Gross written premium since acquisition 1 378 118 496 253 Gross written premium for 12 months 1 2,326 677 3,003 1,532 Net income after taxes since acquisition 1 n / a n / a 73 37 Net income after taxes for 12 months 1 n / a n / a 372 190 Purchase price paid prior to purchase price adjustments and earn-out amounts 2 n / a n / a n / a 1,156 Estimated total tangible net assets as of acquisition date 3 n / a n / a 1,400 714 Estimated total intangible assets as of acquisition date 4 n / a n / a 1,375 701 1 Based on local GAAP information, as IFRS information is not yet available. The information is deemed to be a reasonable approximation but excludes the amortization of identified intangible assets and PVFP which have yet to be determined in accordance with IFRS requirements.
2 Net of acquired debt of USD 510 million at 100 percent. 3 Based on a preliminary assessment, excluding debt of USD 510 million. Final numbers are subject to change. 4 Prior to accounting for the earn-out component of USD 1.6 billion on a gross undiscounted basis.
A provisional fair value of the acquired identifiable intangible assets, primarily the value of the distribution agreements and the present value of future profits, is not yet available. The value of the distribution agreement will be reported on a 100 percent basis and is estimated to represent a significant portion of the purchase price paid.
Acquisition related costs of USD 24 million are included in other administrative expenses for the year ended December 31, 2011, and have been excluded from BOP.
Significant intercompany transactions between the newly acquired companies and the Group between the date of acquisition and December 31, 2011 were: • The newly acquired holding company granted a short term loan of USD 86 million to the Group; • The Group granted a long term loan of USD 246 million to one of the newly acquired entities.
On July 12, 2011, as part of its preparations for local regulatory changes, the Group completed the acquisition of 75.0 percent of 2Plan Group Limited, an independent financial advice firm based in the UK. The total purchase price for the acquisition amounted to zero. The remaining 25.0 percent shareholding continues to be held by members of the founder management team who have options to sell their shareholding to the Group at a price contingent upon the achievement of future profit targets by 2Plan Group Limited. Based on the preliminary initial purchase accounting the tangible net assets acquired amounted to negative USD 5 million and identifiable intangible assets, net of deferred tax, amounted to USD 1 million consisting of software and capitalized recruitment director fees. Goodwill amounted to USD 4 million and reflects the future value from the Group’s improved independent financial advisor proposition and technology offering in the UK.
Consolidated financial statements continued transaction the Group accelerated the expansion of its operations in the Middle East. Following a preliminary purchase price adjustment the total purchase price reduced to USD 33 million. Based on immaterial net assets acquired the residual goodwill amounted to USD 33 million and represents expected growth opportunities in the region.
Divestments and loss of control On February 15, 2010, Royal Bafokeng Finance (Pty) Limited (RBF), an investment company based in South Africa and wholly owned by Royal Bafokeng Holdings (Pty) Limited, based in South Africa and responsible for the management and development of the commercial assets of the Royal Bafokeng Nation, increased its shareholding in Zurich Insurance Company South Africa Limited (ZICSA), of which the Group owned 73.61 percent, by 15.1 percent from 10.0 percent to 25.1 percent for a consideration of USD 32 million in cash with option rights to increase its shareholding up to 51.0 percent or sell the entire stake back to the Group. To appropriately reflect the nature of the put and call options on the shares of ZICSA, the Group has reclassified the 25.1 percent non-controlling interest of RBF as a liability measured at fair value in the Consolidated financial statements. Following this transaction and the acquisition of 0.44 percent of ZICSA shares, the Group owned 58.95 percent of ZICSA shares as of December 31, 2010.
As of December 31, 2010 the Group no longer has control in Futuro de Bolivia S.A. Administradora de Fondos de Pensiones following changes in the regulatory environment. The Group derecognized the assets and liabilities at their carrying amount and recorded a net loss of USD 16 million within net gain/(loss) on divestments of businesses. During 2010, the Group also divested all of its shares in Trent Insurance Company Limited, a company based in the UK and Maryland Insurance Company, a company based in the U.S., for a pre-tax gain on disposal in aggregate of USD 2 million with immaterial cash and net assets sold.
Securities designated at fair value through profit or loss 20 258 537 369 557 628
Held-to-maturity securities 1 – – – 40 – 40 Total net capital gains/(losses) and impairments (5,193) 8,467 1,158 1,500 (4,035) 9,967 1 2010 gains arise entirely from the reversal of impairments.
Table 6.2 in USD millions, for the years ended December 31Net capital gains, losses and impairments on equity and debt securities on total investments
Cash and cash equivalents 10,048 3.4 9,726 3.2 Equity securities: Fair value through profit or loss 83,116 27.8 89,695 29.5 of which: Trading securities 438 0.1 473 0.2 Securities designated at fair value through profit or loss 82,678 27.7 89,223 29.4
Debt securities: Fair value through profit or loss 8,020 4.1 6,869 3.5 of which: Trading securities 50 0.0 43 0.0 Securities designated at fair value through profit or loss 7,971 4.1 6,826 3.5
The Group retains the rights to the risks and benefits of ownership of loaned securities and securities under short-term sale and repurchase agreements. These risks and benefits include changes in market values and income earned.
Mortgage and asset-backed securities: < 1 year – – 866 575 41 17
Other governments and supra-nationals 34,350 33,226 1,553 923 (1,303) (855) 34,600 33,294
Mortgage and asset-backed securities 19,713 23,617 939 865 (242) (398) 20,410 24,084 1 Net of impairments (see table 6.2).
Mortgage and asset- backed securities 857 7.6 1,017 9.4 214 265 1,072 1,282
Real estate held for investment consists of investments in commercial, residential and mixed-use properties primarily located in Switzerland, Germany and the UK.
Associates: DKN Financial Group Limited 1 – 33 1 2 – 30.51%
Joint ventures: MCIS Zurich Insurance Berhad 41 36 4 3 40.00% 40.00%
Less: amount of net unrealized gains/(losses) on investments attributable to: Life policyholder dividends and other policyholder liabilities (1,349) (662) Life deferred acquisition costs (97) (154) Deferred income taxes (834) (869) Non-controlling interests 3 (9)
1 Net unrealized gains/(losses) include net gains arising on cash flow hedges of USD 232 million and USD 56 million as of December 31, 2011 and 2010, respectively. In 2011 the Group applied the cash flow hedge methodology to hedge the foreign currency risk exposure and deferred the attributable basis spreads in shareholders’ equity, whereas the fair value hedge methodology was used to hedge the interest rate exposure with changes in the fair value being recorded through the income statement.
Caps – – – – – – 206 – – Exchange traded Futures 997 – – 997 – – 1,203 – –
Credit contracts: OTC Credit Default Swaps 130 30 – 160 – (1) 432 2 –
Total Group derivative financial instruments 20,667 5,769 9,763 36,200 1,290 (616) 36,414 1,009 (958) Total unit-linked derivative financial instruments 662 1,158 66 1,886 65 (37) 2,353 104 (3)
In terms of notional amounts, the major change compared with December 31, 2010 related to additional long receiver swaptions entered to protect one of the Group’s large life insurance books against falling interest rates and interest rate swaps related to a closed book of variable annuities products within the U.S. life business.
Equity contracts Equity contracts are entered into mostly on a portfolio level to protect equity investments against a decline in equity market prices and to manage the risk return profile of equity exposures. Most equity contracts are purchased put options. The decrease in the notional amount of call options between December 31, 2011 and December 31, 2010 was mainly driven by the sale of a book of guaranteed equity bonds (structured deposit accounts) to an external counterparty. Total return swaps and exchange traded options relate to the dynamic hedging strategy that has been put in place to reduce the volatility associated with a closed book of variable annuities products within its U.S. life business.
Foreign exchange contracts Foreign exchange contracts consist mainly of forward contracts which are used to hedge the Group’s foreign currency exposures and to manage balance sheet mismatches.
In 2011 the Group decided to hedge the purchase price of a large acquisition. As of December 31, 2011 there were still USD 789 million in notional term of foreign exchange options outstanding.
Other contracts Other contracts predominantly include stable value options (SVOs), which include written equity put options. SVOs have been provided by the Group to certain bank and corporate customers (policyholders) in the U.S., in respect of the investment returns which arise on investments underlying Bank Owned Life Insurance (BOLI) and Company Owned Life Insurance (COLI) policies. Premiums received from policyholders under these policies are invested in separate account portfolios. Throughout the life of the policies, policyholders are entitled, in addition to mortality cover, to tax-exempt investment returns linked to the performance of the underlying investments. The policies are long duration contracts providing charges and benefits over a policy life that can be greater than 45 years. SVOs reduce the volatility of the policyholders’ investment returns. In the event that a policy is surrendered, the policyholder would be entitled to recover the excess of the notional SVO derived value as well as the market value of the underlying investments. Certain policy features as well as certain regulations provide disincentives for surrender. The Group monitors the risk of surrender on an ongoing basis and considers the likelihood of surrender as an input factor to the model to determine the fair value of the SVOs. During 2011, there were two full surrenders compared with five surrenders in 2010. In 2011 the net gain on surrender amounted to USD 1 million. The fair value of the derivative liability recognized in respect of the SVOs, included in written put options, was USD 52 million and USD 25 million as of December 31, 2011 and 2010, respectively. The notional SVO derived value was USD 523 million and USD 831 million as of December 31, 2011 and 2010, respectively, representing the total loss before surrender charges in the unlikely event that all policies would have been surrendered on those dates.
Fair value hedges: Cross currency interest rate swaps – 1,518 – 1,518 269 – 1,540 258 –
A fair value hedge relationship on the EUR 500 million 4.5 percent subordinated bond due June 2025 issued by Zurich Finance (USA), Inc. (see note 21), was entered into at the issuance of the debt instrument in 2005 and will end on June 15, 2015.
The Group also has fair value hedge relationships consisting of currency swaps to protect certain non euro-denominated fixed income securities from foreign currency fluctuation.
The Group also uses currency swaps for cash flow hedging to protect against exposures to variability of cash flows. The change in the fair value of the hedging instrument is recognized directly in other comprehensive income. The ineffective portion of the change in fair value is recognized directly in income within administrative and other operating expense. The effective portion, related to spot rate changes in the fair value of the hedging instrument, is reclassified to income within administrative and other operating expense as an offset to foreign currency revaluation on the underlying hedged debt.
The portion recognized in income was a loss of USD 53 million and USD 134 million before tax for the years ended December 31, 2011 and 2010, respectively, as an offset to the foreign currency revaluation on the underlying hedged debt.
Policyholders’ contract deposits and other funds 18,251 17,430 (2,181) (2,246) 16,070 15,184 Reserves for unit-linked contracts 59,154 61,786 – – 59,154 61,786 Total reserves for insurance contracts 1 240,811 242,719 (19,486) (18,949) 221,325 223,770 1 The total reserves for insurance contracts ceded are gross of allowance for uncollected amounts of USD 125 million and USD 132 million as of December 31, 2011 and December 31, 2010, respectively.
Losses and loss adjustment expenses incurred: Current year 28,497 28,929 (4,755) (3,930) 23,742 24,999
Losses and loss adjustment expenses paid: Current year (10,777) (11,573) 959 1,049 (9,817) (10,524)
1 The 2011 net movement mainly included reserves for losses and loss adjustments expenses acquired with MAA and Compagnie Libanaise d’Assurances SAL of USD 170 million, partly offset by USD (21) million due to the reclassification to held for sale of the Group’s operations in Bolivia (see note 5).
Table 8.2 shows the development of reserves for losses and loss adjustment expenses during the year. The decrease of USD 890 million in total net reserves includes USD 1,302 million of favorable reserve development emerging from reserves established in prior years. Gross of reinsurance, the favorable development was USD 1,650 million. This favorable development was primarily attributable to the General Insurance business and breaks down into many individual movements by market-facing business, country, line of business, and accident year.
Cumulative (deficiency)/ redundancy of net reserves (8,819) (6,223) (2,254) 1,184 3,438 3,533 3,048 2,565 1,302 Cumulative (deficiency)/ redundancy as a percentage of initial net reserves (29.0%) (16.8%) (5.2%) 2.6% 6.8% 6.5% 5.8% 4.6% 2.3%
Table 8.3 presents changes in the historical non-life reserves, net of reinsurance, that the Group established in 2002 and subsequent years. Reserves are presented by financial year, not by accident year. The reserves (and the development thereon) are for all accident years in that financial year. The top line of the table shows the estimated gross reserves for unpaid losses and loss adjustment expenses as of each balance sheet date, which represents the estimated amount of future payments for losses incurred in that year and in prior years. The cumulative paid portion of the table presents the cumulative amounts paid through each subsequent year in respect of the reserves established at each year end. Similarly, the cumulative incurred losses section details the sum of the cumulative paid amounts shown in the triangle above and the changes in loss reserves since the end of each financial year. The net reserves re-estimated portion of the table shows the re-estimation of the initially recorded reserve as of each succeeding year end. Reserve development is shown in each column. Changes to estimates are made as more information becomes known about the actual losses for which the initial reserves were established. The cumulative deficiency or redundancy is equal to the initial net reserves less the liability re-estimated as of December 31, 2011. It is the difference between the initial net reserve estimate and the last entry of the diagonal. Conditions and trends that have affected the development of reserves for losses and loss adjustment expenses in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results cannot be derived from the information presented in table 8.3.
Losses and loss adjustment expenses incurred 42 79 35 34 Losses and loss adjustment expenses paid (159) (125) (138) (90) Foreign currency translation effects (8) (8) (94) (79)
Losses and loss adjustment expenses incurred 31 20 61 20 Losses and loss adjustment expenses paid (41) (38) (51) (38) Foreign currency translation effects 1 – 1 –
Reserves for asbestos claims decreased by USD 125 million gross and USD 53 million net, and by USD 196 million gross and USD 135 million net during the years ended December 31, 2011 and 2010, respectively. In both years the decrease was mainly driven by the re-estimation of the ultimate liability for asbestos as well as the normal payout of claims. During 2011, this was partially offset by the increase in UK gross and net reserves following a court ruling in Scotland and Northern Ireland related to the impact of pleural plaques losses. In addition, the 2010 decrease included the impact of the strengthening of the U.S. dollar, as a significant portion of the Group’s reserves is held in British pounds.
Table 8.6 in USD millions, for the year ended December 31Effect of changes in assumptions for future life policyholders’ benefits
Universal life and other contracts 11,577 11,164 Policyholder dividends 5,355 4,973
Consolidated financial statements 9. Liabilities for investment contracts with and without discretionary participation features (DPF)
Liabilities related to unit-linked investment contracts 44,220 44,941 Liabilities related to investment contracts (amortized cost) 834 592 Liabilities related to investment contracts with DPF 5,607 5,134
Unit-linked investment contracts issued by the Group are recorded at a value reflecting the returns on investment funds which include selected equities, debt securities and derivatives. Policyholders bear the full risk of the returns on these investments.
As of January 1 2,168 1,837 Net unrealized (losses)/gains on investments (676) (39) Current period profit 5 194 Foreign currency translation effects (9) 176 As of December 31 1,488 2,168
Losses and loss adjustment expenses 26,847 27,098 (4,408) (3,478) 22,439 23,620 Life insurance death and other benefits 11,366 11,004 (462) (456) 10,904 10,548 Change in future life policyholders’ benefits (107) 488 (182) (172) (289) 316 Total insurance benefits and losses 38,106 38,591 (5,052) (4,106) 33,054 34,484
Amortization charged/ (credited) to other comprehensive income – – (21) (74) – – (21) (74)
As of January 1 866 856 Origination costs deferred 101 142
Foreign currency translation effects (9) (13) As of December 31 824 866
As of December 31, 2011 and 2010, deferred policy acquisition costs and deferred origination costs related to non-controlling interests were USD 347 million and USD 355 million, respectively.
FGI has historically charged a lower management fee than the amount allowed by contract. The range of fees has varied by line of business over time and from year to year. The gross earned premiums of the Farmers Exchanges were USD 18,149 million and USD 18,311 million for the years ended December 31, 2011 and 2010, respectively.
As part of the Deutscher Herold transaction in 2002, the Group acquired various mortgage loans. Deutscher Herold had previously sold these loans to credit institutions while retaining the related credit and interest risk. Therefore the loans have not been derecognized from the balance sheet and the transaction is reflected as a collateralized borrowing. Accordingly, the loans are recorded as mortgage loans given as collateral and the liability to credit institutions as collateralized loans.
Gross carrying value as of January 1, 2011 352 1,201 471 582 828 3,435
Net carrying value as of January 1, 2010 364 828 111 267 371 1,942
Gross carrying value as of December 31, 2010 352 1,201 471 582 828 3,435
Net carrying value as of December 31, 2011 2,060 879 2,149 1,025 1,616 104 7,834
Gross carrying value as of December 31, 2011 2,186 2,519 2,579 1,025 4,210 190 12,709 1 The reduction in Goodwill is mainly a result of a revised earn-out calculation within one of the Group’s Spanish General Insurance operations and the classifications as held for sale of the Group’s operation in Bolivia.
As of December 31, 2011, the intangible assets related to non-controlling interests were USD 127 million for the present value of future profits (PVFP) of acquired insurance contracts, USD 979 million for distribution agreements and USD 5 million for software. Caja de Ahorros y Monte de Piedad de Navarra (Caja Navarra), one of the distribution partners, merged all its assets and liabilities into Banca Civica in June 2011. The Group is continuing to review and assess, as details emerge, the effects of this merger and of related industry developments on the determination of its control over this investment and its distribution agreement amounting to USD 141 million gross of non-controlling interests.
Extensions of existing distribution agreements resulted in net additions of USD 28 million in the Life insurance operations in Italy, USD 14 million in the General insurance operations in Turkey and USD 5 million in the Life insurance operations in Spain. New distribution agreements to gain access to the mass consumer market in Brazil added a further USD 28 million.
The decision to decentralize its Direct insurance efforts in the Group’s General Insurance operations in Switzerland and Spain was the main driver of software impairments, as it resulted in USD 85 million charge for software which will no longer be used.
Net carrying value as of December 31, 2010 2,104 906 2,281 1,025 1,623 119 8,059
Undiscounted cash flow 3 1 Excluding liabilities for defined benefit plans. 2 Allocation to the time bands is based on the expected maturity date. 3 Allocation to the time bands is based on the earliest contractual maturity.
During the year ended December 31, 2011 the Group initiated several restructuring programs, recording a total charge to income of USD 176 million. A further USD 45 million was recorded in respect of restructuring programs initiated in prior years. The main restructuring program impacted several European countries within the General Insurance operations with estimated costs of USD 112 million. In addition, the Group recorded USD 85 million of software impairments as outlined in note 17.
During the year ended December 31, 2010, the Group entered into several restructuring programs, recording a total charge to income of USD 62 million. A further USD 49 million was recorded in respect of restructuring programs initiated in prior years. The largest restructuring program was initiated as part of the new strategy of the Group’s General Insurance business. The UK Direct operations are now integrated into the UK business to create operational synergies and the focus of the Direct insurance efforts are on Germany, Italy and Switzerland. The related restructuring costs amounted to USD 20 million. In addition, the Group recorded USD 114 million of software impairments as outlined in note 17.
Actual income tax expense attributable to shareholders 24.1% 1,206 20.3% 894 Plus: income tax expense/(benefit) attributable to policyholders (242) 462 Actual income tax expense 20.3% 965 27.9% 1,355
The table above sets out the factors that cause the actual income tax expense to differ from the expected expense computed by applying the Swiss statutory tax rate of 22.0 percent, which is the rate applicable in the jurisdiction where the ultimate parent company is resident.
Table 20.1 in USD millions, for the years ended December 31Income tax expense – current / deferred split
Current tax receivables 789 740 Current tax payables (779) (850) Net current tax receivables/(payables) 10 (110)
Net deferred tax liabilities attributable to policyholders (154) (473) Net deferred tax liabilities attributable to shareholders (1,819) (2,014) Net deferred tax liabilities (1,973) (2,487)
Reserves for losses and loss adjustment expenses 457 (4) 511 (2) Reserves for unearned premiums 729 (61) 720 – Pensions and other employee benefits 541 – 381 –
Tax loss carryforwards 617 – 505 – Gross deferred tax assets/(liabilities) before valuation allowance 3,851 (1,662) 3,468 (1,335) Valuation allowance (113) – (66) – Gross deferred tax assets/(liabilities) after valuation allowance 3,738 (1,662) 3,401 (1,335) Deferred tax assets 2,076 2,067
Deferred acquisition and origination costs 76 (2,592) 90 (2,784) Depreciable and amortizable assets 143 (1,877) 147 (2,023) Life policyholders’ benefits and deposits 1 955 (777) 808 (722) Unrealized (gains)/losses on available-for-sale investments and cash flow hedges 303 (1,075) 249 (1,019)
Tax loss carryforwards 203 – 173 – Gross deferred tax assets/(liabilities) before valuation allowance 3,892 (7,930) 3,619 (8,162) Valuation allowance (12) – (11) – Gross deferred tax assets/(liabilities) after valuation allowance 3,880 (7,930) 3,608 (8,162) Deferred tax liabilities (4,049) (4,554)
For which deferred tax assets have not been recognized, expiring 5 to 20 years 169 180 > 20 years or with no time limitation 598 436
Management assesses the recoverability of the deferred tax asset carrying values based on future years taxable income projections and believes that the carrying values of the deferred tax assets as of December 31, 2011, are recoverable.
Senior debt Zurich Capital Markets Various debt instruments payable within 1 year – 400 Zurich Finance (USA), Inc. 3.50% CHF 300 million notes, due November 2011 1, 6 – 322 4.50% EUR 1 billion notes, due September 2014 2, 6, 7 1,312 1,353 4.875% EUR 800 million notes, due April 2012 1, 6 1,037 1,069 6.50% EUR 600 million notes, due October 2015 3, 6 776 801 Euro Commercial Paper Notes 400 – Zurich Finance (Luxembourg) S.A. 3.25% USD 750 million notes, due September 2013 5, 6, 7 764 765 Zurich Insurance Company Ltd 3.875% CHF 1 billion notes, due July 2011 6 – 1,071 3.75% CHF 500 million notes, due September 2013 6 531 531 2.25% CHF 500 million notes, due July 2017 6 529 – 2.875% CHF 250 million notes, due July 2021 6 262 – 2.375% CHF 525 million notes, due November 2018 6 553 – Zurich Santander Insurance America S.L. 7.5% EUR 182 million loan, due December 2035 236 – Other Various debt instruments payable in more than 1 year 141 141 Senior debt 6,541 6,453 Subordinated debt Zurich Insurance Company Ltd 12.0% EUR 143 million perpetual capital notes 6 184 190 7.5% EUR 425 million notes, due July 2039 6 547 564 4.625% CHF 500 million perpetual notes 6 525 – Zurich Finance (UK) plc 6.625% GBP 450 million perpetual notes 4, 6 690 692 Zurich Finance (USA), Inc. 5.75% EUR 500 million notes, due October 2023 1, 6 641 661 4.5% EUR 500 million notes, due June 2025 5, 6, 7 688 696
ZFS Finance (USA) Trust V Series V 6.5% USD 1 billion Trust Preferred Securities, due May 2067 497 497
Senior and subordinated debt To facilitate the issuance of debt, the Group has in place a Euro Medium Term Note Programme (EMTN Programme) allowing for the issuance of senior and subordinated notes up to a maximum of USD 18 billion. All issuances under this programme are either issued or guaranteed by Zurich Insurance Company Ltd. The Group has also issued debt instruments outside this programme when deemed appropriate.
i) Senior debt Senior debt increased to USD 6,541 million as of December 31, 2011, from USD 6,453 million as of December 31, 2010. This was primarily due to three senior notes issued by Zurich Insurance Company Ltd under the EMTN Programme in July and November 2011 totaling CHF 1,275 million, and to the new issuance by Zurich Finance (USA), Inc. of USD 400 million commercial paper notes in October and December 2011 under the Group’s new Euro Commercial Paper Programme.
In addition, new long term debt of EUR 182 million was raised in November 2011 by a 51 percent owned subsidiary in connection with the Group entering into a 25-year strategic distribution arrangement in Latin America.
Description 12.00% EUR 143 million, perpetual capital notes 12.00% payable annually up to July 15, 2014 and then reset quarterly to 3-month EURIBOR plus 10.33%.
7.5% EUR 425 million notes, due July 2039 7.5% payable annually up to July 24, 2019 and then reset quarterly to 3-month EURIBOR plus 5.85%.
5.75% EUR 500 million notes, due October 2023 5.75% payable annually up to October 2, 2013 and then reset quarterly to 3-month EURIBOR plus 2.67%.
4.5% EUR 500 million notes, due June 2025 4.5% payable annually up to June 15, 2015 and then reset quarterly to 3-month EURIBOR plus 2.20%.
Series V 6.5% USD 1 billion Fixed / Floating Trust Preferred Securities, due May 2067 6.5% payable semi-annually until May 9, 2017 and then reset quarterly to 3-month LIBOR plus 2.285%.
Debt maturities reflect original contractual dates without taking early redemption options into account. For call/ redemption dates, see 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 flows include interest and principal cash flows on debt outstanding as of December 31, 2011 and 2010, respectively. All debt is assumed to mature within 20 years of the balance sheet date at the latest without refinancing. Floating interest rates are assumed to remain constant as of December 31, 2011 and 2010, respectively. The aggregated cash flows are translated into U.S. dollars at end-of-period rates.
Credit facilities On October 31, 2011 the Group early refinanced its revolving credit facility of USD 3 billion, which would have expired in September 2012, by a new syndicated revolving credit facility of EUR 2.5 billion maturing in 2018 at the latest. Zurich Insurance Company Ltd and Farmers Group, Inc. are guarantors of the facility and can draw up to EUR 2.3 billion and EUR 200 million, respectively. No borrowings were outstanding under this facility as of December 31, 2011 or as of December 31, 2010 under the former facility.
Table 21.3 in USD millions, as of December 31Maturity schedule – of outstanding debt
Table 21.4 in USD millions, for the years ended December 31Interest expense on debt
Issued share capital As of December 31, 2009 14,747,307 147,473,068 0.10 Share capital reduction as approved by the Annual General Meeting in 2010 (183,640) (1,836,404) 0.10 New shares issued from contingent capital in 2010 95,023 950,232 0.10
c) Contingent share capital Capital market instruments and option rights to shareholders The share capital of Zurich Financial Services Ltd may be increased by an amount not exceeding CHF 1,000,000 by the issuance of up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each (i) by exercising conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services Ltd or one of its Group companies in national or international capital markets; and/or (ii) by exercising option rights which are granted to current 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.
Consolidated financial statements continued at market conditions (including standard dilution protection provisions in accordance with market practice) and the new shares are issued at the then current convertible bond or warrant issue conditions.
The conversion rights are exercisable during a maximum period of ten years and option rights for a maximum period of seven years from the time of the respective issue. The conversion or option price or its calculation methodology shall be determined in accordance with market conditions whereby, for shares of Zurich Financial Services Ltd, the quoted share price is to be used as a basis.
Employee participation On January 1, 2011, and January 1, 2010, the contingent share capital, to be issued to employees of Zurich Financial Services Ltd and Group companies, amounted to CHF 470,836 and CHF 264,383 or 4,708,363 and 2,643,831 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each.
During 2011 and 2010, 798,926 shares and 950,232 shares, respectively, were issued to employees from contingent share capital under the program described above. Of the total 798,926 registered shares issued to employees during the year 2011, 607,254 shares were issued in the period from January 1, 2011 to March 31, 2011 and 191,672 registered shares were issued as from April 1, 2011 to December 31, 2011. As a result, on December 31, 2011 and 2010, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Financial Services Ltd and its subsidiaries, amounted to CHF 390,943.70 and CHF 470,836 or 3,909,437 and 4,708,363 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. Pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares or respective option rights to employees is subject to one or more regulations to be issued by the Board of Directors and takes into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to employees at a price lower than that quoted on the stock exchange.
1 The amount is gross of issuance costs of USD 14 million as of December 31, 2010 and 2009. 2 The amount shows the nominal amount of preferred securities bought back by group companies. The respective movement in the balance sheet deviates from this amount by USD 14 million, representing the gain on this transaction which was recognized within the same line item. 3 Total redeemed securities, including those bought back by group companies during 2010 amounted to USD 575 million.
The Group had 52,648 and 54,934 employees (full-time equivalents) as of December 31, 2011 and 2010, respectively. Personnel and other related costs incurred for the year ended December 31, 2011 and 2010, were USD 5,890 million and USD 5,427 million, including wages and salaries of USD 4,885 million and USD 4,516 million, respectively.
The tables below show the funded status of the Group’s plans, being the pension plans’ assets at fair value less the pension plans’ liabilities based on the present value of the obligations. Plans that are wholly unfunded are shown separately from plans that are wholly or partly funded.
Unrecognized past service cost (1) (1) – (1) – – – – – – Cumulative impact of asset ceiling (3) (3) (15) (7) (62) – – – – –
Table 23.3 in USD millions, as of December 31Status of funded and unfunded defined benefit plans
Actuarial gain/(loss) included in other comprehensive income (1,894) (598) (4) (4)
Foreign currency translation effects 162 (81) (5) (7) Benefit obligation as of December 31 (17,478) (15,238) (302) (296)
The summary of the balance sheet changes in relation to defined benefit plans and other defined post-employment benefits is given below.
Current average life expectancy for a 65 year old male 21.1 22.9 19.6 18.4 19.9 22.7 19.4 18.3
b) Defined contribution pension plans Certain of the Group’s companies sponsor defined contribution pension plans. Eligibility for participation in such plans is either based on completion of a specified period of continuous service or the date of commencement of employment. The plans provide for voluntary contributions by employees and contributions by the employer which typically range from 2 percent to 10 percent of annual pensionable salary, depending on a number of factors. The Group’s contributions under these plans amounted to USD 127 million and USD 108 million in 2011 and 2010, respectively.
Effect of a change in health care cost trends on other defined post-employment benefits
Consolidated financial statements continued 24. Share-based compensation and cash incentive plans
The Group has adopted various share-based compensation and cash incentive plans to attract, retain and motivate executives and employees. The plans are designed to reward employees for their contribution to the performance of the Group and to encourage employee share ownership. Share-based compensation plans include plans under which shares and options to purchase shares, based on the performance of the businesses, are awarded. Share-based compensation plans are based on the provision of the Zurich Financial Services Ltd shares.
Employee share plans Share Incentive Plan for employees in the UK The Group established an Inland Revenue approved Share Incentive Plan and launched the partnership shares element of this plan in 2003, which enabled participating employees to make monthly purchases of Zurich Financial Services Ltd shares at the prevailing market price out of their gross earnings. There were 252 and 274 participants in the plan as of December 31, 2011 and 2010, respectively. The Group also operates the profit-sharing element of the Share Incentive Plan (reward shares) which was launched in 2004 with annual share allocations being made in May each year subject to business performance. The awards are based on the business operating profit (BOP) after tax for the year, for the business unit of each participating employee. Individual awards are subject to a maximum of 5 percent of a participant’s base salary (before any flexible benefit adjustments) with an overall maximum of GBP 3,000. The total number of participating employees in the reward share element of the plans as of December 31, 2011 and 2010 was 4,463 and 4,775 respectively.
Share-based compensation plans for executives The Group operates long-term incentive plans for selected executives. These plans comprise the allocation of a target number of shares and/or share options with the vesting of these share and option grants being subject to the achievement of specific financial performance goals.
With effect from 2011, share option grants were discontinued. Those option grants made in the period up to and including 2010 continue to earn out in accordance with the terms and conditions of those grants. The Group can also make restricted share grants to selected employees, which provide share awards if the individual remains employed with the Group on selected dates in the future.
The average share price for Zurich Financial Services Ltd shares in 2011 and 2010 was CHF 212.72 and CHF 241.41 respectively.
Shares granted / vested during the period 537,955 407,940 244 260 Options granted / vested during the period 1 828,407 1,698,817 – 29 1 Number of options granted is shown as the number of shares under option granted during the period.
Up to and including 2010, options granted during each year were treated in the same way. From 2011 option grants have been discontinued. Option grants made in the period up to and including 2010 continue to earn out in accordance with the terms and conditions of those grants. The fair value of options granted is estimated using the Black-Scholes option pricing model, with the assumptions shown in table 24.6.
Share price, in CHF 1 260 Exercise price, in CHF 260 Assumed volatility 25.55% Risk-free interest rate 2.00% Expected dividend yield 6.10% Contracted option life 7 years 1 Share price as at date of grant.
The risk-free interest rate was determined by using the seven year CHF swap rate applicable in 2010. The implied volatility was determined based on the average of a number of several independent quotes.
Table 24.5 for the years ended December 31Options and shares granted during the period
Consolidated financial statements 25. Contingent liabilities, contractual commitments and financial guarantees
Commitments under investment agreements 4,037 4,100 Less funded commitments (3,586) (3,513) Remaining commitments under investment agreements 451 587 Guarantees and letters of credit 1 10,387 9,544 Future operating lease commitments 1,169 1,016 Undrawn loan commitments 57 149 Other commitments and contingent liabilities 7 88 1 Guarantee features embedded in life insurance products are not included. For such guarantee features see note 8 on insurance reserves.
Guarantees and letters of credit USD 8,691 million of the USD 10,387 million for financial guarantees and letters of credit as of December 31, 2011 relate to guarantees in the aggregate amount of GBP 5,595 million provided to the directors of a fully owned subsidiary in connection with the rationalization of the Group’s top legal holding structure which resulted in the merger of Zurich Group Holding into Zurich Financial Services Ltd in December 2009. These guarantees will expire in August 2015. In 2011, an additional USD 738 million relate to guarantees in the aggregate amount of GBP 475 million provided to the directors of a fully owned subsidiary in connection with the repatriation of capital.
The Group is active in numerous countries where insurance guarantee funds exist. In some jurisdictions funding is based on premiums written. In other jurisdictions the Group may be called upon to contribute to such funds in case of a failure of an other market participant. In the case of German life companies the amount of contribution is limited to 1 percent of the net underwriting reserve net of payments already made.
The Group has commitments to provide collateral on certain contracts in the event of a financial strength downgrading for Zurich Insurance Company Ltd from the current AA- by Standard & Poor’s. Should the rating by Standard & Poor’s fall to A+, then the additional collateral based on information available as of December 31, 2011 is estimated to amount to approximately USD 131 million.
In common with other groups writing life assurance business in the UK, the Group remains exposed to a number of Conduct of Business issues. While provisions are maintained which reflect management’s best estimate at the balance sheet date of the probable costs and expenses of resolving these matters, significant uncertainty regarding the ultimate cost remains. The main area of uncertainty concerns complaints related to sales advice. The key assumptions used to derive the complaint provisions are the volume of complaints, both those already recorded and an assumption as to the level of future complaints, the percentage of complaints which will be successful (the uphold rate), the average redress payable per complaint and the expenses of reviewing each case or complaint. The assumptions used to set the provisions have been based on actual recent experience.
In 2003, the Group completed the divestment of various asset management operations. As part of these agreements, the Group guaranteed certain minimum levels of “assets under management” to the acquirers. The guarantees provide that if the “assets under management” fall below those defined levels under certain conditions, the Group may be required to compensate the acquirers.
Pledged assets The majority of assets pledged to secure the Group’s liabilities relate to debt securities pledged under short-term sale and repurchase agreements. The total amount of pledged financial assets including the securities under short-term sale and repurchase agreements amounted to USD 8,147 million and USD 9,611 million as of December 31, 2011 and 2010, respectively.
Cash and cash equivalents 8,768 8,182 8,768 8,182 Available-for-sale securities Debt securities 129,306 128,257 129,306 128,257
Financial liabilities at FV through profit or loss Trading: Obligation to repurchase securities (1,794) (3,330) (1,794) (3,330)
Liabilities related to investment contracts (833) (592) (834) (592) Liabilities related to investment contracts with DPF (5,337) (4,875) (5,607) (5,134)
Total investments at FV through profit or loss 99,426 102,322 99,426 102,322
Loans and receivables Total 100,771 103,970 100,771 103,970 Financial liabilities at FV through profit or loss Designated at FV
Level 3 – this category includes financial assets and liabilities for which fair values are determined using valuation techniques with at least one significant input not being based on observable market data. In circumstances when there is little, if any, market activity for a certain instrument, the Group is required to develop internal valuation inputs based on the best information available about the assumptions that market participants would use when pricing the asset or liability. This would normally apply in the case of investments in hedge funds, private equity funds, asset-backed securities for which currently very limited market activity is observed, and long-dated derivatives. The effect of changes in the internal valuation inputs to reasonably possible alternative values is disclosed in tables 26.4a and 26.4b.
Total securities at FV through profit or loss 3,673 5,749 1,851 11,274
Total available-for-sale securities 42,241 89,584 6,230 138,055 Securities at FV through profit or loss Trading
Table 26.2a in USD millions, as of December 31, 2011Fair Value Hierarchy – current period
Realized gains/(losses) recognized in income 1 26 500 6 1 23 – – Unrealized gains/(losses) recognized in income 1 (12) (61) 19 (10) 28 16 (27) Unrealized gains/(losses) recognized in other comprehensive income (14) (277) – – – – –
1 Presented as net capital gains/(losses) and impairments on Group investments in the Consolidated income statements.
The key assumptions driving the valuation of these investments include discount margins and rates for prepayment, recovery and default. The effect on reported fair values of using reasonably possible alternative values for each of these assumptions, while the other key assumptions remain unchanged, is disclosed in tables 26.4a and 26.4b. While tables 26.4 illustrate the overall effect of changing the values of the unobservable inputs by a set percentage, the significance of the impact and the range of reasonably possible alternative assumptions, may differ significantly between investments, given their different terms and circumstances.
As of December 31, 2011 and 2010, under Level 3 the Group also classified investments in hedge funds and private equity funds amounting to USD 1.9 billion and USD 2.2 billion, respectively. These investments are valued based on regular reports from the issuing funds and fair values are reviewed by a team of in-house investment professionals and may be adjusted based on their understanding of the circumstances of individual investments. Investments in hedge funds and private equity funds have not been included in the sensitivity analysis due to the large number of valuation assumptions that while, in total, have a significant effect on the fair value of these investments, when considered individually, the impact of changing them to reasonably possible alternative values would not be significant.
Table 26.4a as of December 31, 2011Sensitivity analysis of Level 3 ABSs to changes in key assumptions – current period
Realized gains/(losses) recognized in income 1 2 46 Unrealized gains/(losses) recognized in income 1 – 218
Sales / redemptions (21) (329) Transfers into Level 3 – 1 Transfers out of Level 3 – (4) Foreign currency translation effects – (5)
Sales / redemptions (29) (167) Transfers into Level 3 1 – Transfers out of Level 3 – (19) Foreign currency translation effects (4) (7)
Table 26.6a in USD millionsRoll forward analysis for financial assets classified under Level 3 – current period
The table below sets out related party transactions with equity method accounted investments, as well as other related parties, such as the Group’s distribution partners of the jointly owned companies in Spain (Banco Sabadell S.A.) and Latin America (Banco Santander S.A.), reflected in the consolidated income statements and consolidated balance sheets.
For the years ended December 31, Net earned premiums and policy fees 28 12 Net investment income (190) (104) Net investment expense (1) (1) Other income/(expense) (1) (37) Losses and loss adjustment expenses (4) (6) Administrative and other operating expenses (5) (4)
Consolidated balance sheet as of December 31, Cash and cash equivalents 172 475 Other loans 442 537 Total unit-linked investments 3,447 3,196
Policyholders’ collateral and other loans 21 9 Reserves for losses and loss adjustment expenses (8) (11)
As of December 31, 2011 and 2010 there were no loans, advances or credits outstanding from Members of the Group Executive Committee. Outstanding loans and guarantees granted to Members of the Board of Directors amounted to USD 3 million for the year ended December 31, 2011 and USD 2 million for the year ended December 31, 2010. The terms “Members of the Board of Directors” and “Members of the Group Executive Committee” in this context include the individual as well as members of their respective households. The above figures include the fees paid to Members of the Board of Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd, which were USD 5 million and USD 3 million for the years ended December 31, 2011 and December 31, 2010, respectively.
No provision for non-repayment has been required in 2011 and 2010 for the loans or guarantees made to Members of the Group Executive Committee.
a) Surplus note and certificates of contribution issued by the Farmers Exchanges As of December 31, 2011 and 2010, FGI and other Group companies held the following surplus notes and certificates of contribution issued by the Farmers Exchanges. Originally these were purchased by FGI in order to supplement the policyholders’ surplus of the Farmers Exchanges.
Conditions governing payment of interest and repayment of principal are outlined in the surplus notes and certificates of contribution. Generally, repayment of principal may be made only when the issuer has an appropriate amount of surplus, and then only after approval is granted by the issuer’s governing board and the appropriate state insurance regulatory department in the U.S. In addition, payment of interest may generally be made only when the issuer has an appropriate amount of surplus and then only after approval is granted by the appropriate state insurance regulatory department in the U.S.
Effective December 31, 2010, the All Lines agreement was modified and the participation ratio was decreased from 25.0 percent to 12.0 percent. In addition to this change, the provisional ceding commission for acquisition expenses was increased by 1.0 percent from 25.7 percent to 26.7 percent, while the Farmers Exchanges’ catastrophe losses were changed from a maximum of USD 1.0 billion to a maximum of USD 1.2 billion. Unearned premiums totaling USD 693 million were transferred from Farmers Re Co and ZIC to the Farmers Exchanges as a result of their decreased participation in the All Lines agreement effective December 31, 2010. In addition, the Farmers Exchanges remitted USD 185 million of reinsurance commissions to Farmers Re Co and ZIC for acquisition expenses due to the decreased participation in the All Lines agreement.
Effective December 31, 2011, the All Lines agreement was amended subsequent to which Farmers Re Co and ZIC entered into a 20.0 percent All Lines agreement, under which each assumes a percentage of all lines of business written by the Farmers Exchanges, prospectively. Under the All Lines agreement, which amended the 12.0 percent All Lines agreement in effect since December 31, 2010, Farmers Re Co and ZIC assume a 4.0 percent and 16.0 percent respective 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. In addition, under the All Lines agreement, the Farmers Exchanges catastrophe losses are subject to a maximum of USD 1.2 billion. As a result, Farmers Re Co and ZIC are subject to a maximum annual catastrophe loss of USD 48.0 million and USD 192 million, respectively. The All Lines agreement, which can be terminated after 90 days notice by any of the parties, also provides for the Farmers Exchanges to continue to receive a provisional ceding commission of 26.7 percent of premiums for acquisition expenses, 9.0 percent of premiums for unallocated loss adjustment expense and 5.3 percent of premiums for other expenses. Unearned premiums totaling USD 527 million were transferred from the Farmers Exchanges to Farmers Re Co and ZIC as a result of their increased participation in the All Lines agreement as from December 31, 2011. In addition, Farmers Re Co and ZIC remitted USD 141 million of reinsurance commissions to the Farmers Exchanges for acquisition expenses due to the increased participation in the All Lines agreement.
Based on the results for 2011, ceded premiums earned and commissions were USD 1,984 million and USD 635 million, respectively, and recoveries totaled USD 1,396 million, for the year ended December 31, 2011. Ceded premiums earned and commissions were USD 4,574 million and USD 1,418 million, respectively, and recoveries totaled USD 3,059 million, for the year ended December 31, 2010.
As of January 1, 2011, the Group implemented changes in the way it manages two of the three core segments on a secondary level.
The 2010 segmental results have been restated to reflect these changes, with no impact on the Group’s financial position or performance.
Policyholder dividends and participation in profits, net 9 3 (2,826) 10,302 – – – – 133 496 – (1) (2,685) 10,801 Income tax expense/(benefit) attributable to policyholders – – (242) 462 – – – – – – – – (242) 462 Underwriting and policy acquisition costs, net 5,587 5,409 2,029 1,503 902 1,733 16 6 9 8 (20) (10) 8,523 8,649 Administrative and other operating expense (excl. depreciation / amortization) 3,673 3,134 2,394 1,883 1,290 1,900 1,193 980 213 188 (1,490) (1,195) 7,274 6,890 Interest credited to policyholders and other interest 24 39 395 428 – 1 10 3 57 62 (7) (3) 479 529 Restructuring provisions and other items not included in BOP (238) (306) (130) (179) (10) (602) (107) 12 1 21 – – (483) (1,055) Total BOP benefits, losses and expenses (before interest, depreciation and amortization) 29,969 28,074 11,123 24,539 4,288 6,739 1,170 1,072 888 1,544 (1,517) (1,209) 45,920 60,759 Business operating profit (before interest, depreciation and amortization) 2,836 3,392 1,781 1,922 1,660 1,860 357 322 100 (46) (864) (874) 5,870 6,576 Depreciation and impairments of property and equipment 86 83 30 32 56 65 14 20 5 4 – – 191 205 Amortization and impairments of intangible assets 278 398 315 303 118 109 93 64 1 8 – – 805 882
Losses and loss adjustment expenses, net 20,894 19,773 59 76 2,105 3,708 1 2 (622) 62 3 – 22,439 23,620 Life insurance death and other benefits, net 20 22 10,208 9,773 – – 57 69 618 683 – – 10,904 10,548 (Decrease)/increase in future life policyholders’ benefits, net 1 – 1 (764) 291 – – (1) – 479 24 (3) – (289) 316
Net income/(expense) on intercompany loans 3 (49) (55) (14) (37) – – 65 86 – – 2 (5)
European countries (see notes 17 and 19). 5 Includes USD 67 million related to a voluntary settlement of an insurance liability in Italy.
Real estate held for investment 2,911 2,940 5,126 4,893 132 135 42 45 258 261 – – 8,468 8,274
General Insurance Global Life Farmers Other Operating Businesses Non-Core Businesses Eliminations Total
Investments for unit-linked contracts – – 93,096 96,139 – – – – 11,508 11,808 – – 104,603 107,947
Reinsurers’ share of reserves for insurance contracts 13,440 13,320 2,068 1,997 – 212 – – 4,509 4,328 (656) (1,041) 19,361 18,816 Deposits made under assumed reinsurance contracts 71 120 19 11 2,141 2,201 – – 508 530 (28) (26) 2,711 2,837
Reserves for losses and loss adjustment expenses, gross 64,074 63,864 39 58 1,410 1,938 28 46 2,559 2,953 (586) (752) 67,525 68,107 Reserves for unearned premiums, gross 15,026 15,084 205 201 1,318 773 4 5 22 25 (9) (7) 16,567 16,081 Future life policyholders’ benefits, gross 92 103 74,162 74,901 – – 6 6 5,097 4,569 (42) (265) 79,314 79,315 Policyholders’ contract deposits and other funds, gross 1,269 1,192 14,195 13,397 – – – – 2,787 2,839 – 2 18,251 17,430 Reserves for unit-linked contracts, gross – – 47,647 49,978 – – – – 11,507 11,807 – – 59,154 61,786
Rest of Latin America 5 8 Subtotal Latin America 207 183 North America United States 247 232 Rest of North America 6 8 Subtotal North America 254 240 Asia-Pacific Australia 79 79 Hong Kong 6 7
Net investment result on Group investments 330 346 134 120 3,957 3,844 140 68 13 12 – – 4,575 4,390 Net investment income on unit-linked investments (29) (30) 8 8 2,024 1,790 106 78 30 16 – – 2,139 1,862 Net capital gains/(losses) and impairments on unit-linked investments (18) 49 (24) 60 (4,595) 6,665 (946) 965 (104) 39 – – (5,687) 7,777
Asia-Pacific and Middle East Hong Kong 89 79 146 169 Indonesia 1 – – –
2 Includes business written with freedom of service and freedom of establishment into Europe. 3 Includes business written through licenses into all regions.
Table 29.9 in USD millions, as of December 31Global Life – Non-current assets by region
Table 29.11 in USD millions, for the years ended December 31Other Operating Businesses – Overview
Insurance benefits and losses, incl. PH dividends, net 57 69 1 3 – – 58 72 Underwriting and policy acquisition costs, net 15 5 – – – – 16 6 Administrative and other operating expense (excl. depreciation / amortization) 170 184 1,156 927 (133) (130) 1,193 980 Other expenses (excl. items not included in BOP) (91) 17 (5) (3) – – (96) 14 Depreciation, amortization and impairments of property, equipment and intangible assets 3 – 104 84 – – 107 84
Zurich Australia Limited Sydney Global Life 100 100 AUD 0.5 Zurich Australian Insurance Limited Sydney General Insurance 100 100 AUD 6.6 Zurich Financial Services Australia Limited Sydney General Insurance 100 100 AUD 22.8 Austria
Luxembourg Zurich Eurolife S.A. Bertrange Global Life 100 100 EUR 20.0
South Africa Zurich Insurance Company South Africa Limited 4 Johannesburg General Insurance 58.95 58.95 ZAR 3.0 Spain Bansabadell Pensiones, E.G.F.P, S.A. Barcelona Global Life 50 50 EUR 7.8 Bansabadell Seguros Generales, S.A. de Seguros y Reaseguros Barcelona General Insurance 50 50 EUR 10.0 Bansabadell Vida S.A. de Seguros y Reaseguros Barcelona Global Life 50 50 EUR 43.9
Zurich Vida, Compañía de Seguros y Reaseguros, S.A. – Sociedad Unipersonal Madrid Global Life 100 100 EUR 56.4 Switzerland Genevoise Real Estate Company Ltd Geneva Global Life 100 100 CHF 17.0
"Zurich" Investment Management AG Zurich Other Operating Businesses 100 100 CHF 10.0
Zurich International Life Limited Douglas, Isle of Man Global Life 100 100 GBP 105.6 Zurich Specialties London Limited Fareham, England Non-Core Businesses 100 100 GBP 150.0 4 Listed on the Johannesburg Stock Exchange. On December 31, 2011, the company had a market capitalization of ZAR 2.2 billion (ISIN Number 000094496). 5 Represents the Group’s newly acquired Santander insurance operations in Latin America (see note 5). The results of the operating activities will be included in the Global Life and General Insurance segments, whereas the headquarter’s activities will be included in Other Operating Businesses.
United States of America Farmers Group, Inc. Reno, NV Farmers 100 100 USD 0.001
Farmers Reinsurance Company Los Angeles, CA Farmers 100 100 USD 58.8 Farmers Services LLC 8 Wilmington, DE Farmers 100 100 USD – Zurich American Corporation Wilmington, DE Non-Core Businesses 100 100 USD 0.00001
On January 11, 2012, the Group announced the successful placement of USD 500 million of undated Capital Notes (hybrid capital), first callable in 2018, primarily to investors in the Asian market. The hybrid capital has been issued by Zurich Insurance Company Ltd under the EMTN Programme. The coupon has been set at 8.25 percent.
As statutory auditor, we have audited the consolidated financial statements of Zurich Financial Services Ltd, which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash flows, consolidated statement of changes in equity, and notes (pages 104 to 144 and 153 to 278), for the year ended December 31, 2011.
Opinion In our opinion, the consolidated financial statements for the year ended December 31, 2011 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
The majority of this report, Sections 1 to 9, relates to Global Life, but summary information relating to the non-core life business is given in Section 10 and to the total Group in Section 11.
Embedded value report 1. Analysis of embedded value earnings 284 2. New business 288 3. Main acquisitions 292 4. Expected contribution and transfer to shareholder net assets 293 5. Operating, economic and other non-operating variances 294 7. Maturity profile of value in-force 298 8. Reconciliation of IFRS equity to embedded value 299 10. Non-core life business 301 11. Group MCEV 302 12. Embedded value methodology 303 13. Embedded value assumptions 309 Appendix: Embedded value tables 312
New business value was USD 980 million, an increase of USD 118 million or 14 percent. Excluding the effect of the refinement in methodology described in section 12, new business value was flat in U.S. dollar terms and reduced by 5 percent in local currency. New business margin for the year remains at a strong level of 21.6 percent excluding the methodology change and 24.5 percent including the change. Margin was positively impacted by an increase in the proportion of protection business sold which was particularly evident in Spain, where higher levels of protection business meant new business value decreased only marginally compared with 2010 despite lower sales of savings products. The change in persistency assumptions noted previously in North America negatively impacted new business margin as did product mix in the UK which experienced higher growth in lower margin products. Lower interest rates in Europe also reduced margin on some product lines.
Embedded value earnings were USD 200 million generating a return on embedded value of 1.3 percent. Embedded value earnings were negatively impacted by the challenging economic conditions.
in USD millions, for the year ended December 31Embedded value key results
Dividends & capital movements end of period (9) (18) (27) (28) (55)
1 As noted in section 12 c) the UK’s required capital and free surplus allow for a Pillar 2 basis.
New business net of non-controlling interests (122) (701) (823) 1,586 763 Expected contribution at reference rate 27 69 96 120 216 Expected contribution in excess of reference rate 17 25 42 364 406 Transfer to free surplus 289 853 1,142 (1,142) –
Dividends & capital movements end of period 14 (966) (952) – (952)
Embedded value by geographical region in USD millions in USD millions, for the year ended December 31, 2010
Value of business in force Total of which: Asia-Pacific and Middle East 602 296 121.5% 899 1,815 (69) (19) (78) 1,649 2,548 1 SM is the local minimum solvency margin. 2 CE is the certainty equivalent value of business in force. 3 FC is the frictional cost.
Embedded value by geographical region, 2011 in USD millions, as of December 31, 2010
operating earnings of which: Asia-Pacific and Middle East 98 136 (34) (202) (23) (25)
Q1 Q2 Q3 Q4 for the twelve months ended December 31
Q1 Q2 Q3 Q4 Q4 YTD Q1 Q2 Q3 Q4 Q4 YTD
1 APE is new annual premiums plus 10 percent of new single premiums. 2 PVNBP is new single premiums plus the present value of new annual premiums.
of which: Asia-Pacific and Middle East 524 463 2,943 2,588 136 112 25.9% 24.3% 4.6% 4.3%
Overall, in Europe sales were slightly down on a local currency basis compared with 2010 due to some of the challenging European markets. There were large offsetting effects with strong improvements to new business value in the UK and Switzerland.
The UK contributed a strong increase in sales, up 24 percent in APE on a local currency basis, with a small reduction in margin linked to a change in business mix. The main drivers were the Private Banking Client Solutions and corporate protection and savings business with some offset from lower sales through brokers and banks. Overall the new business value increased by 16 percent on a local currency basis compared with 2010.
In Germany, sales volume decreased on a local currency basis by 14 percent as measured by APE. In addition to the lower volume the deteriorating economic climate in the second half of 2011 reduced margins. Overall the new business value reduced by 22 percent on a local currency basis.
In Switzerland, APE increased by over 40 percent and new business value increased almost by a multiple of five compared with 2010 on a local currency basis. In the corporate protection and savings business the strong increase in APE was not fully translated into new business value as margins were reduced due to changes in business mix, while in Individual business both volume and business mix contributed to a strong increase in new business value.
Sales in Spain remained at a low level. Lower sales of savings products were mainly offset by higher sales of profitable protection business. The resulting impact on new business value was a decrease of only 6.8 percent compared with 2010 on a local currency basis.
For Asia-Pacific and Middle East, sales improved significantly due to the strong development of corporate protection and savings business while margins increased slightly. New business value increased by 14 percent on a local currency basis compared with 2010.
In the Other region, the international corporate protection business performed well, with an increased volume of 18 percent as measured by APE, on a local currency basis. Excluding the impact of the methodology refinements, new business value was not materially different compared with 2010.
c) Transfer to free surplus The expected transfer to shareholders’ net assets shows the profits expected to emerge during the year in respect of business that was in force at the start of the year. The net affect on embedded value is zero, as the reduction in the value of business in force is offset by an increase in shareholders’ net assets.
Mortality and morbidity experience increased the embedded value by USD 49 million, positive experience in the UK was to some extent offset by adverse experience in North and Latin America. Following a mortality expense study into the corporate protection and savings business in Asia-Pacific and Middle East the mortality tables were updated resulting in a positive embedded value impact of USD 109 million. In North America the post level term mortality model was improved, in line with a new industry standard, which resulted in a positive impact of USD 136 million. Overall, updated mortality and morbidity assumptions increased embedded value by USD 289 million.
Persistency experience decreased embedded value by USD 89 million mainly due to higher than expected rates of termination. In Ireland, difficult market conditions in combination with the Irish government announcement of a pension fund levy resulted in an increase in lapses which reduced value by USD 52 million. Experience persistency in the Asia-Pacific and Middle East and the Other regions reduced value by USD 52 million. This impact resulted from one-off lapses of corporate schemes and elevated lapse rates in general. In total, updated persistency assumptions reduced embedded value by USD 191 million. The main positive contribution was from Germany where updated persistency assumptions increased value by USD 105 million. This was more than offset in Asia-Pacific and Middle East and North America where updated persistency assumptions reduced embedded value by USD 179 million and USD 91 million respectively.
Expense overruns reduced embedded value by USD 22 million. Main impacts were lower than expected expenses in UK of USD 49 million which was more than offset by overruns in other regions. The main overruns were due to infrastructure spend in Brazil and expense overruns in North America. Revised maintenance expense assumptions reduced embedded value by USD 234 million. This was mainly driven by a review of cost allocation in the savings and protection business of Asia-Pacific and Middle East. In the UK assumed future expenses increased.
Other operating variances include modelling changes and non-recurring expenses and other operating variances not captured elsewhere.
Embedded value Split of other operating variances in USD millions, for the twelve months ended December 31, 2011
Development expenses of USD 211 million were incurred to fund the Global Life growth strategy, in particular to fund a new platform in the UK and hub development in Ireland. One-off expenses reduced value by USD 71 million and included costs of regulatory projects.
Other, other operating variances increased embedded value by USD 16 million.
In total Other operating variances reduced the embedded value by USD 143 million.
Economic variances Economic variances are the differences between the actual experience during the period and that implied by the economic assumptions at the start of the period and also include the impact of changes in assumptions in respect of future economic experience at the end of the period. In total economic variances decreased embedded value by USD 1.3 billion in 2011.
The main driver of the large negative impact of economic variances was movements in interest rates in Europe. In the second half of 2011 risk free rates reduced while the yields on sovereign debt increased significantly in several markets across Europe. As risk free rates decrease, the value of spread business and traditional participating business reduces. For those markets where yields on sovereign debt increased, the value of such investments dropped which also reduced the embedded value. Business in Spain, Italy and Portugal was subject to both of these effects reducing embedded value by USD 0.7 billion. In Germany business was affected by the reduced risk free rates limited to a degree by the hedging strategy there. The net economic variance in Germany reduced embedded value by USD 0.3 billion. In Europe unit-linked funds generated a lower than expected return, particularly in the UK and Ireland, reducing the embedded value by approximately USD 129 million.
b) Dividends and capital movements Dividends and capital movements reflect dividends paid by Global Life to the Group and capital received from the Group. Capital movements can also relate to the value of business in force in respect of acquisitions and disposals, or corporate restructuring.
In North America, a dividend of USD 234 million was paid.
In Europe, the UK paid a dividend of USD 289 million, Switzerland paid a dividend of USD 162 million and the Group injected USD 216 million into Italy and USD 28 million into each of Portugal and Ireland. In combination with other smaller capital movements this resulted in a net capital release of USD 291 million from Europe.
In the Asia-Pacific and Middle East region overall dividends of USD 40 million were paid.
Embedded value report 8. Reconciliation of IFRS shareholders’ equity to embedded value
Deferred acquisition costs and deferred origination costs (13.8) Deferred front end fees 5.7 Present value of profits of acquired insurance contracts (0.7) Policyholder share of actuarial intangibles net of tax 1.6 Tax on shareholder share of actuarial intangibles 2.2 Goodwill (0.4) Other intangibles (1.3)
in USD billions, for the year ended December 31, 2011Reconciliation of Global Life IFRS shareholders’ equity to embedded value
Economic sensitivities 100 basis points increase in risk free yield curve 4% 20% 100 basis points decrease in risk free yield curve (10%) (39%) 10% fall in equity market values (2%) – 10% fall in property market values (2%) 1% 25% increase in implied volatilities for risk free yields (2%) (3%) 25% decrease in implied volatilities for risk free yields 2% 3% 25% increase in implied volatilities for equities and properties (1%) – 25% decrease in implied volatilities for equities and properties 1% 1%
– Base for sensitivities is without liquidity premium and using a cost of capital charge of 4 percent applied to CRNHR – Changes in embedded value and new business value are calculated on the basis of no liquidity premium and end of period assumptions, reducing embedded value by
The Group has written life business in Zurich American Life Insurance Company and in its Centre operations, which are not managed by Global Life and are included in Non-core life businesses. The main products that have been written by these businesses outside Global Life were: • variable annuity contracts that provide annuitants with guarantees related to minimum death and income benefits; • disability business; and
The Group MCEV is presented in the following table as the Global Life covered business which is valued under the MCEV principles and the non-covered businesses which are valued at the unadjusted IFRS net asset value. Non-covered businesses include the unadjusted IFRS net asset value of acquired businesses in Malaysia and Latin America, the non-core life businesses managed outside Global Life and all other Group businesses including general insurance and Farmers.
Non-operating MCEV earnings (1.2) 0.0 (1.2) Total MCEV Earnings 0.2 2.4 2.6
Closing Group MCEV 15.8 17.2 33.1 1 For non-covered business this is set equal to the change in Net Income After Tax (NIAT) over the period. 2 For non-covered business this is set equal to the change in Other Comprehensive Income (OCI) excluding the foreign currency translation adjustment over the period. 3 Closing adjustments refer to dividend and capital movements, non-controlling interests and foreign currency translation effects.
• For 2011, the Group has applied a liquidity premium to the key major operating currencies in its embedded value assumptions and, for greater consistency with other European insurers, the cost of capital applied to residual non-hedgeable risks was set at 4 percent. Embedded values and new business values for 2010 disclosed in this report have been restated to include these changes, unless otherwise stated. The impact on opening embedded value for 2011 was an increase of USD 331 million and the impact on 2010 new business value was an increase of USD 45 million.
For certain smaller companies in Global Life, no embedded value has been calculated but these companies have been included in the embedded value at their shareholders’ net asset value, as calculated in accordance with the Group’s IFRS accounting policies. The contribution from these companies to the embedded value is approximately 1 percent.
Embedded value report continued c) Shareholders’ net assets Shareholders’ net assets represent the market value of net assets held in respect of the covered business, and consists of the required capital and free surplus. The level of required capital reflects the amount of capital considered by the local Directors to be appropriate to manage the business. This would be set at least at the level equal to the regulatory required capital, at which the regulator would intervene to request a capital injection and in addition, for the main companies, an adequate buffer to cover short term volatilities in solvency due to financial and non-financial risks or to achieve the capital required to maintain the desired credit rating.
Frictional costs (FC) reflect a deduction for the cost of holding shareholder capital. Under the Group’s market consistent framework, these frictional costs represent tax in respect of future investment income on total required capital plus investment management costs. In Germany, the policyholders’ share of investment income on the capital is also included.
The allowance for frictional costs is included both in the value of business in-force and in the new business value. For new business, frictional costs are applied to the minimum solvency capital required to be held in respect of that business.
CRNHR is calculated as a charge on the capital held for residual non-hedgeable risks. This is calculated according to Zurich’s internal risk based capital model by applying 1 in 2000 shocks to the embedded value assumptions. To align with the MCEV Principles the risk based capital is scaled to 99.5 percent confidence level by using empirical distributions where available, or by assuming probability distributions as appropriate.
Quarterly new business is valued on a discrete basis. New business value is calculated separately for each quarter using assumptions, both operating and economic, as of the start of the relevant quarter. New business strain is also calculated on a quarterly discrete basis, meaning that it takes account only of cash flows during that quarter and makes no allowance for any subsequent reduction in strain during the remainder of the year. Once calculated, the new business value will not change in local currency terms.
The risk free yield curve assumptions are based on the swap curve in each major currency (U.S. dollars, euros, British pounds and Swiss francs). For liabilities where payouts are either independent or move linearly with markets, deterministic techniques (referred to as “certainty equivalent”) have been used. In such cases, the projection and discounting are based on the same risk free yield curve.
The simulations used for calculation of TVFOG reflect the actual yield curves and implied volatilities observable as at the valuation date.
Simulations are produced for the economies in the U.S., the UK, Switzerland and the eurozone. In each economic area, risk free nominal interest rates are modeled using a LIBOR market model. The excess return on other asset classes relative to the total returns on risk free assets are then modeled using a multi-factor lognormal model. Hong Kong uses U.S. dollar simulations as their principal liabilities are U.S. dollar-denominated. Chile uses closed form solutions rather than simulations. The other operations not mentioned above have no significant options and guarantees. Further details are set out under “Economic assumptions” in section 13.
n) Employee pension schemes Actuarial gains and losses arising from defined benefit pension and other defined benefit post-retirement plans are recognized in full in the period in which they occur and are presented on a separate line in the statement of comprehensive income in the Group’s consolidated financial statements, with a liability recognized for employee benefit deficits under IAS 19. This adjustment has not been made in the detailed embedded value described in this embedded value report. If the adjustment had been made the embedded value at the valuation date would have been lower by USD 624 million. The actuarial and economic assumptions used for this adjustment are consistent with those used for the equivalent allowance made in the Group’s Consolidated financial statements.
q) Translation to Group presentation currency To align embedded value reporting with the Group’s consolidated IFRS financial statements, relevant results have been translated to the Group presentation currency, U.S. dollar, using average exchange rates for the period. This applies to new business value, new business volumes (APE and PVNBP) for the current period and comparative figures. This approach has also been applied to the analysis of movement. Valuations as at a specified date are translated at end-of-period exchange rates.
A 10 percent decrease in voluntary discontinuance rates means that, for example, a base assumption of 5 percent per annum would decrease to 4.5 percent per annum.
A 5 percent improvement in mortality and morbidity assumptions for assurances means that, for example, if the base mortality assumption for assurances was 90 percent of a particular table, this would decrease to 85.5 percent.
Required Capital set to Minimum Solvency Capital means that frictional costs are applied to minimum solvency capital only and frictional costs on excess solvency capital are released.
Details of the economic assumptions for the major economies in which Zurich Global Life carries out business can be downloaded in a spreadsheet from the Investors section of www.zurich.com.
a) Economic assumptions Market consistent framework The Group has adopted a computational method known as “risk neutral.” With this method the key economic assumptions are: • risk free rates; • implied volatilities of different assets; and, • correlations between different asset returns.
Expected asset returns in excess of the risk free rate have no bearing on the calculated embedded value other than in the expected return used for the analysis of embedded value earnings. The expected return for equities comprises an equity risk premium added to the start of period one year swap rate. The expected return on corporate bonds is equal to the start of period one year swap rate plus a risk premium estimated by comparing the market yield on corporate bonds with the swap rates for equivalent durations. In addition, a reduction must be made to the yield to allow for the expected level of defaults.
The Group applies liquidity premium in the operating currencies of U.S. dollar, Euro, British pound and Swiss franc in its embedded value.
The liquidity premium is also applied to the TVFOG. All sensitivities in the report relate to the base yield curve with no liquidity premium.
For equity assets for units where there is a substantial equity allocation, the investment return assumption is based on the long term “real world” expected return allowing for reversion to the mean over a period of five years. For equity assets for units without a material equity allocation the investment return assumption is based on the one year swap rate at the start of period plus a margin to reflect the additional risk associated with investment in this asset class.
For property assets, the investment return assumptions are based on the one year swap rate at the beginning of period plus a margin to reflect the additional risk associated with investment in this asset class.
Participating business Rates of future bonus or crediting rates have been set at levels consistent with the risk neutral investment return assumptions and current bonus plans. In the UK, bonus rates have been set so as to exhaust any remaining assets in the relevant long-term funds. In certain scenarios shareholder injections may be required to meet existing guaranteed benefits and this additional cost is included in the TVFOG.
In other European life businesses and in the U.S., bonuses have been set to be consistent with the investment return assumptions and with the book value approach used by these life businesses in practice. Existing practice, contractual and regulatory requirements as well as the reasonable expectations of policyholders are considered in setting bonuses.
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 embedded value is noted in Section 12n) 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.
In countries where significant development work is performed these are shown under “Development Expenses”.
The restart of business in Luxembourg is treated as a start-up operation with acquisition and maintenance expenses set at expected medium term levels. Any actual expenses incurred in excess of policy allowances is treated as an expense overrun and shown as an expense experience variation.
Embedded value information: Opening embedded value 2,818 2,655 631 499 10,334 11,195 2,548 2,283 142 120 16,472 16,752 Dividends and capital movements start of period (35) (34) (14) 47 (464) (447) (7) 5 (5) 2 (525) (427)
New business value Global Life 60 68 71 52 547 529 136 118 167 49 980 817
New business margin (% of APE) 54.3% 69.8% 22.6% 25.9% 19.0% 18.9% 25.9% 25.5% 103.7% 35.0% 24.5% 22.1% New business margin (% of PVNBP) 5.9% 7.2% 5.3% 5.3% 2.0% 2.0% 4.6% 4.6% 12.5% 6.1% 2.9% 2.6%
1 2010 values are calculated without liquidity premium and using a cost of capital charge of 2.5 percent applied to CRNHR
New business information: Annual premiums 90 90 262 150 1,475 1,245 446 411 107 77 2,379 1,973
New business information: Annual premiums 554 393 493 460 88 56 125 132 93 93 122 111 1,475 1,245
The methodology and assumptions underlying the report are described in Sections 12 and 13.
We have audited the Embedded Value Report (“EV Report”) of Zurich Financial Services Ltd included in pages 283 to 316 of the Annual Report 2011 for the year ended December 31, 2011. The embedded value information included in the EV Report has been prepared in accordance with the Market Consistent Embedded Value (“MCEV”) Principles and Guidance issued by the European Insurance CFO Forum, as described on pages 303 to 308.
We conducted our audit in accordance with Swiss Auditing Standards as well as the International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the EV Report is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the EV Report. An audit also includes assessing the principles used and significant estimates made by the Board of Directors, as well as evaluating the adequacy of the overall presentation of the EV Report. We believe that our audit provides a reasonable basis for our opinion.
This report has been prepared solely for the Board of Directors of Zurich Financial Services Ltd in accordance with the terms of our engagement letter. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown except where explicitly agreed by our prior consent in writing. This report does not extend to any financial statements of Zurich Financial Services Ltd.
Net income after taxes for the year was CHF 961 million compared with CHF 70 million in 2010. The increase was mainly driven by higher dividend income from its subsidiary Zurich Insurance Company Ltd which paid a dividend of CHF 1.5 billlion, compared with no dividend payment in 2010, partially offset by higher other financial expenses. In 2011, Zurich Financial Services Group redeemed the three remaining series of Trust Capital Securities issued through the Zurich RegCaPS Funding Trusts. After the redemption, the trusts that issued these securities, and the related limited partnerships and limited liability companies were liquidated, resulting in a net loss of CHF 435 million, included in other financial expenses. A further loss of CHF 256 million resulted from impairments on investments in subsidiaries.
Shareholders’ equity decreased by CHF 1,333 million to CHF 16,610 million as of December 31, 2011, from CHF 17,943 million as of December 31, 2010, as a result of the dividend paid in 2011, partially offset by net income after taxes for the year and capital contributed through the issuance of new shares. The Board will propose a dividend from the capital contribution reserve of CHF 17.00 per share in respect of the year 2011 for approval at the Annual General Meeting to be held on March 29, 2012.
Capital contribution reserve 11 12,981,667 14,000,000 General capital contribution reserve 12,646,757 14,000,000 Reserve for treasury shares 12 334,910 –
General legal reserve 341,140 – Reserve for treasury shares – 341,140
Transfer from / to capital contribution reserve 2,479,883 (3,223,839) Dividends paid (2,479,883) 1 – Other movements – 131,005
Net income after taxes 960,686 69,718 Retained earnings, as of December 31 2,939,269 3,254,285 Total shareholders’ equity (before appropriation of available earnings) 16,609,801 17,943,070 Total liabilities and shareholders’ equity 17,447,931 20,506,018 1 Dividends paid in the year, proposed in respect of the 2010 result 2 Dividends paid in the year, proposed in respect of the 2009 result in CHF thousands, as of December 31Assets
4. Administrative expense Administrative expense includes directors’ fees of CHF 4.1 million for 2011 and CHF 3.5 million for 2010 (see note 15) and overhead expenses of CHF 10 million for 2011 and 2010. In addition, administrative expense for 2011 includes CHF 75.3 million in respect of an irrevocable commitment made by the Company on behalf of the Zurich Financial Services Group to the Z Zurich Foundation to fund its charitable activities.
5. Other financial expense Other financial expense includes a loss of CHF 435 million related to the redemption of the three remaining series of Trust Capital Securities issued through the Zurich RegCaPS Funding Trusts. After the redemption, the trusts that issued these securities, and the related limited partnerships and limited liability companies were liquidated.
Zurich Insurance Company Ltd 11,088,466 100.00 11,087,485 100.00 Zurich Financial Services EUB Holdings Ltd 607,936 99.90 727,936 99.90
9. Commitments and contingencies Zurich Financial Services Ltd has provided unlimited guarantees in support of various entities belonging to the Zurich Capital Markets group of companies. Zurich Financial Services Ltd has entered into various support agreements and guarantees for the benefit of certain of its subsidiaries and their directors. These contingencies amounted to CHF 11,894 million as of December 31, 2011, and CHF 11,842 million as of December 31, 2010. CHF 8,150 million of CHF 11,894 million relate to guarantees in the aggregate of GBP 5,595 million provided to a fully owned subsidiary and some of its directors in connection with the rationalization of the Group’s top legal holding structure which resulted in the merger of Zurich Group Holding into Zurich Financial Services Ltd in December 2009. Furthermore, Zurich Financial Services Ltd has issued an unlimited guarantee in favor of the Institute of London Underwriters in relation to business transferred to Zurich Insurance plc, from a group company which no longer has insurance licenses.
10. Shareholders’ equity a) Issued share capital In 2011, there were no changes to the ordinary share capital or to the authorized share capital.
At the Annual General Meeting on March 30, 2010, the shareholders approved a share capital reduction of CHF 183,640.40 from CHF 14,747,306.80 to CHF 14,563,666.40 by canceling 1,836,404 registered shares. The effective date of the capital reduction was June 15, 2010. In addition, the shareholders approved an increase in the authorized share capital to a new maximum of CHF 1,000,000, allowing for enhanced financial flexibility of the company for future capital management, and an increase in the contingent share capital to a new maximum of CHF 500,000 which can be issued to employees of Zurich Financial Services Ltd and its subsidiaries in connection with employee participation plans. During the years 2011 and 2010, a total of 798,926 shares and 950,232 shares, respectively, were issued to employees out of the contingent capital.
b) Authorized share capital Until March 30, 2012, the Board of Zurich Financial Services Ltd is authorized to increase the share capital by an amount not exceeding CHF 1,000,000 by issuing up to 10,000,000 fully paid registered shares with a nominal value of CHF 0.10 each. An increase in partial amounts is permitted. The Board determines the date of issue of such new shares, the issue price, type of payment, conditions for exercising pre-emptive rights, and the beginning of dividend entitlement.
Employee participation On January 1, 2010, the contingent share capital, to be issued to employees of Zurich Financial Services Ltd and Group companies, amounted to CHF 264,383 or 2,643,831 fully paid registered shares with a nominal value of CHF 0.10 each. At the Annual General Meeting on March 30, 2010, the shareholders approved the proposed increase of the contingent share capital for the issuance of new shares to employees of the Group to a new maximum of CHF 500,000. This increase was approved and registered with the Commercial Register on April 1, 2010. On January 1, 2011, the contingent share capital, to be issued to employees of Zurich Financial Services Ltd and Group companies, amounted to CHF 470,836.30 or 4,708,363 fully paid registered shares with a nominal value of CHF 0.10 each.
During 2011 and 2010, 798,926 shares and 950,232 shares, respectively, were issued to employees out of the contingent share capital under the program described above. Of the total 798,926 registered shares issued to employees during the year 2011, 607,254 shares were issued in the period from January 1, 2011 to March 31, 2011 and 191,672 registered shares were issued as from April 1, 2011 to December 31, 2011. As a result, on December 31, 2011 and 2010, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Financial Services Ltd and its subsidiaries, amounted to CHF 390,943.70 and CHF 470,836 or 3,909,437 and 4,708,363 fully paid registered shares, respectively, with a nominal value of CHF 0.10 each. The pre-emptive rights of the shareholders, as well as the right for advance subscription, are excluded. The issuance of shares to employees is subject to one or more regulations to be issued by the Board of Directors and take into account performance, functions, levels of responsibility and criteria of profitability. Shares may be issued to the employees at a price lower than that quoted on the stock exchange.
Holding company continued 11. Capital contribution reserve As of January 1, 2011, a new Swiss tax regulation based on the Swiss Corporate Tax reform II became effective, allowing for payments free of Swiss withholding tax to shareholders out of a new capital contribution reserve, created from additional paid in capital since January 1, 1997.
Average purchase price of additions, in CHF 199 – Average selling price, in CHF 256 281 1 in CHF thousands 2 The cost value of the treasury shares held by Zurich Insurance Company Ltd was adjusted in 2010.
At the Annual General Meeting 2010 the shareholders approved the cancellation of the remaining 1,836,404 shares from the share buyback program authorized by the Board of Directors on February 13, 2008. The cancellation was effective June 15, 2010.
13. Shareholders The shares registered in the share ledger as of December 31, 2011, were owned by 124,920 shareholders of which 119,021 were private individuals holding 23.9 percent of the shares (or 14.9 percent of all outstanding shares), 2,051 were foundations and pension funds holding 7.6 percent of the shares (or 4.7 percent of all outstanding shares), and 3,848 were other legal entities holding 68.5 percent of the shares (or 42.6 percent of all outstanding shares).
Holding company 14. Information on the risk assessment process Refer to the disclosures in the Risk review on pages 103 to 149 of this Annual Report.
15. Remuneration of the Board of Directors and the Group Executive Committee This note sets out details of the remuneration of the Board of Directors and of the members of the Group Executive Committee (GEC) in accordance with the information required by articles 663bbis and 663c paragraph 3 of the Swiss Code of Obligations. This information should be read in connection with the unaudited Remuneration Report, set out on pages 48 to 73 in which additional details of the remuneration principles and architecture can be found.
The remuneration paid to the Directors for their Board membership of Zurich Financial Services Ltd, the holding company of the Group, and Zurich Insurance Company Ltd is paid entirely by Zurich Financial Services Ltd. The fees for Mr de Swaan’s additional Board membership in Zurich Insurance plc (ZIP) and Zurich Life Assurance plc (ZLAP) and for the additional Board memberships of Mrs Bies and Mr Nicolaisen in Zurich Holding Company of America (ZHCA) are paid by the respective companies. Remuneration paid to the members of the GEC is not paid by Zurich Financial Services Ltd, but by the Group entities where they are employed. The remuneration shown below includes the remuneration that the members of the Board and the GEC received for all their functions in the Group. As the financial statements of the holding company are presented in Swiss francs, all figures are shown in Swiss francs, with totals also presented in U.S. dollars. Year-on-year comparison in Swiss francs is affected by the actual exchange rates during the year.
4 Directors who reside in the US received an additional fee of USD 10,000 per annum in 2010, this is discontinued in 2011. 5 The cash fees were previously defined in US Dollars, but paid in the actual currencies where the Board members reside, based on the relevant exchange rate at the dates of the payment. From 2011 onwards, the fees are designated in Swiss francs.
11 At the Annual General Meeting on March 30, 2010 Mr Pidoux retired from the Board and Mr Ackermann was elected to the Board and was appointed Vice Chairman. 12 As of June 30, 2010, Mr Gentz was allocated 1,071 shares, Mr Ackermann was allocated 235 shares, and the other Board members were allocated 314 shares based on a full year’s membership. The share price (CHF 246.50) and the exchange rate (USD / CHF 1.131) as of June 15, 2010, were adopted to calculate the number of shares based on the fixed portion of the fee allocated in shares for the respective members. Where the value of the allocated shares did not equal the value of the portion of the fee to be allocated in shares, the difference was paid in cash. The amounts shown in the table above reflect the fixed amount in U.S. dollars (translated into Swiss francs) of the portion of the fee to be allocated in shares.
No benefits (or waiver of claims) have been provided to related parties of the Directors or related parties of former members of the Board during the year 2011, nor during the year 2010. Neither had any related party of the Directors or of former members of the Board outstanding loans, advances or credits as of December 31, 2011 or 2010.
7 From 2011 onwards, options are no longer granted. 8 In line with applicable laws where the executives are employed, Zurich paid the company-related portion of contributions to social security systems, which amounted to
in CHF million1, for the year ended December 31All GEC members (incl. the highest paid)
2 The amounts reflect the total value of pension benefits, calculated on the basis of the service costs for the company as assessed under IAS 19 accounting principles. Service 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 costs on accrued benefits, adjustments for actuarial gains and losses, nor the expected return on any assets held.
During 2011, one member retired and another left the Group. Agreements with the departing members provided remuneration in accordance with their employment contracts. No termination payments were made. As described in last year’s report the member retiring at the end of 2010 after long service with the Group is being retained as a consultant in 2011 and 2012. Recognizing the prior contractual obligations, adherence to post-employment obligations and the provision of services in 2011 the member received remuneration in the amount of CHF 2.1 million during 2011. No other former members of the GEC received remuneration in 2011.
Former members of the GEC are eligible to continue their mortgage loans following retirement on similar terms to those when they were employed, in line with the terms available to employees in Switzerland as stated above. As of December 31, 2011 and 2010 no former member of the Group Executive Committee had any outstanding loans, advances or credits.
16. Shareholdings of the Board of Directors and the Group Executive Committee Share and share option holdings of the Directors and of the members of the Group Executive Committee (GEC), who held office at December 31, 2011 and 2010, are set out below in accordance with the information required by article 663c paragraph 3 of the Swiss Code of Obligations. This information is also included in the unaudited Remuneration report, set out on pages 48 to 73 of the Annual Report in which additional details can be found.
M. Gentz, Chairman 6,868 5,345 J. Ackermann, Vice Chairman 806 235 S. Bies, Member 1,246 881 V. Chu, Member 1,246 881 Th. Escher, Member 7,084 6,164 F. Kindle, Member 16,529 11,164 A. Meyer, Member 2,853 2,488 D. Nicolaisen, Member 1,529 1,164 V.L. Sankey, Member 2,699 2,334 T. de Swaan, Member 1,529 1,164 R. Watter, Member 4,497 4,132 1 None of the Directors together with parties related to them held more than 0.5 percent of the voting rights as of December 31, 2011 or 2010, respectively.
None of the Directors, nor any related party of a Director, hold any share options or conversion rights over Zurich Financial Services Ltd shares as of December 31, 2011 or 2010.
Share and share option holdings of the GEC members The following table sets out the actual share and share option holdings of GEC members as of December 31, 2011 and 2010. In addition to any shares acquired in the market, the numbers include vested shares, whether sales-restricted or not, and vested share options received under the Group’s Long-Term Incentive Plan. However, the table does not include the share interests of the members of the GEC through their participation in the currently unvested performance shares, unvested restricted shares or unvested performance share options.
All interests are beneficial and include Zurich Financial Services Ltd shares or share options held by parties related to the GEC members. One vested option gives the right to one share with normal voting and dividend rights. Further details on the overall number of share options allocated under the Group’s Long-Term Incentive Plan and the terms of the options are set out in the tables “Summary of outstanding options”. With effect from 2011, share option grants were discontinued. Those option grants made in the period up to and including 2010 continue to earn out in accordance with the terms and conditions of those grants.
Year of grant Total 1 Mr Amore retired on December 31, 2010. 2 Mr Hopkins retired on June 30, 2011. 3 Mr Wemmer left the function on September 30, 2011.
Year of expiry as of December 31, 2011Summary of outstanding options, 2011 as of December 31, 2010Summary of outstanding options, 2010
Appropriation of available earnings as proposed by the Board of Directors Net income after taxes 960,686 69,718 Balance brought forward 1,978,583 3,184,567 Retained earnings 2,939,269 3,254,285 Transfer to capital contribution reserve – (1,275,702) 1
Appropriation of capital contribution reserve Balance at January 1, 2012 (incl. reserve for treasury shares) 12,981,667 Transfer to free reserve for dividend payment out of capital contribution reserve (2,505,559) 1
Balance carried forward 10,476,108 1 1 These figures are based on the issued share capital as of December 31, 2011. They may change following the issuance of shares out of contingent capital for employees after the balance sheet date (see note 10). Treasury shares are not entitled to dividends.
The Board of Directors proposes to the Annual General Meeting on March 29, 2012, to transfer CHF 2,506 million from the capital contribution reserve to the free reserve to be subsequently paid out as a dividend.
If this proposal is approved, a payment of CHF 17 per share exempt from Swiss withholding tax is expected to be paid starting from April 5, 2012.
Manfred Gentz as of December 31 in CHF thousands in CHF thousands
As statutory auditor, we have audited the financial statements of Zurich Financial Services Ltd, which comprise the income statement, balance sheet and notes (pages 319 to 332), for the year ended December 31, 2011.
On your instructions, we have audited in accordance with Art. 653f, paragraph 1 Swiss Code of Obligations the issuance of new shares, which took place during the period of January 1, 2011, to December 31, 2011, according to the resolution of the general meeting of March 30, 2010.
Richard Burger Frédéric Kocher Audit expert Audit expert Auditor in charge
Registered share data 340 Financial calendar 342 Contact information 343 Glossary 344
Number of shares issued 147,385,822 146,585,896 Number of dividend-bearing shares 1 147,385,822 146,585,896 Market capitalization (in CHF millions at end of period) 31,319 35,503 Authorized capital, number of shares 10,000,000 10,000,000 Contingent capital, number of shares 13,909,437 14,708,363 1 Treasury shares are not entitled to dividends.
Zurich Financial Services LtdDJ Titans Insurance 30 Index Source: Thomson Reuters
As of December 31, 2011 Zurich Financial Services Ltd is not aware of any person or institution, other than BlackRock, Inc., New York, Norges Bank, Oslo and Aberdeen Asset Management PLC, Aberdeen, which, directly or indirectly, had an interest as a beneficial owner in shares, option rights and/or conversion rights relating to shares of Zurich Financial Services Ltd representing three percent or more of its issued shares. The related announcements of these notifications can be found via the search facility on the SIX Disclosure Office’s platform: disclosure/major_shareholders_en.html
Zurich offers its shareholders the opportunity to deposit Zurich Financial Services Ltd registered shares free of charge at SIX SAG Ltd in Switzerland. The securities deposit regulations as well as the application form for a securities custody account can be downloaded from our website: www.zurich.com/investors/shareholderinformation
Annual Report 2011 The Annual Report contains detailed information about Zurich’s financial performance, its structure, executive bodies, risk management, corporate governance and remuneration. It is available in German, French and English, with the complete financials in English only.
Annual Review 2011 The Annual Review contains information about Zurich’s businesses, its strategy and its performance over 2011. It is available in German, French and English.
Embedded value (EV) principles is a methodology using a “bottom-up” market consistent approach, which explicitly allows 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. A liquidity premium which increases risk discount rates has been applied to certain lines of business consistent with the CFO Forum principles. Options and guarantees are valued using market consistent models calibrated to observable market prices.
Gross management result is a performance measure of Farmers Management Services calculated as management fees and other related revenues minus management and other related expenses, which include amortization and impairments of intangible assets of the Farmers Management Services.
Surplus ratio (Farmers Exchanges) is a measure that indicates the amount of capital available to support the volume of insurance business written, and is calculated by dividing the end-of-period surplus balance by the net premium written in the preceding twelve-month period.
Cosimina Donnaianna will be celebrating twenty years of working for Zurich this year, which began when she did an apprenticeship with us in 1992. Today Cosimina is a property and liability claims inspector based in Bern, Switzerland. Among her many experiences over the years she witnessed first-hand the enormous damage that natural disasters can cause after severe storms passed through the Bernese Alps in 2005. The experience intensified her commitment to being a caring, reliable professional, and to doing what she does best – helping customers understand and protect themselves from risk.