Ceded Reserves for losses and loss adjustment expenses (12,182) (12,232) Reserves for unearned premiums (2,000) (1,889) Future life policyholders’ benefi ts (2,076) (1,873) Policyholders’ contract deposits and other funds (2,457) (2,690) Reinsurers’ share of reserves for insurance contracts, ceded 1 (18,715) (18,684)
Net Reserves for losses and loss adjustment expenses 55,903 52,986 Reserves for unearned premiums 15,676 14,510 Future life policyholders’ benefi ts 76,514 74,345 Policyholders’ contract deposits and other funds 16,400 14,357 Reserves for unit-linked contracts 58,204 47,297 Total reserves for insurance contracts, net 222,697 203,495 1 Gross of allowance for uncollectible amounts of USD 88 million and USD 89 million as of December 31, 2009, and 2008, respectively.
Cumulative paid as of December 31: One year later (7,976) (8,923) (9,930) (9,464) (11,423) (11,237) (12,551) (13,047) Two years later (12,855) (14,472) (15,550) (16,273) (18,044) (18,362) (19,660) Three years later (16,698) (18,001) (20,407) (21,234) (23,077) (23,421) Four years later (19,255) (21,390) (23,941) (24,945) (26,850) Five years later (21,634) (23,814) (26,616) (27,798) Six years later (23,471) (25,799) (28,668) Seven years later (24,849) (27,442) Eight years later (26,166)
Net reserves re-estimated as of December 31: One year later 26,908 32,239 38,977 43,627 45,976 49,594 53,441 51,927 Two years later 28,471 34,471 40,413 45,006 45,827 48,642 52,559 Three years later 30,636 36,118 42,004 45,325 45,297 48,127 Four years later 31,784 37,691 42,254 45,294 45,249 Five years later 33,326 37,880 42,470 45,604 Six years later 33,799 38,282 43,017 Seven years later 34,004 38,951 Eight years later 34,716
Losses and loss adjustment expenses incurred 652 539 240 196 Losses and loss adjustment expenses paid (299) (281) (339) (278) Foreign currency translation effects 251 217 (699) (632)
Losses and loss adjustment expenses incurred 7 4 (11) – Losses and loss adjustment expenses paid (61) (40) (57) (51) Foreign currency translation effects 1 1 6 2
While the Group believes that it has made adequate provision for these claims, it is possible that future adverse development could have a material effect on the Group’s results of operations, cash fl ows and fi nancial position. The net reserve amounts relating to such claims are not discounted for the time value of money.
Table 8.4 in USD millionsDevelopment of reserves for losses and loss adjustment expenses for asbestos and environmental claims 09_Financial_Statements_Part2_7443_Eng.indd 19609_Financial_Statements_Part2_7443_Eng.indd 196 24/2/10 20:18:0724/2/10 20:18:07
Interest and bonuses credited to policyholders 2,752 2,983 (68) (252) 2,683 2,730
1 Effective June 30, 2008, the underlying contracts relating to a UK annuity portfolio ceded in 2007 for an amount of USD 7.1 billion were transferred to the reinsurer, resulting in a reduction of gross and ceded future life policyholders’ benefi ts.
2 The 2009 movement represents the transfer to reserves for unit-linked contracts (see note 1 for further details).
The amount of policyholder dividends to be paid is determined annually by each life insurance subsidiary. Policyholder dividends include life policyholders’ share of net income and unrealized appreciation of investments that are required to be allocated by the insurance contract or by local insurance regulations. Experience adjustments relating to future policyholders’ benefi ts and policyholders’ contract deposits vary according to the type of contract and the country. Investment, mortality and morbidity results may be passed through by experience credits or as an adjustment to the premium mechanism, subject to local regulatory provisions.
expense assumptions increased the benefi ts by USD 2 million in 2009 and reduced them by USD 4 million in 2008;•
Table 8.5 in USD millionsDevelopment of future life policyholders’ benefi ts 09_Financial_Statements_Part2_7443_Eng.indd 19709_Financial_Statements_Part2_7443_Eng.indd 197 24/2/10 20:18:0724/2/10 20:18:07
Interest and bonuses credited to policyholders 879 (385) (90) (105) 789 (490) Changes in assumptions – (2) – 1 – (1)
Table 8.6 in USD millions, as of December 31Policyholders’ contract deposits and other funds gross
Table 8.8 in USD millionsDevelopment of reserves for unit-linked contracts 09_Financial_Statements_Part2_7443_Eng.indd 19809_Financial_Statements_Part2_7443_Eng.indd 198 24/2/10 20:18:0824/2/10 20:18:08
The net amount at risk is the present value of payouts exceeding the current policyholder account balance assuming the payout criteria in all policies would have been collectively triggered as of the balance sheet date. The net amount at risk is not the same as the fair value of these benefi ts, as it does not fully take into account the option value accruing to the policyholder. In determining the excess benefi t reserve, the Group follows the guidance in the U.S. Financial Accounting Standards Board (“FASB”) Accounting Standards Codifi cation (“ASC”) related to insurance companies and contracts. Under this guidance the new reserve level is determined from expected policyholder benefi ts net of assessments, coupled with a loss adequacy test on the result taking into account policyholder behavior experience and current market conditions. Policyholder behavior assumptions are updated when statistically relevant changes in behavior have been observed. The liability for future life policyholder benefi ts net of reinsurance includes an excess benefi t reserve of USD 629 million and USD 513 million as of December 31, 2009 and 2008, respectively, with the increase since December 31, 2008 largely due to policyholders’ behavior experienced in current market conditions.
Liabilities related to unit-linked investment contracts 40,143 30,397 Liabilities related to investment contracts (amortized cost) 254 122 Liabilities related to investment contracts with DPF 5,728 5,461
The value of fi nancial liabilities at amortized cost is based on a discounted cash fl ow valuation technique. The discount rate is determined by the current market assessment of the time value of money and risk specifi c to the liability.
As of January 1 35,979 54,485 Premiums and claims 787 (838) Interest and bonuses charged/(credited) to policyholders 5,864 (8,647) Acquisitions / transfers – 790 Increase/(decrease) recorded in shareholders’ equity 28 9 Foreign currency translation effects 3,465 (9,819) As of December 31 46,124 35,979 10. Equity component relating to contracts with DPF
Certain investment and insurance contracts sold by the Group contain benefi t features for which the amount and timing of declaration and payment are at the discretion of the Group. Where that discretion has not been exercised, the total amount of undeclared funds surplus is included in shareholders’ equity. Mandated allocations related to unrealized results and earnings are included in policyholder liabilities and, upon declaration, discretionary bonuses are allocated to policyholders. The changes in the table below represent the increase or decrease in unallocated gains and retained earnings after charging discretionary bonuses to policyholder liabilities.
As of January 1 1,221 1,309 Net unrealized (losses)/gains on investments 381 (371) Current period profi t 192 230 Foreign currency translation effects 44 53 As of December 31 1,837 1,221
Change in reserves for unit-linked products 6,911 (13,239) – – 6,911 (13,239) Change in liabilities for investment contracts –
Change in reserves for unearned premiums 826 1,781 (80) (220) 746 1,560
Table 11.1 in USD millions, for the years ended December 31Insurance benefi ts and losses
Foreign currency translation effects 71 (230) As of December 31 856 770 1 The 2009 movement represents the reclassifi cation from insurance contracts to investment contracts (see note 1 for further details).
Wages and salaries 2,908 2,888 Other employee benefi ts 566 453 Amortization and impairments of assets 878 638 Rent, leasing and maintenance 398 369 Marketing costs 315 372 Life renewal commission 318 309 Premium, asset and other non-income taxes 184 153 IT costs 734 816
The above numbers refl ect the costs by nature after allocation of certain costs, in particular wages and salaries as well as other employee benefi ts, on a functional basis.
Table 15.1 in USD millions, as of December 31Receivables 09_Financial_Statements_Part2_7443_Eng.indd 20309_Financial_Statements_Part2_7443_Eng.indd 203 24/2/10 20:18:1124/2/10 20:18:11
Impairment charges of USD 1 million on mortgage loans given as collateral were recorded in income for both years ended December 31, 2009 and 2008.
Gross carrying value as of January 1, 2009 359 1,398 438 767 735 3,697
Net carrying value as of January 1, 2009 359 851 86 219 374 1,889
Net carrying value as of December 31, 2009 364 828 111 267 371 1,942
The fi re insurance value of the Group’s own-use property and equipment totalled USD 3,473 million and USD 3,676 million as of December 31, 2009 and 2008, respectively.
USD 548 million additions to goodwill, USD 4 million additions to PVFP, and USD 106 million additions to other intangible assets resulted from the acquisitions accounted for in 2009 as disclosed in note 5.
Table 18.2 in USD millions, as of December 31, 2009Intangible assets by segment – current period 09_Financial_Statements_Part2_7443_Eng.indd 20609_Financial_Statements_Part2_7443_Eng.indd 206 24/2/10 20:18:1324/2/10 20:18:13
Gross carrying value as of January 1, 2008 1,560 2,392 2,961 1,025 7,939 Less: accumulated amortization / impairments (8) (1,612) (1,683) – (3,303) Net carrying value as of January 1, 2008 1,553 780 1,278 1,025 4,636
Table 18.4 in USD millions, as of December 31, 2008Intangible assets by segment – prior period 09_Financial_Statements_Part2_7443_Eng.indd 20709_Financial_Statements_Part2_7443_Eng.indd 207 24/2/10 20:18:1324/2/10 20:18:13
Other fi nancial liabilities: Amounts due to reinsurers, agents and other insurance companies 1,996 1,778 Amounts due to investment brokers 853 790 Amounts due to life policyholders 561 559 Liabilities for cash collateral received for securities lending 508 182 Derivative liabilities 660 1,388 Bank deposits 1,800 1,179 Liabilities for defi ned benefi t plans 1,891 2,294 Other liabilities for employee benefi t plans 101 105 Other liabilities 6,616 6,264 Other non-fi nancial liabilities: Current tax payables 983 1,025 Restructuring provisions 119 88 Premium prepayments and other advances 828 697 Other liabilities 567 594 Total other liabilities 17,485 16,944
Table 20.1 in USD millions, as of December 31Other liabilities 09_Financial_Statements_Part2_7443_Eng.indd 20809_Financial_Statements_Part2_7443_Eng.indd 208 24/2/10 20:18:1424/2/10 20:18:14
Table 20.2 shows the maturity schedule of other fi nancial liabilities as of December 31, 2009 and 2008, respectively.
Undiscounted cash fl ow 3 1 Excluding liabilities for defi ned benefi t 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, 2009, the Group entered into several restructuring programs, recording a total charge to income of USD 86 million. Additionally, USD 15 million were incurred with respect to restructuring programs already initiated in prior years. The largest restructuring program in 2009 relates to the integration of the management services business of 21st Century into the Group’s Farmers business division. A restructuring plan was announced in which offi ce closures and a reduction in workforce will occur. The impact is predominantly headcount related, with costs approximating USD 28 million. As a result of the 21st Century transaction, the Group also assumed already existing restructuring provisions of USD 17 million for on-going restructuring activities.
During the year ended December 31, 2008, the Group entered into four main restructuring programs, recording a total charge to income of USD 141 million. The UK General Insurance Business recorded restructuring costs totalling approximately USD 66 million, of which, USD 53 million related to a restructuring program aligned to the operational transformation strategy of the Group. The remainder related to a decision to close all retail outlets of one of the UK subsidiaries in order to focus on internet based sales.
Total income tax expense/(benefi t) attributable to policyholders 387 (1,184) Total income tax expense/(benefi t) attributable to shareholders 908 732 Total income tax expense/(benefi t) 1,295 (452)
Actual income tax expense attributable to shareholders 21.9% 908 19.0% 732 Plus: income tax expense/(benefi t) attributable to policyholders 387 (1,184) Actual income tax expense/(benefi t) 28.6% 1,295 (17.0%) (452)
As of January 1 (583) (2,375) Net change recognized in the income statement (327) 1,189 Net change recognized in equity (1,189) 1,380 Net changes due to acquisitions/(divestments) 11 (1,029) Foreign currency translation effects (119) 253 As of December 31 (2,207) (583)
Table 21.7 in USD millions, as of December 31Deferred taxes – policyholder/ shareholder attribution 10_Financial_Statements_Part3_7444_Eng.indd 21110_Financial_Statements_Part3_7444_Eng.indd 211 24/2/10 20:23:3324/2/10 20:23:33
Deferred acquisition and origination costs 31 (516) 65 (584) Depreciable and amortizable assets 20 (31) 22 (43) Life policyholders’ benefi ts and deposits 1 11 (7) 20 – Unrealized (gains)/losses on available-for-sale investments and cash fl ow hedges 316 (365) 965 (332) Accruals & deferred income 197 – 239 – Reserves for losses and loss adjustment expenses 489 – 569 (46) Reserves for unearned premiums 706 (158) 744 (253) Pensions and other employee benefi ts 376 – 384 –
Deferred acquisition and origination costs 56 (2,762) 22 (2,330) Depreciable and amortizable assets 101 (2,116) 191 (1,592) Life policyholders’ benefi ts and deposits 1 529 (861) 473 (817) Unrealized (gains)/losses on available-for-sale investments and cash fl ow hedges 344 (580) 710 (355)
Tax loss carryforwards 244 – 183 – Gross deferred tax assets/(liabilities)
As of December 31, 2009 the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized amount to approximately USD 16 billion. In the remote scenario in which these temporary differences were to reverse simultaneously, the resulting tax liabilities would be very limited due to participation exemption rules.
For which deferred tax assets have not been recognized, expiring 5 to 20 years 178 203 > 20 years or with no time limitation 219 –
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, 2009, are recoverable.
Table 21.9 in USD millions, as of December 31Tax losses carryforwards and tax credits 10_Financial_Statements_Part3_7444_Eng.indd 21310_Financial_Statements_Part3_7444_Eng.indd 213 24/2/10 20:23:3424/2/10 20:23:34
Zurich Finance (UK) plc 6.625% GBP 450 bond, undated notes 4, 6 717 648 Zurich Finance (USA), Inc. 5.75% EUR 500 bond, due October 2023 6 707 687
Debt related to capital markets and banking activities Debt related to capital markets and banking activities decreased from USD 2,527 million as of December 31, 2008 to USD 839 million as of December 31, 2009. Zurich Capital Markets’ debt reduced by USD 2,054 million, largely due to commercial paper repayments, partially offset by an increase of USD 366 million in the level of corporate and institutional deposits held by our banking operations. A signifi cant portion of the commercial paper repayments was fi nanced by the issue of longer term senior debt which better matches the duration of the assets.
i) Senior debt Senior debt increased from USD 3.4 billion to USD 6.3 billion during the year, mainly as a result of issuances under the EMTN Programme. The senior debt issued on September 30, 2009, was used to meet operational debt requirement of capital markets and banking activities, partially through the repayment of existing operational debt.
On September 30, 2009 Zurich Finance (Luxembourg) S.A. issued USD 750 million of senior debt under its EMTN Programme. These bonds carry a fi xed annual coupon of 3.25% and mature in September 2013.
On July 1, 2009, Zurich Insurance Company Ltd issued EUR 143 million (USD 203 million) of subordinated capital notes under its EMTN Programme. These subordinated bonds carry a fi xed annual coupon of 12.0% and are callable in 2014.
On August 11, 2009, Zurich Insurance Company Ltd, Bermuda Branch, purchased the following principal amounts of securities issued by ZFS Financial (USA) Trusts from investors, which resulted in a total pre-tax gain of USD 136 million: USD 64 million of Series III Floating Rate ECAPS issued by ZFS Finance (USA) Trust III;•
USD 206 million of Series IV Fixed/Floating Rate Trust Preferred Securities issued by ZFS Finance (USA) Trust IV; and, •
Series I 6.15% Fixed / Adjustable Rate USD 600 ECAPS, due December 2065 6.15% payable semi-annually until December 15, 2010 and then reset quarterly to the adjustable rate
Redeemable in whole or in part at par plus any accrued interest.
Debt maturities shown in table 22.3 refl ect original contractual dates without taking early redemption options into account. For call/redemption dates, refer to table 22.2. The total notional amount of debt due in each period is not materially different from the total carrying amount disclosed in table 22.3. Undiscounted cash fl ows include interest and principal cash fl ows on debt outstanding as of December 31, 2009 and December 31, 2008, respectively. All debt is assumed to mature within 20 years of the balance sheet date without refi nancing and where the Group has the option to repay the debt, the option is assumed to expire. Floating interest rates are assumed to remain constant as of December 31, 2009 and December 31, 2008, respectively. The aggregated cash fl ows are translated into USD at end-of-period rates.
Interest expense on debt Interest expense on debt decreased from USD 599 million in 2008 to USD 586 million in 2009, primarily as a result of lower interest rates and foreign exchange fl uctuations.
Credit facilities The Group has access to a syndicated revolving credit facility of USD 3 billion that terminates in 2012. Zurich Financial Services Ltd through the absorption of Zurich Group Holding, together with Zurich Insurance Company Ltd and Farmers Group, Inc. are guarantors of the facility and can draw up to USD 1.25 billion, USD 1.5 billion and USD 250 million, respectively. No borrowings were outstanding under this facility as of December 31, 2009 and December 31, 2008.
Dunbar Bank and Zurich Bank have access to various committed credit facilities totalling GBP 240 million and GBP 190 million, respectively. As of December 31, 2009 and December 31, 2008, GBP 50 million were drawn under these credit facilities.
As of December 31, 2009 and December 31, 2008, fi nancial debt consisted of the following components.
Debt related to capital markets and banking activities 839 814 25 1,379
The USD 1,047 million adjustment to senior debt contains the newly issued USD 750 million under the EMTN Programme by Zurich Finance (Luxembourg) S.A. loaned directly to our capital markets and banking activities, an adjustment of USD 100 million for non-recourse debt and the USD 200 million drawn under the Leschi credit facility.
Table 22.5 in USD millions, as ofFinancial debt 10_Financial_Statements_Part3_7444_Eng.indd 21810_Financial_Statements_Part3_7444_Eng.indd 218 24/2/10 20:23:3724/2/10 20:23:37
Authorized, contingent and issued share capital As of December 31, 2008 15,679,873 156,798,727 0.10 a) Issued share capital As of December 31, 2008, Zurich Financial Services Ltd had bought back 3,750,500 of its registered shares over a second trading line within its buy-back program authorized by the Board of Directors on February 13, 2008. In March 2009, the Board of Directors decided not to propose the destruction of these shares to the Annual General Meeting of shareholders but to keep the shares as treasury shares for use in connection with the funding of potential acquisitions in the future or for employee share-based compensation. This rededication of the shares has been approved by the Swiss Takeover Board.
At the Annual General Meeting on April 2, 2009 the shareholders approved an increase in both authorized and contingent share capital to a new maximum of CHF 1,000,000 each, allowing for enhanced fi nancial fl exibility of the company for future capital management. On April 17, 2009, Zurich Financial Services Ltd placed 4,800,000 new shares issued under its authorized share capital and 1,914,096 existing treasury shares, bought back under the share buy-back program authorized in 2008, with institutional investors via an accelerated bookbuild. This capital increase reduced the authorized capital to CHF 520,000. The proceeds from the accelerated bookbuild were used in connection with the funding of the 21st Century acquisition completed on July 1, 2009.
b) Authorized share capital Until April 3, 2011, the Board of Zurich Financial Services Ltd is authorized to increase the share capital by an amount not exceeding CHF 520,000 by issuing up to 5,200,000 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. The Board may issue such new shares by means of a fi rm underwriting by a banking institution or syndicate with a subsequent offer of those shares to 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.
The Board is further authorized to restrict or withdraw the pre-emptive rights of shareholders and to allocate them to third parties if the shares are to be used for the take-over of an enterprise, or parts of an enterprise or of participations or if issuing shares for the fi nancing including re-fi nancing of such transactions, or for the purpose of expanding the scope of shareholders in connection with the quotation of shares on foreign stock exchanges.
Employee participation On February 14, 2007, the Board of Directors of Zurich Financial Services Ltd decided 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 on April 3, 2007. On January 1, 2008, the contingent share capital, to be issued to employees of Zurich Financial Services Ltd and Group companies, amounted to CHF 320,258 or 3,202,579 fully paid registered shares with a nominal value of CHF 0.10 each. During 2009 and 2008, 550,448 and 8,300 shares, respectively, were issued to employees out of the contingent share capital under the program described above. As a result, on December 31, 2009 and 2008, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Financial Services Ltd and its subsidiaries, amounted to CHF 264,383 and CHF 319,428 or 2,643,831 and 3,194,279 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 or respective option rights 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 profi tability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
In February 2001, the Group placed six series of Trust Capital Securities (Zurich RegCaPS) for a total amount of USD 1,125 million (USD 1,096 million net of issuance costs) with a limited number of qualifi ed institutional and corporate U.S. investors. The securities, which were issued under Rule 144A in the U.S., are perpetual, non-cumulative and have a par value of USD 1,000 each. They have no voting rights, except in certain specifi ed circumstances and are linked to Farmers Group, Inc. Class C shares. On March 30, 2006, April 11, 2006 and April 18, 2008, the Group redeemed the Series I, III and IV of the Zurich RegCaPS, respectively. The liquidation amounts totalled USD 550 million in aggregate. Of the remaining series totalling USD 575 million, one has a fi xed rate coupon of 6.58 percent and two have fl oating rate coupons at LIBOR +71 basis points. These coupon rates step up after the fi rst call dates. The Group has the option to call all outstanding securities in 2011.
Treasury shares comprise shares repurchased under the share buy-back program announced in 2008 and shares acquired in the market held to cover employee share and option plans. The number of treasury shares amounted to 3,269,338 and 5,219,803 as of December 31, 2009 and 2008, respectively.
On February 13, 2008 the Board of Zurich Financial Services Ltd authorized a share buy-back program for the repurchase of up to CHF 2.2 billion worth of shares over the course of 2008. As of December 31, 2008, 3,750,500 fully paid shares, with a nominal value of CHF 0.10, had been bought back at an average price of CHF 293 per share, at a total cost of CHF 1.1 billion. In March 2009, the Board of Directors decided not to propose the destruction of these shares to the Annual General Meeting of shareholders but to keep the shares as treasury shares for use in connection with the funding of potential acquisitions or for employee share-based compensation. This rededication has been approved by the Swiss Takeover Board.
In its meeting of February 3, 2010, the Board of Directors decided to propose to the Annual General Meeting 2010 the destruction of the remaining 1,836,404 shares from the share buyback program authorized by the Board of Directors on February 13, 2008. Since their rededication in March 2009 these shares were held as treasury shares for use in connection with the funding of potential acquisitions in the future or for employee share-based compensation plans.
The Group had 56,668 and 57,609 employees (full-time equivalents) as of December 31, 2009 and 2008, respectively. Personnel and other related costs incurred for the year ended December 31, 2009 and 2008, were USD 5,174 million and USD 5,404 million, including wages and salaries of USD 4,197 million and USD 4,468 million, respectively. The reduction of wages and salaries of USD 271 million represents a reduction of USD 130 million on a local currency basis.
For the defi ned benefi t pension plans, total contributions to funded pension plans and benefi t payments by the Group are currently estimated at USD 456 million for 2010 compared with USD 451 million estimated in the previous year for 2009. The actual amount may differ.
Present value of funded obligations (13,966) (12,680) (13,653) (12,190) (70) (93) (66) (70) Fair value of plan assets 12,622 10,879 13,285 11,071 – – 5 10
Unrecognized past service cost – (1) – 2 – – – – Cumulative impact of asset ceiling (15) (7) (62) – – – – –
Pensions are long-term by nature. However, short-term variations between long-term actuarial assumptions and actual experience may be positive or negative, resulting in actuarial gains or losses, which are recognized in full in the period in which they occur, but included in other comprehensive income.
Expected return on plan assets 619 727 – – Past service cost (7) (14) 9 – Gains on curtailment or settlement 2 2 – –
Table 24.1 in USD millions, as of December 31Status of funded defi ned benefi t plans
Table 24.3 in USD millions, as of December 31Status of funded and unfunded defi ned benefi t plans
Table 24.4 in USD millions, as of December 31Expense recognized in income 10_Financial_Statements_Part3_7444_Eng.indd 22410_Financial_Statements_Part3_7444_Eng.indd 224 24/2/10 20:23:3924/2/10 20:23:39
As a matter of policy, pension plan investment guidelines do not permit investment in any assets in which the Group or its subsidiaries have an interest, including shares or other fi nancial instruments issued and real estate held for own use.
Actuarial gain/(loss) included in other comprehensive income 12 (320) (7) 3
Fair value of plan assets as of January 1 10,879 13,286 – 5 Expected return on plan assets 619 727 – – Actuarial gain/(loss) included in other comprehensive income 318 (1,485) – –
Table 24.6 in USD millionsMovement in funded and unfunded defi ned benefi t plan obligation
The movements in actuarial gains and losses due to differences between actual and expected experience on the Group’s plan assets and defi ned benefi t obligations, together with the impact of changes in actuarial assumptions to refl ect economic conditions at the year end are summarized below: Actuarial gain/(loss) as of January 1 (2,907) (1,308) (1,870) (2,420) Experience adjustments on plan liabilities (37) (147) (118) (375) Experience adjustments on plan assets 318 (1,485) 188 447 Changes due to discount rate assumptions (103) 223 975 – Changes due to other actuarial assumptions 144 (392) (345) 528 Asset ceiling recognition (7) 51 (64) – Foreign currency translation effects (80) 152 (75) (50) Total actuarial gain/(loss) as of December 31 (2,672) (2,907) (1,308) (1,870) Total actuarial gain/(loss) net of policyholder participation and taxes as of December 31 (1,762) (1,934) (818) (1,286)
The principal fi nancial assumptions used to calculate the Group’s major defi ned benefi t pension and defi ned postemployment benefi t obligations and the Group’s pension expenses are as follows: Table 24.8 in USD millionsMovement in liability for funded and unfunded plans
Expected long-term rate of return on assets 4.1% 6.6% 7.0% 5.1% 4.1% 5.9% 6.8% 5.0%
The expected long-term rate of return on assets is derived separately for each of the Group’s funded benefi t plans. Each major asset class is assigned an expected long-term rate of return, net of investment expenses, appropriate for the environment in which that plan is invested. The overall expected long-term rate of return on assets for a plan is calculated as the weighted average of the expected return for each asset class, weighted by the plan’s target allocation to each asset class.
Discount rate 5.5% 6.0% Expected increase in long-term health cost – initial rate 8.4% 8.4% Expected increase in long-term health cost – ultimate rate 4.8% 4.9%
The actuarial assumptions of healthcare cost trend rates have an impact on the amounts recognized. A one percentage point change in the health care cost trend rates would have the effects on amounts recognized in 2009 as set out in table 24.12.
b) Defined contribution pension plans Certain of the Group’s companies sponsor defi ned contribution pension plans. Eligibility for participation in such plans is either based on completion of a specifi ed 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 47 million and USD 52 million in 2009 and 2008, respectively.
Table 24.10 as of December 31Assumptions used in determining the actuarial liabilities for major defi ned benefi t pension plans
Table 24.11 as of December 31Assumptions used in determining the actuarial liabilities for other defi ned postemployment
a) Cash incentive plans Various businesses throughout the Group operate short-term incentive programs for executives, management and, in some cases, for employees of that business unit. Awards are made in cash, based on the accomplishment of both organizational and individual performance objectives. The expenses recognized for these cash incentive plans amounted to USD 354 million and USD 285 million for the years ended December 31, 2009 and 2008, respectively.
The average share price for Zurich Financial Services Ltd shares in 2009 and 2008 was CHF 209.33 and CHF 280.49 respectively.
Exercise date January to April, 2009 2,211 190 May to August, 2009 68,336 218 September to December, 2009 76,822 241
The shares and options granted during the year are the target allocations made under the performance option and performance share plans together with any restricted share awards granted during the year. Whether these grants become vested or not will depend on whether the performance achievements are met. In case the performance achievements deviate from the initial assumptions, the expense is being adjusted.
Table 25.5 for the years ended December 31Options and shares granted during the period
The Group has provided contractual commitments and fi nancial guarantees to external parties, associates and joint ventures as well as partnerships. These arrangements include commitments under certain conditions to make liquidity advances to cover delinquent principal and interest payments, make capital contributions or provide equity fi nancing.
Commitments under investment agreements 4,165 4,205 Less funded commitments (3,386) (3,423) Remaining commitments under investment agreements 779 782 Guarantees and letters of credit 1 9,911 915 Future rent commitments 1,154 1,261 Undrawn loan commitments (capital markets and banking activities) 405 646 Other commitments and contingent liabilities 84 47 1 Guarantee features embedded in life insurance products are not included. For such guarantee features refer to note 8 on insurance reserves.
The Group knows of no event of default that would require it to satisfy fi nancial guarantees. Irrevocable letters of credit have been issued to secure certain reinsurance contracts.
Commitments under lease agreements The Group has entered into various operating leases as lessee for offi ce space and certain computer and other equipment. Lease expenses totaled USD 200 million and USD 198 million for the years ended December 31, 2009 and 2008, respectively.
Table 26.1 in USD millions, as of December 31Quantifi able commitments and contingencies
Table 26.2 in USD millions, as of December 31Future payments under non-cancellable operating leases with terms in excess of one year 10_Financial_Statements_Part3_7444_Eng.indd 23210_Financial_Statements_Part3_7444_Eng.indd 232 24/2/10 20:23:4424/2/10 20:23:44
Terms and conditions associated with the fi nancial assets pledged to secure the Group’s liabilities are usual and standard in the markets in which the underlying agreements were executed.
In 2006, the Group settled with various U.S. state attorneys general and state insurance regulators in connection with investigations in the U.S. concerning certain business practices involving insurance brokers and insurance companies. In July 2006, the Group also entered into a settlement agreement to resolve consolidated class-action litigation concerning those matters. Final judgment has been entered approving the settlement, and the appellate court has upheld the settlement approval. A number of individual claims not covered by the class action settlement remain pending against the Group.
Financial Information 27. Fair value of fi nancial assets and fi nancial liabilities
The following tables compare the fair value of fi nancial assets and fi nancial liabilities with their carrying value.
Cash and cash equivalents 11,631 12,428 11,631 12,428 Available-for-sale securities Debt securities 124,358 105,752 124,358 105,752
Cash and cash equivalents 5,840 4,460 5,840 4,460 Investments at FV through profi t or loss Designated at FV
Total investments at FV through profi t or loss 89,429 69,666 89,429 69,666
Group investments and other non-unit linked financial instruments carried at fair value
Total available-for-sale securities 49,238 78,610 3,942 131,790 Securities at FV through profi t or loss Trading
Net transfers into Level 3 315 2 – 10 – – –
Sensitivity of fair values reported for Level 3 instruments to changes in key assumptions The Group has classifi ed under Level 3 a total amount of USD 3.2 billion of asset-backed securities (ABSs) held as Group investments. These ABSs include non-agency backed securities for which the limited market activity observed at year end required our pricing providers to make certain internal valuation assumptions. To determine the fair value of these investments, pricing providers use valuation models that are based on an expected present value technique.
Key assumptions Discount margins +20% (171) 20% 183 Prepayment rates –20% (39) +20% 33
Total investments at FV through profi t or loss 52,084 32,636 4,709 89,429 Derivative assets – 98 – 98
Financial liabilities at FV through profi t or loss Designated at FV
Table 27.4 as of December 31, 2009Sensitivity analysis of Level 3 ABSs to changes in key assumptions
Sales / Redemptions (32) (145) Foreign currency translation effects 4 4 1 Presented under ”Net investment result on unit-linked investments” in the Consolidated income statements.
The table below sets out related party transactions with equity method accounted investments, as well as other related parties, such as our distribution partners of the jointly owned companies in Spain, refl ected in the consolidated income statements and consolidated balance sheets.
Consolidated balance sheets as of December 31 Cash and bank deposits 158 171 Other loans 1,095 1,457 Total unit-linked investments 2,349 818
Policyholders’ collateral and other loans 12 15 Reserves for losses and loss adjustment expenses (12) (8)
Remuneration of key personnel of the Group Cash compensation, current benefi ts and fees 29 39 Post-employment benefi ts 4 4 Share-based compensation 31 34 Total remuneration of key personnel 64 77
No provision for non-repayment has been required in 2009 and 2008 for the loans or guarantees made to Members of the Group Executive Committee.
Table 28.2 in USD millions, for the years ended December 31Related party transactions – key personnel 10_Financial_Statements_Part3_7444_Eng.indd 24010_Financial_Statements_Part3_7444_Eng.indd 240 24/2/10 20:23:4924/2/10 20:23:49
Farmers Group, Inc. (FGI) and its subsidiaries provide certain non-claims related management services to the Farmers Exchanges, which the Group manages but does not own. 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, 2009 and 2008, FGI and other Group companies held the following surplus note and certifi cates of contribution issued by the Farmers Exchanges. Originally these were purchased by FGI in order to supplement the policyholders’ surplus of the Farmers Exchanges.
b) Quota share reinsurance treaties with the Farmers Exchanges The Farmers Exchanges cede risk through quota share reinsurance treaties to Farmers Reinsurance Company (Farmers Re), a wholly owned subsidiary of FGI, and to Zurich Insurance Company Ltd (ZIC).
The following are the signifi cant changes to the 2004 APD agreement: Effective January 1, 2006, the Farmers Exchanges modifi ed the terms of the APD agreement with Farmers Re and • ZIC. The new APD 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 APD agreement also includes provisions for additional experience commissions that will depend on loss experience and recoveries below a specifi ed 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 APD agreement, which can be cancelled after 90 days notice by any of the parties, was renewed with the same terms on January 1, 2009 and has a termination date of December 31, 2011.
The following are the signifi cant changes to the 2002 All Lines agreement: Effective December 31, 2004, the 10.0 percent All Lines agreement was amended and the quota share participation • was increased by 2.0 percent to 12.0 percent; Effective December 31, 2005, the quota share participation was decreased from 12.0 percent to 6.0 percent;•
Effective December 31, 2007, the quota share participation was further reduced by 1.0 percent to 5.0 percent. In • addition, under this treaty the Farmers Property and Casualty (P&C) Companies’ catastrophe losses were changed from USD 800 million to a maximum of USD 1 billion; Effective September 30, 2008, the quota share was modifi ed and the participation was increased from 5.0 percent • to 25.0 percent. In addition to this change, the ceding commission for acquisition expenses was increased from 22.0 percent to 25.0 percent; Effective June 30, 2009, the All Lines agreement was cancelled subsequent to which Farmers Re and ZIC entered into • a new 37.5 percent All Lines agreement under which each assumes a percentage of all lines of business written by the Farmers P&C Companies, prospectively. Under the All Lines agreement, which amended the 25.0 percent All Lines agreement in effect since September 30, 2008, Farmers Re and ZIC assume a 7.5 percent and 30.0 percent respective quota share of the premiums written and the ultimate net losses sustained in all lines of business written by the Farmers P&C Companies after the APD agreement has been applied. In addition, under the All Lines agreement, the Farmers P&C Companies catastrophe losses are subject to a maximum of USD 1 billion. As a result, Farmers Re and ZIC are subject to a maximum annual catastrophe loss of USD 75 million and USD 300 million, respectively. The All Lines agreement, which can be terminated after 90 days notice by any of the parties, also provides for the Farmers P&C Companies to receive a provisional ceding commission of 25.0 percent of premiums for acquisition expenses, 8.8 percent of premiums for unallocated loss adjustment expense and 5.3 percent of premiums for other expenses. Unearned premiums totaling USD 970 million were transferred from the Farmers P&C Companies to Farmers Re and ZIC as a result of their increased participation in the All Lines agreement through September 30, 2009. In addition, Farmers Re and ZIC remitted USD 242 million of reinsurance commissions to the Farmers P&C Companies for acquisition expenses due to the increased participation in the All Lines agreement.
Based on the results for 2009 and 2008, Farmers Exchanges’ share of recoveries were USD 3,239 million and USD 940 million, respectively. For the years ended December 31, 2009 and 2008, Farmers Exchanges’ share of ceded premiums earned were USD 4,722 million and USD 1,379 million, respectively. Farmers Exchanges’ share of ceding commissions was USD 1,461 million and USD 403 million for the years ended December 31, 2009 and 2008, respectively.
c) North America Commercial Small Business Solutions (SBS) On June 13, 2008, the Group completed the sale of the rights to access renewals of its North America Commercial Small Business Solutions (SBS) book of business to Truck Insurance Exchange (TIE), one of the Farmers Exchanges, which the Group manages but does not own. As part of the transaction, the Group has entered into a 100 percent quota share reinsurance agreement for the in-force business as of June 1, 2008. This resulted in the Group paying TIE the balance of unearned premium reserve related to the business ceded to TIE of USD 425 million and TIE compensating the Group for its deferred acquisition cost balance as of the effective date of the transaction by paying a ceding commission of USD 120 million. In addition, the management of the in-force SBS book of business has been transferred together with certain assets and liabilities to FGI. This transaction had no impact on the scope of consolidation.
Global Life pursues a strategy with market-leading propositions in unit-linked and protection products through global distribution and proposition pillars to develop leadership positions in its chosen segments.
For the purpose of discussing our fi nancial performance we consider General Insurance, Global Life and Farmers to be our core operating segments.
Non-Core Businesses include insurance businesses that the Group does not consider core to its operations and that are therefore mostly managed to achieve a benefi cial run-off.
In addition, Non-Core Businesses now also include the Group’s banking activities that, following a strategic review, are no longer seen to support the core insurance business, but as a useful adjunct to it. As a result management responsibility over banking activities has been transferred as of September 30, 2009 and to refl ect this transfer the segment analysis has been aligned by moving them from Other Operating Businesses to Non-Core Businesses.
Universal Underwriters Life Insurance Company from the previously reported Other Businesses to Global Life•
The Group also manages its business on a geographic structure. As a result of the realignment of the previous International Businesses region into a new regional structure, as of January 1, 2009, Southern Africa is part of an expanded Europe & Africa region, Latin America is part of an expanded Americas region and Asia-Pacifi c & Middle East forms a new stand-alone region. The Group’s identifi ed regions are as follows: Americas
To be consistent with the Group’s geographic structure, the following major transfers between regions have been made for 2009 fi nancial reporting: Reporting Units in Southern Africa from the previous International Businesses to Europe & Africa•
Reporting Units in Latin America from the previous International Businesses to Americas•
The 2008 segmental results have been restated to refl ect these changes, with no impact on the Group’s fi nancial position or performance.
Revenues Direct written premiums and policy fees 1 32,516 35,357 12,343 10,694
Gross written premiums and policy fees 34,157 37,151 12,440 10,794 Less premiums ceded to reinsurers (5,222) (5,646) (769) (741)
Net written premiums and policy fees 28,935 31,505 11,672 10,053 Net change in reserves for unearned premiums 136 (583) 6 –
Net investment income on Group investments 3,070 3,711 4,081 4,518 Net capital gains/(losses) and impairments on Group investments 110 (88) (49) (829)
Farmers Other Operating Businesses Non-Core Businesses Eliminations Total 10_Financial_Statements_Part3_7444_Eng.indd 24710_Financial_Statements_Part3_7444_Eng.indd 247 24/2/10 20:23:5424/2/10 20:23:54
Add back: Business operating profi t attributable to non-controlling interests (3) 24 15 26 Net income before shareholders’ taxes 2,614 2,156 931 1,531 Income tax expense attributable to policyholders – – 387 (1,184)
Table 30.2 in USD millions, for the years ended December 31Reconciliation of BOP to net income after income taxes 10_Financial_Statements_Part3_7444_Eng.indd 24810_Financial_Statements_Part3_7444_Eng.indd 248 24/2/10 20:23:5624/2/10 20:23:56
Reinsurers’ share of reserves for insurance contracts 12,957 12,749 2,160 2,008 Deposits made under assumed reinsurance contracts 66 68 3 – Deferred policy acquisition costs 3,374 3,247 12,276 10,768 Deferred origination costs – – 856 770
Total assets (after cons. of investments in subsidiaries) 119,597 111,710 215,494 185,304 Liabilities Liabilities for investment contracts – – 46,374 36,230 Reserves for insurance contracts 79,900 77,468 136,256 120,706
Table 30.3 in USD millions, as of December 31Assets and liabilities by business segment 10_Financial_Statements_Part3_7444_Eng.indd 25010_Financial_Statements_Part3_7444_Eng.indd 250 24/2/10 20:23:5824/2/10 20:23:58
Farmers Other Operating Businesses Non-Core Businesses Eliminations Total 10_Financial_Statements_Part3_7444_Eng.indd 25110_Financial_Statements_Part3_7444_Eng.indd 251 24/2/10 20:24:0124/2/10 20:24:01
Gross written premiums and policy fees 7,602 7,888 9,864 11,215 Net earned premiums and policy fees 4,738 4,834 8,331 9,258 Insurance benefi ts and losses, net 3,540 4,457 5,711 6,508 Policyholder dividends and participation in profi ts, net 3 4 8 11 Total net technical expenses 964 975 2,355 2,495
Southern Africa 650 654 Rest of Europe & Africa 1,899 2,013
Americas United States 9,189 10,469 Rest of North America 469 520 Latin America 1,353 1,236
Asia-Pacifi c & Middle East Asia-Pacifi c Mature Markets 1,070 1,141 China & South East Asia 229 311
Net investment income on Group investments 437 433 342 710 1,733 1,899 Net capital gains/(losses) and impairments on
Supplementary information Gross written premiums and policy fees from external customers 1,257 1,087 1,089 1,089 3,379 3,846 Property, equipment and intangible assets 297 244 446 403 1,020 996 1 The Global Life segment includes approximately USD 2,698 million and USD 1,250 million of gross written premiums and future life policyholders‘ benefi ts for certain universal life-type contracts in our Spanish operations for the years ended December 31, 2009 and 2008, respectively (see note 3).
Farmers Management Services Management fees and other related revenues 2,690 2,458 Management and other related expenses 1,399 1,317 Gross management result 1,291 1,142 Other net income (excl. items not included in BOP) 35 60 Business operating profi t before non-controlling interest 1,326 1,202 Business operating profi t 1,326 1,202 Farmers Re
Gross written premiums and policy fees 6,615 3,381 Net earned premiums and policy fees 5,722 2,378 Insurance benefi ts and losses, net (3,904) (1,622) Total net technical expenses (1,760) (697) Net underwriting result 58 59 Net non-technical result (excl. items not relevant for BOP) 71 19 Net investment result income 100 75 Business operating profi t before non-controlling interests 228 154 Business operating profi t 228 154 Farmers business operating profi t 1,554 1,356
Table 30.8 in USD millions, for the years ended December 31Farmers – Overview 10_Financial_Statements_Part3_7444_Eng.indd 25810_Financial_Statements_Part3_7444_Eng.indd 258 24/2/10 20:24:1224/2/10 20:24:12
Gross written premiums and policy fees – – Net earned premiums and policy fees – – Net investment income 8 10 Net capital gains/(losses) and impairments on investments – – Other income 11 11 Total BOP revenues 19 21 Insurance benefi ts and losses, incl. PH dividends, net – – Underwriting and policy acquisition costs, net – – Administrative and other operating expense (excl. depreciation / amortization) 27 8 Other expenses (excl. items not included in BOP) – – Depreciation, amortization and impairments of property, equipment and intangible assets – – Interest expense on debt 24 40 Business operating profi t before non-controlling interests (32) (28) Non-controlling interests – (2) Business operating profi t (32) (25)
Table 30.9 in USD millions, for the years ended December 31Other Operating Businesses – Overview 10_Financial_Statements_Part3_7444_Eng.indd 26010_Financial_Statements_Part3_7444_Eng.indd 260 24/2/10 20:24:1324/2/10 20:24:13
Table 30.10 in USD millions, for the years ended December 31Non-Core Businesses – Overview 10_Financial_Statements_Part3_7444_Eng.indd 26210_Financial_Statements_Part3_7444_Eng.indd 262 24/2/10 20:24:1524/2/10 20:24:15
Report of the statutory auditor on the consolidated fi nancial statements
Board of Directors’ responsibility The Board of Directors is responsible for the preparation and fair presentation of the consolidated fi nancial statements in accordance with the International Financial Reporting Standards (IFRS) and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consolidated fi nancial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confi rm that an internal control system exists which has been designed for the preparation of consolidated fi nancial statements according to the instructions of the Board of Directors.
ZG Investments II Ltd. Hamilton Other Operating Businesses 100 100 USD 0.01
as of December 31, 2009Signifi cant subsidiaries 11_Significant_Subsidiaries_7417_Eng.indd 26611_Significant_Subsidiaries_7417_Eng.indd 266 24/2/10 20:26:2624/2/10 20:26:26
Ireland Zurich Life Assurance plc Dublin Global Life 100 100 EUR 17.5 Zurich Financial Services EUB Holdings Limited Dublin Non-Core Businesses 100 100 GBP 0.001
Zurich Finance (Luxembourg) S.A. Howald Other Operating Businesses 100 100 EUR 0.1
Portugal Zurich – Companhia de Seguros S.A. 4 Lisbon General Insurance 100 100 EUR 10.0 South Africa Zurich Insurance Company South Africa Limited 5 Johannesburg General Insurance 73.61 73.61 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 CaixaSabadell Vida, S.A. Companyia d´Assegurances i Reassegurances Sabadell Global Life 50 50 EUR 39.1 CAN Seguros Generales SA Pamplona General Insurance 50 50 EUR 9.0 Zurich Vida, Compañía de Seguros y Reaseguros, S.A. – Sociedad Unipersonal Madrid Global Life 100 100 EUR 50.4 "Zurich España, Compañía de Seguros y Reaseguros, S.A." 6 Barcelona General Insurance 100 100 EUR 33.6 4 Zurich – Companhia de Seguros S.A. (a public limited liability company incorporated and existing under the laws of Portugal) merged into Zurich Insurance plc (a public limited liability company incorporated in Ireland) with effect from 1 January 2010.
Zurich Insurance Company Ltd Zurich Other Operating Businesses 100 100 CHF 825.0
Turkey Zurich Sigorta A.S. Fındıklı, Istanbul General Insurance 100 100 TRY 47.3 United Kingdom
Zurich Assurance Ltd Swindon, England Global Life 100 100 GBP 236.1
Zurich Specialties London Limited Fareham, England Non-Core Businesses 100 100 GBP 150.0
ZFS Finance (USA) LLC V 7 Wilmington, DE Other Operating Businesses 100 100 USD –
Zurich Holding Company of America, Inc. Wilmington, DE Other Operating 7 This entity is a LLC that has no share capital.
This report describes the development in 2009 of the embedded value of the Zurich Financial Services Group.
EV operating earnings 1,921 1,983 (62) of which New business value 782 753 29 Embedded value earnings 3,088 (1,575) 4,663 Return on Opening EV 24.0% (9.9%)
EV operating earnings were USD 1.9 billion, a 3 percent decrease compared with the prior year. Operating earnings were resilient due to the strong new business performance and the impact of changes to align with the new European Insurance CFO Forum MCEV Principles 1, which had an estimated impact of USD 220 million, in spite of lower expected returns.
EV earnings were USD 3.1 billion, representing a return of 24 percent. The economic and non operating positive variances of USD 1.2 billion were largely due to a recovery in equity markets in many countries during the second half of the year.
in USD millions, for the years ended December 31Embedded value key results 1 © Stichting CFO Forum Foundation 2008 12_Embedded_Value_Report_8065_Eng.indd 27112_Embedded_Value_Report_8065_Eng.indd 271 24/2/10 20:27:1024/2/10 20:27:10
New business net of non-controlling interests 337 (1,112) (775) 1,506 730 Expected contribution at reference rate 63 72 135 236 371 Expected contribution in excess of reference rate 14 25 38 430 469 Transfer to free surplus 436 687 1,123 (1,123) –
Opening embedded value 6,981 8,953 15,935 New business value global Life (685) 1,437 753
Other non-operating variances 118 136 253 Embedded value earnings (515) (1,059) (1,575) Dividends & capital movements (217) 309 92 Foreign currency translation effects (802) (831) (1,633) Closing embedded value 5,447 7,371 12,818
Embedded value by territory (in USD millions, for the years ended December 31)
The Group applied the MCEV Principles for its embedded value calculations for the year ended December 31, 2009. For the year ended December 31, 2008, embedded value calculations were performed in accordance with the EEV Principles which preceded the MCEV Principles.
In addition, the Group has amended the split of geographical segments this year in line with, and as described in, the Group’s IFRS Financial statements.
Analysis of embedded value earnings, 2008 12_Embedded_Value_Report_8065_Eng.indd 27312_Embedded_Value_Report_8065_Eng.indd 273 24/2/10 20:27:1624/2/10 20:27:16
New business margin (as % APE) 20.6% 21.4% 23.1% 20.5% 21.3% 22.2% 22.5% 22.4% 24.7% 23.1% New business margin (as % PVNBP) 2.5% 2.9% 2.9% 2.4% 2.6% 2.7% 2.9% 3.2% 2.9% 2.9%
1 APE is new annual premiums plus 10% of single premiums. 2 PVNBP is new single premiums plus the present value of new annual premiums.
Bank Distribution APE increased by USD 0.4 billion to USD 1.1 billion, driven by the joint ventures in Spain through successful protection and savings campaigns. 2009 has also benefi ted from a full year’s inclusion of the results from the joint ventures compared to 2008 which only received the benefi t of one quarter. The UK business grew from the sale of newly introduced investment products.
IFA/Brokers distribution increased APE by 11 percent in local currency terms but reduced slightly in U.S. dollar terms. Strong pension sales in the UK and successful sales campaigns from the Finanza e Futuro distribution channel in Italy were partially offset by lower sales of unit-linked pension products in Germany.
Corporate Life & Pensions distribution increased APE by USD 0.2 billion to USD 0.6 billion. The pillar experienced growth in both protection and pension business with the main contributions arising from ZIS, the UK and Latin America.
In addition, the CRNHR replaced the CNMR methodology in 2009 to align with the MCEV Principles, which increased new business value by USD 16 million in the second quarter.
in USD millions, for the years ended December 31New business 12_Embedded_Value_Report_8065_Eng.indd 27712_Embedded_Value_Report_8065_Eng.indd 277 24/2/10 20:27:2224/2/10 20:27:22
1 ZIS is Zurich International Solutions, the international business based in the Isle of Man. ZIS in 2008 includes USD 7 million of development costs that were incurred centrally.
The UK continued to grow its new business value, particularly in local currency, driven by improved margins, higher pension sales and successful sales through our major banking partners.
Germany and Switzerland have suffered lower margins in 2009. The economic environment has increased the cost of interest rate guarantees, although there has been some improvement in the third and fourth quarters due to management action to refi ne profi t sharing models and close some products. The continuing economic uncertainty has also reduced investment in unit-linked products. Germany’s new business in 2008 included a one-off impact from premiums received in respect of state-funded pension business.
Ireland’s new business value grew strongly in 2009, by 19% in local currency. New business premiums fell only slightly despite the steep decline in the local market. Margins increased substantially due to a successful focus on protection business particularly in the group protection market and also through effective expense control.
Spain delivered strong new business performance in particular from the joint ventures whose growth exceeded expectations. 2009 has benefi ted from a full year’s inclusion of the results from the joint ventures compared to 2008 which only received the benefi t of one quarter.
Emerging Markets in Asia have also performed favorably in the diffi cult market conditions, driven by an increased focus on protection business and strong management control of pricing and expenses have improved margins.
Expected contributions were lower in 2009 compared with 2008 due to the lower interest rate environment and the lower opening embedded value.
Operating Variance Operating variance measures the difference between actual experience during the period and that implied by the operating assumptions. It also includes the impact of changes in assumptions about future operating experience.
Operating assumption changes Mortality / morbidity 1 14 (148) 42 (91)
Other operating variances Global development expense (4) (6) (18) (28) (56)
Mortality experience increased embedded value by USD 34 million. As a result of the regular reviews of mortality around Global Life we have updated some of our assumptions. This has led to a mixture of impacts but with a negative USD (148) million from the U.S. partially offset by a positive USD 47 million from Switzerland.
Expense assumptions were improved in several countries to refl ect the outcome of management cost-saving initiatives with an overall impact of USD 111 million. Expense experience in the year resulted in a positive variance of USD 5 million.
Other operating variances totalled USD 152 million. The new CRNHR methodology increased operating earnings by an estimated USD 140 million, and the application of frictional costs to required capital (rather than available capital) increased embedded value by an estimated USD 78 million. A positive variance of approximately USD 50 million came from improved modelling of operational risk for CRNHR and the recognition of internal reinsurance in ZIS. Switzerland benefi ted by approximately USD 50 million from releasing some reserves and from fund management initiatives. These gains were partially offset by corrections to variable premium rate tables in the U.S. during the third quarter with a negative impact of USD (165) million.
The non operating variance of USD (123) million was mainly due to the implementation of the CRNHR methodology. This allows for non-hedgeable ALM risk and reinsurance credit risk, which were not previously allowed for under the old CNMR methodology.
Deferred acquisition costs / Deferred origination costs (13.1) (11.5) Deferred front end fees 5.5 4.7 Present value of profi ts of acquired insurance contracts (0.9) (1.0) Policyholder share of actuarial intangibles 2.6 2.2 Tax on shareholder share of actuarial intangibles 2.1 1.9
Operating sensitivities 10% increase in initial expenses and commissions n / a n / a n / a (79)
10% increase in voluntary discontinuance rates – (494) (494) (89) 10% decrease in voluntary discontinuance rates – 590 590 107 5% improvement in mortality and morbidity for assurances 2 230 232 32 5% improvement in mortality and morbidity for annuities (3) (57) (60) (2) Required capital set equal to minimum solvency capital – 55 55 –
Economic sensitivities 100 basis points increase in risk free yield curve (226) (299) (525) 9 100 basis points decrease in risk free yield curve 115 (594) (479) (13) 10% fall in equity market values (73) (159) (233) (2) 10% fall in property market values (34) (206) (240) (2) 25% increase in implied volatilities for risk free yields 1 (353) (352) 5 25% decrease in implied volatilities for risk free yields (1) 59 58 2 25% increase in implied volatilities for equities and properties – (175) (175) – 25% decrease in implied volatilities for equities and properties – (36) (36) 2
The key assumption changes represented by each of these sensitivities is given in Section 10(r).
The 100 basis points increase in risk free yield curve reduces the value of some products, such as term assurance, with fi xed cash fl ows that are discounted at higher rates. This reduction is offset by the increase in the value of other products, such as those with profi t sharing, due to the higher assumed investment returns on investment of net cash fl ows.
in USD millions, as of December 31, 2009Sensitivities 12_Embedded_Value_Report_8065_Eng.indd 28512_Embedded_Value_Report_8065_Eng.indd 285 24/2/10 20:27:2724/2/10 20:27:27
The Group has written life business in Kemper Investors Life Insurance Company and in Centre operations, some of which is not managed in Global Life. The main products that have been written by these businesses outside Global Life are: variable annuity contracts that provide annuitants with guarantees related to minimum death and income benefi ts;•
Shareholders’ net assets 1.0 1.2 Certainty equivalent value 0.1 (0.6) Time value of fi nancial options and guarantees (0.0) (0.0) Frictional costs (0.0) (0.0) Cost of residual non-hedgeable risk 1 (0.1) (0.4)
Value of business in force (0.1) (1.1) Embedded value 0.9 0.2 1 For 2008 this fi gure was calculated using the CNMR methodology in USD billions, as of December 31Estimated embedded value of life businesses in Non-Core Businesses 12_Embedded_Value_Report_8065_Eng.indd 28612_Embedded_Value_Report_8065_Eng.indd 286 24/2/10 20:27:2824/2/10 20:27:28
The Group MCEV is presented in the following table as the Global Life covered business valued under the MCEV principles and the non-covered businesses, which include the non-core life businesses managed outside Global Life, valued as described in Section 8, and the remaining Group non-life business valued as the unadjusted IFRS net asset value.
Operating MCEV earnings 1.9 2.5 4.4 Non-operating MCEV earnings 1.2 0.0 1.2 Total MCEV Earnings 3.1 2.5 5.6
Closing Group MCEV 16.8 17.0 33.8 in USD billions, as of December 31, 2009Group MCEV, 12_Embedded_Value_Report_8065_Eng.indd 28712_Embedded_Value_Report_8065_Eng.indd 287 24/2/10 20:27:2824/2/10 20:27:28
Embedded value represents the shareholders’ interests in the entities included in Global Life as set out in the Group’s consolidated IFRS Financial Statements. Embedded value excludes any value from future new business.
a) Covered Business Covered business includes all business written by companies that are included in the Global Life segment, in particular: life and critical illness insurance;•
b) Reporting of Embedded Value In line with the Market Consistent Embedded Value Principles, the embedded value is broken down into the following components: shareholders’ net assets, including free surplus and required capital; and,•
Financial Information 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 refl ects 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 territories, an adequate buffer to cover short term volatilities in solvency due to fi nancial and non-fi nancial risks or to achieve the capital required to maintain the desired credit rating.
Frictional costs refl ect 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. Before 2009, frictional costs applied to total available capital and the change was adopted to align with the CFO Forum’s Market Consistent Embedded Value Principles. 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 margin required to be held in respect of that business.
For most products, the average value has been calculated using Monte Carlo simulations. For a small number of products, the time value of fi nancial options and guarantees has been derived using closed form solutions.
Where appropriate, the calculation of the time value of fi nancial options and guarantees makes allowance for: dynamic actions that would be taken by management under different economic simulations, for example to • implement a life business’ investment strategy; and dynamic policyholder behavior, for example changes in surrender behavior as interest rates rise or fall, or take-up • rates of guaranteed annuity options.
It 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 confi dence level by using empirical distributions where available, or assuming probability distributions as appropriate.
A 2.5 percent cost of capital charge has been applied to the diversifi ed present value of non-hedgeable risk based capital. This represents the risk premium that would be demanded by investors on capital exposed to non-hedgeable risks. It has been determined according to research performed by the CRO Forum which indicated that a suitable charge is in the range 2.5-4.5 percent. As the CRO Forum calculation allowed for fi nancial distress costs and agency costs which are explicitly excluded from the embedded value calculation, the Group took the lower end of the range. The Cost of Residual Non-Hedgeable Risk varies linearly with the charge.
The Group’s approach to the cost of non market risk was based on a valuation of the potential impacts on shareholder value of variance in certain best estimate assumptions to allow explicitly, at product level, for insurance (mortality, longevity and morbidity), business and operational risk.
However, in certain cases this symmetry does not hold, and the Group then considered that it was appropriate to make explicit allowance for this within the embedded value.
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 fl ows 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.
The calculations of the time value of fi nancial options and guarantees are based on stochastic simulations using an Economic Scenario Generator (“ESG”) provided by Barrie & Hibbert. The outputs (“simulations”) have been calibrated to conform to the economic parameters specifi ed by the Group.
Simulations are produced for the economies in the U.S., the UK, Switzerland and the Euro-Zone. 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 US 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 signifi cant options and guarantees. Further details are set out under “Economic assumptions” in Section 11.
j) Holding Companies Holding companies that belong to Global Life have been consolidated in the embedded value at their local statutory net asset value. Related expenses are small and so have been excluded from the projection assumptions. Holding companies outside Global Life are not included in the embedded value of the covered business.
k) Consolidation Adjustments Where a reassurance arrangement exists between two life companies in Global Life, the value of the reassurance is shown in the embedded value of the ceding company. This has no material impact on the reported results.
Embedded value is shown net of non-controlling interests. Where the Group has a controlling interest in a subsidiary company, the new business value and the premium information are shown gross of non-controlling interests. The noncontrolled share of new business value is eliminated through “Dividends & capital movements”.
l) Debt Where a loan exists between a company in Global Life and a Group company outside of Global Life, the loan is valued for embedded value purposes as if contracted with an external party.
m) “Look through” Principle – Service Companies There are some companies within Global Life that provide administration and distribution services. These are valued on a “look through” basis. The results do not include any Group service companies outside Global Life.
In Switzerland, an investment management company provides asset management services to pension schemes written in foundations and other pension funds. The present value of the net asset management fees, after tax, is included in the embedded value and the new business value.
q) Translation to Group Presentation Currency To align embedded value reporting with the Group’s consolidated IFRS fi nancial statements, relevant results have been converted 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 fi gures for December 31, 2008. This approach has also been applied to the analysis of movement. Valuations are translated at end-of-period exchange rates.
The rates can be found in note 1 to the Consolidated Financial Statements.
A 10 percent decrease in voluntary discontinuance rates means that, for example, a base assumption of 5 percent p.a. would decrease to 4.5 percent p.a.
A 25 percent increase in implied risk free volatilities means that, for example, a volatility of 20 percent p.a. would increase to 25 percent p.a.
Projections of future shareholder cash fl ows expected to emerge from covered business and for new business are determined using best estimate operating assumptions. These assumptions, including mortality, morbidity, persistency and expenses, refl ect recent experience and are actively reviewed. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favorable changes in operating effi ciency are not anticipated in the assumptions – in particular for expenses and persistency.
Future economic assumptions, for example, investment returns and infl ation, are based on period end conditions and assumed risk discount rates are consistent with these. For new business, the future economic (and operating) assumptions are based on conditions at the start of the relevant quarter.
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 movement. The expected return for equities comprises an equity risk premium added to the beginning of period one year swap rate. The expected return on corporate bonds is equal to the beginning 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.
Implied Asset Volatility The Group’s embedded value model is based on market consistent assumptions. Interest volatility is derived from the implied volatility of interest rate swaptions. Swaption implied volatilities vary both by the term of the option and also the term of the underlying swap contract, a fact that is refl ected in the economic scenarios. The equity volatilities are based on at-the-money forward European options on capital indices, consistent with traded options in the market. Volatility of property investments is derived from relevant historical return data for each modelled economy.
Financial Information b) Operating assumptions 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.
c) Dynamic decisions To refl ect more realistically the outcome of stochastic simulations, the assumptions for each simulation make allowance for the behaviors of policyholders and management actions in response to the investment conditions modeled.
Embedded value information: Opening embedded value 2,570 2,775 2,895 4,880 Dividends & capital movements start of period 71 (6) 3 (6)
Annual premium equivalent (APE) 259 223 785 878 Present value of new business premiums (PVNBP) 1,794 1,609 6,913 7,272
New business margin (as % of APE) 52.4% 54.3% 12.1% 10.2% New business margin (as % of PVNBP) 7.6% 7.5% 1.4% 1.2%
in USD millions, for the twelve months ended December 31Embedded value results Global Life
Emerging Markets in Asia Rest of the World Global Life 12_Embedded_Value_Report_8065_Eng.indd 29912_Embedded_Value_Report_8065_Eng.indd 299 24/2/10 20:27:3424/2/10 20:27:34
Embedded value information: Opening embedded value 2,271 2,432 299 342 2,570 2,775 Dividends & capital movements start of period 69 (7) 2 1 71 (6)
Dividends & capital movements end of period (7) (87) – (10) (7) (98) Foreign currency translation effects – – 49 (63) 49 (63)
New business information: Annual premiums 91 94 124 96 215 190
Present value of new business premiums (PVNBP) 1,013 947 781 662 1,794 1,609
in USD millions, for the twelve months ended December 31Embedded value results Americas, Emerging Markets in Asia and Rest of the World 12_Embedded_Value_Report_8065_Eng.indd 30012_Embedded_Value_Report_8065_Eng.indd 300 24/2/10 20:27:3624/2/10 20:27:36
The Board of Directors is responsible for the preparation of the EV Report, including the applied methodology and the assumptions used. Our responsibility is to express an opinion on whether the EV Report has been properly prepared in accordance with the MCEV Principles and Guidance.
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 fi nancial statements of Zurich Financial Services Ltd.
Auditor’s Report on Embedded Value 12_Embedded_Value_Report_8065_Eng.indd 30312_Embedded_Value_Report_8065_Eng.indd 303 24/2/10 20:27:4024/2/10 20:27:40
On April 17, 2009, Zurich Financial Services Ltd placed 4,800,000 new shares issued under its authorized share capital and 1,914,096 existing treasury shares, bought back under the share buy-back program authorized in 2008, with institutional investors via an accelerated bookbuild. The proceeds of CHF 1.2 billion from the accelerated bookbuild were used in connection with the funding of the 21st Century acquisition.
Total expenses (372,298) (341,242) Net income 4,082,406 2,658,037 in CHF thousands, for the years ended December 31 13_Holding_Company_7415_Eng.indd 30513_Holding_Company_7415_Eng.indd 305 24/2/10 20:30:1924/2/10 20:30:19
Non-current assets Investments in subsidiaries 7 11,678,292 10,953,361 Subordinated loans to subsidiaries 8 10,293,539 4,000,000 Total non-current assets 21,971,831 14,953,361 Current assets Cash and cash equivalents 11,341 1,081 Loans to subsidiaries 691,320 2,546,345 Own shares 415,945 850,613 Receivable from third parties 5 – Accrued income from subsidiaries 6,482 100,446 Derivatives with subsidiaries 400 650 Total current assets 1,125,493 3,499,135 Total assets 23,097,324 18,452,497
Legal reserves: General legal reserve 10,551,524 9,525,071 Reserve for treasury shares 11 887,906 1,575,468
Free reserve 3,425,820 2,738,258 Retained earnings: As of January 1 2,930,181 2,360,275
As of January 1, adjusted for appropriations 1,420,180 272,144 Net income 4,082,406 2,658,037 Retained earnings, as of December 31 5,502,586 2,930,181 Total shareholders’ equity (before appropriation of available earnings) 20,382,584 16,783,191 Total liabilities and shareholders’ equity 23,097,324 18,452,497 1 Dividends paid in the year, proposed in respect of the 2008 result 2 Dividends paid in the year, proposed in respect of the 2007 result in CHF thousands, as of December 31Assets
Unless otherwise stated all amounts in these fi nancial statements including the notes are shown in Swiss franc thousands, rounded to the nearest thousand.
3. Other financial income Other fi nancial income includes CHF 2,642 million net realized capital gains resulting from the restructuring of the Company’s immediate subsidiary holding companies, Zurich Group Holding (ZGH) and Allied Zurich Limited completed during 2009.
5. Other financial expense Other fi nancial expense includes CHF 75 million net losses on own shares for 2009 and CHF 250 million for 2008.
Zurich Insurance Company Ltd 11,087,485 100.00 2,750 0.06 Zurich Financial Services EUB Holding Ltd 554,754 99.90 – 0.00
1 in CHF thousands 8. Subordinated loans to subsidiaries Subordinated loans of CHF 4,000 million and CHF 6,132 million have been made to the company’s subsidiary, Zurich Insurance Company Ltd.
As of December 31, 2008, Zurich Financial Services Ltd had bought back 3,750,500 of its registered shares over a second trading line within its buyback program authorized by the Board of Directors on February 13, 2008. In March 2009, the Board of Directors decided not to propose the destruction of these shares to the Annual General Meeting of shareholders but to keep the shares as treasury shares for use in connection with the funding of potential acquisitions as of December 31Investment in subsidiaries 13_Holding_Company_7415_Eng.indd 30813_Holding_Company_7415_Eng.indd 308 24/2/10 20:30:2124/2/10 20:30:21
At the Annual General Meeting on April 2, 2009 the shareholders approved an increase in both authorized and contingent share capital to a new maximum of CHF 1,000,000.00 each, allowing for enhanced fi nancial fl exibility of the company for future capital management. On April 17, 2009, Zurich Financial Services Ltd placed 4,800,000 new shares issued under its authorized share capital and 1,914,096 existing treasury shares, bought back under the share buy-back program authorized in 2008, with institutional investors via an accelerated bookbuild. This capital increase reduced the authorized but not issued capital to CHF 520,000. The proceeds from the accelerated bookbuild were used in connection with the funding of the 21st Century acquisition completed on July 1, 2009.
At the Annual General Meeting on April 3, 2008, the shareholders approved a share capital reduction of CHF 343,250.00 from CHF 14,554,682.00 to CHF 14,211,432.00 by cancelling 3,432,500 registered shares that were bought back under the share buy-back program announced on February 15, 2007. The effective date of the capital reduction was June 27, 2008. During the year 2008, a total of 8,300 shares were issued to employees out of the contingent capital.
b) Authorized share capital Until April 3, 2011, the Board of Zurich Financial Services Ltd is authorized to increase the share capital by an amount not exceeding CHF 520,000.00 by issuing up to 5,200,000 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. The Board may issue such new shares by means of a fi rm underwriting by a banking institution or syndicate with a subsequent offer of those shares to 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.
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 fi nancing or re-fi nancing 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 ten years and option rights for a maximum 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 February 14, 2007, the Board of Directors of Zurich Financial Services Ltd decided 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 on April 3, 2007. On January 1, 2008, the contingent share capital, to be issued to employees of Zurich Financial Services Ltd and Group companies, amounted to CHF 320,257.90 or 3,202,579 fully paid registered shares with a nominal value of CHF 0.10 each. During 2009 and 2008, 550,448 and 8,300 shares, respectively, were issued to employees out of the contingent share capital under the program described above. As a result, on December 31, 2009 and 2008, respectively, the remaining contingent share capital, which can be issued to employees of Zurich Financial Services Ltd and its subsidiaries, amounted to CHF 264,383.10 and CHF 319,427.90 or 2,643,831 and 3,194,279 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 or respective option rights 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 profi tability. Shares or option rights may be issued to the employees at a price lower than that quoted on the stock exchange.
11. Reserve for treasury shares This reserve fund corresponds to the purchase value of all Zurich Financial Services Ltd shares held by companies in the Zurich Financial Services Group as shown in the table below.
Additions during the year 1,410,162 343,345 3,750,700 1,100,609 Sales during the year (3,360,627) (1,030,907) (937,551) (304,107) Decrease due to share cancellations (3,432,500) (1,249,897)
Financial Information 13. Information on the risk assessment process Refer to the disclosures in the Risk Review on pages 97 to 135 of this Financial Report.
14. Remuneration of the Board of Directors and the Group Executive Committee This note sets out details of the compensation of the Board of Directors and of the members of the Group Executive Committee (GEC) in accordance with the information required by article 663bbis of the Swiss Code of Obligations. This information should be read in connection with the unaudited Remuneration Report, set out on pages 50 to 67, in which additional details of the remuneration principles and plans can be found.
Remuneration of Directors The following tables set out the total fees paid to Directors of Zurich Financial Services Ltd. All the Directors are also Directors of Zurich Insurance Company Ltd. The Directors receive a combined fee for their work in connection with Zurich Financial Services Ltd and Zurich Insurance Company Ltd. In addition, Mr. de Swaan is a member of the Board of Zurich Insurance plc in Ireland and during 2009 Mrs Bies and Mr Nicolaisen have been elected members of the Board in Zurich Holding Company of America (ZHCA). There were no changes in the fee structure in 2009 compared with 2008. A fi xed portion of the fee was allocated towards the provision of sales-restricted Zurich Financial Services Ltd shares. As in 2008 the portion for the Chairman was set at USD 233,500 (CHF 254,824 for 2009 and CHF 250,846 for 2008), and the portion for the other Board of Directors at USD 68,500 (CHF 74,756 for 2009 and CHF 73,590 for 2008). The overall fees are set out in the following tables: 13_Holding_Company_7415_Eng.indd 31113_Holding_Company_7415_Eng.indd 311 25/2/10 17:50:5825/2/10 17:50:58
2 The remuneration shown in the tables does not include any business-related expenses incurred in the performance of Board members’ services. 3 Committee members receive a cash fee of USD 40,000 for all Committees on which they serve, irrespective of the number. The Committees on which the Board members serve are set out in the Corporate Governance Report on page 29.
5 Directors who reside in the United States receive a fee of USD 10,000 per annum. 6 The cash fees are defi ned in U.S. dollars, but paid in the actual currencies where the Board members reside, based on the relevant exchange rate at the dates of the payment. 7 The shares allocated to the Directors are sales-restricted for three years. 8 As of June 30, 2009, Mr Gentz was allocated 1,296 shares and the other Board members 380 shares based on a full year’s membership. The share price (CHF 197.10) and the exchange rate (USD / CHF 1.0942) as of June 15, 2009, were adopted to calculate the number of shares based on the fi xed 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 refl ect the fi xed amount in U.S. dollars (translated into Swiss francs) of the portion of the fee to be allocated in shares.
9 Neither the Chairman nor the Vice Chairman receive any additional fees for their Committee work. 10 In addition to the fees received as Directors of Zurich Financial Services Ltd and Zurich Insurance Company Ltd, Mrs Bies, Mr Nicolaisen and Mr de Swaan earned fees for their board memberships of the following Zurich Financial Group companies: – Mrs Bies, Mr Nicolaisen a pro rata fee of USD 10,000 for their membership on the board of Zurich Holding Company of America (ZHCA) since October 19, 2009 (based on an annual fee of USD 40,000). The amounts shown in the table also include a US Residence Fee of USD 10,000. – Mr de Swaan earned an annual fee of USD 40,000 for his membership of the board of Zurich Insurance plc and an annual fee of USD 10,000 for being Chair of the audit committee of Zurich Insurance plc in Ireland.
12 As of June 30, 2008, Mr Gentz was allocated 861 shares and the other Board members 252 shares based on a full year’s membership. The share price (CHF 284.00) and the exchange rate (USD / CHF 1.0476) as of June 15, 2008, were adopted to calculate the number of shares based on the fi xed 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 refl ect the fi xed amount in U.S. dollars (translated into Swiss francs) of the portion of the fee to be allocated in shares.
14 Mr Nicolaisen became Chairman of the Audit Committee on April 3, 2008 following the retirement of Mr Schulmeyer. He received a pro rata fee for being Chair. Prior to that he was Chairman of the Risk Committee.
15 Mr de Swaan became Chairman of the Risk Committee on April 3, 2008. He received a pro rata fee for being Chair. 16 In addition to the fees he received as a Director of Zurich Financial Services Ltd and Zurich Insurance Company Ltd, Mr de Swaan earned a pro rata fee of USD 28,111 for his membership of the board of Zurich Insurance plc from April 17, 2008 (based on an annual fee of USD 40,000). He additionally also earned a pro rata fee of USD 2,056 for being Chair of the audit committee of Zurich Insurance plc from October 16, 2008 (based on an annual fee of USD 10,000).
No benefi ts (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 2009, nor during the year 2008. Neither had any related party of the Directors or of former members of the Board outstanding loans, advances or credits as of December 31, 2009 or 2008.
7 The share and share option grants will vest in the future according to achievement of defi ned performance conditions. 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 option pricing model as set out in note 25 to the consolidated fi nancial statements, the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 198.10 for 2009 and CHF 336.50 for 2008) and the valuation of the restricted share grants based on the share price on the date of the grants.
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 USD 1.9 million (CHF 2.0 million) in 2009 and to USD 3.4 million (CHF 3.7 million) in 2008. Since the contributions are based on full earnings, whereas benefi ts are capped, there is not a direct correlation between the costs paid to the social security system and the benefi ts received by the executives.
5 The share and share option grants will vest in the future according to achievement of defi ned performance conditions. 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 option pricing model as set out in note 25 to the consolidated fi nancial statements, the valuation of the target performance share grants based on the share price on the day prior to the grants (CHF 198.10 for 2009 and 336.50 for 2008) and the valuation of the restricted share grants based on the share price on the date of the grants.
As of December 31, 2009, and 2008, the total of loans, advances or credits outstanding from GEC members was CHF 1,073,000 and CHF 1,082,000, respectively. 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. As of December 31, 2009 and 2008, the highest mortgage loan was held by Mr Lehmann (Group Chief Risk Offi cer), in the amount of CHF 773,000 (CHF 782,000 in 2008), which had an overall interest rate of 2.1% (2.6% in 2008).
One of the GEC members retired at the end of 2008. During 2009 one member retired at the end of April 2009 and another member retired at the end of the year. No termination payments were made.
No benefi ts (or waiver of claims) have been provided to former members of the GEC during the year 2009, nor during the year 2008.
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. In this respect, one former member, Mr Eckert, held an outstanding mortgage loan of CHF 2,500,000 as of December 31, 2009 (CHF 3,000,000 as of December 31, 2008), with a reduced interest rate of 2.0% (2.5% in 2008) applying on the fi rst CHF 1,000,000 (CHF 1,500,000 in 2008). Apart from this, no former members of the GEC had any outstanding loans, advances or credits as of December 31, 2009, and 2008.
in CHF millions1, 2 for the years ended December 31Highest paid executive James J. Schiro, Chief Executive Offi cer 13_Holding_Company_7415_Eng.indd 31513_Holding_Company_7415_Eng.indd 315 25/2/10 17:52:5625/2/10 17:52:56
M. Gentz, Chairman 4,274 2,978 Ph. Pidoux, Vice Chairman 2,850 2,470 S. Bies, Member 567 187 V. Chu, Member 567 187 Th. Escher, Member 5,850 5,470 F. Kindle, Member 10,850 10,470 A. Meyer, Member 2,174 1,794 D. Nicolaisen, Member 850 470 V.L. Sankey, Member 2,020 1,640 T. de Swaan, Member 850 470 R. Watter, Member 3,818 3,438 1 None of the Directors together with related parties to them held more than 0.5% of the voting rights as at December 31, 2009 or 2008, respectively.
Share and share option holdings of the Group Executive Committee members The following table sets out the actual share and share option holdings of GEC members as of December 31, 2009 and 2008. 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 benefi cial 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.
2 The distribution of the vested options according to the grants identifi ed in the tables “Summary of outstanding options” is shown in the table below. 3 Includes an amount of 3,800 shares as of December 31, 2009 and 2008, for Mr Schiro, which are held by family run charitable foundations. 4 Mr O’Sullivan retired from the GEC on April 30, 2009. 5 Mr van de Geijn retired from the GEC on December 31, 2008.
The following tables set out additional details of the options outstanding for members of the GEC as at December 31, 2009 and 2008, respectively. Further details can be found in the unaudited Remuneration report, pages 50 to 67.
Distribution of vested share options 13_Holding_Company_7415_Eng.indd 31813_Holding_Company_7415_Eng.indd 318 24/2/10 20:30:2624/2/10 20:30:26
Year of expiry as of December 31, 2009Summary of outstanding options 2009 as of December 31, 2008Summary of outstanding options 2008 13_Holding_Company_7415_Eng.indd 31913_Holding_Company_7415_Eng.indd 319 25/2/10 17:50:2425/2/10 17:50:24
As statutory auditor, we have audited the fi nancial statements of Zurich Financial Services Ltd, which comprise the income statement, balance sheet and notes (pages 305 to 319), for the year ended December 31, 2009.
Board of Directors’ responsibility The Board of Directors is responsible for the preparation of the fi nancial statements in accordance with the requirements of Swiss law and the company’s articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of fi nancial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Auditor’s responsibility Our responsibility is to express an opinion on these fi nancial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the fi nancial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the fi nancial statements. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion.
We further confi rm that the proposed appropriation of available earnings (page 320) complies with Swiss law and the company’s articles of incorporation. We recommend that the fi nancial statements submitted to you be approved.
Confirmation in respect of the authorized capital increase According to your engagement, we have audited your report on the capital increase dated April 17, 2009 in accordance with the provisions of the Swiss Code of Obligations (CO), article 652f, para. 1.
Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession, which require that an audit be planned and performed to obtain reasonable assurance as to whether the report on the capital increase was free of material error. We have performed the procedures appropriate in the circumstances. We believe that our audit provides a reasonable basis of our opinion.
The issuance of new shares in accordance with the provisions of Zurich Financial Services Ltd’s articles of incorporation is the responsibility of the Board of Directors. Our responsibility is to express an opinion whether the issuance of new shares is in accordance with the provisions of Swiss law and the articles of incorporation. We confi rm that we meet the legal requirements concerning professional qualifi cation and independence.
Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession, which require that an audit be planned and performed to obtain reasonable assurance as to whether the issuance of new shares was free of material error. We have performed the audit procedures appropriate in the circumstance. We believe that our audit provides a reasonable basis for our opinion.
Registered Share Data 328 Financial Calendar 330 Contact Information 330 Glossary 331 14_Shareholder_Information_8645_Eng.indd 32714_Shareholder_Information_8645_Eng.indd 327 24/2/10 20:41:1224/2/10 20:41:12
Number of shares issued 147,473,068 142,122,620 Number of dividend-bearing shares 1 147,473,068 142,122,620 Market capitalization (in CHF millions at end of period) 33,403 32,262 Authorized capital, number of shares 5,200,000 6,000,000 Contingent capital, number of shares 12,643,831 8,676,107 1 Treasury shares are not entitled to dividends.
Dividend / nominal value reduction 2005 7.00 July 4, 2006 Nominal value reduction 2004 4.00 July 4, 2005 Nominal value reduction 2003 2.50 July 1, 2004 Nominal value reduction 2002 1.00 July 15, 2003 1 Proposed gross dividend, subject to approval by shareholders at the Annual General Meeting 2010; expected payment date as from April 8, 2010.
As of December 31, 2009 Zurich Financial Services Ltd is not aware of any person or institution, other than the following, who, directly or indirectly, had an interest as benefi cial owner in shares, option rights and/or conversion rights relating to shares of Zurich Financial Services Ltd representing 3% or more of its issued shares: BlackRock, Inc., 40 East 52nd Street, New York, 10022, • U.S.A., along with its subsidiaries, reported as per December 15, 2009, a purchase position of 3.39% of registered Zurich Financial Services Ltd shares.
Barclays Plc, 1 Churchill Place, London E14 5HP, United • Kingdom, along with its subsidiaries, reported as per May 1, 2009, a purchase position of 3.02% of registered Zurich Financial Services Ltd shares.
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 their Web site: www.six-sag.com 14_Shareholder_Information_8645_Eng.indd 32914_Shareholder_Information_8645_Eng.indd 329 24/2/10 20:41:1524/2/10 20:41:15
Business Review 2009 The Business Review contains information about Zurich’s products, services and business performance, including a short summary of fi nancial information. It is available in English, German and French.
Registered Office Zurich Financial Services Ltd Mythenquai 2 8002 Zurich, Switzerland
Corporate Responsibility Group Government and Industry Affairs Zurich Financial Services Ltd, Switzerland
Group investments are those for which we bear part or all of the investment risk. They also include investments related to investment policies with discretionary participation features. Average invested assets exclude cash collateral received for securities lending. We manage our diversified Group investments portfolio to optimize benefits for both shareholders and policyholders while ensuring compliance with local regulatory and business requirements under the guidance of our Asset/Liability Management and Investment Committee.
Other related intangible assets are assets on our Global Life and Farmers Management Services balance sheets and consist of the present value of profits of acquired insurance contracts and attorney-infact relationships.
Farmers includes Farmers Management Services and Farmers Re. Farmers Management Services provides nonclaims related management services to the Farmers Exchanges, prominent writers of personal lines and small commercial lines business in the U.S., which the Group manages, but does not own. Farmers Re includes all reinsurance assumed from the Farmers Exchanges by the Group.
Financial Highlights 2 Key Performance Indicators 3 Measuring our Performance 4 At a Glance 6 Message from the Chairman and CEO 8 Market Review 10 Summary Risk Review 12 Our Strategy 14 Board of Directors 18 Group Executive Committee 20
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