The Group endeavours to ensure that all of its regulated subsidiaries meet local regulatory capital requirements at all times. Furthermore, the Group’s capital management strategy is to manage efficiently the capital base and structure commensurate with our risks and growth opportunities while maximizing long-term total shareholder value using the Group’s internal risk based capital model (RBC) calibrated to an ‘AA’ level. In addition to cash dividends, other components of the Group’s capital management program may, from time to time, include share buy-backs or special dividends to optimize shareholder return. Similarly, share issuances may be used to meet capital needs including growth opportunities as they emerge.
a) Regulatory minimum capital requirements and compliance In each country in which the Group operates the local regulator specifies the minimum amount and type of capital that each of the regulated subsidaries must hold in addition to their liabilities. The Group targets this minimum requirement plus an adequate buffer to ensure each of its regulated subsidiaries meets the local capital requirements at all times. The Group has differing requirements depending on the country in which it operates. The two main territories are Europe (both European Union (EU) and non-EU countries) and the US.
Some countries have already introduced, or are introducing, an economic risk-based capital assessment to be prepared by each local company of the Group and reviewed by the local regulator. In the UK this test is known as Pillar 2. In Switzerland, the new Insurance Supervisory Law (VAG) which came into effect on January 1, 2006 includes the Swiss Solvency Test (SST). Under SST, risk-bearing and target capital have to be calculated based on a risk-based capital model for groups, conglomerates, reinsurers and small companies. Groups, conglomerates and reinsurers have to use company specific internal models, which must be approved by the Federal Office of
In the US, required capital is determined to be the ‘company action level risk based capital’ based on the National Association of Insurance Commissioners risk based capital model. This is a method of measuring the minimum amount of capital approriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The calculation is based on applying factors to various asset, premium, claim, expense and reserve items, with the factors determined as higher for those items with greater underlying risk and lower for less risky items.
The Group’s banking operations, based in Europe, have been subject to the Basel I capital regime up to December 31, 2007, and adopted Basel II from January 1, 2008. Under Basel I, required capital is calculated as the sum of a fixed percentage of the banking operations’ risk weighted assets and capital required for the impact of market risk exposures. There is a further requirement to maintain sufficient capital to support large exposures. Under Basel II, required capital is calculated on a risk based approach. As of December 31, 2007, the Group’s banking operations were in compliance with applicable regulatory capital adequacy requirements and management also expects to be in compliance with Basel II requirements.
The Group endeavours to pool risk and capital as much as possible and, in so doing, benefits in regimes where diversification benefits are recognized (eg. US, UK and Switzerland).
Deferred policy acquisition costs net of present value of profits of acquired insurance contracts (2,614) (2,309)
2 Amount for dividend reflects the proposed dividend for the respective financial year, not yet approved by the Annual General Meeting. Includes amount authorized by Board of Directors for share buy-back program.
Financial Report 2007 b) Dividend restrictions Zurich Financial Services is not subject to legal restrictions on the amount of dividends it may pay to its shareholders other than under the Swiss Code of Obligations. The Swiss Code of Obligations provides that dividends may only be paid out of freely distributable reserves or retained earnings and that 5 percent of annual retained earnings must be allocated to the general legal reserve until such reserve in the aggregate has reached 20 percent of the paid-in share capital and therefore the earnings allocated to those reserves are restricted. As of December 31, 2007, the amount of the general legal reserve exceeded 20 percent of the paid-in share capital of the Group. Similarly, the company laws of many countries in which the Group’s subsidiaries operate may restrict the amount of dividends payable by such subsidiaries to their parent companies.
The table below sets out related party transactions reflected in the consolidated income statements and consolidated balance sheets.
The table below summarizes related transactions with key personnel reflected in the consolidated financial statements. Key personnel includes Directors of Zurich Financial Services, Directors of Zurich Insurance Company and Members of the Group Executive Committee.
Outstanding loans and guarantees granted to Members of the Group Executive Committee amounted to USD 1 million and USD 4 million for the years ended December 31, 2007 and 2006. No outstanding loans or guarantees were granted to the Directors of Zurich Financial Services or Zurich Insurance Company for either of the years ended December 31, 2007 and 2006. The terms “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 and Zurich Insurance Company, which were USD 3.1 million and USD 3.2 million, in 2007 and 2006 respectively.
Farmers Group, Inc. (FGI) and its subsidiaries provide certain non-claims related management services to the Farmers Exchanges. In addition, the Group has the following relationships with the Farmers Exchanges.
a) Surplus note and certificates of contribution issued by the Farmers Exchanges As of December 31, 2007 and 2006, FGI and other Group companies held the following surplus note 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.
Surplus Notes in USD millions, as of December 31 2007 2006 6.15% surplus note, due December 2013 88 88 6.15% certificates of contribution, due December 2013 523 523 6.15% certificates of contribution, due August 2014 296 296
Effective January 1, 2006, the Farmers Exchanges modified the terms of the APD agreement with Farmers Re and ZIC. The new agreement provides for annual ceded premiums of USD 1 billion of gross written premiums with 20.0 percent assumed by Farmers Re and 80.0 percent assumed by ZIC, a 25.8 percent ceding commission for acquisition expenses, and an 8.2 percent ceding commission for unallocated loss adjustment expense. The agreement also includes provisions for additional experience commissions that will depend on loss experience and recoveries below a specified ratio for each year. This experience commission arrangement limits Farmers Re and ZIC’s potential underwriting gain on the assumed business to 2.0 percent of premiums assumed plus 20.0 percent of the underwriting gain resulting from a combined ratio under 98.0 percent. The agreement, which can be cancelled after 90 days notice by any of the parties, has a termination date of December 31, 2008.
For the year ended December 31, 2007, Group companies assumed USD 731 million of gross written premiums (USD 740 million in 2006) from the Farmers Exchanges under the All Lines Quota Share reinsurance agreement.
c) Other transactions between Zurich Financial Services and the Farmers Exchanges The Farmers Exchanges have been charged by Corporate Center for various services throughout the year in the amount of less than USD 1 million.
Income statements in USD millions, for the years ended December 31 by business segment
(Decrease)/increase in future life policyholders’ benefits, net of reinsurance – (1) (9,781) (1,467)
Insurance benefits and losses, net of reinsurance 1 20,966 19,913 694 8,655
Interest credited to policyholders and other interest 268 211 585 583
Additions and capital improvements of property/equipment and intangible assets 1,026 213 343 236
Significant non-cash expenses: Depreciation and impairments of property and equipment 89 76 45 47
Assets and liabilities in USD millions, as of December 31 by business segment General Insurance Global Life
Reinsurers’ share of reserves for insurance contracts 1 13,149 13,702 9,555 1,785
Reserves for losses and loss adjustment expenses, gross 63,383 59,241 6 131
Reserves for losses and loss adjustment expenses, net 51,935 47,386 6 103
Policyholders’ contract deposits and other funds, net 1,006 914 14,026 13,999
Reserves for insurance contracts, net 66,759 61,102 136,542 136,812 1 The Group’s life operations in the UK entered into a reinsurance agreement to transfer the risk associated with a significant annuities portfolio as of January 1, 2007. The initial impact of this transaction was a decrease of USD 7.4 billion in total investments and associated other assets and an increase of USD 7.1 billion in reinsurers’ share of reserves for insurance contracts in the Global Life business.
Zurich Australian Insurance Limited Sydney General Insurance 100 100 AUD 6.6
ZG Investments II Ltd. Hamilton Corporate Functions 100 100 USD 0.01
Deutscher Herold Aktiengesellschaft 3 Bonn Life Insurance 77.83 77.83 EUR 18.4
Zürich Beteiligungs-Aktiengesellschaft (Deutschland) Frankfurt / Main General Insurance 100 100 EUR 152.9
Eagle Star Life Assurance Company of Ireland Limited Dublin Life Insurance 100 100 EUR 17.5
Zurich Financial Services EUB Holdings Limited Dublin Other Businesses 100 100 GBP 0.001
Zurich Investments Life S.p.A. Milan Life Insurance 100 100 EUR 34
Zurich – Companhia de Seguros S.A. Lisbon General Insurance 100 100 EUR 10
Zurich España, Compañía de Seguros y Reaseguros, S.A. Barcelona General Insurance 99.89 99.89 EUR 33.6
Genevoise, Life Insurance Company Ltd Geneva Life Insurance 100 100 CHF 17
Eagle Star Insurance Company Limited Fareham, England Other Businesses 100 100 GBP 50
Zurich Specialties London Limited Fareham, England Other Businesses 100 100 GBP 150
EV information in this supplement includes: • Summary of Embedded Value results; • Geographical analysis of Embedded Value results; • Embedded Value methodology; and,
Embedded Value 15,935 14,092 1 Comparative 2006 figures for Switzerland have been restated. More details can be found in section 2g.
In the consolidated financial statements, an allowance is made for IAS19 Employee Benefits deficits. This adjustment has not been made in the detailed EV described in the remainder of the Embedded Value Report. If the adjustment had been made the EV as of December 31, 2007 would have been lower by USD 85 million at USD 15.9 billion. Similarly the EV as of December 31, 2006 would have been lower by USD 223 million at USD 13.9 billion.
Value of business in USD millions, as of December 31 in-force
Financial Report 2007 c) New business New business value is the value added by new business written, calculated at the point of sale, without any value from future new business sales.
Present value of new business premiums (PVNBP) 2 23,781 20,598 1 APE is taken as new annual premiums plus 10% of single premiums. 2 PVNBP is equal to new single premiums plus the present value of annual premiums.
1 In certain countries, particularly in the UK, where life insurance companies pay tax in respect of both policyholders and shareholders, the results shown in the above table are before shareholders’ tax but after deducting policyholders’ tax.
EV is shown net of minority holdings. Where the Group has a majority interest in a subsidiary company, the new business value and the premium information are shown gross of minority holdings. The minorities’ share of new business value mostly relates to life entities in Germany.
New business in USD millions, for the years ended December 31 value, after tax net of minorities
Expected transfer from value of business in-force to shareholders’ net assets, after tax 1,070 (1,070) –
Closing Embedded Value after foreign currency translation effects 6,982 8,953 15,935 1 Comparative 2006 figures for Switzerland have been restated. More details can be found in section 2g.
Certainty Time equivalent value Cost of value of of options non Value of business Frictional and market business in-force costs guarantees risk in-force
• New business value, after tax reflects the value added by new business written during the period. This item is valued at the point of sale, using the revised methodology described in section 4.g. The reduction in shareholders’ net assets shown in respect of new business (i.e. new business strain) excludes the solvency margin set up in respect of new business. Including the solvency margin, new business strain during 2007 was USD 0.9 billion.
The other components of the movement in EV are: Economic variance, after tax arises from the differences between the actual investment returns in the period and the expected investment returns based on economic assumptions as of the start of year, and allows for the change in future economic assumptions between the start and end of the period. It also includes the impact of legal, tax and regulatory changes in the period.
Embedded Value 16.0 14.1 1 Intangible assets are defined as deferred policy acquisition and origination costs and other intangible assets less front end fees.
Financial Report 2007 f) Sensitivities A number of sensitivities have been produced to indicate the sensitivity of the EV and the new business value to changes in certain assumptions. These are in line with the CFO Forum’s Additional Guidance on European Embedded Value Disclosures issued in October 2005.
Economic sensitivities 100 basis points increase in risk free yield curve (393) (16)
Frictional costs applied to 150% of minimum solvency margin 348 (27)
The key assumption changes represented by each of these sensitivities are as follows: Economic sensitivities • 100 basis points increase and decrease in the risk free yield curve across all durations; • 10% fall in equity and property market values (EV only, this is not applicable for new business); • 100 basis points increase in the discount rates (e.g. a discount rate of 6% p.a. would increase to 7% p.a.); • 10% increase in implied equity and property volatilities (e.g. 15% p.a. would increase to 25% p.a.); • 10% increase in implied risk free volatilities (e.g. 15% p.a. would increase to 25% p.a.).
g) Restatement of comparative 2006 figures for Switzerland Comparative 2006 shareholders’ net assets and value of business in force have been restated for Switzerland due to a model refinement to include the impact of unrealized gains on equity and property, and certain miscellaneous reserves, which were previously reported as part of the shareholders’ net assets and are now included in the value of the business in force. The overall EV remains the same, with a movement of USD 952 million between the shareholders’ net assets and the value of business in-force. The table below gives an overview of the previously reported and the restated comparative figures.
Value of business in USD millions in-force as previously 2006 reported restated
Value of business in-force 6,916 7,868 h) Life business included in Other Businesses The Group writes life business in Kemper Investors Life Insurance Company and in Centre operations, which are not managed in Global Life. The main products written by these businesses are: • Variable annuity contracts that provide annuitants with guarantees related to minimum death and income benefits; • Disability business; and,
EV results for 2007 and 2006 are translated from local currency using different exchange rates. The comments in this section relate to business issues only and not to movements in exchange rates.
Geographical in USD millions, as of December 31, 2007 analysis of Embedded Value
Geographical in USD millions, as of December 31, 2007 analysis of value of business in-force – 2007
Cost of non market risk (144) (86) (42) (55) (106) (71) (505)
Value of business in-force 1,787 2,498 676 1,639 1,825 527 8,953
Geographical in USD millions, as of December 31, 2006 analysis of value of business in-force – 2006
Frictional Costs Frictional costs have changed between 2006 and 2007 broadly in line with shareholders’ net assets and reflect changes in the economic conditions.
• In the UK, the level of frictional costs however reduced as a result of the reinsurance of a major part of its closed book of annuity business and a reduction in the corporate tax rate from 2008 onwards.
Time value of options and guarantees The change in the time value of options and guarantees from 2006 to 2007 reflects the following: • In the US, the increase was mainly related to the lower market yield curve in 2007, which increased the overall exposure to market risk on interest and surrender guarantees from universal life and interest sensitive deferred annuity business.
Cost of non market risk The decrease in the cost of non market risk from 2006 to 2007 reflects the following: • In the US, the increase is due to the revision of the persistency assumption for one of the major blocks of term assurance business.
• In Switzerland, the increase reflects higher volumes of business in-force.
• In Rest of Europe, the increase reflects higher volumes of business in-force as well as the revision of the persistency assumptions in Zurich International Solutions and Spain.
• In International Businesses, the increase was broadly in line with the growth of business in-force and the revision of the persistency and mortality assumptions in Hong Kong.
New business in USD millions, volumes for the years ended December 31
New business value, after tax as % APE as % PVNBP
New business value, before tax as % APE as % PVNBP
Cost of non market risk (18) (9) (6) (5) (20) (13) (71)
Geographical in USD millions, for the year analysis of ended December 31, 2006 new business value, after tax
Cost of non market risk (10) (10) (3) (4) (15) (8) (50)
• In the US, the new business value increased mostly due to a restructure of the reinsurance programs for protection business. The proportion of interest sensitive business in new business is lower than for the existing business portfolio, and hence the time value of options and guarantees is small.
• In the UK, there was an increase in new business value, as a result of a number of initiatives to improve the profitability of new investment contracts sold. This resulted in a decrease in the time value of options and guarantees arising from death guarantees on investment contracts sold in 2007. The benefits emerging from the revision of the business model in prior years, and increased sales of high margin corporate pensions business, also added to the new business value.
• In Switzerland, there was a decrease in new business value mainly due to investments in marketing initiatives. The increase in risk free rates compared with the prior year led to a reduction in the cost of options and guarantees.
• In Rest of Europe, there was an increase in new business value primarily attributable to increased volumes of business sold by Zurich International Solutions and in Ireland. This was however partly offset by the impact of an increase in the risk free rates over 2007.
• In International Businesses, there was an increase in value as a result of profitable new business sold in Hong Kong and Chile. This business has limited financial options and guarantees.
Geographical in USD millions, for the year ended analysis of movement in Embedded Value
New business value, after tax 108 121 184 33 198 85
Closing Embedded Value after foreign currency translation effects 2,432 4,880 2,087 1,895 3,297 1,344
• In the US, operating profit includes a significant contribution from new business value. The operating profit increased as a result of a revision to the expense projection assumptions as well as a revision of the counterparty risk allowance for re-insurance. This increase was partly offset by the revision of the persistency assumption for one of the major blocks of term assurance business. Term assurance is a significant portion of the US business and its value is sensitive to the persistency and mortality assumptions adopted. These assumptions are monitored on a regular basis to ensure they reflect the emerging experience. Economic variance reflects the reduction in the risk free rate, particularly at shorter durations, and the increase in interest rate volatilities in the US economy. This resulted in an increase in interest rate guarantees provided on historical blocks of universal life and deferred annuity business.
• In Germany, operating profit includes a significant contribution from new business value. In addition improved efficiencies from outsourcing the administration services increased shareholder value. Economic variance reflects the strong increase in the risk free yield curve and a reduction in Euro interest rate volatilities compared with 2006. The impact of a change in legislation requiring an increase in policyholders’ share of statutory profits from hidden reserves is also reflected in economic variance.
• In Switzerland, the operating profit was increased by a refinement in the modeling of unrealized capital gains and better than expected persistency experience. The economic variance reflects the reduction in unrealized gains which was partly offset by the impact of the increase in the risk free yield curve and a reduction in interest rate volatilities.
For any life business where part of the capital requirements can be met by free assets other than shareholders’ net assets, the frictional costs allow only for the amount of capital supported by shareholders.
• dynamic policyholder behavior, for example changes in surrender behavior as interest rates rise or fall, or takeup rates of guaranteed annuity options.
However, in certain cases this symmetry does not hold, and the Group considers that it is appropriate to make explicit allowance for this within the EV.
f) New business New business covers new contracts sold during the reporting period and includes recurring single premiums; new premiums written during the period on existing contracts; and variations to premiums on existing contracts where these premiums and variations have not previously been assumed as part of business in-force. Where recurring single premiums are projected over time to derive the corresponding new business value, they are
Financial Report 2007 treated as annual premium for the volume definition. Group Life business which is valued with a renewal assumption of the contracts is treated as annual premium.
The new business is valued as at point of sale. Explicit allowance is made for frictional costs, time value of options and guarantees, and cost of non market risk. New business value is valued consistently with new business volumes.
g) New business methodology enhancement The methodology for the new business value calculation has been enhanced so that the quarterly new business is valued on a discrete basis. From 2007, new business value has been 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 period. Once calculated, the new business value will not change in local currency terms. Comparative results for 2006 have not been restated for this change.
• The majority of the Group’s EV, has been calculated using a “hard close” approach. This means that all asset as well as liability data reflect the actual position as of the valuation date.
Simulations are produced for the economies in the US, UK, Switzerland and the Euro-Zone. In each economy, 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 US dollar simulations as their principal liabilities are US 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 5.
EV is shown net of minority holdings. Where the Group has a majority interest in a subsidiary company, the new business value and the premium information are shown gross of minority holdings. The minorities’ share of new business value is eliminated through “operating variance, after tax”.
As previously reported, expense assumptions for each life business include expected pension scheme costs in respect of future service entitlements.
r) Change in legislation or solvency regime. The impacts of changes in legislation or solvency regime are included in economic variance for the purpose of the analysis of movement.
Future economic assumptions, for example, investment returns and inflation, are based on period end conditions and assumed risk discount rates are consistent with these. For new business, from 2007, the future economic (and operating) assumptions are based on start of the relevant quarter assumptions.
Market consistent framework The Group has adopted a computational method known as “risk neutral”. With this method the key economic assumptions are: • the risk free rates; • the implied volatilities of different assets; and,
These yield curves are consistent with the assumptions used by investment banks to derive their option prices, and hence their use ensures consistency with the derivation of implied volatilities. They also have the advantage that they are available for most of the markets in which the Group operates.
At-the-moneyas of September 30, 2007 forward equity implied volatility (capital index)
Implied volatility as of December 31, 2007 of at-the-moneyforward interest rate swaptions 1 year 2 year 5 year 10 year 20 year 40 year option option option option option option
At-the-money- as of December 31, 2007 forward property implied volatility (capital index)
At-the-money- as of September 30, 2007 forward property implied volatility (capital index)
For equity and property assets, the investment return assumptions are based on the 10 year swap rate at the beginning of period plus a margin to reflect the additional risk associated with investment in these asset classes.
These assumptions have been set by asset class and separately for each sub-fund in each life business in order to best reflect the actual assets held.
Exchange rates EV for December 31, 2007 and December 31, 2006 have been converted to the Group presentation currency; US dollar, using the respective balance sheet exchange rates. The rates can be found on page 13 of the Financial Supplement. The analysis of movements, including new business, has been translated at average exchange rates over the period.
Demographic assumptions The assumed future mortality, morbidity and lapse rates have been derived from recent operating experience and relevant industry statistics. Where operating experience or industry statistics are limited, the assumptions are derived from a best estimate of future developments and are subject to regular review as more experience emerges. Where appropriate, surrender and option take-up rate assumptions that vary according to the investment simulation under consideration have been used, based on our assessment of likely policyholder behavior.
Expense assumptions Management expenses have been analyzed between expenses related to acquisition of new business, the maintenance of in-force business and, where appropriate, one-off project costs. Future expense assumptions allow for expected levels of maintenance expenses. In addition, Corporate Center expenses relating to covered business have been allocated to business units and are reflected in assumed future expenses.
Where service companies have been valued on a look through basis, the value of profits or losses arising from these services have been included in the EV and new business value.
In accordance with our letter of engagement dated 7 January 2008, we have performed a limited assurance engagement on Zurich Financial Services’ process for preparing Embedded Value Information for the year ended 31 December 2007 (“Embedded Value Information”), including methodology and assumptions.
In our opinion nothing has come to our attention which indicates that the methodology as applied by Zurich Financial Services does not comply with EEV principles and has not been implemented consistently, or that the assumptions determined by Zurich Financial Services are not reasonable to derive the Embedded Value Information.
Present value of new business premiums (PVNBP) 1,053 1,039 8,087 7,192
Operating profit expected from in-force business and shareholders’ net assets, after tax 159 152 315 288
New business margin, after tax (as % of APE) 90.8% 52.0% 13.1% 12.2%
New business margin, after tax (as % of PVNBP) 10.2% 5.7% 1.5% 1.4%
1 Comparative 2006 figures for Switzerland have been restated. More details can be found in section 2g.
Embedded Value in USD millions, for the years ended December 31
New business margin, after tax (as % of PVNBP) 2.2% 2.3%
Zurich Financial Services is the holding company of the Group with a listing on the SWX Swiss Exchange. Zurich Financial Services was incorporated on April 26, 2000, with a share capital of CHF 100,000. As of December 31, 2007, the shareholders’ equity totaled CHF 17,352,291,968 (December 31, 2006: CHF 16,779,678,184).
Notes to the financial statements 1. Basis of Presentation Zurich Financial Services presents its financial statements in accordance with Swiss law.
3. Administrative expense Administrative expense consists mainly of directors’ fees of CHF 3,745,570 (prior year CHF 2,936,941), see note 11 page 249, and overhead fees of CHF 7,000,000 (prior year CHF 8,000,000). With effect from January 1, 2007 the directors’ fees paid for their work in connection with Zurich Financial Services and the Zurich Insurance Company were combined into a single fee.
6. Investments in subsidiaries Investments in subsidiaries include a 57.7% interest in Zurich Group Holding with a carrying value of CHF 6,354,745,913 (prior year CHF 6,064,302,120) and a 100% interest in Allied Zurich Limited, with a carrying value of CHF 4,595,865,096 (prior year CHF 4,595,865,096). Allied Zurich Limited holds the remaining 42.3% interest in Zurich Group Holding. During 2007 Zurich Financial Services has purchased from Allied Zurich Limited, 0.7% of Zurich Group Holding’s shares, for a value of CHF 290,443,793. Additionally, Zurich Financial Services holds 49,000 shares of Zurich Insurance Company with a book carrying value of CHF 2,750,190 (prior year CHF 2,750,190).
7. Commitments and contingencies Zurich Financial Services has provided unlimited guarantees in support of various entities belonging to the Zurich Capital Markets group of companies and to Farmers Group Inc. In addition, Zurich Financial Services has agreed with the Superintendent of Financial Institutions, Canada, to provide additional capital in case the applicable capital adequacy tests for the Canadian business are not met and to provide assistance in case of liquidity issues.
Financial Report 2007 8. Shareholders’ equity a) Issued share capital As of December 31, 2007, Zurich Financial Services had 145,546,820 issued and fully paid registered shares of CHF 0.10 par value, amounting to a share capital of CHF 14,554,682.00. As of December 31, 2006, the share capital amounted to CHF 14,474,939.90, divided into 144,749,399 fully paid registered shares of CHF 0.10 par value.
b) Authorized share capital Until June 1, 2008, the Board of Zurich Financial Services is authorized to increase the share capital by an amount not exceeding CHF 600,000 by issuing up to 6,000,000 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 the dividend entitlement. The Board may issue such new shares by means of a firm underwriting by a banking institution or syndicate with subsequent offer of those shares to the current shareholders. The Board may allow the expiry of pre-emptive rights which have not been exercised, or it may place these rights as well as shares, the pre-emptive rights of which have not been exercised, at market conditions.
Capital market instruments and option rights to shareholders: The share capital of Zurich Financial Services may be increased by an amount not exceeding CHF 548,182.80 by the issuance of up to 5,481,828 fully paid registered shares with a nominal value of CHF 0.10 each (1) by exercising of conversion and/or option rights which are granted in connection with the issuance of bonds or similar debt instruments by Zurich Financial Services or one of its Group companies in national or international capital markets; and/or (2) by exercising option rights which are granted to the shareholders. When issuing bonds or similar debt instruments connected with conversion and/or option rights, the pre-emptive rights of the shareholders will be excluded. The current owners of conversion and/or option rights shall be entitled to subscribe for the new shares. The conversion and/or option conditions are to be determined by the Board.
The Board of Directors is authorized, when issuing bonds or similar debt instruments connected with conversion and/or option rights, to restrict or withdraw the right of shareholders for advance subscription in cases where such bonds are issued for the financing or re-financing of a takeover of an enterprise, of parts of an enterprise, or of participations. If the right for advance subscription is withdrawn by the Board, the convertible bond or warrant issues are to be offered at market conditions (including standard dilution protection provisions in accordance with market practice) and the new shares are issued at then current convertible bond or warrant issue conditions. The conversion rights may be exercisable during a maximum of 10 years and option rights for a
Financial Report 2007 maximum of 7 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 the quoted share price is to be used as a basis.
Employee participation: Subject to shareholder approval to increase the contingent share capital for the issuance of new registered shares to employees of the Group from CHF 75,755.60 by CHF 324,244.40 to a new maximum of CHF 400,000 by issuing up to a maximum of 4,000,000 registered shares payable in full with a nominal value of CHF 0.10 each, the Board of Directors of Zurich Financial Services decided on February 14, 2007, to allow the issuance of up to 4,000,000 shares out of the contingent share capital to employees of the Group. A respective proposal for the increase of the contingent share capital was made by the Board of Directors to the shareholders and was approved at the Annual General Meeting of April 3, 2007. Until December 31, 2007, 797,421 shares of this contingent share capital have been issued. Consequently, as of the same date, the remaining contingent capital, which can be issued to employees of Zurich Financial Services and Group companies, amounts to CHF 320,257.90 or 3,202,579 fully paid registered shares 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 or respective option rights to employees shall be subject to one or more regulations to be issued by the Board of Directors and shall take into account performance, functions, levels of responsibility and criteria of profitability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
The compensation paid to the Board of Directors is paid entirely by Zurich Financial Services, the holding company of the Group. The compensation paid to the members of the GEC is not paid by Zurich Financial Services but by the Group entities where they are employed. The compensation shown below includes the compensation of the members of the Board and the GEC received for all their functions in the Group. As the financial statement of the holding company is presented in Swiss francs, all figures are shown in Swiss francs, despite the fact that the fees paid by Zurich Financial Services to the Directors are defined in US dollars. To be consistent with the figures in the unaudited Remuneration Report the totals of the remuneration paid to the members of the Board and the GEC are also presented in US dollars, as set out in that report.
2 The remuneration shown in the table does not include any business related expenses incurred in the performance of the members’ services. 3 Committee members receive a cash fee of USD 40,000 (CHF 48,499) for all Committees on which they serve, irrespective of the number. The Committees on which the members serve are set out in the unaudited Corporate Governance Report, on page 35. 4 Committee chairs receive an annual fee of USD 20,000 (CHF 24,249) and the chair of the Audit Committee receives an additional USD 10,000 (CHF 12,125).
8 The shares allocated to the Directors are sales-restricted for three years. 9 Neither the Chairman nor the Vice Chairman receive any additional fees for their Committee work.
The Directors’ fees are not pensionable. None of the Directors received any benefits-in-kind or any other compensation than set out in the table above.
Remuneration of Group Executive Committee The total remuneration of the members of the GEC for 2007 comprised the value of cash compensation, pensions, other remuneration and the value of the target equity grants made under the Group’s Long-Term Incentive Plan in 2007. Overall compensation is set out in the following table: Remuneration of Group Executive Committee
6 The share and share option grants will vest in the future according to achievement of defined performance conditions (for further details please refer to the unaudited Remuneration Report, p. 54–67). The value of the share and share options assumes that the grant will vest in the future at 100% of the target level with the valuation of the options based on the Black Scholes methodology as set out in note 23 to the consolidated financial statements, the valuation of the target performance share grants based on the share price at the day prior to the grants (CHF 355.75) and the valuation of the restricted share grants based on the share price at the date of the grants.
As of December 31, 2007, the total of loans, advances or credits outstanding for GEC members was CHF 1,091,000 (USD 910,000). These loans represent mortgage loans, the terms of which are similar to those available to all employees in Switzerland. Mortgage loans are issued with a reduced interest rate of up to one percentage point less than the prevailing market interest rates on mortgage balances, up to a maximum of CHF 1,500,000 (USD 1,250,000). As at December 31, 2007, the highest mortgage loan was held by Mr. Lehmann (currently Group Chief Risk Officer), in the amount of CHF 791,000 (USD 660,000) which had an overall interest rate of 2.3%.
During 2007 one of the GEC members gave up his function. No termination payments were made.
Also, no benefits (or waiver of claims) have been provided to related parties to GEC members or related parties to former members of the GEC during the year 2007. Neither had any related party to GEC members or to former members of the GEC outstanding loans, advances or credits as of December 31, 2007.
Directors’ Number of Zurich Financial Services shares as of December 31, 2007 shareholdings
Total 19,541 1 None of the Directors together with related parties to them held more than 0.5% of the voting rights as of December 31, 2007.
The following table shows how the totals of the vested share options owned by the GEC members are distributed according to the grants identified in the table “Summary of outstanding options”.
The following table sets out additional details of the options outstanding for members of the GEC as at December 31, 2007. Further details can be found in the unaudited Remuneration Report, pages 54 to 67.
Total Number of options Number of options number of shares Exercise price
Year of grant vested unvested under option per share CHF Year of expiry
Shares eligible as of December 31, 2007 and 2006, respectively 145,546,820 144,749,399 in CHF thousands 2007 2006
The Board of Directors proposes a dividend of CHF 15.00 per share to the Annual General Meeting on April 3, 2008.
If this proposal is approved, a payment of CHF 9.75 per share, after deductions of 35% Swiss withholding tax, is expected to be paid starting from April 8, 2008, free of charge and in accordance with dividend payment instructions.
As statutory auditors, we have audited the accounting records and the financial statements (income statements, balance sheets and notes on page 244 to 254) of Zurich Financial Services for the year ended December 31, 2007.
Our audit was conducted in accordance with Swiss Auditing Standards, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
Zurich Financial Services Swiss Market Index DJ Stoxx Insurance Index Source: Datastream
Nominal value reduction 2002 1.00 July 15, 2003 1 Proposed gross dividend, subject to approval by shareholders at the Annual General Meeting 2008; expected payment date is on April 8, 2008.
Zurich Financial Services shares are listed on the SWX Swiss Exchange and traded on the “EU-regulated” segment of virt-x; ticker symbol: ZURN; the Swiss security number (Valorennummer) is 1107539. Trading in Zurich Financial Services shares on virt-x is conducted in Swiss francs. 100 percent of the shares are in free float.
According to the information available to us, as of December 31, 2007, only Barclays Plc, 1 Churchill Place, London, United Kingdom, along with its subsidiaries, has exceeded the threshold of 3 percent by holding a purchase position of 4.25 percent of the share capital and the voting rights of Zurich Financial Services entered in the Commercial Register.
Zurich Financial Services has an American Depositary Receipt program with The Bank of New York (BNY), a subsidiary of The Bank of New York Mellon. For more information call BNY Mellon’s Shareowner Services in the USA at +1-888-BNY-ADRs (1-888-269-2377) or outside the USA on +1-212-815-3700. ADR holder assistance may also be obtained from The Bank of New York Mellon at www.adrbny.com.
1 Expected payment date; subject to approval by shareholders at the Annual General Meeting 2008.
The Financial 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 financials in English only.
Consolidated Financial Statements Include the assets, liabilities, equity, revenues, expenses and cash flows of a company and its subsidiaries. The results of subsidiaries acquired are included from the date of acquisition. The results of subsidiaries that have been sold during the reporting period are included up to the date of disposal. All significant intercompany balances, profits and transactions are eliminated.
Expense Ratio The ratio of general insurance or reinsurance operating expenses (acquisition costs, plus policy administration expenses, less reinsurance commission and profit participation, plus other technical expenses) to net premiums earned. These operating expenses are also referred to as technical expenses.
Net Written Premiums (NWP) Gross written premiums (GWP) less the portion ceded to reinsurers.
Performance Management Process which links the Strategic Direction and Key Success Factors to organizational and individual goals, actions, measurements, performance appraisals and rewards.
Return on Equity (ROE) ROE tells shareholders how effectively their money is being used. It also shows how a company compares with its competitors. ROE is the amount, expressed as a percentage, of the net income for a given period available to common stock shareholders, divided by the average shareholders’ equity.
Zurich Basics Zurich’s core values and basic principles. Zurich Basics, together with Zurich’s General Compliance Rules for Employees, constitutes our Group’s code of conduct.
This communication is directed only at persons who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49 (2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) or to whom it may otherwise lawfully be communicated (all such persons together being referred to as relevant persons). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons.
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