding the Group’s financial instruments and management of capital. The Group has adopted IFRS 7, the amendents to IAS 1 and IFRS 4 as of January 1, 2007 with no effect on its financial results or financial position.
Investment expenses consist of operating expenses for real estate held for investment and other investment expenses, including investment management fees. These expenses are recognized on the accrual basis.
Financial assets designated at fair value through profit or loss at inception are mainly financial assets backing unit-linked insurance and unit-linked investment contracts. Reserves relating to unit-linked insurance contracts and liabilities for unit-linked investment contracts are carried at fair value, which is determined by reference to these assets with changes in the fair value of both the asset and liability recognized in income. The designation of these assets at fair value through profit or loss eliminates or significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or from recognizing the resultant gains and losses on them on a different basis to the liability. The fair value designation, once made, is irrevocable.
Cash flow hedges In a cash flow hedge relationship the effective portion of gain or loss on the re-measurement of the cash flow hedging instrument is recognized directly in shareholders’ equity. The ineffective portion is recognized in current period income. The accumulated gains and losses on the hedged instrument in shareholders’ equity are transferred to income in the same period in which gains or losses on the item hedged are recognized in income.
i) Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to settle the asset and settle the liability simultaneously.
When fair value hedge accounting is applied to borrowings, the carrying values of borrowings are adjusted for changes in fair values related to the hedged exposure rather than carried at amortized cost.
Movements shown in development tables throughout the consolidated financial statements are translated at end-of-period exchange rates.
Investment result, net unit-linked products 3,000 2,384 4,142 9,203 7,142 11,587 1 Including net capital losses on derivative financial instruments of USD 114 million and USD 21 million for the years ended December 31, 2007 and 2006, respectively.
The following table provides an analysis of total investments classified as held-to-maturity debt securities.
Investments in USD millions, for the years ended December 31 in associates
Gains/(losses) in USD millions, as of December 31 arising from fair value hedges
Net change in reserves 12. Deferred policy acquisition costs and deferred origination costs
1 Allowance for impairments includes USD 239 million and USD 204 million as of December 31, 2007, and 2006, respectively, for receivables arising from ceded reinsurance.
Impairment charges of USD 1 million and USD 2 million on mortgage loans given as collateral were recorded in the income statement for the years ended December 31, 2007 and 2006, respectively.
Net carrying value as of January 1, 2006 355 868 94 170 242 1,729
Intangible assets in USD millions, as of December 31, 2007 by segment – current period
Intangible assets in USD millions, as of December 31, 2006 by segment – prior period
Financial Report 2007 a) Debt related to capital markets and banking activities Debt related to capital markets and banking activities decreased from USD 1,889 million as of December 31, 2006 to USD 1,663 million as of December 31, 2007, which is attributable to the maturity of a number of loans.
Fair value of plan assets as of January 1 11,071 8,597 10 13
Expected long-term rate of return on assets 4.1% 5.4% 7.3% 4.0% 6.2% 8.0%
Interest rate 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’s exposures to interest rate risk include, but are not limited to, interest rate risk from debt securities, reserves for insurance contracts, liabilities for investment contracts, and borrowings. 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-for-trading 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.
General Insurance reserves are generally not discounted, or not discounted with market rates; therefore, interest rate risks on these reserves are not considered to be significant, and thus not disclosed.
Maturity schedule in USD millions, as of of liabilities for investment contracts
Additions and in USD millions, for the years ended December 31 capital improvements of property/equipment and intangible assets by geographical segment
As auditors of the Group, we have audited the consolidated financial statements (income statement, statement of total recognized income and expenses, balance sheet, statement of cash flows, statement of changes in equity and notes on pages 91 to 200) of Zurich Financial Services for the year ended December 31, 2007.
Zurich Assurance Ltd Swindon, England Life Insurance 100 100 GBP 236.1
The EV methodology adopted by the Group is based on a “bottom-up” market consistent approach to allow explicitly for market risk. In particular: • asset and liability cash flows are valued using risk discount rates consistent with those applied to similar cash flows in the capital markets; and
The process for preparing the EV information as of December 31, 2007 as well as the new business value and the analysis of movement have been subject to limited external review by PricewaterhouseCoopers AG. Their Statement of External Review is set out in section 6.
Financial Report 2007 2. Summary of Embedded Value results a) Basis of current and future presentation and comparability To align EV reporting with the IFRS accounts, from 2007 relevant results have been translated to the Group presentation currency, US dollar, using average exchange rates for the period. Valuations are translated at endof -period exchange rates. A similar approach was applied to the comparative results for the period ended
• In Switzerland, the frictional costs reduced by USD 32m due to the reclassification described in section 2g.
• In the UK, the increase was due to increased equity implied volatilities, which increased the time value of options and guarantees for unit-linked business. For with profits business, management has in place an investment matching strategy which includes the use of derivative hedging and which mitigates the time value of options and guarantees in both 2007 and 2006.
• In Germany, the significant reduction reflects the increase in the risk free yield curve and the reduction of interest rate implied volatilities over the period. The average interest guarantee in respect of the conventional business is similar to the 2006 level while the ten year risk free rate increased from 4.2% in 2006 to 4.7% for 2007. The time value of options and guarantees is mainly related to guaranteed minimum interest rates as well as guaranteed surrender values and annuity options.
• In Switzerland, the reduction follows from improved investment conditions due to the higher yield curve and lower implied volatilities. The reduction is also due to a refinement in the modeling of unrealized capital gains.
• In Germany, there was an increase in new business value, driven by the change in economic conditions and the reduction of investment guarantees offered on new business. The new business written in 2007 has reduced the time value of options and guarantees for the business written in prior years and this produces the positive time value for new business. Improved efficiencies of the administration service companies and the reduction in the corporate tax rate from 2008 onwards increased the new business margin further.
• In the UK, operating profit includes an increase of USD 176 million due to de-risking the business through the reinsurance of a major portion of the closed book of annuity business in advance of an intended Part VII transfer of the business. This transaction enabled increased dividends to be paid. The contribution from new business value, improved measurement of death guarantees on a significant block of investment contracts, favorable mortality experience and the revision of mortality assumptions in line with the improved experience, increased operating profit. These improvements were partly offset by USD 112 million due to expenses incurred in the development of a new administration system. A revision of the persistency, expense and annuitant longevity assumptions decreased operating profit. The economic variance reflects the increase in the risk free yield curve and equity implied volatilities as well as the under-performance of the equity and property markets over the year. This was partly offset by a reduction in the corporate tax rate from 2008 onwards.
The shareholders’ net assets are based on local statutory and regulatory accounting. Adjustments are made to the EV where appropriate, for example in respect of any unrealized gains attributable to shareholders. Any such adjustments are made consistently with the calculation of the value of business in-force.
n) Debt Where a loan exists between a company in Global Life and a Group company not within Global Life, the loan is valued for EV purposes consistently with the value shown in the Group’s IFRS financial statements.
The maintenance expense assumptions allow for the expected cost of providing future service benefits in respect of the Group staff pension schemes. An adjustment to the EV is noted in section 2.b for pension scheme liabilities under IAS 19 and no allowance is made in the expense assumptions for any contributions as a result of past service benefits.
We have reviewed the methodology and assumptions used for preparing the Embedded Value Information and the process of compilation of the Embedded Value Information.
Also, no benefits (or waiver of claims) have been provided to related parties to Directors or related parties to former members of the Board during the year 2007. Neither had any related party to Directors or to former members of the Board outstanding loans, advances or credits as of December 31, 2007.
5 Includes employee benefits, expatriate allowances, perquisites, benefits-in-kind and any other payments due under the employment contract. Benefits-in-kind have been valued using market rates.
No benefits (or waiver of claims) have been provided to former members of the GEC during the year 2007. Former members of the GEC are eligible to continue their mortgage loans following retirement on similar terms as when they were employed, in line with the terms available to employees in Switzerland as stated above. In this respect, one former member, Mr. Eckert, held an outstanding mortgage loan of CHF 3,000,000 (USD 2,500,000) as at December 31, 2007, with a reduced interest rate of 2.25% applying on the first CHF 1,500,000 (USD 1,250,000). Apart from this, no former members of the GEC had any outstanding loans, advances or credits as of December 31, 2007.
2 These figures are based on the issued and outstanding share capital as of December 31, 2007. They may change following a resolution of the Board of Directors dated February 14, 2007, according to which the remaining contingent capital shares for employees may be issued (as described in note 8). Treasury shares and shares held for cancellation by Zurich Financial Services are not entitled to dividends.
Business Operating Profit (BOP) Zurich’s internal metric for assessing performance. It reflects adjustments for taxes, net capital gains/losses (excluding Capital Markets & Banking), policyholders’ share of investment results for the life business, and significant items attributable to special circumstances.